Editor's Note: The following originally appeared on January 11, 2006 and, in light of current events, has been reprinted here for the benefit of the Minyanville community.

Professor Succo,

Your post got me a bit more scared and disturbed than I already was. The systems (financial, political and socioeconomic) are eroding. The clock is ticking.

Forget about stocks, daily gamesmanship, charts, etc. When the water goes through the cracks and into the basement, what happens then?

Your Faithful Minyan,
Steve

Minyan Steve,

What happens? We have a significant correction in asset prices.

A recession is a healthy thing. In an expansion, excess capital is built up - non-productive capital. Think of all the strip malls opened that shouldn't have. (Couldn't we drive another 2 minutes to pick up that oven mitt?) They only exist because of an expanding economy. This adds costs to society that shouldn't be there.

A recession wipes non-productive capital out and starts the game fresh. It's a healthy thing. This is a natural cycle in capitalism.

But through political will, the Federal Reserve and the government have expanded their activities to wipe out these cycles by printing money. But they haven't been wiped out - only delayed.

And compressed: The next recession is going to turn into a major credit contraction equal to the credit expansion that's been allowed to grow unchecked.

So when it does happen, it will wipe out the egregious amount of un-productive capital that exists. One problem, though, is that now the real economy is inextricable from stock and real-estate prices.

But when all is said and done, perhaps we'll realize what it means to give the government the power to debase the currency we've given them (which they don't really have the right to do - we just let them). This will set the stage for America to rise again.

Yours,
Professor Succo