Years of debt accumulation aren't cured by a 5% correction in stocks, as Wall Street would have you believe. A major debt correction -- one that the market has been trying to accomplish for years but which has been rejected time and time again by Fed policy -- is necessary to correct the huge imbalances that exist. To deny the necessity of this eventuality is, of course, human.
Total US debt is now 3.6 times GDP and continues to grow. But new debt is less and less effective in driving economic growth: More income is going to service that debt and less to creating production, the stuff that generates income.
In 1929, US debt was 2.9 times - the second highest it's ever been. Despite Mr. Bernanke’s false recollections of Fed actions back then, they created an immense amount of liquidity (credit) trying to cure the stock market crash. The market did rally temporarily as a result, then slowly crashed to deeper lows, since that new credit just went to short-term speculation in stocks. The new money did no real good, because there was already too much capacity, so the credit never went to creating production.
The same thing is happening today. It now takes $7 of new debt to make $1 of GDP where it only took $1 in 1980 and $3 in 2000.
And the consumer -- which is most of the economy -- is in trouble too. Today household debt is now 130% of income. That's up from 100% just in 2001, 70% in 1986, and 40% in 1953. How quaint we were back then.
So step back from the TV and take a good long look. The US' problems aren't solved by a 5% correction in stocks and the coming debt correction won’t take a week and then go away. We don't know how it will manifest, nor do we know the timing of it. But you should know the nature of the beast and the only way to fight it: Reduce risk before everyone else does.
Email
Print
Del.icio.us
Digg
Facebook
Subscribe
