海角大神

Normandy, France 鈥� On Friday, everything went down. Well, almost everything. The Dow fell 261 points. Gold dropped $22. Copper. Oil. The dollar. You name it; it went down.

Unless you name US Treasury bonds 鈥� which were up!

What does this mean? Maybe nothing. But since it accords with the direction we think the markets ought to be taking, we鈥檒l say it鈥檚 a trend. It鈥檚 a Great Correction. Asset prices go down. Cash goes up.

Let鈥檚 go back and see where we鈥檝e come from. Then, maybe we鈥檒l see more clearly where we鈥檙e going.

In 1999, the US stock market 鈥� led by the NASDAQ 鈥� clearly topped out. The bubble in the tech sector blew up. Equities started down.

This happened after 50 years of credit expansion. And after much of the 鈥済rowth鈥� in the economy had begun to look suspiciously like borrowing from the future rather than real growth, debt in the private sector had reached record levels.

It was time for a bear market/credit contraction. That is, it was time for a correction.

The correction began in January 2000. The NASDAQ collapsed. And in 2001, the economy entered a recession.

But this recession was phony. Consumer spending didn鈥檛 go down; it went up. Consumers kept borrowing money. It wasn鈥檛 correcting the debt problem, in other words, it was making it worse.

Why? Who knows? Maybe the consumer wasn鈥檛 ready for a correction. Or, perhaps it was because the feds began the biggest countercyclical stimulus program in history. The prime interest rate was dropped to below the rate of consumer price inflation. The federal budget went from about $300 billion in surplus to $500 billion in deficit (from memory).

For the rest of the decade, the big banks could borrow at less than the inflation rate. And the deficits averaged about $1 trillion every two years.

The correction of 2001 had been held up and made much worse by the feds鈥� efforts to stop it. At least $10 trillion of additional debt was added to the system in the decade of the 鈥�00s.

And guess what? It was soon the Bubble 脡poque!

Stocks boomed. Spending boomed. Real estate boomed. Finance in all its formed boomed.

Growth was positive. But it was phony. Because it was almost all based on debt. It was a debt-fueled bubble 鈥� particularly in real estate.

If you take on debt in order to expand production, the extra output can make it possible to pay off the debt later, and you come out ahead. But when you borrow to increase consumption, all you鈥檙e doing is taking output from the future and consuming it now. You鈥檒l have to settle up later 鈥� by taking your future output and using it to pay off your debt. Then, you鈥檙e no longer borrowing from the future; you鈥檙e paying off the past. And nobody likes it very much. Because it means living below your means rather than above them.

The bill came due in 2007. Subprime crashed. Then, the whole financial sector crashed, followed by the economy itself.

There are a number of ways to look at it, but we think it is most accurate to look at 2000 as the beginning of the present correction. That鈥檚 when stocks hit their peak in real terms. Since then, stocks have gone nowhere. And probably 90% of the 鈥済rowth鈥� since then was phony. Certainly, the average person did not get richer; he got poorer.

But having learned nothing in the 鈥�00s, the feds set to work in 鈥�08-鈥�09 repeating and magnifying their mistakes. Instead of running $500 billion deficits, they ran deficits of $1.5 trillion. Instead of dropping rates below inflation, they took them down as far as they could go 鈥� to effectively zero. In addition, they nationalized whole industries, bailed out big businesses, and proceeded to add immense new financial obligations that nobody really understood.

You have to hand it to the Obama administration. We didn鈥檛 think anyone could be worse than Bill Clinton鈥檚 bunch鈥�but then along came George W. Bush. In comparison, Clinton seemed like a great president. And then, just when we thought we鈥檇 seen the worst administration ever, here comes Barack Obama and his team. Obama has continued all of Bush鈥檚 programs (save torturing people). The war in Iraq continues. The war in Afghanistan continues. And the war on the correction continues. And Obama even added a new front 鈥� a health care initiative that is almost sure to be a financial and administrative disaster.

Not that we鈥檙e complaining. To the contrary, we find it all very entertaining. But we don鈥檛 think people are going to like the consequences.

The economy has been trying to correct since 1999. Every effort to stop it merely increases the size of the eventual correction. In round numbers, the US economy currently has debt equal to 350% of GDP. It averaged about half that much in the 鈥�50-鈥�80 period. If it were to go back to that level, it would have to eliminate about $25 trillion in debt. According to the last number we saw, the private sector was currently writing off, defaulting on, or paying down about $2 trillion per year. Not bad. But that would mean another 12 years of correction.

It would go a lot faster. But, remember, the government is helping.

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