- Published on Thursday, 12 July 2012 18:47
- Written by Bill Bonner, Founder and President, Agora Inc.
- Hits: 747
Dow down 48 points yesterday. Gold down $4/oz.
Nothing particularly troubled investors yesterday. Nothing particularly encouraged them either.
Several analysts say the U.S. economy is already in recession. They say revised numbers will prove it later in the year.
Maybe they are right. Europe is in recession. China is slipping... perhaps faster than anyone realizes. Manufacturing in the U.S. has dropped off. Employment figures show the number of people without jobs is increasing. It would not be at all surprising to find output is declining too.
From all we can tell, the U.S., Japan and Europe are stuck.
This is, of course, just what you'd expect. This is a "Great Correction." After years of living beyond their means, citizens of developed-world nations are now being forced to live within their means... or even a little below.
Debt levels have to go down. Paying down debt... or defaulting on it... is always a drag on an economy. That's what a correction is all about. It is painful. It is unpleasant. But it is also necessary and unavoidable. And it can take time.
The excitement... and the point of great curiosity... concerns the feds' efforts to contradict the primary market trend. Consumers and businesses (and, to some extent, investors too) want to hunker down... correct their mistakes... and repair their balance sheets. But the politicians want to get re-elected. And you don't get re-elected when unemployment numbers are high.
President Obama would be doomed were it not for one man: Mitt Romney. The Republican candidate seems on the verge of pulling off a miracle: getting his opponent re-elected despite a (barely) contained depression. No challenger has ever done that before.
The containment comes in the form of cash and credit. Trillions of dollars' worth. As we reported yesterday, no central bank in the developed world offers short-term interest rates above 0.75%. And not one runs a budget surplus... or anything close to one.
We can be pretty sure about what effect all this containment will have on the real economy. Value investor David Einhorn tells us via Reuters:
David Einhorn, founder and president of hedge fund Greenlight Capital, told CNBC on Tuesday that the U.S. Federal Reserve's economic stimulus program was counterproductive.
Einhorn, known for his prescient call against Lehman Brothers, also said he still favored Apple Inc.
He said low interest rates as a result of the Fed's economic stimulus were "depressing" and kept savers from generating income.
"I think it's actually counterproductive," Einhorn said of the stimulus program, adding that it lowers the standard of living and drives up food and oil prices. He said he would suggest a rise in interest rates on U.S. Treasury bonds to "a reasonable level" of 2% to 3%.
You can't cure a debt problem with more debt. That was obvious from the get-go. The big question is: What happens when you try?
You're not likely to get a pickup in real growth -- because you are essentially just sucking real resources out of the productive sector of the economy and shifting them to unproductive, parasitic sectors. That's not the way to increase prosperity. And without real prosperity, you have no way to "work your way out" of the debt mess you cause.
So what happens?
Well... for the moment, not much. As for the future, we'll have to wait and see. But somehow excesses must be resolved. Whether it is private debt... or public debt... it has to go away, somehow.
Private debt in the U.S. is being reduced. It is down, according to the Financial Times, from about 300% of GDP in 2007 to about 250% today. At this rate it will be down to 1970 levels in roughly 15 years.
But government debt is going up fast. How will that be resolved? When?
In a boom of inflation? Or a bust of depression? We can hardly wait to find out!