The Power of the Great Correction

The downturn looks like it's just getting started...

WHEN THE stock market crashed in 1929, people had no idea what it meant, writes Bill Bonner in the Daily Reckoning. 

They referred to it as a "break" or a "crash." Almost everyone figured it was just a matter of time before things were back to 'normal.' They were more-or-less right. The Dow returned to its '29-high 17 years later. In real terms, it was still around its '29-high as late as the mid-'80s — 55 years later.

But in the early '30s, it looked as though the economy was recovering; the stock market was soon to follow, they figured.

Then, after regaining about half their value, stocks fell hard again. And then banks failed. And companies went broke. Roosevelt began his Fireside Chats. And unemployment rose to 25%.

Still, people did not see it as the "Great Depression" until later.

Similarly, when the subprime crisis and the collapse of Lehman Bros hit the markets few people knew what to think. The feds were particularly dim; they thought it was just another typical post-war downturn. They thought they could fix it the way they fixed all of them — with more credit.

But more credit wasn't the solution to this problem, it was the cause. And adding more just made it worse.

Little by little, month after month, commentators and analysts have opened their eyes. They realize that this is a balance-sheet problem...not an inventory, liquidity or interest rate problem. But that is only the immediate problem. Gradually, they are beginning to realize that there is more going on.

We knew it was a Great Correction from the very outset. We knew debt was the problem. But even we did not see the power of this correction.

Of course, we don't have much experience with this sort of thing. There are only two examples in the last 100 years — the '30s in the US. The '90s and '00s in Japan. Not enough data points to draw much of a conclusion. But at least these two have one genetic similarity — longevity. It took 2 decades to end the Great Depression. The Japanese de-leveraging episode has already lasted more than 20 years.

We should have taken it at face value. Instead, we figured the US de-leveraging would be shorter. We saw it as a battle between the forces of deflation (the markets) and the forces of inflation (the feds). We thought the feds would have won by now. After all, they've got a printing press. And Ben Bernanke told us that they would use it.

But it's not that simple, is it? The feds turned on the printing press. They added trillions in cash and credit. But so what? It hasn't had much effect. Inflation is low...and apparently going down. If the economy goes back into recession, the CPI could even turn negative.

To make a long story short, the Great Correction appears to be greater than we realized. It has frustrated the feds completely. It has sunk bond yields to their lowest levels in 6 decades. It has knocked the upper stories off every house in America. It has taken 7 million people out of the job force.

And it looks like it is just getting started.

So, what's this correction aiming for?

...will it correct the housing bubble that began in 1997...and stop there?

...will it correct the stock market boom since '01...or since '82...and be done with it?

...will it correct the bull market in bonds that goes back to '83...or the bull market in bonds that goes back to 1971?

...how about the post-1971 Dollar-based monetary system?

...will it correct the credit expansion/consumer spending boom that began in '49?

...or maybe it will correct the boom in US economic and military power that dates back to 1917?

...Who knows? Maybe it is going to take out the entire industrial revolution boom going back to the 18th century...

...or even the boom in the human species that goes back to the 17th century?

We don't know where this correction is going...but we want to make sure we're somewhere safe when we finally find out.

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