Bill Bonner

We’re going to rename our theory. This is more than a depression; it’s more than a financial and economic phenomenon. It includes a shift of power…a return to normal after 4 centuries of aberration…and the failure of a whole line of Nobel Prizing-winning economic claptrap, including the Efficient Market Hypothesis and Modern Portfolio Theory. Let’s call this phase “The Great Correction”…and wait for events to prove we’re right.

In the meantime…we await clarification…

When will this bounce end? What will happen when it does?

Yesterday was another inconclusive, information-free day. The Dow rose 17 points. Gold went up $5. Oil fell to $79 a barrel.

But the deep trends continue. The government grows…and heads towards bankruptcy. Most developed nations are running huge deficits in their public accounts. The one that has been most in the news is Greece. The Hellenes promised to cut their spending, rioted in the streets, and now hope for some back-up plan from Europe. The rest of the PIGS (peripheral European states, with good food and wine, but bad finances) watch carefully. What Greece gets now they’re likely to get later.

But the problem is hardly limited to the small states of Europe.

Barron’s reports that the states face “massive shortfalls” in their pension programs. This is in addition to the other massive shortfalls faced by governments all over the planet.

“US ratings threat,” is the headline on today’s Financial Times:

“Moody’s Investor Service will warn the US today that unless it gets its public finances into better shape than the Obama administration projects there would be ‘downward pressure’ on its triple A credit rating.”

Moody’s learned a lesson last year. You take money from the ratee. You give a good rating to junk. Then, people point their fingers at you and sue when the junk goes bad. The raters don’t want every Treasury bond holder in the world at their throats.

The US is going broke; no doubt about it. Of course, it may take years…

What the hell? We can wait…

Some Treasury buyers aren’t waiting until the last minute. “China continues selling US Debt in January,” comes a report from The Wall Street Journal.

Japan too, adds Bloomberg.

Japan, of course, faces a financial crisis of its own. It already has government debt greater than 200% of GDP…and its aging citizens are saving less money each year. Pretty soon, it will be unable to finance its deficits. Then what?

Then, yields will rise and Japan will face a crisis similar to that of Greece.

And what about China? Even countries with sound budgets can take huge financial hits.

“China may face massive bank bailouts,” Bloomberg reports.

Yes, dear reader…China has a solid budget…and industries that make money. The trouble is, it has too many of them. And now it’s made the mistake of stimulating them to increase production – as well as increasing infrastructure – at the worst possible moment, just as their major customer goes into a funk.

So, while China’s state finances are in good shape – at least on the surface – its private sector finances are a mess. They are such a huge potential mess that one analyst refers to China as the ‘mother of black swans.’

Who’s going to bail out China’s banking sector? Who’s going to bail out Greece? Who’s going to bail out Japan? Who’s going to bail out the US?

Day by day, the lumbering, clumbering wheels roll on…towards bigger governments with greater debts… One government looks to another one to help it out. The other looks to yet another. One nation depends on its central bank…and its central bank depends on the US Federal Reserve, the capo di tutti capi of all the world’s central banks.

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. 

  • Harry

    Mr. Bonner, we finally agree on something:

    “Let’s call this phase “The Great Correction”…and wait for events to prove we’re right.”

    Yes, this was a “Great Correction” and definitely no where near a depression. It certainly takes a man to admit his mistakes and you have shown what you’re made of.

    Now that we’ve corrected – almost a year ago now – we continue to see growth at all levels, manufacturing, retail, employment, etc.

    The SPX broke out today (obviously this was written before that important move on the index) to 18 month highs. There is no doubt that we’ll end this year with a minimum 1250 SPX and Dow around 12,700.

    As we finish emerging from the “correction” there is no reason not to be excited about the economy and the market.

  • JMR bayou bobby

    “There is no doubt that we’ll end this year with a minimum 1250 SPX and Dow around 12,700.”

    then what happens?

  • Scott

    Read what Kenneth DART did to Brazil and Argentina. He bought up the national debt for 20 cents on the dollar and made them pay it all back. Watch for wealthy individuals to buy up government debts. As an individual with citizenship you will have to pay your share. It’s OK if you don’t have the money, you can work it off in a Walmart prison. You will get a jumbo bag of chips every other day. You won’t starve.
    Don’t forget to bow down and kiss the feet of your feudal overlord for giving you life.

  • Silver Bully

    “As we finish emerging from the “correction” there is no reason not to be excited about the economy and the market.”

    Oh sure, it’ll be all lollipops and rainbows from here on out. Why, you can trust ETF’s, stocks, everything, there’s no risk at all. Money coming out of our ears, credit as high as the sky. Why, there isn’t a worry in the world . . . until Bernanke begins to raise interest rates. When that happens, it’s all over but the cryin’, and the big correction won’t likely happen right then, either.

    I intend to invest in gold, oil, silver . . . and popcorn.

  • Brian

    Yes the economy is doing so well that the Fed won’t indicate how long they intend to leave rates at 0%. If the econmy was doing well, with all of the money the Fed has pumped into it, we would have inflation by now.

    How many states are nearing bankruptcy? Not sure, but at least 4 do not have enough money to meet their obligations.

    “If you’re due a state tax refund this year, you should probably prepare to wait awhile for that check to arrive. Four cash-strapped states, including Alabama, Hawaii, New York and North Carolina are planning to delay refund payments this year in order to cover budgetary shortfalls. And it’s possible that more states may follow suit, in particular Idaho and Kansas.”

  • Bozo

    Ireland does NOT have good food or wine…..

  • BrianSJ

    With a globalized economy, we need another planet to be ‘the greater fool’.

  • Russ

    Everything is Great! Everyone is calling for markets to continue to climb via the fed’s daily liquidity injections into the market. The only thing missing is the consumer, but, like the fed, we should all be issued printing presses and then we go go shopping for everything we want and the economy will BOOM!

    What market theory states that you can’t print money forever? Obviously outdated as things are different this time…

  • guilhem

    And what if …
    Companies reduce debt burden, reduce workforce, reduce overheads, … and thus increase results although turnover are may be lower … and companies are ready to increase prices quicker than use to …

    Gold, cannot compete …

  • Daniel Miller

    THis poop-eating moron Harry still doesn’t get that the DJ Idiot A is only where it is because of INFLATION, meaning M1. You have heard of some economics terms, feces breath Harold?

    And, I don’t know if you’re aware, Harold, 12,700 still puts the DJIA about three years BEHIND.

    But then, I’m sure one as smart as you got out of the market precisely on September 16, 2008 and back in precisely on March 9, 2009. And thus you are richer than Soros.

    Right? Didn’t think so. You are as much a fraud as this economy.

    BTW Greece still hasn’t been bailed out and the krauts won’t let it.

  • Theophiluspunofall

    Harry once said SPX 1300 pretty much baked in by year end. He hasn’t admitted to his downward revision. He has such a Boner for Bonner I’m guessing he won’t.

    I check in here once a month or so and Harry is still predictably hanging around, like a drunk ranting on a street corner. You’d think he’d enjoy wasting his time even more with like-minded Leprechauns over at Paul Krugman’s blog.

    Ciao, Harry, see you next month. In the meantime, don’t sell your Blockbuster shares – it’s a buying opportunity!

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