First year economics students learn that the most primitive model of economic activity is nothing more than just a construct of self-fulfilling expectations. Consumers feel good. They spend money. In response businesses produce more goods and services, hire more workers, who in turn buy even more goods and services and the GDP grows. On the flip side, consumers feel bad. They retrench. Businesses cut back, fire workers and final demand plummets as a result and GDP contracts.

The longer I live the more I am amazed at how accurately this ridiculously simple model reflects the reality of market economy. Forget econometrics, forget multi-variate formulas. To understand economic reality all you need to do is understand this model. Of course as I write this piece reality bites. ISM data this week printed to 38.9 -its worst reading since 1982. Unemployment hit a 14 year high at 6.5% and US automakers look like the next sector to go belly up. Even the mighty Toyota hinted that it may actually book a loss in the second half of the year. Welcome to the vicious cycle.

How bad will it get? No one knows. One thing however, seems reasonably certain. The economic situation in US is likely to get worse before it gets better. Too much wealth has disappeared into very stupid investments in real estate and supply is still coming online. New York is still littered with hundreds of half built skyscrapers (three on my street alone) that will hit the market next year. Who will pay $1M for a 600 square foot studio in Manhattan?

How about Dubai? Same thing. Across the globe housing prices do not reflect building costs. You cannot expect to sell a unit for $500K than only costs you $125k to build. Those type of gargantuan profit margins never, ever last in the marketplace for long. Once housing becomes unaffordable for the majority of the population it ceases to have value. The pain we see now is simply this adjustment process unfolding in front of our eyes.

In order for true wealth re-building to occur housing must follow the price path of all other goods in our economy such as computers where every year we get more value for less money. Alas not so with housing. We now get sheet rock prefab boxes that crumble at the first sign of wind for far higher prices than our parents ever did. But fear not, like always our civilization will no doubt be saved by technology, as green, energy efficient, more durable edifices are built in the future. For now however we are in quagmire and the rebound may be a long way off.

The net impact on the market of this downbeat reality is likely to be mind numbingly boring range as we work off the excesses of the past few years. Although volatility remains the staple of the intra-day price action in the currency market it will not last. We know that volatility is much more mean reverting than price and already see some signs of moderation in the daily ranges. For FX traders currently counting on endless days of 500 point moves in the pound - don’t hold you breath. We may have a few more weeks of this environment, but then the price action may slow to crawl as markets react to the grinding slow pace of adjustment in the real economy.

Boris Schlossberg serves as director of currency research at GFT, and runs bktraderfx.com.