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I never tire of posting this graph from the WSJ, as it provides a perfect snapshot of the "W" economy:

But it also provides an important insight on what's happening today with the economic crisis.

To cut to the chase: the growth of the past few years (ie the GDP line above) was fake. And the economy is now tumbling back to where it really should have been - at the line below.

The fact remains, of course, that the difference between the two did exist for a while, in the form of a debt bubble (what I call counterfeit money). As we all know, that fake wealth was captured by a small minority (the financiers with their hands on the tap, and the rich which held assets and saw their value niely inflate) - and the problem is that, dollars being dollars, that fake wealth was mixed with the real kind and diluted it, which means that the bursting of the bubble takes away something from everybody, and not just from those that benefitted from the bubble in the first place.

Economic statistics, no longer sustained by bubble hype, are crashing to "safe" ground, ie from what people can spend with plentiful debt, to what they can actually afford with no debt. And that first crash, which first looked mostly like a financial event, of course has further second order effect consequences on the real economy: people who suddenly feel they have less money to spend, do spend less, cut demand, and further shrink the economy - the real one.

So we'll end up below the flat line of the W years. But the sharing of the wealth has been changed in the meantime, and will not revert because of the crash, unless policies change (and Obama's budget proposals go in the right direction in that respect).

Which means that all Americans face a 20% drop in living standards, on average - unless macro-economic policies change in a massive way.

That 20% income/output gap was stolen over the past presidency, and is just "acknowledged" today - with collateral damage. But that's the size of the problem.

Originally posted to Jerome a Paris on Wed Mar 04, 2009 at 03:49 AM PST.

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