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You should know the nature of the beast and the only way to fight it: reduce risk before everyone else does.

The relatively small sell-off in global stocks has the media scrambling for reasons and apologists regurgitating their normal excuses. The Wall-Street machine churns out bull after bull to assure us that "the bottom of the housing slump has been reached" and "stocks have no more downside."

There is a reason for the sell-off, although none has been touched on by mainstream sources. Does anyone remember Japan raising rates? For nearly a week nothing happened, so the connection was lost. Even marginally higher interest rates are death to the massive structural problems that exist. The fact that they will take years to correct is something that most do not want to contemplate. Central bankers assure us everything is fine. This is, if I can identify one thing, the problem.

A market economy works because its participants are entrepreneurs. The economy rewards their production and mercilessly punishes their sloth. The economy should provide its own liquidity through production and then savings. In its self-interest it seeks the best value and destroys the worst. It tightens liquidity when debt gets too high and loosens it when it's too low. Government steps in with some regulation to ensure fair play. Fine.

But when government grows too big and through its hubris believes its bureaucracy knows more than the market, the seeds of eventual deflation are sewn. I am not talking about the re-distribution of income through taxes (that is another story); I am talking about direct intervention in the supply of credit to "ensure price stability." That lie is due to the political refusal to allow the market to tighten.

The problem becomes worse when big government aligns itself with big business (the extinction of entrepreneurs) to affect the natural self-correction processes of the market.

Years of debt accumulation are not cured by a 5% correction in stocks as Wall-Street wants you to believe. A major debt correction, one that the market has been trying to accomplish for years but is 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 human.

Total U.S. debt is now 3.6 times GDP and continues to grow. But new debt is having less and less effect in driving economic growth: more income is going to service that debt and less to creating production, the stuff that generates income. The second highest U.S. debt has ever been was 2.9 times in 1929. 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 back temporarily as a result, then slowly crashed much worse as 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 is 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 are not solved by a 5% correction in stocks and the coming debt correction won't take a week and then go away. We do not know how it manifests 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.

Best Regards,
Mr. Practical
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