Macro Economics
When will the Recovery Start?

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By EddieLuck
February 12, 2009

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The best guide we have in modern times as to what will happen is the recent Japanese experience. Their crash in 1999 was the result of gross excess credit growth like ours. Like us, they stimulated the economy after the crash with buckets of printed and borrowed money.

Now, twenty years later, they have the biggest ratio of govt. debt to GDP in the developed world, their GDP has not materially advanced, their population is falling, their marriage rate has dropped considerably, their culture has changed a lot, and their stock market is down 80% from its peak level and dropping like a stone lately. All this while their workers have made stunning technological and industrial advances, and they have continued to be a stable productive society.

I don't think there's any rush to pick your favorite recovery stocks and pile in. That is, unless you think our leadership is smarter and more effective than the Japanese leadership has been.

HINT: Although many say that WW2 ended the US depression of the 'thirties, a look at a graph of total debt to GDP is enlightening. The US recovery started advancing from a low base when the debt ratio fell to a conservative level, then accelerated as the debt level increased inexorably to its recent gross excess, then started to fall again in this most recent episode. These crashes are caused by excess debt, and there is no such thing as "recovery". Economies do not recover from such excesses. They crash and contract until debt and credit disappear and/or get paid off. When the crushing debt load has been removed, the economy starts growing again FROM A LOWER LEVEL. It doesn't just pop back to where it was, as in 1987.

No one in power will ever admit this because it illustrates how stupid it is to use debt as a substitute for money, and shows how the banks from the fed on down interfere with stable human existence.

CONCLUSION. Capital preservation is the order of the day. Gold, fixed income, whatever. Not growth stocks. Stocks are cheap, but only in context of recent past earnings. Earnings will be falling for a long time and stocks do not yet reflect that. Nobody's really worried yet because the media is telling everyone that there's a recovery coming soon. I can't find the beef in that idea. This is not a "typical" recession caused by the Fed's cyclical interest rates. This is a depression caused by unbelievable, unprecedented debt ratios all over the world that cannot be supported any more because they reached the level where they could no longer grow. It is mathematically impossible to get them soaring again, so our attempts to stimulate are just a waste of money.

This link is my perennial reference item that I've been posting for years. It explains what has happened better than I can and one can infer what will happen next.

When the ratio of total US debt to GDP has fallen to a small fraction of it's present level (don't hold your breath) then we can start growing again.

Good luck,