On March 4th I wrote: 'My overall view is that fears of economic Armageddon have been grossly exaggerated (and consequently equities grossly oversold), and that the unprecedented global fiscal and monetary stimulus will gain traction in the next few months, and generate a sub-par but real recovery, led by the US by early 2010. Depression talk, in the sense of a repeat of the economic extremes experienced in the 1930's, is hysterical nonsense.'  To put that nonsense in perspective, and assuming realistically that the US economy is bottoming this quarter, the chart below looks at the loss in output in recessions over the last 70 years. Although the peak to trough loss in real GDP is the largest since the post-war slump in 1947 (which was a simple temporary result of booming war production being re-tooled for consumer demand) at 3.9% to date, it's only slightly bigger than the 3.2% in 1974-74 and 3.7% in 1957-58. Certainly, the downward trajectory of this recession was historically steep  before unprecedented monetary and fiscal expansion was unleashed late last year, but the sheer scale of that expansion (in monetary terms six times that during the Depression) was pretty guaranteed to boost growth.

In many ways, as the first recession of the Internet age, I think the tightly coupled information links across the global economy exacerbated the pace of decline, as CFOs had 'one click' access to incoming sales data and to suppliers across the world. The classic inventory adjustment that fuels a recession occured almost in real time, and that may help explain why global trade fell far faster than the underlying economic data would have suggested likely. Notwithstanding the very real leverage and earnings issues that will constrain US consumers, that unprecedented connectivity may also work to the upside in a rebound. In a way, IT advances have made the real economy more like the stockmarket in terms of adjustment speed to macro changes, which when combined with just-in-time production and low buffer stocks will act to amplify economic gyrations over a cycle.

So where does that leave us now? The freefall sensation that made most consumers and businesses freeze investment decisions late last year is over, and about half of the paper wealth lost since the peak has been restored by the liquidity fueled rally in global financial markets since March. Confidence is a critical factor in the modern economy, and stabilizing asset prices are key to sustaining it, so to that extent very aggressive central bank policies have worked. The question is at what price. We will see a global economic recovery over the next few months, and it may seem surprisingly strong initially given the scale of potential industrial inventory restocking from extreme levels. But policy makers, by seeking to yet again 'innoculate' the US economy from a dose of capitalist creative destruction, and attempting to sustain the unsustainable in the form of excess consumption and chronic underinvestment, are likely to end up with a recovery that sputters within 12-18 months, at around the same time that inflationary pressures begin to surge. When trillions of dollars in new money supply is hosed over the world economy, the first inflationary impact is on asset prices, then the real economy, and only later on CPI. If you pump enough adrenaline into a comatose patient, the limbs start to twitch in a reflex action...but he's still in a coma.