A Period of Positive Collapse

“Negative growth,” says today’s paper.

Yes, dear reader. Stocks are advancing to the rear…and economies are growing…smaller. How we love these oxymorons! If only we could age negatively…and eat all we wanted and gain minus pounds!

The commentators have it all wrong. Look on the bright side. The world economy is not in a period of negative growth. It’s in a period of positive collapse! That’s why the Great Depression was so great, after all. What’s positive about this depression is that it is clearing away a generation’s worth of mistakes, misallocations of resources and misplaced confidence.

Stocks are down more than 20% this year. The U.S. economy is retreating at more than 6% per year. Britain is walking backwards at a 2% pace. And Japan? Wow…when it comes to negative growth, the Japanese are experts. Their economy is growing negatively at more than 12% per year. If this keeps up, by the time the next bull market comes along, there won’t be any Japanese economy left.

The Asian Development Bank says the losses so far have cost the world $50 trillion.

The Financial Times reports:

“The ADB’s estimates take into account falling stock market valuations and losses in the value of bonds supported by mortgages and other assets, though not financial derivatives. About a fifth of the losses in dollar terms arise from the depreciation of many currencies against the dollar.”

The last estimate of the total world’s wealth we saw was $100 trillion. If these estimates are correct, the planet has lost about half its value. But who bids for planet earth?

Just about everything that existed – the real wealth of the world – still exists. What disappeared were the fantasy financial evaluations. A truck is a truck is a truck. It doesn’t become less of a truck just because the world has entered a period of financial contraction. It is just as serviceable now as it was two years ago. And the poor guy who had a trucking company keeps on trucking…

But now he has a whole lot less trucking to do than he did before. The stores aren’t moving as much merchandise…so no need to deliver so much. And so the value of his truck – in terms of how much revenue it can produce – has gone down. So too has the value of his trucking company. Maybe he should never have bought that truck in the first place…

The Dow is down near 6,500. Only 1,500 points to go. At least, that was our guess a few years ago. We figured that the Dow would have to go to 5,000 in order to get down to real bottom prices.

Will the bear market finally be over then? Nope. That’s just where you can begin looking for a bottom. Remember, markets tend to overshoot.

So far, the Dow has wiped out 43 years of gains. Adjusted for inflation, it was at this level back when the Beach Boys and the Beatles were just starting out. Actually, we don’t remember when the Beach Boys and the Beatles began…but it must have been in the md- ’60s.

Back in ’66, the Dow hit a high for the cycle. It had been going up since the bottom in 1949. After the peak in ’66, it retreated…and then staged another attack on the summit two years later. But inflation was getting pumped up too…and in real terms, the ’68 high failed to better the peak of ’66.

From ’66 to ’82 it was down, down, down. Then, Business Week threw in the towel: “The Death of Equities” said the cover story. Then, it was up, up, up…until…well, you remember the rest.

We only bring this up to warn readers: these major cycles take time. So far, the Dow has only gotten down to the ’66 TOP. Now, it has to get to the ’82 BOTTOM…adjusted for inflation. Where would that be?

Well….as we recall, the Dow was barely at 1,000 when the bull market began. And if adjust that to consumer price inflation, we come to a 2,000 – 3,000.

Will it get there? Who knows?

The Dow gained 32 points on Friday…a slight bounce up at the end of a dismal week. Oil rose to $45. And gold, which seems to have finished its correction, ended the week at $942.

Bill Bonner
for Markets and Money

Bill Bonner

Bill Bonner

Since founding Agora Inc. in 1979, Bill Bonner has found success and garnered camaraderie in numerous communities and industries. A man of many talents, his entrepreneurial savvy, unique writings, philanthropic undertakings, and preservationist activities have all been recognized and awarded by some of America’s most respected authorities. Along with Addison Wiggin, his friend and colleague, Bill has written two New York Times best-selling books, Financial Reckoning Day and Empire of Debt. Both works have been critically acclaimed internationally. With political journalist Lila Rajiva, he wrote his third New York Times best-selling book, Mobs, Messiahs and Markets, which offers concrete advice on how to avoid the public spectacle of modern finance. Since 1999, Bill has been a daily contributor and the driving force behind Markets and Money.

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