The Great Correction is Over! Or Not. - The Daily Reckoning
The Daily Reckoning by Bill Bonner
On This Day - 20 February 2014
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Baltimore, Maryland

First, the market news: the Dow went down 89 points yesterday. Gold dropped back 4 bucks.

And now the good news: The Great Correction is over!

Hallelujah. People are going deeper into debt...and getting divorced again.

No kidding. Bloomberg reports:

    The number of Americans getting divorced rose for the third year in a row to about 2.4 million in 2012, after plunging in the 18-month recession ended June 2009, according to U.S. Census Bureau data.

    "As the economy normalizes, so too do family dynamics," said Mark Zandi, chief economist at Moody's Analytics Inc. in West Chester, Pennsylvania. "Birth rates and divorce rates are rising. We may even see them rise strongly in the next couple of years, as households who put off these life-changing events decide to act."

    Divorces were at a 40-year low in 2009, according to Jessamyn Schaller, an economics professor at the University of Arizona in Tucson, citing data from the federal government's National Center for Health Statistics. The divorce rate more than doubled between 1940 and 1981 before falling a third by 2009, according to figures from NCHS, based in Hyattsville, Maryland.
Well, that's great news, isn't it? Things are going back to normal. And if the Great Correction is over, you can expect higher consumer prices, more jobs, lower bond prices and a higher rate of growth. A real recovery, finally.

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But if the Great Correction isn't over, you can expect more of what we have seen for the last 5 years - a low CPI (officially only 1.5% over the last 12 months), low bond yields (high prices), more QE, and sluggish growth.

The Wall Street Journal:

"Household Debt Jumps as Banks Loosen Up."

Pity the poor schlep who has been forced to stay with his wife because he couldn't afford to get rid of her. Here's his chance: the Fed has gamely tried to boost credit, borrowing, spending, consumer prices and divorce rates. But the banks have been sitting on their reserves, rather than lending them out. Result: stagnation. But now...for the first time since 2008, year over year, households are borrowing more than they are paying off or defaulting on.

"People actually want to step up and take on more debt," said an analyst quoted by the WSJ.

For the last five years, households paid down debt. This is why the QE $3.2 trillion QE program was such a dud. The Fed's QE must pass through the banking system in order to get to the consumers' money supply. Banks have to lend out the money. If they don't, the cash stays in reserves.

The genius of fractional reserve banking is that it permits banks to lend out a deposit not once, but up to 10 times. So, if households' appetite for borrowing has suddenly improved...and if the banks put their shoulders to it...there could soon be substantial increases to the amount of money out and about. This would give consumer prices the boost the Fed has been aiming for. Who knows; they might even get more than they were hoping for. Higher inflation could spook overseas dollar holders...causing them to give their tattered Franklins and shopworn Grants the heave-ho, back to where they came from.

But looking more closely, it appears to us that neither divorce numbers nor the debt numbers are sure signs of economic health. After 5 years of sub-normal divorce numbers, you would expect them to regress to the mean, no matter what was going on in the economy. And as for the debt, the biggest gain came in student debt, which rose 12%. In fact, it rose almost exactly as much as borrowers aren't paying. Delinquencies are at about 12% too.

Why do people want to go to school, rather than working? Because they can't find good jobs. Why do they borrow, rather than pay for it out of savings? Because they have no savings. Why do they borrow from the federal government? Because this lender performs no credit check.

Once the federal debt devil has you in his grip, it is very hard to get away. You may be prepared for a job, but that doesn't mean a job is prepared for you. And the only way you can put off making payments on your debt is to borrow more and stay in school. Deeper into the bowels of debt hell you go.

That's why student loan defaults are growing so fast. Nearly one in 8 borrowers hasn't made a payment in the last 90 days - the highest delinquency rate of any form of debt. And it's going up. It rose by 40% in the last 3 years. How much of that debt will never be repaid? And remember, when debts go unpaid, it reduces the money supply.

The fastest growing category of debt owes its growth to the failure of the economy, not its success. Is the correction really over? Maybe not.

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

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