The Economy has a mind of its own

Aug 17, 2010

Ouzilly, France,

What were they doing down by the pond?

The Dow was flat yesterday. Gold rose $9 to $1,226.

Has the dip in gold already come and gone?

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We were expecting lower stock prices...and lower gold prices too. Both went down earlier in the summer. But neither went down as much as we expected...nor stayed down.

But it's still fairly early in this correction. The recession began at the end of '07. We're now approaching the last quarter of '10.

By this time in the '30s, stocks were hitting rock bottom. The market crashed in the autumn of '29...then bounced...and then started down again. It didn't stop until it hit bottom in July of '32 - nearly three years later. By then, stocks had lost nearly 90% of their value, from 381down to 41.

It can take longer, however. Japanese stocks crashed in '90. But they didn't hit their ultimate bottom until 2008 - 18 years later - with losses of about 90%.

So relax, dear reader.

Analysts are talking about a "double dip." They're worried that the economy may slip back into recession in the 4th quarter.

There are signs of weakening. GDP growth figures are being revised downward. Consumers aren't spending. Banks aren't lending - except to the federal government. Mortgage payments are falling further behind - even with fixed mortgage interest rates at record lows.

So many people are out of work for such a long time that we're seeing more and more "Death of the American Dream" articles.

Even lawyers are out of work. Recent law school graduates say they can't find jobs.

And the president of all the Americans, Barack Obama, tells us not to "give in to fear."

"All we have to fear is fear itself," said Franklin D. Roosevelt. Yes, fear...and 25% unemployment...the Great Depression (made worse by Roosevelt's interventions)...a 27% decline in GDP...the Dust Bowl...the Wehrmacht...and the Imperial Japanese Army!

Obama might want to save the fear claptrap until Americans have something worry about. So far, the correction has only taken 4% off America's GDP and only took the official unemployment rate to 10%. And consumer prices haven't actually gone negative - yet.

Don't trouble yourself about it. The economy is in a correction that began in '07 and hasn't stopped. It won't end until it has done its work. That will take time...maybe another 5 years. Maybe another 15 years.

Markets have to breathe in and breathe out. This market is exhaling. That's just the way it works.

A Wall Street Journal headline:

"Another threat to the economy: Boomers cutting back."

You see, dear readers, the financial press has no idea of what is really going on. Boomers are cutting back? Of course boomers are cutting back! They're getting ready for retirement. They need to save some money.

It was loony to think you could finance your retirement out of the increases in your house value. Who were you going to sell the house to? Boomers were the biggest buyers of houses. When they turned into the biggest sellers, it was sure to cause trouble.

Besides, you gotta live somewhere.

Financing your retirement on stock market gains was a bit absurd too. Stocks go up...and down. There was never any guarantee that they would be up at a convenient moment...nor that they would stay up when the boomers all decided to cash out.

No, dear reader, you can never count on getting something for nothing. You can't expect to finance your retirement on money you didn't earn. Instead, you need real savings. Saved money. Money you didn't spend. Money set aside. Anything else is just hoping...wishing...praying you get lucky.

(Even real savings are not guaranteed. Your money can still be swept away by inflation.)

But the problem with the WSJ headline runs much deeper. Financial journalists don't understand what an economy is. Instead, they wallow in the same flattering claptrap as economists. They think the economy is something that is supposed to do their bidding. It's supposed to make us all rich, by growing constantly. If it isn't growing there must be something wrong with it. Something that needs to be fixed by the mechanics at the Fed and the Treasury.

You think the economy is "threatened" by boomers cutting back? Not the least bit. It's just breathing in and breathing out. What's the big deal?

But economists want to 'do something.' It's all very well when the boomers spend and the economy expands its broad chest. But when it exhales they rush to put a plastic bag over its head.

*** Things grew more tense and unsettled around the family home yesterday.

"What? They were doing what down at the pond?"

We will spare our dear readers' delicate and refined sentiments. But the clan was up to something and Pater Familias didn't like it.

"Not someone. Everyone, Dad..." answered our informant.

"What...even Calvert [your author's 64-year-old cousin]?"

"No...not Calvert. Not you. Not mom. But everyone else. It's not a big deal."

Hmmm... We had a problem.

Pater Familias wondered what to do...what to say? Should he try to root out the source of the problem...and send the evildoer into exile? Should he play it cool, and count on the children - now almost all adults - to manage their own affairs?

He decided to talk:

"This...thing," he began, speaking to his informant. "It may not be a big deal for you. You're an adult. But there are children here too."

"Children? They're all over 16. Don't worry about it. It's cool. It's under control...."

"Wait a minute. Maybe it isn't a big deal. It's a little deal. But it's not a good deal. Do you understand?

"But Dad, you always gave us all wine at dinner. What's the difference?"

"Well, I didn't give you much. I figured it was better for you to get to know it in a civilized, sensible way...rather than by getting drunk at college keg parties.

"And remember, we're here to enjoy real life... You can do that anywhere. But you can't be with your family anywhere. You can't talk to your grandmother, for example, anywhere or anytime. You only see her a couple of times a year. And you may not see her again. No one lasts forever.

"These days are precious. You're very lucky to have them. You don't want to waste them. You should use them to connect to other members of the family. And to yourself. To figure out who you really are and what you really want..."

"'re making a big deal out of nothing..."

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

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