The Great Correction… Five Years On, Part IV


It doesn’t look good, dear reader.

The Dow lost 171 points yesterday. Oil slipped closer to $90. And what’s this…gold, up $22.

The debt deal is done. And the Great Correction intensifies…as expected.

“Another bear market has begun,” says our old friend Marc Faber.

“After debt deal: economy in deeper peril,” says MSNBC.

Why would the economy be in deeper peril? Actually, it’s in the same peril. But most people didn’t know what peril it was in. They had swallowed the “recession…recovery” story. They believed it was just a matter of time before the economy got back on its feet.

But it’s not a recession. And there will be no recovery. Never.

It’s a correction. And it has to do its work. It has to reduce debt levels. And that takes time…and pain. Here’s Bloomberg, on the case:

Consumer Spending in U.S. Unexpectedly Falls as Hiring Slumps

Aug. 2 (Bloomberg) — U.S. consumer spending unexpectedly dropped in June for the first time in almost two years and savings climbed, adding to evidence that the slump in hiring is hurting household confidence.

Purchases declined 0.2 percent after a 0.1 percent gain the prior month, Commerce Department figures showed today in Washington. The median estimate of 77 economists surveyed by Bloomberg News called for a 0.1 percent increase. Incomes grew at the slowest pace since November.

The lack of jobs combined with wage gains that have failed to keep pace with inflation raise the risk of further cuts in consumer spending, which accounts for 70 percent of the world’s largest economy. Companies like Newell Rubbermaid Inc. are among those cutting forecasts for the year.

“Wages are very stagnant and that’s affecting consumer spending and consumer confidence,” Fed Chairman Ben S. Bernanke said in semi-annual testimony to Congress on July 13. “There is also ongoing uncertainty about the durability of the recovery.”

Friday’s news on GDP shows the double dip has arrived — an expansion of only 1.3 percent and consumer spending up 0.1 percent in the second quarter. Astonishingly low by any account. The debt ceiling trouble and lack of a longer term resolution to the deficit will make it worse.

Yes, dear reader, so far, so good. Things are not looking up. They’re looking down. Which is fine with us. This correction needs to speed up…so we can get it over with.

Where are we so far? Houses in Florida, California, Nevada and Arizona are down about 50%. Banks have about 2 million foreclosed houses in stock…and about 11 million more are underwater. Prices will probably fall another 25% or so before bottoming out.

Unemployment, depending on how you measure it, is near depression levels. About 14 million people are jobless…with nearly half of them out of work for more than 6 months.

A quarter of the people asked by Gallup pollsters said they thought the economy really is in a depression.

Are we back in a recession? No! The correction never ended…and it has a lot further to go.

Before it is over, stock prices will be cut in half. Food stamp rolls will hit 50 million. Houses will have lost 60% of their value. And more than 20 million people will be out of a job.

Then, our problems will be over, right? Then, things can begin looking up, right? Then, the worst will be behind us, correct?


Then, the feds will really get to work. Private citizens can make mistakes. They can get themselves into deep trouble. But if you really want to make a mess of things, you need government support. Stay tuned.

And more thoughts…

*** Our speech, concluded:

Even in a world ruled by destiny, the morons still stand out. History always seems to find knuckleheads to do Her dirty work …especially when it involves ruining a great empire.

First, there was Woodrow Wilson. He got America involved in a war in which it had no business being involved….and began the imperial agenda on a big scale. Now, the US has no business in Iraq, or Afghanistan, or Yemen, or Somalia, or Pakistan, or Libya. It claims to be fighting ‘terrorism.’ But terrorism is in the eye of the beholder. According to press reports, for example, America’s vice president, Joe Biden, sees terrorism at work in the Tea Party. That’s right, he called the Tea Partiers “terrorists.” Apparently, anyone who tries to stop America from going bankrupt is a terrorist. It is probably only a matter of time before the Pentagon orders drone attacks on Michelle Bachman and Grover Norquist.

Of course, the nation’s bankruptcy owes a lot to a long line of enablers stretching all the way from Woodrow Wilson to Barack Obama. Each one made his contribution. Richard Nixon substituted make believe money for the real thing. He cut gold out of the dollar altogether. So, foreign central banks started carrying the dollar and other foreign currencies…and government bonds…their own and other nations’…as reserves. This freed Americans to borrow and spend much more money. They could pay for goods and services in China or elsewhere. He also opened up China…making the beginning of the end for down-market US manufacturing.

And Ronald Reagan. Not only did he defeat communism — turning loose some 3 billion people to compete against us — he also greatly increased US debts.

But George W. Bush deserves special mention. If history was looking for someone to drive the country into bankruptcy, he was the man for the job. He used the 9/11 event to vastly expand the scope of US military operations…in what has to be the least profitable investment of military resources in the world.

And here is the interesting thing. George W. Bush was supposed to be a conservative. He wasn’t, of course. He was an activist — expanding the role of the state in almost every direction, including a huge expansion into health care..

Then Barack Obama took over. He was supposed to be a liberal. But what did he do? He just continued doing everything Mr. Bush was doing — and added an even bigger expansion into health care.

And if you look back over the last 100 years, what you find is almost the same uninterrupted pattern. With a few exceptions, it didn’t seem to matter who was in the White House or who was in Congress. The role of the government increased. The budget increased. And government debt increased — especially after 1971, when the feds no longer needed to pay for things with real money. When a recession threatened the economy, the feds added more credit. Presto! Another boost of spending and borrowing.

And here’s something odd too…this pattern of growing government debt…with a declining private sector… happened in almost all developed countries at about the same rate at about the same time. It didn’t seem to matter whether it was France or Japan…or the US.

In France, they refer to the “30 glorious years” after WWII ended. That was a big growth period for the US too. Then, in the 80s, France and the US took very different routes.

France put Mitterand, a socialist, in power. The US elected Reagan, a conservative. But guess what? It didn’t make much difference. In France, as in the US, the good growth came to a halt after the ‘70s. Then, it was more or less bad growth — financed by debt, and led by an expansion of the public sector. In France, as in America, real private sector wages have not increased since the ‘70s.

So how could two such different countries, with such different policies, end up in more or less the same place? Wait a minute. They’re not in the same place. France is way ahead. Both countries have about the same amount of debt — about 5 times GDP, when you include pension and health liabilities. But at least, as I mentioned earlier, the French households are in much better shape.

Still, what I’m trying to show is that there is more going on here than just a few bad decisions by a few particularly incompetent public officials. It is almost as if there is some kind of destiny at work. Or at least some grand historical forces that we don’t understand yet.

When the developed nations ended their phase of healthy growth, the emerging nations took over. India, China, Russia, Brazil are now growing at about twice or three times the rate of the US and Europe.

Maybe the two things are related. Maybe the emerging economies are taking jobs and market share from the advanced economies. The emerging markets have less debt to weigh them down. Less social legislation. Fewer impediments to growth and commerce.

And here’s something else that helps explain it. As you use more and more borrowed money, it becomes less and less effective. This is just the old principle of declining marginal utility, or what most people call the Law of Diminishing Returns, applied to credit. A little is a good thing, in other words. A lot is not so good. And eventually — in 2007 — you have so much credit that you can’t keep going. It blows up your private sector economy.

And then you have a Great Correction to work through. Which is where we are now. And when you realize what has happened you also realize that you can’t possibly help things by lending more money. More credit is the very thing the economy doesn’t need.

When an economy is saturated with debt, additional inputs of credit produce negative returns. In other words…they produce the kinds of returns you’d expect from central planning. They take good capital and waste it.

So, the credit expansion alone may help to explain what is going on. After the ‘70s, the economies of much of the developed world were driven by debt expansion…which did not yield much in the way of real growth or incomes. By 2007, the whole credit expansion broke down…as diminishing returns turned into vanishing returns.

And here’s something else. Economic growth has been largely driven by using more energy. More energy use — mostly from oil — raises living standards and GDP/person. But the law of diminishing returns applies to energy use as well as to everything else. It could be that by the ‘70s, developed nations were reaching levels of energy use where further inputs produced less and less extra GDP. The oil shock of ’73 sent oil prices soaring…the first time the US economy came under that kind of stress. Oil prices subsequently came back down, but it may be that the point of diminishing returns had been reached. The developed economies simply were not getting much extra bang for the energy buck.

And then, in the late ‘90s, oil consumption topped out in much of the developed countries…which was followed by a decade not of slow growth, but of no real growth at all.

That doesn’t mean there hasn’t been progress in the last 10 years. Many of the electronic gadgets and gizmos we take for granted were developed since 2001. But these are mostly entertainment devices. They don’t seem to increase GDP. To the extent they have any effect at all, it seems to be negative…in that better communications makes companies more efficient and enables them to out-source more work to the cheaper emerging markets. Result? Fewer middle class jobs in the developed countries.

Just look what happed to Borders. The company was undermined by electronic books that don’t have to be printed on tree products, nor shipped in trucks, nor stocked in warehouses, nor put on the shelves of bookstores, nor sold by clerks who know how to read and right. Result — greater efficiency. Fewer jobs.

But this is only the beginning. This is where it gets interesting. Faced with such sluggish growth — the authorities in America are likely to want to print money to stimulate the economy, just as they have done so far.

It will take years of painful de-leveraging to bring debt burdens down to more comfortable levels. As for public debt, Europe will struggle to bring it under control. America will let it run… that is the meaning of the debt deal just concluded in Washington. Since it has the world’s reserve currency….and since everyone has come to think that the US is good for the money…it will be able to continue debasing its currency for a while longer. That is, until the whole thing blows up.


Bill Bonner
For Daily Reckoning Australia

Bill Bonner

Bill Bonner

Best-selling investment author Bill Bonner is the founder and president of Agora Publishing, one of the world's most successful consumer newsletter companies. Owner of both Fleet Street Publications and MoneyWeek magazine in the UK, he is also author of the free daily e-mail The Daily Reckoning.
Bill Bonner

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4 Comments on "The Great Correction… Five Years On, Part IV"

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5 years 2 months ago

Amen Brother !

Janice Lemon
Janice Lemon
5 years 2 months ago
Bill, your daily analyses of the USA and Europe are top class. They are unbelievably good if it weren’t for the fact that the long term global/western outlook is so depressing. But one thing bemuses me. You keep referring to history to substantiate your claim that empires never learn why they’ve unravelled – or how to undo what they’ve done wrong. But wouldn’t you say that Gorbachev’s glasnost and perestroika that brought the soviet empire to an end is laudatory? Or don’t you consider the USSR to have been an empire? And, yes, you’re right: it’s the transfer of manufacturing… Read more »
5 years 2 months ago
Bill, it still takes two to tango. The shift of manufacturing to the East would not have been possible without the companies choosing to do it. Nixon did not force them. Apparently they got and still get preferential tax treatment for creating jobs outside the US. On second thoughts, it takes three to tango: 1. US company shifting manufacturing East. 2. Eastern country providing labour force etc. 3. US tax system being favourable to that move. Another little point that so many people forget. House prices fell …… They fell because the wars sucked out too much purchasing power from… Read more »
5 years 2 months ago

“… clerks who know how to read and right.”, kinda ironic, n’est pas.

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