Inflating a Bubble

Let me do a brief post here as no one will read me anyway because I think we are in a false, prolonged bear bounce due to a variety of factors. My bigger fear for those that may listen is I have no idea how long it might last. It could be days, months or perhaps even years, though I suspect reality makes the latter unlikely. Still, I am not willing to discount the possibility that all this massive stimulus around the world will either kick the can substantially down the road or, perhaps, build a new bubble and bubbles typically take a few years to build and pop.

So let's assume we are in the process of building a new bubble to burst. So what? Well, our current economic demise is in part due to Greenspan (sorry Alan) inflating our current debt bubble to deal with the dotcom bubble bursting. So U.S. citizens have for most of the past five years been spending massively with debt - debt due to easy credit, debt tied to inflated home values, debt that exceeded their ability to pay - in a word, massive debt (okay, that's two words). America needs to deleverage massively on an individual level.

On the corporate side (banks and certain financial institutions aside) we came into this recession pretty well capitalized. Nonetheless, most corporations do need credit on a regular basis to operate, simply to keep things operating properly. So a credit thawing is needed for basic corporate America to operate properly. To me, however, this should be through smaller regional banks that did not cause the mess, not the evil players we are subsidizing.

For individuals, however, we did not come into this well capitalized. We were spending well over our means using the house piggy-bank. That piggy bank is getting very thin right now and will not support more lending. Add to us having way too much individual debt the concept that job losses are increasing, incomes are decreasing, collateral - like homes - is decreasing in value and people with jobs are working less hours and worried about keeping them, then you know individual deleveraging will continue. And let me add to this that this deleveraging is an extremely good thing for our country and for the people doing it. Painful in the short to medium term, but good overall.

Perhaps, also, painful in the long run. What do I mean by this? We are even after paying off debt returning to a place where we save 5% or more and do not build debt. If incomes do not take off - and they won't - then the future means a significantly lower level of spending money. We need to pay off debt and increase savings all on reduced income. This truly sucks but in the end we will achieve new balance.

So think about it. Less pay, reducing debt, increasing savings - what does all this mean to the economy? In my book it means an economy that sucks wind for a while. You are free to figure out your own take on it.

Let me add another point to the equation. Personal incomes in the U.S. have been overall rather stagnate this millennium. They are going down now but even in the good times on average were not going up.

So let me stop by simply noting Geithner cannot wave his magic wand and solve our problems. I have gone on at length on how I think he is doing the wrong thing, as in more debt does not solve - for the long term - a debt-based crisis. I do hope we wake up soon and start making some smarter moves. Unfortunately politicians need to focus on "fixes" that will work in two to four years, the election cycle. The economy is not tied to the same cycle.

One request to Obama, as I conclude. Please give Paul Volcker more say in what is happening. He is less beholden to Wall Street and more concerned about what happens to main street. If you are truly concerned about "change," you have no choice.

Disclosures: None.