The Great Correction: Awaiting bailouts that will never come
We鈥檙e going to rename our theory. This is more than a depression; it鈥檚 more than a financial and economic phenomenon. It includes a shift of power鈥 return to normal after 4 centuries of aberration鈥nd the failure of a whole line of Nobel Prizing-winning economic claptrap, including the Efficient Market Hypothesis and Modern Portfolio Theory. Let鈥檚 call this phase 鈥淭he Great Correction鈥濃�nd wait for events to prove we鈥檙e right.
In the meantime鈥e await clarification鈥�
When will this bounce end? What will happen when it does?
Yesterday was another inconclusive, information-free day. The Dow rose 17 points. Gold went up $5. Oil fell to $79 a barrel.
But the deep trends continue. The government grows鈥nd heads towards bankruptcy. Most developed nations are running huge deficits in their public accounts. The one that has been most in the news is Greece. The Hellenes promised to cut their spending, rioted in the streets, and now hope for some back-up plan from Europe. The rest of the PIGS (peripheral European states, with good food and wine, but bad finances) watch carefully. What Greece gets now they鈥檙e likely to get later.
But the problem is hardly limited to the small states of Europe.
叠补谤谤辞苍鈥檚 reports that the states face 鈥渕assive shortfalls鈥� in their pension programs. This is in addition to the other massive shortfalls faced by governments all over the planet.
鈥�US ratings threat,鈥� is the headline on today鈥檚 Financial Times:
鈥淢oody鈥檚 Investor Service will warn the US today that unless it gets its public finances into better shape than the Obama administration projects there would be 鈥榙ownward pressure鈥� on its triple A credit rating.鈥�
Moody鈥檚 learned a lesson last year. You take money from the ratee. You give a good rating to junk. Then, people point their fingers at you and sue when the junk goes bad. The raters don鈥檛 want every Treasury bond holder in the world at their throats.
The US is going broke; no doubt about it. Of course, it may take years鈥�
What the hell? We can wait鈥�
Some Treasury buyers aren鈥檛 waiting until the last minute. 鈥�China continues selling US Debt in January,鈥� comes a report from The Wall Street Journal.
Japan too, adds Bloomberg.
Japan, of course, faces a financial crisis of its own. It already has government debt greater than 200% of GDP鈥nd its aging citizens are saving less money each year. Pretty soon, it will be unable to finance its deficits. Then what?
Then, yields will rise and Japan will face a crisis similar to that of Greece.
And what about China? Even countries with sound budgets can take huge financial hits.
鈥淐hina may face massive bank bailouts,鈥� Bloomberg reports.
Yes, dear reader鈥hina has a solid budget鈥nd industries that make money. The trouble is, it has too many of them. And now it鈥檚 made the mistake of stimulating them to increase production 鈥� as well as increasing infrastructure 鈥� at the worst possible moment, just as their major customer goes into a funk.
So, while China鈥檚 state finances are in good shape 鈥� at least on the surface 鈥� its private sector finances are a mess. They are such a huge potential mess that one analyst refers to China as the 鈥榤other of black swans.鈥�
Who鈥檚 going to bail out China鈥檚 banking sector? Who鈥檚 going to bail out Greece? Who鈥檚 going to bail out Japan? Who鈥檚 going to bail out the US?
Day by day, the lumbering, clumbering wheels roll on鈥owards bigger governments with greater debts鈥� One government looks to another one to help it out. The other looks to yet another. One nation depends on its central bank鈥nd its central bank depends on the US Federal Reserve, the capo di tutti capi of all the world鈥檚 central banks.
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