It Is In the Cards

I posted this morning briefly a piece by John Mauldin and noted it is a must read, which it is. One link in the piece I have since read is one of the more entertaining posts I have seen for a while.

http://www.thereformedbroker.com/2010/06/24/econ-gangs-of-new-york/

Reading it, I am with John Mauldin in the New Normalers gang following the folks at PIMCO. The way I think of it is a college student graduating and being given multiple credit cards (some years back that was the norm, not today). That student uses the cards to furnish his apartment, buy a new car, take some vacations and the like. This becomes this graduate's reality, his or her "normal," even though he or she does not yet have a job or perhaps has one paying not nearly enough to do all this fun stuff. Anyone can tell you this is not normal, it is living off debt. Well, that is exactly what this country - and apparently many others - has been doing for a decade or two.

So debt has over the past couple of decades become the new normal. That, in itself, is not normal. Living off debt is not normal or reality, it is problematic. Now I am not saying debt, in and of itself, is evil. It is a vital component to our economy on both a commercial and individual level. But we took debt to new extremes, on a personal, governmental and company level, and that cannot be sustained. Reality is not living off debt or building a life or country on debt. That folks, is fantasy!

And so I agree with the folks at PIMCO that we are returning to the new normal. I disagree a bit with the nomenclature, because what we have lived in was not normal, but I agree with the concept that the economy going forward will be significantly subdued compared to the past decade or so, which was built on debt and bubbles.

The new normal - or reality as I have called it - is not a bad thing. I realize for those losing jobs or struggling to get by this does not hold true, but on a general economic level for the country, reality is a pretty good thing I believe. Indeed, ignoring reality brought us to our current problems so a dose of reality should be a good thing.

What we have here is a good old fashion correction on a very grand scale. Corrections are called that for a reason; there is a problem and the markets naturally correct it. This correction is going to be long and painful, I suspect. The first dip was very fast and painful and I suspect the next dip which we are entering into will be equally painful but not nearly as fast. The last one took a lot of people by surprise, so the drop was fast and furious. This time I suspect the markets are somewhat ready for it so the drop will be slower, but I think no less severe in the long term. Unfortunately, it will also take a long time for us to come out of it for various reasons.

First, it is a correction and corrections take time especially when the problem being corrected took decades to build. In this case personal debt is still very high, despite saving rates rising to 4% last month (a promising sign in my book). I truly hope personal saving rates increase significantly. It will depress spending and GDP in the short term but it will also decrease debt and better prepare folks for the future. We can and will get through this but it will take, I fear, years of what most people would label a recession.

Second, the government has a big shovel and has been in this debt hole shoveling for the past two years increasing government debt and they are still shoveling. Governments in the EU are now realizing that they are simply digging a bigger hole by supplanting individual or corporate debt with government debt. The U.S. needs to put down its shovel (other than measures essential to avoid extreme problems or depression and measures aimed at helping those in need of necessities). It has not said it will yet, but the failure to pass an extension of unemployment benefits last week is a sure sign that a lot of additional stimulus is no longer in the cards. And so we will likely over time - at least after the coming elections - switch to an austerity bent. This will slow or negate stimulus, but in my book that is a good thing, with the qualifications noted above.

So I see a double-dip recession that will be long and painful but in the long term good for us if we simply let it happen with certain safety nets to avoid catastrophe. It will take several years to unfold and we will have a very subdued economy during that time, as will most of the world, but it is a correction and things will be better at the end. At the end, which could be a long time off, there is, I believe, light at the end of the tunnel. This is what I hope will happen as I fear that any other alternative will in fact be much worse.

Now we can all hope I am wrong and too pessimistic, and I hope that proves true. I truly do as I will and I have a load of realtives who have and will suffer the longer this continues.

Disclosures; None.