Back in October, I did a blog entry looking at how long the recession would last. Some predicted it would one years, others were saying it could take as many as five. The bottom line is no-one knows.

Now, we have President-elect Obama saying recovery will take years, not months. He has a point.

The fundamentals of the US economy look very bad: GDP is falling. Per capita GDP is likely to drop more than 5% in this current cycle. Deflation pressures are escalating with some economists tipping that year on year inflation might be -3% or lower in mid-2009. If that happens, it will delay the spending recovery. Unemployment is soaring with some forecasts that go past 10% in 2010. The wealth destruction has been huge in this downturn with house prices down more than 20% from the peak and share prices off around 40%. The financial sector is being progressively nationalised. The current account deficit remains around 5% of GDP and should stay wide as the deficit blows out. The budget deficit is growing to more than 9% of GDP and could get wider on an aggressive Obama fiscal stimulus package. Federal Government debt is 50% of GDP and is on track to reach 80% in the next few years. And all the states are struggling to fund recurrent expenditures.

This is why Vice President-elect Joe Biden has told George Stephanopoulos that the US economy is close to "tanking" and that it's worse shape than they thought.

Markets will recover but it will take time. In every downturn, governments have thrown money around to stimulate economic recovery. The reality, however, is that each stimulus package does not have an impact overnight. It can take many months, perhaps years, until there is a recovery.

But what's needed is a change in Government policy once the recovery comes. As veteran central bank watcher and fixed-income analyst George Coopertold the media, Governments seem to have two different policies depending on how the economy is travelling. "When things are bubbling along, they are Friedmanites who leave the market to do its thing. When they get one whiff of a slowdown, though, they turn Keynesian, rushing to stimulate the economy with rate cuts. 'As a rule we favour capitalism in an expansion and socialism in a contraction,' Cooper observes.

What's needed are policies that prick the bubbles, or at least take the steam out, when things are booming. It will save a whole lot of grief later on.