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Friday, July 10, 2009

The government remains stuck in deep economic illusion

Economists are still talking about an “exit strategy.” But in view of what is actually going on in the economy, they’ll probably want to stay on this highway a lot longer. This is the long road to ruin, of course. It may be fatal, but it is not – yet – unpopular. Broadly, what is happening is exactly what should be happening.

The stock market rally is getting old…and may have already peaked out. The consumer is running out of time, money and credit. He has no choice but to cut back. Savings rates are rising fast – from zero to about 5% of disposable income.

Naturally, businesses are finding it hard to make sales. Earnings are collapsing…stock dividends are down sharply…

…and of course, businesses try to cut expenses by lightening up on their payroll.

When the correction began, it was led by losses in the financial sector. Those losses led to cutbacks throughout the economy. Now, it’s the cutbacks that are leading to financial losses. The economy followed the markets; now the markets follow the economy. Investors are realizing that their favorite companies will find it hard to prosper in this new economic environment. . . .

Once again, we see the feds’ plans failing. They give trillions to the bankers; the bankers cut back on consumer credit. And why shouldn’t they? They can see what the rest of us see – the consumer can’t keep up with the debt he’s got already. . . .

[T]he consumer has wised up. He’s sick of debt. He’s seen where that road leads. What he wants is to get out of debt…to be free…to be safe.

It’s the government that remains stuck in deep illusion… The feds know that it was too much credit that got consumers into trouble. Their solution? Give them more credit! The banks are issuing fewer credit cards than they did last year – 38% fewer. They’re pushing credit limits down too – the average limit on a new card is down 3% so far this year.

Instead of passing money on to customers, the banks are using the feds’ free cash to build up their own reserves…raise their salaries…and pass out bonuses. Makes sense. What else could they do with it?
-- from "The Long Road to Ruin" by Bill Bonner

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