The Great Correction continues

Aug 16, 2010

Ouzilly, France,

Nothing much happened on Wall Street Friday. Gold...stocks...held more or less where they were. So, we take up another week...wondering...
waiting...trying to puzzle out what is going on.

Just like every other week!

Economists are finally beginning to ask questions. How come the economy isn't doing better? Why aren't consumers spending? Why aren't businesses hiring?

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They've thought they were dealing with a typical recession - just one that was worse than most. But now, they're scratching their heads. It sure doesn't act like a typical recession. Maybe this isn't a cyclical problem at all, they're beginning to say to themselves. Maybe it's structural. Maybe something will have to change. But what? How? When?

Whatever is going on, it ain't a 'recovery.' It ain't a depression either - at least, not yet. So far, our Great Correction hypothesis seems as good as an explanation as any.

Here's the latest from Bloomberg:

"Prospects for U.S. economic growth took a hit this week after reports showed the trade deficit swelled and consumers reined in spending.

Consumer spending, which makes up 70 percent of the economy, is being held back by an unemployment rate close to a 26-year high. An Aug. 12 Labor Department report showing more Americans than estimated filed applications for unemployment benefits last week pointed to further weakness in the job market."

The U.S. trade deficit widened by $7.9 billion in June, the most since record-keeping began in 1992, to $49.9 billion, a report from the Commerce Department showed. Exports posted the biggest decline since April 2009.

Investors should prepare for "major structural changes" as the global economy shifts to slower growth, Mohamed A. El- Erian, chief executive officer at Pacific Investment Management Co. said yesterday in a radio interview on "Bloomberg Surveillance" with Tom Keene.

Consumers are spending less - no surprise there. That's just what you'd expect in a correction. The bad news is the trade deficit. It tells us that the little consumers are spending is not going to US producers. It's going overseas.

Which means, the US continues to ruin itself so that others may have prosperity, and have it more abundantly. Jobs will be created in foreign countries - not in the US. Profits will be earned by foreign firms - or US firms doing business overseas. Capital/skills/expertise/technology - all the ingredients necessary for success in the modern economy - will continue to accumulate outside the US.

Yes, dear reader, the Great Correction continues. It will surely correct the credit bubble...the housing bubble...and the stock market bubble. It may correct far more than that - including the dollar...the US bond market...America's bubble of power...and outsized living standards in the US.

** From Germany comes news of a remarkable resurgence.

BERLIN - The government on Friday announced quarter-on-quarter economic growth of 2.2 percent, Germany's best performance since reunification 20 years ago - and equivalent to a nearly 9 percent annual rate if growth were that robust all year.

The strong growth figures will also bolster the conviction here that German workers and companies in recent years made the short-term sacrifices necessary for long-term success that Germany's European partners did not. And it will reinforce the widespread conviction among policy makers that they handled the financial crisis and the painful recession that followed it far better than the United States, which, they never hesitate to remind, brought the world into this crisis.

A vast expansion of a program paying to keep workers employed, rather than dealing with them once they lost their jobs, was the most direct step taken in the heat of the crisis. But the roots of Germany's export-driven success reach back to the painful restructuring under the previous government of Chancellor Gerhard Schröder.

By paring unemployment benefits, easing rules for hiring and firing, and management and labor's working together to keep a lid on wages, Germany ensured that it could again export its way to growth with competitive, nimble companies producing the cars and machine tools the world's economies - emerging and developed alike - demanded.

Germans steered clear of the debt-fueled consumption boom that many believe contributed to the financial crisis. During the recession, Chancellor Angela Merkel resisted the palliative of government spending that the United States and some European partners felt was crucial to restoring growth.

As the latest numbers show, Germany is outproducing its neighbors by wider and wider margins, raising fears of a two-speed Europe that could render the common regional currency unstable.

France's economy grew at just a small fraction of Germany's, 0.6 percent in the second quarter. Spain's economy grew an anemic 0.2 percent, while Greece's shrank 1.5 percent.

How do you like those Germans? They ignore Tim Geithner, Martin Wolf, Paul Krugman and all the other neo-Keynesian meddlers and know-it-alls. Instead, they stick to the basics. They encourage work and productivity. And now, wouldn't you know it? The Teuton ants are taking market share from their grasshopper competitors.

You remember how Wolf, et al, told the Germans not to work so hard? Angela Merkel was urged to raise wages in Germany...and boost spending. Germans were said to be producing too much, working too hard, and goofing off too little.

"You should be more like us," said the Anglo-Saxons. Fortunately Merkel had the good sense to ignore them.

Does that mean, the crisis is over for the Germans? Have they found a way make the welfare state work?

Maybe. There's no doubt that they are on a better road than the US, France and Britain. But there are bound to be some potholes.

*** Jules and his father performed a musical duet last night. One of the guests - an Englishman - surprised us. He got out a harmonica and joined in. It turned out, he had been a musician in his youth.

"You do country....I do blues," he explained. But the two styles came together in a couple of bluesy country numbers, including "Girl from the North Country" and "Folsom Prison Blues."

As they performed the old tunes, the young people got up and headed off to the pond. They started a fire on the bank and sat around roasting marshmallows.

But it was not exactly a night with the Boy Scouts...or Kumbaya...

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

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1 Responses to "The Great Correction continues"


Aug 16, 2010

Why do you discuss about dead economies. Why noy India and China and the impact of dead economies on them, who ismore depwndent on these senile economies, C or I, How is the flow of FIIs going to effect the most, I or C etc.

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