06/11/10 Baltimore, Maryland – “We need to slash debt,” declared our friend Nassim Taleb this week on CNBC. Government debt, that is. “Unfortunately, that’s the only solution.” And the most unlikely.
The Federal Reserve’s quarterly Flow of Funds report shows households trimmed their debt 2.4% during the first quarter. Business debt was flat. But local and state government debt grew 4.3%. And federal government debt ballooned another 18.5%.
And what do we have to show for it? “We had less debt cumulatively [two years ago],” Taleb says, “and more people employed. Today, we have more risk in the system, and a smaller tax base.
“Obama promised us 8% unemployment through stimulus,” he continues. “It hasn’t worked. It’s not that they [the administration] make mistakes, it’s that they almost get nothing right.”
The result of this – both here and abroad – is what one of Bill Gross’ top lieutenants at Pimco calls a “Keynesian endpoint.”
The notion of solving debt problems with more debt is increasingly “being seen as a magic elixir that has morphed into poison,” according to an e-mail note this week from Anthony Crescenzi.
“Time, devaluations and debt restructurings might be the only way out for many nations.”
Perhaps the US stock market senses this on some subconscious level, which is why it’s exhibiting the sort of financial bipolar disorder we’ve diagnosed the last couple of weeks. Yesterday brought us another manic episode, propelling the major indexes up nearly 3% and the Dow past 10,000 again, for no obvious reason.
Today? A depressive episode. Markets opened down nearly 1%. Before the open, the Commerce Department reported a 1.2% drop in retail sales from April to May…the first drop in eight months. This is another one of those “unexpected” numbers that are increasingly whacking traders upside the head. In this case the numbers were “much worse than expected,” according to MarketWatch.
So where from here? Well, consider this…
The folks at Westwood Capital put together these nifty charts with two commonalities – a bubble peak and a period of panic selling followed by a rapid rebound. You’ll also see what may turn out to be a third commonality – the rebound petering out in April 1930, and perhaps doing the same in April 2010.
Obviously, there are differences. In ’29, it took only three months to go from peak to trough. This time, it took nearly 18. As Mark Twain said, history doesn’t repeat, but it does tend to rhyme.
Addison Wiggin
for The Daily Reckoning
Addison Wiggin
Addison Wiggin is the editorial director of The Daily Reckoning, and executive publisher of Agora Financial, an independent financial research firm based in Baltimore, Maryland. His second editions of international best-sellers Financial Reckoning Day Fallout and The New Empire of Debt, which he co-authored with Bill Bonner, were updated in 2009. His third book, The Demise of the Dollar… and Why it’s Even Better for Your Investments was updated in 2008, the same year he wrote I.O.U.S.A.
Wiggin is the executive producer and co-writer of I.O.U.S.A. an acclaimed documentary nominated for the Grand Jury prize at the 2008 Sundance Film Festival and the 2009 Critics Choice Award and shortlisted for a 2009 Academy Award. Wiggin is a three-time New York Times best-selling author whose work has been recognized by The New York Times Magazine, The Economist, Worth, The New York Times, The Washington Post as well as major network news programs.
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If you see the weekly EUR/USD graphic from 2008 it is almost an exact replica of the 30´s stock crash =)
The Federal Reserve’s quarterly Flow of Funds report shows households trimmed their debt 2.4% during the first quarter. Business debt was flat. But local and state government debt grew 4.3%. And federal government debt ballooned another 18.5%.
jinny