No end to the Great Correction anytime soon - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 1 February 2012
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Baltimore, Maryland

Readers who expect an early end to this Great Correction are going to be disappointed. There is no sign of it reaching its conclusion anytime soon. Just the contrary...there's no end in sight.

The Great Correction seems to be going along just as you'd expect. Or, just as we'd expect.

Here's the latest from Reuters:

Home prices fell more steeply than expected in November, and consumers turned less optimistic in January, highlighting the hurdles still facing the bumpy economic recovery.

The S&P/Case-Shiller composite index of single-family home prices in 20 metropolitan areas, released on Tuesday, declined 0.7 percent on a seasonally adjusted basis, a bigger drop than the 0.5 percent economists expected.

Separately, an index of consumer attitudes fell to 61.1 in January from 64.8 the month before, as Americans turned gloomy about the job market and income prospects, said the Conference Board, representing private companies.

Some improving housing data in late 2011 had raised hopes the recovery was finding its footing. But weaker numbers this month have underscored how lengthy the healing process will be.

U.S. housing prices have plunged by about a third from their peak before the financial crisis, and a combination of high unemployment, tight mortgage lending conditions and more foreclosures in the pipeline are holding back a recovery.

A report released on Monday showed spending was flat in December as Americans focused more on saving.

Once a key pillar of the U.S. economy, Americans have taken a more frugal tack as many struggle with hefty debt burdens.

And guess what? The Great Correction is having the same effect in Europe. Here's the Wall Street Journal:

LONDON-U.K. households made a record repayment of personal loans and credit card bills in December, Bank of England data showed Tuesday, underscoring households' limited appetite for spending and heightening fears the U.K. may slip back into recession.

BOE figures showed U.K. consumers made a net repayment on unsecured loans of £377 million ($592.3 million) in December, the highest figure since records began in 1993. It was also the first time since last January that repayments exceeded new borrowings.....

In some ways the situation in Europe is worse than in the US, depending on where you are. Youth unemployment is up as high as 50% in some areas. Even in supposedly strong economies it is around 20%.

And, oh yes, you want yield? How about a 10-year note from Portugal? It comes with a yield of 17%.

Portugal's economy is shrinking at a 5% annual rate. Italy, Spain, Greece and Ireland are not in much better shape.

So what do the euro-crats do? Same thing as the US-crats. They give the banks money, hoping the nice bankers will spread it around.

Last month, the European Central Bank provided 489 billion euros in 3-year loans. "Super Mario" Draghi - formerly head of the bank of Italy, now head of the ECB - keeps the banks from going bust...and begs them to keep the governments from going bust.

The banks needed about 230 billion to refinance loans coming due in the first quarter of this year. They got the money from the ECB.

What a show! Draghi, Monti, Papademos and all the other 'technocrats' now managing the crisis are the very same guys who created the crisis. They worked for Goldman, ran central banks, and helped organizations such as the IMF and the World Bank make a mess of the world's financial system.

Now, they're solving the crisis the same way they caused it - by creating more debt. The banks can't pay their bills so the central bank lends them money. Governments can't pay their bills either, so the central bank lends them money so they can lend it to the government.

The ECB says it will give away more money on February 28th. Goldman Sachs is advising other banks to take the loot. As much as $1 trillion could be given out.

Let's see, how does this work? You are deeply in debt. So, the bankers lend you money so you can continue making payments. You go even deeper in debt...and the bankers lend you more money so you can keep making payments...

...and so on...

Where does this end? We don't know.

Whee!

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*** We had lunch with an old friend last week. We hadn't seen him since our school days in the '60s. He told us the following story.

"It's amazing. I've lived there all my life. But I'm a little different, I guess. My brothers are doctors and lawyers. I did them a favor by being the black sheep of the family. So they didn't have to be.

"I live in a rich neighborhood. But I don't work much. I can't work at all now, since I had my motorcycle accident. And I guess people wonder how I could live in such a place. Well, the answer is simple. My father was an eye surgeon and he bought it in 1941 and gave it to his children when he died.

"Well, somehow, the idea got out that we were drug dealers. The police started keeping an eye on us. There was an old van parked on the property. They figured it was for transporting drugs. And then, I had a couple of Mexicans helping me on the farm. They figured those guys must be drug runners. I don't know how it all happened, because I've been there for more than 60 years...and anyone could have asked me what was going on.

"But one night, I'm in bed and these guys in combat gear bust down the door and point rifles and me and my wife. It was a SWAT team of some sort. And then my son came home. They asked him what he was doing there. He told them he lived there. So they arrested him too...

"Of course, the door wasn't even locked. They could have just turned the doorknob. But I guess that wouldn't have been so exciting..."

"They let me out of jail in a matter of hours...but only after signing a paper saying we wouldn't sue the police for false arrest, etc. If I didn't sign the paper they said the arrest would be on my son's record for life..."

How do things like that happen? How do the police and drug enforcement agencies make such a mistake?

Well, there's a lot of money in the drug trade...and not just for the people who traffic in drugs. The drug dealers make money. The drug fighters make money too. In short, the illegal drug industry has been zombified.

The dealers make money because the drug fighters restrict supply, keeping prices, and profit margins, high. The drug fighters make money because they are on the front lines in the war against drugs! They put on uniforms and pretend to be combating serious crime. They get jobs, helicopters, cars, guns, sophisticated machinery...and much more.

And then, when they actually catch someone with drugs, the lawyers come into the picture...and the prosecutors...and the prisons. Guess what is said to be the most powerful single lobbying organization in the state of California? Prison guards! The whole thing is immensely profitable. Everyone wants a piece of it.

The war on drugs may be a colossal waste of money and a stain on America's escutcheon, with millions of dollars wasted and thousands of people sent to prison for no good reason. But neither the drug dealers nor the drug fighters want to see it come to an end.

Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.

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2 Responses to "No end to the Great Correction anytime soon"

M G Sharma

Feb 4, 2012

good, Everybody need to have job no matter whether it is morally right or wrong. And everybody has reason to pronounce homself/herself/itself right doer including the govt. If everything on this earth statrts happening in natural right way then govt and the peoples running these governments will start thinking about existence, their future and there job of fooling the the human kind on this earth. Regards

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JOSE

Feb 1, 2012

world economy will have to struggle' but india will go against.

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