Wisely, households cut spending and reduced borrowing. But they are still heavily in debt. In 1971 - before the big debt bubble began inflating - American households had $5 of income to every $4 of debt. Now, for every $5 of household income they have $12 of debt. That's down from the 'peak debt' of 2007 - at $13 for every dollar of disposable income, but still much more than the historic average.
The feds' response to household prudence was also predictable. After so many years of back-stopping the stock market...and luring consumers and business deeper and deeper into debt...they weren't about to quit. Besides, their theories told them that this was when their help was needed most.
This put the feds and Mr. Market on opposing sides of the big blow. The feds whip the winds up from the south. Mr. Market sends them blowing down from the north. The feds want inflation; Mr. Market wants deflation. The feds want more credit; Mr. Market is ready for a credit contraction. The feds send down torrents of liquidity. Mr. Market mops them up.
This leaves the economy in the center...in the eye of the storm, where it is quiet. Prices seem to be fairly stable. The streets are calm. The sun shines. Restaurants and bars report decent traffic.
Black Friday was a disappointment for retailers, but that was said to be because so much shopping is now done via internet. There are fewer real 'breadwinner' jobs. But, heck, the unemployment rate is down. The economy is sluggish...but the stock market reports clear sailing.
Yet, in any direction, beyond this scene of calm and normalcy, are the strong winds of almost irresistible force pushing against an almost immoveable object.
Zero interest re policies...quantitative easing...deficit spending - all are meant to off-set Mr. Market's dark clouds and fierce tornadoes. If Mr. Market weren't in such a destructive mood, these measures would have already sent interest rates and inflation soaring skyward. Without Mr. Market, there would probably be a super-boom, with the Dow flying up to 25,000...gold at $3,000...and $5 for a Big Mac sandwich.
And if the feds weren't so determined to stop him, Mr. Market probably would have knocked the Dow down to about half what it is today. He would have crushed half of the major Wall Street firms...and you'd probably be able to get a Big Mac for $1 - with fries.
But for now...all is calm. Almost. Mr. Market is counter-balanced by the feds. The feds are holding off Mr. Market.
Who will win this contest?
In the end, Mr. Market will triumph. He always does. He represents the forces of Nature...and the gods. He is the fellow who keeps trees from growing to the sky...who forces prices back to the mean...and who never gives a sucker an even break. And that bell you don't hear ringing at the top of a market? That's Mr. Market not ringing it.
Bill Bonner is the President & Founder of Agora Inc, an international publisher of financial and special interest books and newsletters.