August 10, 2009
When a CNBC analyst dared say that some of the recent earnings reports were phony, simply the result of mass layoffs and cost-cutting, Jim Cramer quickly countered “I don’t like that tone!” Well, Jimbo might think “we’re back,” but I expect something quite horrifying to occur on Wall Street in the near future. Bill Bonner agrees. (And though an exact date for a sharp drop in equities, followed by price inflation in commodities and consumer goods, can’t be known for certain, the readiness is all.)
Paul Krugman says the world “avoided a second Great Depression.” He’s wrong…
The stock market crashed in ‘29. The market then bounced. After a few months almost everyone was persuaded that the “worst was over.” But the worst was just beginning. It wasn’t until 1932 that the stock market finally hit bottom. By then, it was beginning to seem like a depression…and only years later did economic historians tag it as a ‘great’ depression.
This depression is still wet behind the ears… We’re still in the bounce phase. On Friday, the Dow went 113 points higher. And as the bounce continues, more and more investors will come to believe that stocks are in a new bull market and that the economy is back in growth mode.
Neither will be true.
The stock market is in a bear market rally, not a genuine bull market. The economy is entering a long depression…possibly a ‘great’ one.
How can we be so sure? Well, we’re not sure of anything. But all the signs point in that direction. Household debt as a percentage of disposable income hit a low of about 2% just at the end of WWII. It’s been going up ever since. By 2005 it nudged against 15%—seven times higher than it had been 60 years earlier. Household debt represents spending that has been taken from the future. But you can’t take an infinite amount from future earnings. You reach a point when the future can’t handle it. As more and more future earnings are absorbed by past consumption, pretty soon there’s not enough left to live on. At some point, so much of earnings are devoted to paying the interest and principle on past borrowings that the poor householder cannot to pay his expenses. And imagine what happens if his disposable income goes down.
Guess how many jobs the US private sector has added over the last 10 years? Almost none. Private sector employment is back to levels of 1999. There are more jobs in restaurants and health care…but many fewer in manufacturing. Net gain: zero.
The only job gains have been in the parasite sector—government .
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