Mister Market’s Moral Lesson

Markets are not mathematical, nor mechanical; they're moral. Their purpose is not to make people wealthy, but to make them wise. If they were mathematical they would make people richer by adding zeros. But it's not that simple. Zimbabwe tried it; and showed that it didn’t work. If they were purely mathematical, you might be able to anticipate price movements with computers and PhDs in math. Many have tried it, but so far as known none has ever really succeeded.
It's not a mechanical system either. When prices go down, there are no levers that can be pulled, or injectors that can be applied. It's not that simple.
Instead, markets are complex natural systems they can never really be controlled or predicted. That's what makes them so interesting.
Markets are always teaching or correcting something. Those are the moral lessons in the broadest sense.

The purpose of a bear market (after Aug. 2007) is to correct the errors of the preceding boom (before Aug. 2007). Most prominent among those errors is to think that money can be made by speculation. When this idea is successful for a while, good sense is lost. People buy dotcoms with no business plan, and houses not to be lived in by them.
 
When people don’t want anymore be involved with those stuff, the market has changed and that can take a long while. Don’t wonder if another crash the next leg down of the double W-cycle is in this historic economic correction that will teach another moral lesson. The media are telling that the recession is almost over, because the declines are less, but still are there. Wishful thinking, says fewer declines equal economic improvement, which isn’t true either.
Apparently Central Banks haven’t learned this lesson so far. All over the world they're trying to solve a problem caused by too much credit by providing trillions more of the same.

Look at China where the market has gone wild because of the government’s half a trillion stimulus that now is spent. In the rest of the world they've been less successful. But they haven't given up. On the contrary, they've put at risk an amount equal to nearly twice the GDP of the entire US economy, and now are talking about Stimulus II. And God may know how many stimuli are coming thereafter?

Consumers have become wiser. They seem to have learned their lesson. Savings rates have gone from zero to 7% in the past 12 months, which is a remarkable turnaround. Penny-pinching is back in fashion. The word ‘Thrift’ has been put back in the dictionary. Consumers are tired of carrying huge debt loads. They're eager to get rid of their debt as soon as is possible.

But neither Wall Street, nor Washington, nor other Central Banks seem to have learned much. Wall Street is still handing out billions in bonuses, leaving its institutions short of capital reserves. Investors still seem ready to jump onto whatever wagon with the most people on it. And while the private sector ran up trillions in debt in the bubble years; now, it's the public sector's turn to apply the brakes on spending.

“In 1991, borrowing by government and the private sector put together was less than 5% of GDP. But by 1998, the private sector was on a binge. Every year for the following decade, households and businesses borrowed between 10% and 15% of GDP, while government continued to borrow modest amounts...less than 5% of GDP.”
“In 2008, the positions reversed dramatically. Private sector borrowing collapsed to below zero,” meaning the private sector is paying off debt, thus not adding more of it. On the other hand: “The public sector has come to the rescue with borrowings between 10% and 15% of GDP.” Indicating that there are still lessons to be learned.

It is said that counter-cyclical stimulus is a good remedy. Everyone says so. Without it, said Ben Bernanke, “we might have entered a Second Great Depression.” One thing is for sure; “The private sector is no longer borrowing and spending like it used to; now, the feds have to do it, right.”

But that's not the way it works. “The credit explosion in the bubble years didn't really make households richer, it made them poorer. That's why they're struggling to pay their bills now. And the credit explosion in the public sector now isn't going to make people richer either; it's going to make them poorer too. Soon, the United States will be struggling to pay its debts too.”

And this is the moral lesson: borrowing makes you poorer. Unless you're using the money to invest to increasing production output, otherwise there is no economic health in it. In other words, if a manufacture sees an opportunity, it might borrow to expand. The extra output should produce enough profit to allow it to repay the loan, and come out ahead. But if you borrow to consume, at the end of the day you're poorer. That's the lesson of the Bubble Years. That's the lesson consumers need to learn every couple of generations. And now, they seem to have learned this lesson. They remember that the economy ran hot in the bubble era, but it didn't do them any good. And while the stimulus of that era did stimulate consumption, it was not genuine wealth building.

The Feds and Central Bankers all over the world are borrowing and spending on a scale never before seen. “The American federal deficit is expected to come to $2 trillion this year. Trillion-dollar deficits are foreseen for the next 10 years.” There seems to be no way out.

The private sector eliminated about $1.4 trillion of debt, which is put back into the financial system by the public sector!

Will this spending produce any more real wealth than the private sector binge did before? Not at all! Look at the news reports that tell that stimulus money is spent to fix toilets in national parks, cut down pine trees in rural areas and finally are bailing out the bankers on Wall Street. However this is pure consumption and no investment. If it is investment the money should be put into projects that pay off a return on investment, that pay dividends, those create cash flows to pay back the debt. There is enough doubt that spending for the stimulus/bailout projects will do that. Government should become wise and learn the market’s moral lesson.