02/10/11 Baltimore, Maryland – Is the Great Correction over? Not quite!
Nothing much in the markets yesterday. Dow and gold both essentially flat.
So, let’s rehearse what we’ve learned so far.
Government’s main business is protection. Always and everywhere, its chief responsibility is the security of the nation’s borders and the safety of its own officers. As a secondary matter, it is concerned with the protection of the people it governs.
Of course, it protects, first and foremost, the interests of the people who control it.
A modern democracy is controlled by competing groups. In a combination of larceny and bribery, almost everyone gets something. Elite and powerful groups get a lot. The less powerful masses get a little.
In the crisis of ’07-’09, for example, government moved fast to protect elite interests – with trillion-dollar transfers to the banks and their bondholders.
Then, as the economy weakened, the masses of voters needed bribes too – food-stamps, unemployment relief, shovel-ready jobs, etc.
These measures do not produce genuine prosperity. How could they? They are just boondoggles and bailouts. But they give the appearance of stability and they help keep everything under control.
But how can the feds pay for all this larceny and bribery? They have to borrow…effectively shifting the cost to the next generation. Debts are incurred now. Money is spent now. It is meant to be repaid sometime in the future, by people who benefit from neither the bribes nor the thefts.
The private sector unloaded debt as quickly as it could in ’08 and ’09. Savings rates went from 2% of disposable income to 7%. We called it a “Great Correction.”
But now the process of correcting seems to have stalled. While the private sector threw off debt, the public sector picked it up. And now, it looks like the private economy is beginning to borrow again too.
Savings rates have fallen back to around 5%. Credit card debt has increased for the first time since the crisis began. Non-revolving credit is reported to be at a record high.
Government debt, meanwhile, is soaring. The US deficit last year was greater than all the money borrowed by the US government from its founding until 1986. And the Obama administration will borrow more than all previous administrations put together.
Is the Great Correction over?
Where will this end? Bankruptcy? Hyperinflation? Or revolution?
Maybe all of the above.
But wait. What if the peoples’ representatives “see the light”? What if they turn the situation around, forcing the US government to de-leverage along with the private sector?
Well, anything is possible. But we wouldn’t count on it.
Meanwhile, there’s another part to our hypothesis. Over time, stable societies become more and more rigid as elites get a tighter grip on them. They become “zombified,” with more and more of the society dependent on giveaways, bribes, boondoggles, protected markets and redistributed income. In a democracy, that means that the numbers begin to work against evolution. Against change. Against natural correction.
More and voters get more from the government than they pay for it. They will not permit any change to the system, because any change would be harmful to them.
So, over time, governments become less and less able to produce wealth…less dynamic…less responsive to evolutionary adjustment.
How does that work, exactly?
Well, it works in many, many different ways. But here’s a simple example. If the crisis of ’07- ’09 had happened back in the 19th century the big banks involved would have gone broke. Not only that, the bankers involved would have lost everything – including their personal mansions in the Hamptons. Because back then, typically, a banker was personally responsible for his losses. Neither banks nor investment houses had the advantage of corporate protection.
Today, the failures remain in business. The failed executives continue to receive bonuses. Their losses are socialized…picked up by feds and spread to people who don’t deserve them – notably, the next generation.
Most people think this process will last forever…with the costs pushed infinitely into the future. But it won’t.
“Stability leads to instability,” said Hyman Minsky. We see it coming. Stability makes people think that the system is eternal. They lend to the government at low interest rates…or even accept its new, paper money as though it was the real thing. This permits the government to run up far more debt than it could in an “unstable” era. The debt then becomes unsustainable…and the system collapses.
When? Who knows? But sooner or later, the lenders revolt. Or the next generation does.
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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The American way is to do nothing until a real crisis appears and then it usually overreacts. Rather than inflating or deflating, I expect the Treasury/Fed/ Administration to throw a Hail Mary pass, by giving gold an arbitrary figurs of x thousand dollars and offering to buy and sell gold at that given figure.
Whether that will succeed or not, only time would tell and how it would affect the economy I cannot tell. Any thoughts?
I think Tom Friedman would agree with your points.
I am wondering how “zombification” applies (or does it apply) to emerging Egypt?
Egypt is the next generation revolting. That is what is likely here as well. How long do you expect these kids to pay for our mistakes when the only jobs they can find are minimum wage jobs? Do we really expect immigrants from Mexico to pay for our social security? Wouldn’t count on it, but anything is possible.
Americans are hoping for a “clinton boom” to free themselves from the mess they are now in. Of course this is unlikely to happen since the worlds economy is in a much more perilous state than 1992. So it the debt will deterioate until they are forced to make real changes
Best article about the way we are going…zombies all. The living dead economy papered over my paper money. like the false Hollywood props used for movies.