Bill Bonner

The Great Correction intensifies…

The Dow rose on Friday. The dollar fell. Gold is back over $1,400. And the euro – the world’s most despised currency – is back over $1.40.

A chart circulates, supposedly proving that GDP is now back to where it was in ’07, after falling only 4% in the downturn.

We don’t believe it; they’ve juked and jived the figures.

None of the key components of US GDP have recovered. Housing starts, for example, are running at a million less than they were before the crisis began. Employment is back to the levels it was at 10 years ago – with 7 million fewer jobs than in 2007! Retail sales are going up – but they are still not at the level they were in ’06 or ’07.

So how could the overall economy recover, while the most important parts of it do not?

The real answer: the economy hasn’t recovered. And the Great Correction hasn’t gone away. Instead, the correction is like a hurricane sitting just off the coast. It took a swipe at land, and now, it’s back out at sea; its winds are picking up speed. It’s getting larger…stronger… It’s intensifying.

Why?

As we’ve said too many times, none of the problems that led to the crisis of ’07-’09 were corrected. Instead, they were twisted into awful new shapes. They’re still there – swirling around, worse than ever.

Approximately 73% of the economy comes from consumer shopping. So, in order for the economy to grow, consumers have to be able to shop, right? But how can they?

Properly adjusted for inflation, the average wage is lower today than it was in 1973. That’s right, almost 40 years of going nowhere.

Well, hold on…we know what you’re thinking: “What are you talking about? There were some great years for the US economy between ’73 and ’07.”

And you’re right. But they didn’t come from solid, real growth in consumer purchasing power. Instead, they came from two sources:

First, consumers borrowed more. Total debt went from about 150% of GDP to over 370%. The financial industry went wild, sending our credit cards to dogs and dead people…lending money to people without jobs or income…writing mortgage contracts with built-in fuses.

This was not healthy growth. It was not sustainable. It just took “growth” from the future and moved it forward. Want to know why the housing industry builds so few houses today? Easy. It already built today’s houses yesterday. Why is a credit-fueled boom not sustainable? It’s because credit markets go up and down, just like all other markets. When credit is cheaper, people borrow more and buy more. When credit becomes more expensive, they have to pay down their loans and stop buying so much.

Second, during the period ’74 to ’07 more people worked longer hours. The whole family went to work; not just the head of the household. And they worked more hours. This was proclaimed as a great era for women. They went to college. They got jobs. And they had families too. Now, they no longer supplement their husband’s salary. They’ve become equal partners in the household…often, senior partners. The lucky ladies; they get to work two jobs now – one at the office and another one at home!

Up until 2007, the feds could counteract every attempted correction by making more credit available at lower prices. But by 2006, the credit machine no longer worked. The private sector economy was saturated with debt. It couldn’t take any more.

Only the feds could still borrow freely – which they did. In ’09 and ’10, the US government borrowed ALL America’s savings – and then some. Since November of ’10, the Fed has simply been printing money – enough to cover 109% of the government’s borrowing needs during that period.

For the most part, households still can’t borrow…and don’t want to. Unless they are borrowing from the government. All the recent increase in consumer credit, for example, can be explained by the increase in student loans.

Consumers are in no position to borrow…and no position to drive a real recovery. They’re still nailing up plywood over the windows and moving the furniture to the second floor. They don’t have jobs. They don’t have credit. And their houses – which they might have borrowed against – are still sinking below the waterline.

Oh yes, the next big surge of ARM resets, recasts and defaults begins next month.

Pity the poor lumpenconsumer. He was in such a hurry to consume in the bubble years. Now he can’t consume at all. His income is stagnant. His net worth is falling.

And if that weren’t bad enough. The poor consumer’s costs are rising.

Take a look at this report from CNBC:

Cost of Living Hits Record, Passing Pre-Crisis High

One would think that after the worst financial crisis since the Great Depression, Americans could at least catch a break for a while …

A special index created by the Labor Department to measure the actual cost of living for Americans hit a record high in February, according to data released Thursday, surpassing the old high in July 2008. The Chained Consumer Price Index, released along with the more widely-watched CPI, increased 0.5 percent to 127.4, from 126.8 in January. In July 2008, just as the housing crisis was tightening its grip, the Chained Consumer Price Index hit its previous record of 126.9.

The regular CPI, which has already been at a record for a while, increased 0.5 percent, the fastest pace in 1-1/2 years. However, the Fed’s preferred measure, CPI excluding food and energy, increased by just 0.2 percent.

Bottom line: The cost of living for Americans is now above where it was when housing prices were in a bubble, stock prices at a record, unemployment low and consumer confidence was soaring. Something has gotta give.

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 ReckoningDice 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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