As the World Economy Turns

09/19/11 Buenos Aires, Argentina – What keeps this world economy turning around?

Not the US. America’s private sector isn’t spinning at all. It’s stuck…dead in the water…out of gas…pumped out…

GDP growth is reported at 1%. But that’s almost all government transfer payments and stimulus deficits. Real growth is negative.

And all the recent reports show it is getting worse. Wall Street is cutting earnings estimates…strategists reduced their S&P 500 targets 8%.

…corporate tax receipts have decelerated sharply…

…the president’s job bill is DOA in Congress…

…retail sales are slowing…

…and prices are softening, with the core CPI headed below 2%.

As we keep saying, there is nothing unusual about this. It’s just what you’d expect in a Great Correction. And it will probably get much worse.

How about Europe, then? Maybe Europe is providing the steam to keep things moving.

Uh uh. Moody’s just downgraded French banks… It assumed they would lose 60% on their Greek debt holdings. But the banks themselves have only written off about 20%. And then there’s the Italian debt. And the Spanish debt.

They’ve got a long way to go. And it’s all down.

Merkel and Sarkozy may pledge to keep the olive countries from defaulting. But where will they get the money? France is deep in debt too. And the German economy has stopped growing all together. Not to mention that German voters are just about fed up. They won’t pay for the Greeks to take early retirements forever.

Europeans are becoming old, tired pinchpennies. Just like Americans. They’ve got a social welfare system they can’t afford — just like Americans. And they’re going broke — just like Americans.

What they don’t have is a huge, expensive, aggressive military. Americans regard their armed forces with pride. They see the Pentagon as their greatest strength. Actually, it is their biggest weakness. All told, the imperial agenda costs the US $1.2 trillion per year. Ultimately, both Europeans and Americans may be forced to tighten their social welfare belts.

But can the Americans off-load their ammunition belts? We don’t think so. There are two parts to the human character, said the ancient Greeks. There is appetite and spirit. Appetite is logical, goal-oriented, material…and sensible. But the spirit is mad. It is concerned with symbols…atavistic impulses and the length of God’s arms. The spirit sets off on the road to Hell. The appetite shows it how to get there.

But we are getting off the subject. What keeps the world economy going, we asked? Europe is stuck in the mud. The US is exhausted.

But wait. There’s China. Uh oh. The Middle Kingdom looks like it is slowing down too. Ambrose Evans Pritchard in The Telegraph:

China risks hard landing as global woes spread… China’s carefully-managed soft landing is turning harder by the day, threatening to deflate the torrid credit bubble of the past three years. Beijing is alarmed by inflation above 6pc and price-to-income ratios for property in the rich coastal cities… “There is a large potential risk,” said Zhu Min, the deputy managing director of the International Monetary Fund and a former Chinese official. Mr. Zhu said China had doubled the loan ratio from below 100pc of GDP before the Lehman crisis to roughly 200pc today. The danger is that this excess could start to unwind just as the West goes into a sharp downturn, and possibly a double-dip recession. China and emerging Asia are fundamentally in weaker shape this time, having used up their “fiscal cushions”, leaving them with little leeway to cope with a fresh global shock.

China is our last great hope. If China goes down, the world economy falls with it.

When the stock market crashed in ’29, people had no idea what it meant. They referred to it as a “break” or a “crash.” Almost everyone figured it was just a matter of time before things were back to ‘normal.’ They were more-or-less right. The Dow returned to its ’29-high 17 years later. In real terms, it was still around its ’29-high as late as the mid-’80s — 55 years later.

But in the early ’30s, it looked as though the economy was recovering; the stock market was soon to follow, they figured.

Then, after regaining about half their value, stocks fell hard again. And then banks failed. And companies went broke. Roosevelt began his Fireside Chats. And unemployment rose to 25%.

Still, people did not see it as the “Great Depression” until later.

Similarly, when the subprime crisis and the collapse of Lehman Bros hit the markets few people knew what to think. The feds were particularly dim; they thought it was just another typical post-war downturn. They thought they could fix it the way they fixed all of them — with more credit.

But more credit wasn’t the solution to this problem, it was the cause. And adding more just made it worse.

Little by little, month after month, commentators and analysts have opened their eyes. They realize that this is a balance-sheet problem…not an inventory, liquidity or interest rate problem. But that is only the immediate problem. Gradually, they are beginning to realize that there is more going on.

Our Daily Reckoning view of it was better than most — if we say so ourselves. We knew it was a Great Correction from the very outset. We knew debt was the problem.

But even we did not see the power of this correction.

Of course, we don’t have much experience with this sort of thing. There are only two examples in the last 100 years — the ’30s in the US. The ’90s and ’00s in Japan. Not enough data points to draw much of a conclusion. But at least these two have one genetic similarity — longevity. It took 2 decades to end the Great Depression. The Japanese de-leveraging episode has already lasted more than 20 years.

We should have taken it at face value. Instead, we figured the US de-leveraging would be shorter. We saw it as a battle between the forces of deflation (the markets) and the forces of inflation (the feds). We thought the feds would have won by now. After all, they’ve got a printing press. And Ben Bernanke told us that they would use it.

But it’s not that simple, is it? The feds turned on the printing press. They added trillions in cash and credit. But so what? It hasn’t had much effect. Inflation is low…and apparently going down. If the economy goes back into recession, the CPI could even turn negative.

To make a long story short, the Great Correction appears to be greater than we realized. It has frustrated the feds completely. It has sunk bond yields to their lowest levels in 6 decades. It has knocked the upper stories off every house in America. It has taken 7 million people out of the job force.

And it looks like it is just getting started.

So, what’s this correction aiming for?

…will it correct the housing bubble that began in 1997…and stop there?

…will it correct the stock market boom since ’01…or since ’82…and be done with it?

…will it correct the bull market in bonds that goes back to ’83…or the bull market in bonds that goes back to 1971?

…how about the post-1971 dollar-based monetary system?

…will it correct the credit expansion/consumer spending boom that began in ’49?

…or maybe it will correct the boom in US economic and military power that dates back to 1917?

…Who knows? Maybe it is going to take out the entire industrial revolution boom going back to the 18th century…

…or even the boom in the human species that goes back to the 17th century?

We don’t know where this correction is going…but we want to make sure we’re somewhere safe when we finally find out.

Regards,

Bill Bonner
for The Daily Reckoning

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America's most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind The Daily Reckoning. Dice Have No Memory: Big Bets & Bad Economics from Paris to the Pampas, the newest book from Bill Bonner, is the definitive compendium of Bill’s daily reckonings from more than a decade: 1999-2010. 

 

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