Jeff Linderman: economic downturn could become a depression

No one is making this connection, and I think it is both intuitively obvious as well as vital for an understanding of why a modern depression scenario (definition: 10% peak to trough reduction in annual GDP) isn't out of the question.

1. Everyone agrees there is massive worldwide deleveraging in all financial organizations (notably banks, dealers, HFs) across the entire investment spectrum: commodities, equities, CDOs, CDS, and all manner of securitized Real Estate consumer lending vehicles. As others have noted, Equity markets have already unwound every single Dollar of gain since Spring of 2003.
2. Everyone agrees that GDP over the past five years, at the margin, has benefitted from a not-seen-in-decades upsurge in real property origination, construction, and sales - with its attendant trickledown into the materials/industrial sectors, as well as home improvement/furnishings sectors via aggregate lending of multi-trillion $ worth of HELOCs/second mortgages. Govt Stats indicate, conservatively, a 29% cumulative increase in Nominal GDP from FY03 to FY08 (depends where Q4 comes in).
3. Everyone agrees that profits from (2) as well as consumer funds borrowed against the real estate bubble and (in the case of NY, CT, Chicago, and Calif) massively outsized financial services/HF compensation (I'll cuff that at a conservative figure of an incremental $150 Billion per year) has goosed GDP numbers over the past 5 years vis a vis previous 'normalized' patterns of personal income and spending.
4. If (1), (2) and (3) are essentially true, can there can be any other conclusion but that some significant portion of GDP growth over the past five years has been a one-off illusion? Since the entire economy is now in serious spending-retrenchment mode, and increasing unemployment is a given for the next 3 or 4 quarters, is it so far fetched to believe that this recession could unwind the economic clock back to something close to 2003's figures? And, just to put the icing on the cake -- unlike the deflation of the internet bubble in 2000-2002, we will not be subsequently pumping up the economic base artificially via a new bubble due to the fact that Leverage in all capacities is soon to be subject to strict regulation.

Hence, the runup from 8,000 to 14,000 on the Dow was, at its core, pretty much a Fake rally achieved on the back of systemic leverage throughout the investment chain. Investors tend to psychologically 'anchor' themselves to the most recent results in any tradeable market and make a presumption that said recent highs (Dow 14K a year ago) or lows (Dow 8K at the last bear low in 2003) are reflective of a 'normal' level. Unfortunately, an anchor mentality only serves to obscure what future equity returns may be realistically achieveable - to say nothing of the potential Dow level of the low point in this particular cycle.