Re-pricing the World's Credits

Wham! Bam! Whack! Smack!

Markets took a beating yesterday. The Dow got walloped for a 376-point loss.

Tellingly, gold lost only $4. Proportionately, it should have gone down nearly $40.

The story was the same all over the world. Here in China, stocks fell…as they did everywhere else.

And not just stocks – commodities went down too.


Traders and pundits are talking about trouble in Europe. According to the Reuters report, the sell-off came after Germany banned naked short selling. Those Germans! Always the party poopers.

But when markets are ready to roll over, they’ll do so. Commentators and analysts can look for the ‘cause,’ but they are just making noise.

Still, we suggest that they take their eyes off the naked Germans. Instead, they might want to take a look at what is going on in the US of A…

The Great Correction is a worldwide phenomenon, but it is centered in America. The US economy is changing. As a result, all the world’s credits need to be re-priced.

What does that mean? Just that much of the world economy was geared to a trend that has come to an end – the growth and leveraging of the US consumer economy. Here in China, for example, much of the export apparatus is set up to service US households. Much of the rest of it faces the opposite direction – towards Europe.

But the old world and the new world are both beginning to look a little stale. Both have too much debt. Both have made too many promises to too many people.

We are now, broadly speaking, in the process of debt de-leveraging. The private sector in America is paying down and defaulting on debt. In the housing market, for example, delinquencies and foreclosures are at peak levels. And demand for new mortgage loans is at a 13-year low.

Since so much of the wealth of the country rested on housing prices, it is not surprising that a write-down in house prices would be as unwelcome as Chinese wallboard. In fact, it’s hard to find a place that hasn’t been affected. People have less money; they spend less. They have too much debt; they borrow less. Sales go down. And the banks that hold much of this debt go bust. The FDIC says it has 775 banks on its “problem” list.

When sales go down, so does employment. The latest figures show jobless claims rising again. Among the poor and uneducated, the unemployment rate is over 30%

Meanwhile, the de-leveraging process is clearly seen in falling consumer and wholesales prices. Demand goes down; so do prices. Both indexes are down, with less consumer inflation than at any time in more than 40 years.

In Europe, the process of de-leveraging focuses on governments. By and large, households are much sounder, financially, in Europe than they are in America. But governments are just as shaky…and sometimes in worse shape than in the US.

The credits of Greece, Spain, and Portugal have already been marked down considerably. Most likely, the credits – bonds and currencies – of the others will follow.

Governments tried to appease the market gods by offering to sacrifice virgins, widows, orphans, the rich and other taxpayers. Higher taxes and austerity measures are expected to give investors confidence.

Naturally, neither the virgins nor the taxpayers were willing to go along. Neither were government employees, whose salaries and pensions are supposed to be cut. The process of de-leveraging is going to be long and hard, in any case. Most likely, it will end in bankruptcy, default and write-downs of public debt.

At least Euroland has taken up the issue. On the other side of the Atlantic, few politicians, taxpayers, or investors see a problem. They believe the credit of the US is not only elastic, but with unlimited stretch.

Wait ’til it snaps back!

Bill Bonner
for The Daily Reckoning