The Great Correction: Awaiting Bailouts that Will Never Come

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

The Daily Reckoning