The worst is over. At least in the Northern Hemisphere. Yesterday marked the earth’s greatest tilt away the sun, leaving the northern latitudes in darkness for much of the day.

Here in Paris, for example, it was practically dark at 4PM yesterday…at 9AM this morning, it is still dark.

But the world turns. Around and around it goes. It never seems to stop. Oh…we’re getting dizzy!

And while it is dark and cold today…lo! Soon it will be sunny and warm. Beginning today, the daylight will last a little longer every day. Gradually, we will tip back into the sun’s favor.

In the meantime, we can’t remember such a foreboding Christmas season. Factories all around the world are shutting down. People are losing their jobs. Banks are repossessing houses. Prices are being cut.

Just this morning, we turned to Elizabeth: “We’re going to have to shift to Plan B next year.”

“Plan B?”

“Yes…we’ve got to cut back on our expenses. Plan A is where we go along as we have been. Plan B is where you have to get rid of some of your horses. And then, there’s Plan C….”

“Plan C?”

“Yes, in Plan C we eat the horses.”

In California, joblessness has reached a 14-year high – at 8.4%. European car sales have plunged. HSBC says it needs more money. Louis Vuitton cancelled a new flagship store in Tokyo. Traffic at Gatwick Airport in London is down 13% from the year before.

These are just today’s headlines. Every day is about the same – more cutbacks…more bankruptcies…more trouble.

The Dow fell 25 points on Friday. Oil closed the day about $42. And the 10-year T-note rose to yield all of 2.12%. People are eager to put their money in Treasury paper – even at these tiny yields. They may not make any money, they reason, but at least they won’t lose any. (We predict that they will lose a lot of their money; when…we can’t say.)

And we will venture another guess. When next it is sunny and warm outside in Paris and New York, the financial crisis will still be with us. That’s right; market cycles last longer than planetary cycles. The bull market in stocks began when it was sunny and hot, August 1982. Since then, the earth has made its way around the sun 26 times…and the Dow rose almost 20 times.

You don’t think that such a huge, generational bull market will be corrected in a single year, do you? You don’t think that the correction will only take the Dow down about 45%, do you? You don’t think people will be able to stick with Plan A, do you?

We don’t. The worst is still ahead. Here’s why:

When the boom began, people were slow to get in the spirit of it. They remembered the ’70s and fretted. As the Dow rose from 800 to 1,800 they thought they saw a crash around every corner. Then, in October of ‘87, the Dow hit 2,700 and crashed – down 507 points in a single day. Investors thought the bull market was over. Instead, it continued.

By December, 1996, the Dow had reached 6,437. Alan Greenspan, as witless at the beginning of his career as at the end of it, pronounced this the result of “irrational exuberance.”

But the boom continued. And gradually, people came to accept that stocks would always go up “in the long run,” and that houses always went up all the time. Oh yes, and jobs were always available…and so was credit. At the beginning of the boom, people saved about 10% of their incomes. But as their faith in the boom grew their savings diminished. There was no longer any need to save money for a rainy day – because it never rained.

And if they did need money, they could always draw on someone else’s savings! Stocking money began to seem as old-fashioned as canning tomatoes. Why bother? You can get all the fresh tomatoes you want at the supermarket. And, until recently, you could get all the cash you needed from credit cards and home equity lines.

The saving rate fell to zero.

Then, of course, it started to rain. And now, the lack of savings is becoming a serious crisis at the household level. Gone are the smiley faces at the home-equity loan departments. Nor are there more credit cards arriving in the mail.

A little insight from Durham University in Britain: You might have thought that in the Bubble Epoch people used their credit for extraordinary expenses…such as adding on to their houses or taking a once-in-a-lifetime vacation. If that were the case, they could now merely forego the unusual expense. Their lives may not be so much fun…but at least they would be solvent. Not so. It turns out that borrowers got used to living on home equity withdrawals. They counted on the money to fill in the gaps in their household budgets.

James Saft: “It seems that even during boom times in Britain people were not borrowing against their houses simply to buy BMWs or to pay for vacations, but often to keep their households running during tough times.”

In short, they used borrowing in place of savings – for when they got sick, lost their jobs, or had some other crisis.

Now, cometh another crisis – the worldwide financial crisis – and they have to move to Plan B. But how? They have no savings. They can no longer borrow. What do they do if they lose their jobs?

“You can always get a job flipping burgers,” was the poor cousin of “stocks always go up over the long run.” Both these fantasies depended on a boom. The boom gone…so are the jobs… Soon, they will have a crazed look in their eyes…and a carving knife in their hands. Look out, Flicka! Look out, Mr. Ed!

*** The more the average householder is pinched, the more he resents Wall Street. The press no longer reports the latest news on executive compensation with admiration…now it is outrage that readers want to feel. A group of 600 executives in the financial industry – the same executives who are now getting bailed out with taxpayers’ money – pocketed $1.6 billion last year. The banks did the same thing as ordinary households. Rather than save money, they spent it. The typical household bought a big-screen TV. The banks paid off their top employees, giving the average banker a compensation of $2.6 million.

“The bankers get bailed out; we get sold out,” said one unemployed autoworker.

*** We have only seen the beginning of this crisis. So far, consumers have put off buying things they could easily delay – such as new cars and new houses. Next year, without jobs, they will cut back further. Consumer prices will fall – simply because consumers will buy less of them.

Then, the call will go out to stop bailing out Wall Street and begin bailing out the consumer. Some form of direct giveaway to households is almost inevitable. Perhaps more “rebate” checks will be sent out. How much? Hard to say…but this is what gives us confidence in the feds. If they really, really want to cause consumer prices to rise – they can always bring over Gideon Gono as a consultant…and add zeros.

Source: Americans Turn to ‘Plan B’

Yesterday, markets were closed in both the US and Britain. Still, here at the Daily Reckoning’s mobile command post, we continued our lonely vigil. What are we waiting for? What are we watching for?

Ah, dear reader…just a little dignity, a little grace, a little courage and beauty. That’s all we ask. Can we find it on Wall Street? In Washington? In politics or economics? We hope so, because that’s all we have to work with here at the Daily Reckoning.

Oil went up yesterday. Asian markets fell – with Japan taking its biggest hit in 6 weeks. And the dollar fell. Speculators are beginning to bet that the Fed will cut rates for an 8th time; that’s the world on the street. As we predicted, the first 7 cuts have done wonders for the prices of oil, gold and commodities…but little for the real economy. Oil has gone up 60% in 6 months…putting big pressure on US household budgets. Now, instead of taking the hint – that it’s time to go in the other direction, by raising rates to head off rising prices – speculators think Ben Bernanke will continue battling deflation with further rate cuts. Maybe, maybe not…but our guess is that it doesn’t matter. Even if the Fed raises rates, it is unlikely to raise them enough to block the consumer price inflation already in the pipeline.

In economic theory, the supply of money is the key to prices. Prices should remain more or less stable when the supply of money increases at the same rate as the supply of goods and services. But in the last 15 years, the US money supply increased about twice as fast as GDP. The surprising thing was that prices didn’t rise. That was the period known as the Great Moderation. Food prices only increased at a 2.5% annual rate…even though money supply, MZM, was going up at nearly 9%.

We have given our opinion as to why consumer prices did not go up. We guessed, too, that those trends that labored so hard to hold them down have now walked off the job. Prices now seem to be adjusting to a higher money supply, with food up 4% last year, officially. Unofficially and anecdotally, consumer prices are rising at about 10% per year.

But while consumer prices were stable during that 15 year period…asset prices frequently went into bubble territory. And now, we await the Final Bubble, dear reader…about which we will have more to say later in the week.

In the meantime, the winner of the Enron Prize, and former head man at the Fed, Alan Greenspan, is in the news this morning. The Financial Times reports that he believes “there still greater than 50% probability of recession.”

Warren Buffett, on the other hand, says recession is already a fact of life. And he says it will be “deeper and longer that people expect.”

The old timer’s definition of a recession was ‘when your neighbor loses his job.’ When you lose your own job, it’s a depression. How many people have lost their jobs in this downturn? Well, for the answer to that question we look to the same people who give us the official inflation numbers – the apparatchiks at the U.S. Labor Department. Therein, of course, hangs a tale…and we will let Dana Samuelson of Danagold tell it:

” The average person judges a recession mainly on employment. If jobs are available, then the economy is holding up. If jobs are scarce, the economy is poor. By that standard, the economy is really struggling, with payrolls down in each of the first four months of the year. But the headline figures, again, don’t reflect the lived reality of Americans. At 5.0% in April, down from 5.1% in March, the current BLS unemployment rate is relatively low by historical standards. Yet the number of jobless Americans of prime working age, that is, men aged 24 to 54, is historically high at 13.1%. Most of these people don’t qualify as unemployed but they are nonetheless out of work.

“Why don’t these would-be workers show up in the headline statistics? Mainly because the government’s definition of the unemployed includes only people who do not have a job, have actively looked for work in the four weeks preceding the survey, and are currently available for work. But it excludes the self-employed, 1099 workers who can’t get enough contracts, those working part-time or on commission only, and the under-employed (like real estate agents waiting tables or mortgage brokers bagging groceries). It also doesn’t count those who’ve given up looking for work altogether—a category known as “discouraged workers,” defined as persons not currently looking for work specifically because they believe there aren’t any jobs available for them. Some analysts say this particular group of jobless Americans—who believe their prospects for finding a job are getting ever dimmer, yet who don’t figure in the computation of the unemployment rate—represent the nation’s dire job situation. According to John Williams’ Shadow Government Statistics , the primary source for unbiased economic data, if adjusted for “discouraged workers,” the actual unemployment figure for April rose to 13.1%, up from 13.0% in March. Now that’s recessionary!”

Real inflation at 10%? Real unemployment at 13%? Maybe. But we have not quite seen the fall off in consumer spending that these numbers suggest…

…stay tuned.

More thoughts…

*** Since we have so little market news to report to you, we will take our quest for truth and beauty to other areas: global warming and the children of Israel for example. Both are touchy issues. In Europe, if you say you are skeptical of global warming, they look at you like a lion at a Christian. In America, you can say almost any nasty thing you want against Arabs…but if you are planning to run for public office, don’t dare to criticize Israel.

We begin by telling a story. A Jewish colleague told us yesterday.

“You really have to be careful to maintain good relations with your neighbors. That’s something my family discovered in WWII. My father was just a little boy in Paris when the war broke out…and then the French surrendered. You know, France was divided in two…there was the zone occupied by the Nazis and there was the unoccupied zone to the South. Since they were Jewish, they figured they’d sneak across the line and once they got to the unoccupied zone, they would just keep a low profile, not mention to anyone that they were Jews, and they would be safe. But my father was only a kid. And when they put him in the local school, in the little town they were staying in, the first thing he did was tell everyone that he was a Jew. So everyone knew why they were there. And then, when the Germans took over all of France anyone in the village could have denounced them and get them sent to a concentration camp. But no one did.”

This recalled another story. A disagreeable French woman, then in her ‘70s, once told us that during the war she had been the directress of a boarding school for little children. It was a catholic boarding school. But it was wartime and a few of the children were Jewish, sent there by their parents in the hopes that they would be safe.