So what's the problem? Seems to me, we never had a true budget surplus. The only time we showed a surplus was in the late 1990's and very early 2000's. This was not a true surplus. It was theft from the Social Security Fund. Take away the theft and it was red ink the whole time.

What was the real story of the 1990's? Yes, we had our first rumble with Iraq, but, I believe the true story lies in two other events. These two events were huge in the economic progression of our country. The first was the creation of the internet. The second was the uncertainty, and the necessary precautions needed to protect against the arrival of Y2K.

The internet turned out to be one of the greatest inventions of the Century This has changed the lives of practically everyone in this country, as well as the rest of the world. The numbers of pc's that were sold were in the ten's of millions. This truly put a new spin on technology. Couple this with the increase in the improvements being made within the hardware and software, through the decade, and you have sales on top of sales. Times could not be better, or could they?

Y2K was just around the corner. With the risk of being out of business at 12:00 on the turn of the millennium, corporations had little choice but to update their computers. With the development of revolutionary new hardware and software, corporations had no choice but to purchase new systems. These were truly great times for the tech industry. Funny thing, they still never made any money!

I was once told I was stupid not to have money in the tech stocks. This happened in March of 2000, right at the top of the NASD. I have a degree in accounting. I'm a numbers cruncher. Many times I would attempt to find a way to justify the lofty ratios of the tech companies. Never was I able to understand how an analyst could justify the purchase of a stock at greater than 100X its earnings, and that is assuming that earnings existed in the first place. Never would I have dreamed that the insanity could have pushed the NASD to greater than 5000. Never were they more bullish than at 5000. All this after Y2K had run its course. Any corporate management team choosing to invest in new computers would have done so prior to 2000. It would make absolutely no sense to ignore Y2K and then purchase new computers in 2000. This is a no brainier! With the improvements in technology, I would guess that updates in hardware may be few and far between.

Overall price earnings ratios were approaching 40X using pro-forma accounting. I would love to have seen the numbers filed with the IRS. This is the insanity that captured the lives of investors. I would have thought that investors would have learned their lessons. 2003 proved that to be false.

We are in the process of seeing the end of one of the greatest bear market rallies in history. Why do I call this a bear market rally? Simple! Bear markets, which no-one disputes we were in, do not end until price earnings ratios fall to levels below the average. The average p/e ratio is 14X earnings. If we were truly in a bear market, the bear market would not have ended until the ratio fell below 14X earnings. Not pro-forma earnings, but GAAP earnings. This could easily reduce the amount of pro-forma earnings by an additional 25%.

Personally, I believe the bear market will not end until we have p/e ratios in the single digits. This could mean 7%-10% yields on common stock. Utility stocks could yield much more. With the p/e ratios running at roughly 25X, this would mean that the Dow would have to fall to below 4000 to have a ratio of 10X. This also assumes earnings will not decline. Never in history has a bull market in stocks begun with interest rates on their lows. Interest rates will begin rising. Not because the economy is doing so well, but because inflation has reared its ugly head. Personally, I believe interest rates will rise because the morons who have been buying all our debt have finally realized the errors of their buying habits. Rising interest rates will be necessary to continue to entice money into our debt markets. Rising interest rates could signal the beginning of the end. I expect to go through a period where we have inflation and deflation at the same time. Inflation will be felt in items such as gas and food. Deflation will come about in areas such as real estate, brought on by the rising interest rates which eventually will bring prices down.

This brings me back to the deficits. Where would our economy be if we were not running a $500,000,000,000 budget deficit? You take this money away from our system and then tell me what our growth rate is. This years deficit creates about $2,000 in additional debt for every man woman and child in this country. Add on the fact that rates are at their lowest levels in 50 plus years and I have to wonder why our economy isn't barreling ahead after three years of this madness? Seems to me that something else must be wrong. Could it be that the problem lies somewhere else?

Remember, from 1982 to 2000 we experienced terrific growth in this country. Times could not have been any better. We never had a budget surplus. Now we are running deficits that are incomprehensible and they tell us that we are in a recovery. I find it impossible to believe them. In fact, I think they should be prosecuted for the way they have destroyed our future way of life. When the time comes that we are FORCED to pay our debt down, we will all view things differently than we do today. Our standard of living will be considerably less than it is today. They will tell us that we are in a recession or a depression. The reality is that this will not be a negative thing. Sure lots of people are going to be hurt. I'm sure I will feel bad for them. Most will be hurt because of the financial mistakes they made in the prior years. The reason this will not be a bad thing is because people will be paying their debt down. The process of paying their debt down will improve their individual balance sheets. This will be a long and very hard process. Improving one's financial position, with the debt we carry today can never be a bad thing. This is what we should have done prior to now. Had we have paid our bills down, instead of going absolutely insane with the easy access to additional debt, through credit cards and refinancing, where excess equity was pulled from our homes, we and our country would be far better off.

Recessions are not a bad thing. They are the inevitable process of correcting credit excesses. The problem comes in the amount time it takes us to realize we have a problem that needs to be dealt with. When recessions turn into depressions, the only consoling point we have is the recognition of the fact that we have only ourselves to blame for the foolishness that brought us to our knees.

Recover to a Bubble? I don't think so! I want my sons to have a chance at a better life than it appears they will have. I already believe they will not have a life as good and free as we have had. This is the reason I feel we need to deal with our problems sooner rather than later. The only question left is "when is it best to take the fix away from the addict?"

Mike

PS I have a new E-Mail address, please make the changes, and feel free to write with your comments.

mhoy@neb.rr.com