It was refreshing to read Anatole Kaletsky’s contrarian piece in Sunday’s London Times, and it should be required reading for all investors. "I am probably the only economist left in the world who still believes that a U.S. recession is likely to be avoided," says Kaletsky. Given the massive amount of doom and gloom in the financial press, it’s important to try to understand the contrarian argument.

The core of Kaletsky’s argument is that we’re only seeing sector-specific slowdowns in the U.S. and that "problems affecting only one or two parts of the economy are a continuous feature of any market economy with its constant variations in demand and supply for particular products and services." But surely the financial and housing crises in America are now so severe that there can be no hope of avoiding a self-sustaining downward spiral? Kaletsky disagrees, and offers three reasons for continuing to resist the consensus view:

1. "First, the occurrence of a severe financial crisis is not, in itself, a sufficient reason for expecting a recession. In fact, there have been severe financial crises that did not lead to recessions in the middle of every previous economic cycle: for example, the Latin American defaults of 1984, the stock market crash of 1987 and the savings and loan and housing collapse of 1988-89 and the Mexican peso, Asian and Russian crises of 1995-98."

2. He writes that "powerful expansionary forces are about to come into play in the U.S. economy in the months ahead." Kaletsky believes that the U.S. tax rebate will have a meaningful impact. "Even if only half this money is spent, U.S. consumption will therefore be guaranteed to grow by at least 3 per cent in the third and fourth quarters. And beyond that, the lagged effects of the Fed’s recent monetary easing will kick in from the start of 2009."

3. He believes that the end of the U.S. housing downturn is in sight, citing affordability statistics. "U.S. house prices have already fallen almost 15 per cent from their peak and as a result property in America is no longer expensive in relation to average incomes," he says. "For example, the National Association of Realtors’ composite affordability index stands at 135, compared with a record high of 140.8 reached in 1999, at the start of the recent housing boom."

Mr. Kaletsky’s argument sounds great, but he fails to show how a fragile U.S. economy will be able to cope with an unexpected, external shock. America is bankrupt and does not have sufficient savings to absorb future shocks. Foreigners will have to step in and save the day, but the plummeting greenback make U.S. assets look like falling knives. What happens if a collapsing dollar forces the Fed to raise interest rates to entice foreigners to buy the government bonds that finance the U.S. deficit? The Fed is running out of ammunition, further limiting its ability to effectively cope with future problems.

As much as I want to believe in Mr. Kaletsky’s point of view, I have to admit that his case only scratches the surface. Call me a doom and gloomer, but I believe that the current crisis is a symptom of a deeper cause and that Mr. Kaletsky’s arguments are interesting but irrelevant. This could be the end of credit expansion based on the mistaken belief of market fundamentalism, meaning now is not the time to argue about the semantics of recession.