by Bill Bonner
“Yesterday was a nothing, no-account, waste-of-time kind of day in the markets. The Dow rose a bit. Gold did too. So, let’s take this opportunity to raise our heads and have a look around. When you watch something too closely you can miss the bigger story, like studying an unfolding bud and without realizing it is springtime. But first, a chance to meet Dear Readers… We’re planning a trip to China next month. We’ll be there with colleague Addison Wiggin and three of our children, visiting Beijing and Shanghai. If you live in China, we’d like to meet you. We’ll host a cocktail reception in both cities. It might be a small party; but it will be fun. Drop a line to our assistant: firstname.lastname@example.org
Now, back to springtime… In April, 2007, the US, British, Irish…and many other economies…were saturated with debt. It had to be squeezed out. And so began a Great Correction. Everything under heaven serves some purposes. And the purpose of a correction is to correct mistakes. In this case, the Great Correction was meant to purge the errors of a credit expansion that was already more than half-a-century old.
The de-leveraging began in US subprime mortgages. Then, it spread, calling into question the value of just about everything. It resulted in the biggest losses in history – mostly in stocks, real estate, and derivative assets. From memory, those losses were estimated at between $20 and $30 trillion dollars, worldwide. The rescuers were on the scene in force by the fall of ’08, after Lehman Bros. went belly up. They effectively stopped the process – partially – by refusing to allow major borrowers to go broke. If a large institution couldn’t pay its debts, they lent it more money.
In Ireland, for example, lenders had put far too much money into real estate. When borrowers couldn’t pay, the government stepped in, grandly announcing that it would cover all the loans. Whew! What were they thinking? The bad debts turned out to be a lot more than the Irish government could handle. Pretty soon, not only were the bankers in trouble, but so was the government itself. Ireland was going broke. And the more private lenders raised their lending rates, the more broke Ireland became. The government was desperate for a bailout; it turned to the IMF and Brussels. Now, the hole is deeper…and the Irish are looking for another bailout.
In the US, the story is similar. It bailed out the banks, Fannie, Freddie, AIG, General Motors and so forth. But since the US can print its own money, it could bail without sinking its own barque. In the short run at least, its own credit was unimpaired. The Fed bought up the bad loans and mortgage derivatives – to the tune of $1.2 trillion – printing the money to do so. Unlike the Europeans, whose central bank is run by Germans with a residue of financial integrity, the Fed followed the Bank of Japan. It reduced lending rates to zero. It monetized debt – first the $1.2 trillion of private sector debt from all over the world…and then $600 billion (still underway) of public sector loans. And let’s not forget the $700 billion TARP program. Or the tax cuts. Add it all together and you a total bailout bill that may exceed $20 trillion.
What has been the result of all this expense and effort? Well, if you think the Great Correction needed to be arrested – at any cost – it was a marginal success. US GDP shrank…but only by about 4% maximum. Unemployment got no higher than 10% – thanks largely to the way the number is put together. Unemployment seems to be yielding grudgingly to the feds’ assault. At least, that’s the way the papers tell the story. By our math, job creation is just barely keeping up with the population increase. Meanwhile, housing fell about 20%…and is still going down.
From all that we can tell, the Great Correction has not been turned around…it has merely been slowed down, delayed, and magnified by public sector borrowing, and money-printing, on a huge scale. In short, the feds have made the situation worse, just as we predicted. They’ve frozen the process of correction. Which leaves the zombies still preying upon the productive economy.”