What is a correction really for?

Feb 17, 2011

Baltimore, Maryland

Gold up a buck. Dow up 61.

Housing still going nowhere...NAHB index flat for 4 months in a row.

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Food imports inflating at a 30% annual rate over the last 3 months. Fuel going up at a 60% rate. The World Bank says food stocks at “dangerously low” levels...

"Manufacturers squeezed," by rising metals prices, says a headline.

Retails sales in January below expectations.

What can we say? Mixed signals. Confusing outlook. The underlying economy is in a slump. But the feds are putting out more and more hot money to try to fix it. It’s a Great Correction, in other words.

So, let’s step back one more time and take a look at the big picture...then we’ll return to our day by day reckoning tomorrow.

Steven Rattner, writing in the Financial Times, says we’re headed for a "fiscal nightmare."

He puts the unfunded obligations of Social Security and Medicare at $50 trillion. Which is a lot of money. Even in this day and age.

And he notes, as we did, that Obama's deficit cutting initiatives are puny and pathethic. In a nutshell, the Democrats don't want to cut discretionary spending for infrastructure, education, health and other seemingly laudable goals. The Republicans don't want to cut any money destined to maintain the security of the United States - also a worthy goal, if you put it that way.

Nobody wants to cut Social Security or Medicare entitlements.

That doesn't leave much. It is as if the feds were trying to butcher a wicker chair. There's no meat on it to cut.

By our reckoning, the feds collect about $2 trillion in taxes. They spend about $3.6 trillion. That is how we get a record budget deficit of more than $1.6 trillion this year.

They spend about $1.80 for every dollar in revenues, the greatest imbalance since WWII.

During wartime we can understand going deep in the hole. "Buy Bonds," say the posters. "Support our Troops," say the slogans. Lending money to the feds seems like a good thing to do; the alternative - defeat -- would be such a drag.

But what is the emergency now? If the feds slow down their spending machine, what calamity will be upon us? What evil is so great that we should put the financial integrity of the nation at risk? Will foreign soldiers fill our bars and brothels? Will we have to surrender Bush and Cheney as war criminals? Will we have to pay reparations and lose Alaska?

Nah? Then what is it?

As near as we can figure, if we cut the deficit now we risk a return to sanity. That is, without the boost from government's very stimulative fiscal deficits, the economy would have to operate on a more sensible basis. The feds could spend only what they could afford. People who rely on money from the feds would have to get honest jobs...or cut their own spending to bring it in line with their real incomes.

People could not spend money they got from the feds...after the feds borrowed it from someone else. So, there would be less money in the consumer economy, leading to all the big D problems - deflation, de-leveraging, defaults and depression.

In other words, without the feds' activism, things might do what they ought to do. Debts would be written off, paid down, or restructured. Companies that depend on debt-fueled demand would go out of business. People who couldn't make ends meet without some extra twine from the government would finally wouldn't get their ends together; they could go broke and get on with their lives.

That's what a correction is for - to fix the mistakes of the past...notably the mistakes caused by too much easy credit.

Instead, the feds seem determined. They're doing the most remarkably imbecilic thing, no matter what we think here at the Daily Reckoning. Rather than let the private economy adjust to new circumstances...they will bankrupt the US government trying to keep the craziness going.

But we are libeling imbeciles, aren't we? Stupid people would never think of doing such a thing. It takes a smart person with a lot of education. Because it's not that easy to overcome common sense. You need a lot of brainpower to do something that stupid.

*** The world took a big step forward - on the road to perfection - last week. At least, that's what you'd think if you watched TV or read the paper.

To hear the press tell it, when a mob upsets a dictator, it is because they 'yearn for freedom.' They can hardly wait to get into the voting booth so the can pull the lever for truth and justice.

Martin Wolf, writing in the Financial Times, and recently listed by Foreign Policy magazine as one of the world's 100 best thinkers, says the move in Egypt was a step in the right direction. How does he know it is the right direction? Because that's the way the rest of the world is going!

He provides figures showing there are many more democracies today than there were in 1945. The reasons he gives for this shift? Economics. Education. Richer, better educated people are less inclined to leave all the power in the hands of an autocrat, he thinks.

But there's another reason.

"The most powerful reason for believing in democracy's future, however is that it responds to something deep with in us."

Yes, dear reader...it is in our genes. Our inner democrat just needed about 2,000 years after the birth of Christ to express himself. And now he's mouthing off everywhere.

Or...is it possible that democracy is just the flavor of the month...an evolutionary development, like all the forms of government that came before it? Is it possible that it succeeded in the 20th century because it was much better adapted to leeching out the wealth and complicity of the average man? It gave him a stake in the system -- like getting some prisoners to guard each other, or bribing taxpayers to rat out their neighbors to the IRS? Isn't it possible that by giving the masses a "voice," the elites who really control government are better able to take his money...and, if necessary, his life?

Soldiers will do their duty to a dictator, if the price is right. They will do their duty to the government they helped elect for less. And they will more willingly submit to government's taxes, too, if they feel they are its masters, rather than the slaves. The real difference may only be an illusion, but it is an effective one. In practice, the individual may have less ability to influence the large pool of voting numbskulls than he does to influence a single knuckleheaded autocrat. But heck, we're all democrats now.

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

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3 Responses to "What is a correction really for?"

K.G. Rao

Feb 18, 2011

Could EQM ask Bill Bonner to comment specifically on Paul Krugman's theory, contrary to Bill's that currently more deficit spending stimulus is the way to go. Each writes his own view (Krugman in NYT/Hindu), but a debate is what is needed.


r k sharma

Feb 17, 2011

Keep it a bit easy
This was perhaps a bit too tough for the retail guys eh?


r k sharma

Feb 17, 2011

Monarchy,Oligarchy,...Democracy are all steps towards a Utopian society/state/form of governance.
None of them is perfect and those that were discarded was for a system that appeared to be more equitable/just/fair.
Each of the systems discarded was in view of the capacity of vested interests to manipulate the system to their advantage.
Democracy is by no means a perfect system by this yardstick and it is susceptible to manipulation by vested powerful interests.The problem is that this is the best form of governance that human ingenuity has been able to devise so far ; a bit doubtful about this.
The best system that the human race can have would have to ensure that it cannot be subject to manipulation by anyone for vested interests.Perhaps, this would be possible if everyone knew or had the capacity to know what everyone else was doing... THE REALITY.
Here our concept of human rights is one of the problem to overcome. The second would be our concept of a seperate nations.
Are you listening ...George Orwell.

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