As we signed off on Friday, the Saudis were suppressing a ‘Day of Rage’ in Arabie… Gaddafi was mopping up the resistance in Libya… And an earthquake and tsunami left thousands dead in Japan.

But that didn’t stop the stock market. The Dow rose 59 points.

Now it is Monday. And in all the excitement we kinda lost track… But we gots to know…

Is the Great Correction over?

We are coming up on the 4th anniversary. Countrywide – one of America’s leading subprime lenders – went broke in 2007. That was when it began. After more than 6 decades of adding to its liabilities, America began to off-load debt.

And now we have to face a critically important question. Is the Great Correction over?

The New York Times tells us that the Great Correction has done its work. By defaulting on their mortgages and cutting spending, they’ve got their debt burden down to the lowest level in 6 years:

Total US household debt, including mortgages and credit cards, fell for the second straight year in 2010 to $13.4 trillion, the Federal Reserve reported Thursday. That came to 116% of disposable income, down from a peak debt burden of 130% in 2007, and the lowest level since the fourth quarter of 2004.

With the help of rising stock prices, the decrease in debts put average household net worth at $505,000 at the end of 2010, up 5.1% from 2009, though still well below a peak of $595,000 in the second quarter of 2007, before housing prices plunged.

Defaults on mortgages and credit cards played a large role in bringing down household debt, underscoring the extent of the financial distress still afflicting US families. Commercial banks wrote off $118 billion in mortgage, credit-card and other consumer debt in 2010, the Fed said. That’s over half the total $208.8 billion drop in household debt, which also includes new mortgages and credit cards.

People are also fixing their finances the hard way, by boosting the portion of their income that they use to pay down debt. The personal savings rate averaged 5.8% in 2010, up from a low of 1.4% in 2005, and back to a level last seen in the early 1990s.

Even as US households reduce their debt, the country’s overall obligations are rising, with weak tax revenues and efforts to stimulate the economy translating into large budget deficits. Total US nonfinancial debt rose 4.8% to $36.3 trillion, driven largely by a 20% increase in federal debt. Debts of nonfarm, nonfinancial companies rose 5.4% as companies took advantage of low interest rates, but much of that money went to boost their cash coffers, which grew to $1.9 trillion.

The TIMES tells the story of one couple who have reduced their debts… (Notice to grammarians… Yes, it should be a couple “that has reduced its debts.” But, what the heck? We’ve stopped wearing a tie to work. We haven’t been to church in weeks. And now we’re going to be a little loose with the language too.):

Since late 2008, he and his wife have slashed their total debt from nearly $1 million to zero by walking away from the mortgages on four rental properties and paying off two others, all of which lost about half their value in the housing bust. He’s no longer taking up to $4,000 from his monthly income to pay mortgage interest that the rental income didn’t cover.

Instead, he and his wife are fulfilling their goal of building a new $350,000, four-bedroom home in the Dallas suburb of Lewisville, where they plan to retire. “It’s a big relief,” said Mr. Shah. “We went through some rough times, but now I’m comfortable and don’t have to worry about my retirement.”

What a happy story. Here’s a couple that improved its balance sheet by $1 million…simply by “walking away” from mortgages.

Hey, wait a minute. Surely, those debits were someone else’s credits. What happened to the million bucks?

Oh, don’t play dumb, dear reader. You know how the system works. The mortgages were held by banks. The banks wrote off $118 billion last year. Other mortgages were included in packages known as derivatives. When they went bad, the banks sold them to the Fed, which included them on its list of “assets.”

In 2007-2009 the banks faced losses that would have wiped many of them out – including the biggest. But what are the feds for if not to protect half-wits, incompetents and bankers? So, the bankers were allowed to dump their mistakes on the Fed…and the public. Zero interest rates then allowed them to restock their bonus pools while force-feeding debt onto the whole society.

You have to marvel at it. It is as though the debt just disappeared. Trillions’ worth.

And now what? Private households may still be reducing their debt, but the financial sector – with the Fed behind it – is off to the races again. Corporations are going into the marketplace, borrowing money and distributing it to their owners.

The Financial Times:

Economist Andrew Smithers points out that in the first 9 months of last year, non-financial corporations, listed and un-listed, paid out more to shareholders than they made in profits. In other words, they took advantage of record low interest rates to transfer money from lenders and bondholders to shareholders.

Yes, dear reader, the world may not be going back to the naive bubble of the ’05-’07 years. No one would want it to. It’s moving on – to a new bubble. Total bank loans are still below the level of 2009. But they’re going up. “Cov-lite” loans – those with little protection for the lenders – are coming back. Even interest only loans are making a re-appearance.

Capital is changing hands…from the fools to the knaves. Private equity hotshots are borrowing money at low rates so they can pay themselves. The underlying business is weakened with debt; but nobody seems to care.

The other sector of the economy that is leveraging up in a big, big way is government. Here again, the money goes from the fools to the knaves. Government squanders the money in all the usual ways. But lenders still believe they will get it back. Our guess is that the lenders will be wrong. They are making a bad bet. They will not be repaid.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.