Dec 10, 2007
Spirit of the Season

     The clowns in charge of things understandably feel that they have to do something -- or pretend to -- in the face of what is shaping up to be not just a credit "crunch," but a potentially lethal illness in the credit system per se -- that is, in the very process of trading in paper that claims to represent faith in the future creation of wealth. That process underlies all of modern finance. Investments, currencies, economies, and nations hang in the balance.
     President Bush, seeming very much the clown-in-chief, led the way last week by proposing a mortgage crisis bail-out that would appear to have no chance whatsoever of working as advertised. He called it, arrestingly, the Hope Now Alliance. It blithely assumed that those "servicing" mortgages -- that is, collecting the monthly payments -- have the ability to suspend scheduled upward re-sets of adjustable mortgages for five years for certain select homeowner payees -- so that theoretically said homeowners could avoid foreclosure.
     What might have worked in 1934, when the originators of mortgages were local banks that also "serviced" them (i.e. collected the monthly payments) is unlikely to avail today since the mortgages have been sold off in bunches to pension funds, hedge funds, money markets, and foreign investment funds -- none of which have an interest or the ability to renegotiate loans with millions of schlemiels from Cleveland to Denver to Fresno -- while the companies "servicing" these contacts are mere errand boys, with no say over the terms of anything they collect on.
      So, what if these loans are not "restructured," that is, renegotiated on new terms by both parties on what is, after all, a contract?  What if the government just "declares" that the current terms are void? Since the mortgage contracts have been bundled into bonds and sold off, it means that the value of the bonds is no longer what they were sold to represent. So, while a command to suspend mortgage re-sets might give comfort to schlemiels who used bad judgment in signing mortgage contracts for houses they couldn't afford, it will further impair the value of the bonds dispersed throughout the investment markets and increase disarray in the basic system of creating future credit. That is, if it worked as advertised.
    But how can it work? The president said that this relief action would apply only to those who were current in their payments or no more than 60 days behind. Is it possible that a federal bureaucracy that could not even helicopter bottled water to desperate people trapped in plain sight on highway overpasses in New Orleans in 2005 can process millions of sheaves of relief applications in 60 days? Or even concoct the forms and print them?
     Even if the paperwork could be designed, printed, and distributed overnight, in reality, the applications would collect in the in-boxes for decades. Meanwhile there would be no way to meaningfully establish time-based qualifications for relief. The absurd process would quickly only cast more doubt on the market value of the bonds sitting "out there" while it would create a monumental disincentive for any financial enterprise to lend money for future mortgages (or perhaps anything else). So the New Hope Alliance would have the dual effect of killing the housing "industry" and the credit markets. It could easily have a third and not inconsiderable effect of destroying the credibility of the currency of the nation engaging in such obviously foolish political theatrics. And if the dollar goes, the entire global system of currencies could enter a state of dangerous instability.
     These are some of the hazards of suspending law as applied to financial markets, which can only function on the basis of contract law. Once contract law goes out the window, so does the faith of parties with reserve capital in lending out capital at interest. If the interest rate can be changed arbitrarily or capriciously by third parties, then those with capital would be better off buying gold or impressionist paintings or Manhattan apartments or private armies for protecting their Hampton estates, than lending money at interest established by contract.
     Anyway, this argument is academic because the Hope Now Alliance is just a political sham. The purpose of it is not to save the hapless occupants of over-leveraged houses, but first to buy a little more time so that the worker bees in the financial industry can justify awarding each other multi-million-dollar Christmas bonus packages, and second, to postpone the "workout" of all this bad investment as far into the future as possible.
     I have been wrong in the past about timing things, but I don't see any way on God's green earth that such a workout of mis-investment can be put off until somebody else is sworn in to lead the government in January 2009. The capital allocation system is already listing and groaning like a leaky ship in a hurricane.
      Maybe all the players really know that keeping the ship afloat until Christmas is really the best they can hope for. Christmas means a lot in this country. It represents all Americans' old hope that miracles can happen. Bums turn out to be Santa Claus. Old curmudgeons are transformed overnight into loving uncles. Angels save us when we jump despairingly into icey torrents. And Goldman Sachs executives pass out multi-million-dollar checks to the wizards who "innovated" an ingenious way for the rest of their country to commit financial suicide.

Dec 3, 2007
Magic Wand Finance

  For those of you concerned about my sense of pride -- yes, I sure got that eggy feeling all over my face last week after calling for a thousand-point Dow plunge, only to watch it put on the greatest two-day melt-up in five years. I suppose I underestimate the desperate moves of desperate people against the backdrop of an economy (and a finance sector) that remains unsound to the max despite the 700+ point sucker's rally or dead cat bounce, or whatever you want to call the giddy action in recent days.
     Whatever else you think of it, there is an awful lot at stake in manipulating the collective mood of those who traffic in capital. Beneath the momentary fugue of triumphalism, markets have never been so distressed in the lifetimes of most of us living. It's not just the folks in charge of things whose legitimacy is at stake, but the system itself. When the markets really do start to manifest their true state of extreme disorder, many will blame "capitalism," not the swindlers who have been gaming it in recent years.
     I would pause to remind readers how I regard capitalism in the first place: not as a belief system or a political ideology, but merely as a set of laws describing the behavior of surplus wealth and the "money" that represents it. Compound interest has worked for communists and Republicans alike. The trouble in our case today stems not from the inherent defects of capitalism which, like gravity, exerts its laws no matter how people think or feel, but from cavalier indifference to its laws. One of these is the idea that capital markets will perform credibly -- within reasonable limits of risk -- only if there is agreement that its tradable paper has some value. When markets work properly, fortunes are made and lost on the basis of relatively slight differentials in notions of value. In other words, people must have some idea what they are trading.
     This is referred to as "transparency," meaning that those working the markets can see through the blur of daily action and know, for instance, that IBM common stock is fundamentally valuable (as back in, say, 1969) because every single office in the nation was buying IBM Selectric typewriters and paying for the service contracts that went with them. Nobody doubted that IBM had value, only whether it was worth $57 or $63 a share in a given week, or about how many Selectrics IBM might sell in the next quarter.
     The action in the markets now all hinges on how certain species of "derivative" paper -- certificates based on the value of other certificates -- are valued. The certificates in question are mortgage-backed-securities (MBSs), collateralized debt obligations (CDOs), and other instruments based on debt rather than equity, that is loans rather than wealth. Of course, one problem associated with these things is that they exist now mainly in the forms of electrons in computer systems, represented by pixels on screens, not in paper contracts or promises to pay. Thus they are abstracted not just in derivation but in representation. The further and more crucial problem is not that there is necessarily disagreement over their value, but that, in fact, there's a growing consensus that their value is close to zero. And there is enough of the worthless crap to choke banks all over the world.
      The current distress in the markets derives from the frightening recognition of this problem and perhaps even more from the efforts to conceal it. There was a ton of action on that front last week, which ignited the fools' rally in stocks. For instance, Citicorp, like many other big banks, is choking on scores of billions of dollars denominated in pixels derived from bad loans. Citicorp is in the unhappy position of not being able to cover its losses on this dreck. It appears to have liabilities exceeding its capital assets. It is even having trouble "papering over" these losses -- i.e. borrowing more money to appear solvent. The loan of $7.5 billion it got last week from Abu Dhabi's sovereign investment fund (a nationalized enterprise) came at the cost of 11 percent interest, a rate more commonly associated with New Jersey racketeers than legitimate bankers.
     The event was greeted with triumphal sighs of relief on Wall Street. My guess is this was so only because the managers of money think it will keep appearances pasted together just long enough for them to crawl over the Christmas bonus finish line. It seems to me that there is still plenty of room left for things to go awry.
     Another big spur to last week's engineered rally was the chatter about a distressed mortgage bail-out scheme by Secretary of the Treasury Hank Paulson and others. It would be nice, perhaps, if some honcho-wizard could wave his magic wand and command the adjustable mortgages to magically stand pat for an indefinite period -- say, long enough to sort out the value of all those dubious MBSs and CDOs -- but despite the appearance of good intentions, such a program has no practical viability whatsoever.
     For one thing, nobody really knows where the actual ownership of the individual mortgages has actually landed. This is a major awful consequence of the scheme to disperse risk so widely in the creation of these derivatives. The scheme was so successful that now nobody knows which mortgage belongs to whom and how to begin renegotiating it. So any talk about restructuring these mortgages is absurd, since to do so would require agreement between the borrowers and the lenders. All the lawyers who ever lived would not be able to sort out this mess, and most of the money at stake would end up going to the lawyers now living if the process were to go forward.
     All this is apart, by the way, from the question as to whether insolvent homeowners could keep up with their payments whether the rates were frozen or not, not to mention the further unsettling prospect that the interest deferred would only end up being added to their principal even while the market value of their houses spiraled ever-lower in the ongoing bubble bust.
    A blanket freeze would further degrade the legitimacy of contracts between all borrowers and lenders, making it impossible to price in risk for any future lending contracts -- since they would now be susceptible to arbitrary changes-in-terms by authorities in charge. In the meantime, a court in Ohio has already ruled that one major bank (Deutsche Bank) which thought it held mortgages there, had no legal standing to foreclose on non-performing properties (story). Also meanwhile, public investment funds from Florida to Norway are hemorrhaging because of mortgage-associated derivatives clogging their portfolios. Meanwhile, moreover, credit markets have seized up because those supposedly holding capital can't say how much they really have, and are now terrified of loaning out "money" that might actually not be there, not in accounts receivable, not on or off any books, just... not... there... anymore....
     The recognition is growing that our financial markets have been subject to mischief so egregious that there will be hell to pay. The current "distress" is the inability of the markets to function -- no matter what the Dow Jones Industrial Average appears to say at any given moment. The legitimacy of the markets and those now pretending to preside over them hangs in the balance as we slide sickeningly into the holidays.

Nov 26, 2007
Either / Or?

     The great debate among those of us on the Economy Deathwatch seems to be whether the debacle we observe around us will resolve as a crash or a slow-motion financial train wreck. It seems to me that at every layer of the system, we're susceptible to both -- in tradable paper, institutional legitimacy, individual solvency, productive activity, real employment, "consumer" behavior, and energy resources. Some things are crashing as I write.
      The dollar is losing about a cent every three weeks against other currencies. A penny doesn't seem like much, but keep that pace up for another year and the world's "reserve currency" becomes the world's reserve toilet paper. Oil prices are poised to enter the triple-digit realm, the psychological effect of which may be jarring to 200 million not-so-happy motorists. The value of chipboard-and-vinyl houses is tanking beyond question. Of course, the government's consumer price inflation figures and employment numbers are dismissed broadly as lacking credence. But anybody who has bought a bag of onions and a jar of jam lately knows that things are way up in the supermarket aisles, and so many illegal Mexican migrants were employed in the Sunbelt housing boom, that their absence in the bust won't register on any chart.
     It's hard to describe what constitutes the bulk of the stuff moving through the world's financial markets for the simple reason that it was purposely-designed to be so abstruse and provisional that traders would be too intimidated to ask what it represents -- and the growing terrified suspicion is that it's mostly worthless. By this I refer to the global freak show of derivatives, concocted "plays" on hypothetical "positions," credit default swaps, arbitrages in imagined "differentials," nifty equations, hedges, promises, algorithms executed by robots, and "off-book" wishes chartered in the Cayman Islands. Probably all of them, in one way or another, are just scams, since they are unaffiliated with productive activity.
     At a more fundamental level, these mutant "investments" were derived from a very tangible trade in loans and mortgages made to flesh-and-blood chumps, but even those are only the last in a long spiral of serial "bubbles," or market frenzies based on unreal expectations. And this leads into the very real realm of poor choices, fiscal and fiduciary irresponsibility, deliberately deceptive policy, criminal malfeasance, and the broad abandonment of standards in acceptable behavior by people in authority. A lot of observers attribute this to the Gordon Gecko ethos -- the discovery back in the 1980s that "greed is good," which was meant to trump a previous ethos that life is tragic.
     Anyway, the trade in mutant investment entities appears to be collapsing now as their worthlessness in market terms (as opposed to theoretical terms) becomes manifest. The major holders of this dreck are losing the ability to conceal their losses, but suspicion now reigns that the losses are far greater than even the massive multiple billions reported so far by the likes of Merrill Lynch, Citicorp, and others. I suppose that what we've been seeing lately is a desperate attempt to hold things together just long enough to cut those Christmas bonus checks so that when the pink slips do finally fly in 2008, at least some Big Boyz will walk away with enough cash to cover a hacienda in Uruguay and the salaries of a half-dozen private security goons to guard it.
     But I must say, at the risk once again of sounding extreme, that the structural and systemic sickness in the finance realm is now so severe that it is hard to imagine we will get through the month of December without some major trauma in the markets. In fact, I'd go so far as to predict a thousand-point drop (or more) in the Dow just in this week after Thanksgiving. Real wealth "out there" is evaporating like popsicles dropped on the floor of Hell's fifth circle. It is coming out of the system whether the Big Boyz or anybody else likes it or not, and its absence will assert itself.
     At the risk of sounding even more extreme, I would be hard put to believe any reports that "consumer" spending in the days following Thanksgiving will match the hopes and wishes of economic officialdom. My own hunch is that average Americans are so maxed out on debt that they don't know whether to shit or go blind. Perhaps lot of them are willing to take a last step into fatal insolvency in order to put a plasma TV screen under the Christmas tree and appear as heroes to their families. If that's the case, it would only imply a greater bloodbath in credit card default thundering through the system in February and March, which would only deepen the carnage in collateralized debt instruments further up the food chain.
     That stuff probably has a long way to unwind, even as the "train" of losses hits the immovable obstacle of reality and the "boxcars" of consequence fly off the rails. The slow-motion train wreck could sweep away an awful lot of familiar things in its path -- banks, companies, government-sponsored enterprises, whole industries, whole economies, nations, up to and including the prospects for civilized existence, if severe hardship leads to war, which it often does.
     To some extent, the speed and severity of the financial train wreck will occur in a mutually reinforcing relation to what happens in the oil markets. The rise in price is only the mildest symptom of growing instability for the system that allocates the world's most critical resource. Even in the face of "demand destruction," weird changes are occurring in the way that the oil producers do business. The decline in export rates and the new spirit of "oil nationalism" will take center stage now, even if the US economy seizes up. These phenomena will represent a new cycle in world affairs: the global contest for remaining fossil fuel resources.
      Sooner rather than later, the next symptom will appear: spot shortages around the US and hoarding behavior. This is what will finally wake the American public out of its long sleepwalk (and Matthew Simmons said this first, by the way) -- when the lines form at the gas stations and the tempers flare and the handguns come out of the glove compartments.
     In the financial markets and the economies of nations, it's not a case of either / or. It's a matter of either / and.

Nov 19, 2007
Formerly Normal

     Venturing into the rural outlands of the upstate New York counties these days, you see new houses everywhere in what was, until about the 1970s, mostly farm country. Almost all of them are stand-alone houses; there are very few multiple-unit subdivisions up here, a la the vast beige housing monocultures found in the sunbelt. But they seem no less tragic to me.
     These new houses all follow the "normal" programming of their time -- a time that is stealthily ending. The program is as follows: Each house occupies an out-parcel of an acre or so of what used to be a farm or a woodlot. The house is set in the middle of the plot, surrounded by an apron of decorative foundation shrubs and grass lawn. The scheme derives from the English idea of "a manor in a park." You can tell, because if trees remain (or get planted) on the lawn, they are always deployed arbitrarily, never in formal rows, as the French would do it. The idea is that every homeowner is the "lord of the manor."
     Of course, a major feature of this is the asphalt pad-and-driveway where the household stores (and not incidentally displays) its collection of cars, one for each adult family member plus "training" models for the adolescent offspring. This part of the package is indispensable, the umbilicus that connects the household to all the necessities of life, from paychecks to Slim Fast bars. Its continuation is assumed. In fact, the value of the house depends on that assumption.
     The appeal of this program is obvious in the consumer-democracy of recent times. The stupendous aggregate wealth ginned up at the climax of the cheap energy fiesta made everyone an aristocrat. As Tom Wolfe has pointed out, the average American roofer or insurance adjuster of these times has enjoyed a more comfortable life than Louis XIV. They certainly bathe more regularly, in sumptuous vinyl tubs, with motor-drive water jets, and possess refrigerated larders of delicacies from thousands of miles away (not to mention access to colonoscopies and periodontics).
     This luxurious life is a fragile thing, though. The fragility is actually expressed in the houses themselves, which are uniformly constructed from materials that would not seem to have a glorious destiny: wood-chips, glue, and vinyl. Anyone who visits the Palatine Hill in Rome must be impressed by the way stone blocks and masonry walls melt away over time. Imagine what would happen to a box made of chip-board over fir studs after a few decades of poor maintenance. You can even state categorically that the vinyl cladding was not designed to be maintained, only replaced. And in as much as vinyl siding is made from petroleum byproducts, one can easily foresee future replacement problems.
     There are also the things that you can't see: the furnaces and the mortgages. The expectation that it will be possible to get affordable heating oil or propane gas a decade or so into the future must be considered, shall we say, a crap shoot at best -- and in the climate of upstate New York, that can't be reassuring. As for the mortgages, we already know what is happening to them -- like the "transformer" entities of the movies, they are morphing into monsters that destroy everything in their path.
     I guess what really gets me about these houses popping up in the former cornfields and meadows is that the owners have absolutely no idea what a problem they are creating for themselves and their families (and their society), especially now as we move into a critical period of post-peak-oil instability. It's both poignant and pathetic, and a little disgusting. Their expectations are plain to see: that the life of luxury and incessant mobility is so assured that they can invest everything, even their anticipated future earnings, to enjoy all that the program had to offer. But they have tragically missed the fact that the program has changed.
     Of course, I am aware that my ability to venture easily into the outlands of Washington County, New York, is not something that I can take for granted much longer. A year or so from now, I may have to plan ahead, even make sacrifices, to travel so distantly from where I live. In the meantime, I wonder with the keenest curiosity what is going through the minds of the people who dwell out there. Surely they've noticed that gasoline is $3.25. One can easily imagine the granite countertop in the kitchen where the bills are piling up, the frightening invoices from Master Card and Discovery, along with dunning letters from the company that "services" the mortgage. One can imagine the feelings of despondency creeping up the veins of the household lord and his lady as they contemplate the distress sale of their motorboat, jet skis, snowmobiles, and RV -- and the futility even of trying.
     I think we are entering a time when what has seemed utterly normal to us will suddenly appear alien and threatening. If there was ever a recipe for an extreme social response, this will be it. As the poet said, the center cannot hold.

November 12, 2007
Peak "Money"

The multi-dimensional meltdown underway in the finance sector illustrates perfectly how the complex systems we depend on start to wobble and fail as soon as peak oil establishes itself as a fact in the public imagination. Mainly what it shows is that we don't have to run out of oil -- or even come close to that -- before the trouble starts. Just going over the peak and heading down the slippery slope of depletion is enough. Peak oil, it turns out, is also peak money. Or should we say, peak "money?"
First of all, what is finance exactly? I'd bet that a lot of people these days don't know, including many working in the financial "industry," as it has taken to calling itself. Finance, until very recently, was the means by which investment was raised for useful economic activities and productive ventures -- in other words, the deployment of capital, which is to say accumulated wealth. Historically, this accumulated wealth was pretty meager. There wasn't a whole lot to deploy and the deployment was controlled by a tiny handful of people statistically greater only than the number of Martians in the general population. They operated as families or clans, and everybody knew who they were: the Medici, the Rothschilds. Even the Roman Empire was a kind of financial Flintstones operation compared to what we see on CNBC these days. Not having the printing press, the Romans had to inflate their currency the old-fashioned way, by adding base metals to their silver coins. Finance in the 200-odd-year-long industrial era evolved step-by-step with the steady incremental rise of available cheap energy. More to the point, the instruments associated with finance evolved in complexity with that rise in energy. It was only about two-hundred years ago, in fact, that circulating banknotes or paper currencies evolved out of much cruder certificates that were little more than IOUs. Once printed paper banknotes became established, and institutions created to regulate them, the invention of more abstract certificates became possible and we began to get things like stocks and bonds, traded publicly in bourses or exchanges, which represented amounts of money invested or loaned, but were not themselves "money."
Much of this innovation occurred during the rise of the coal-powered economy of the 19th century. It accelerated with the oil-and-gas economy of the 20th century, up into the present time. So, for about 150 years -- or roughly since the end of the American Civil War -- we've had a certain kind of regularized finance that enjoyed continual refinement. Even in the face of cyclical traumas, like the Great Depression, currencies, stocks, and bonds retained their legitimacy if not always their face value.
Russia was a bizarre exception. Crawling out of the mud of medievalism relatively late in the game, Russia pretended to abjure capital while still faced with the need to deploy it in industry. They solved this paradox conditionally by disqualifying the Russian public from participation in any part of the industrial economy except the hard work, and pretended to pay them in promises for "a brighter future," which never arrived as long as the Soviets remained in charge. (The Russian people repaid the system by only pretending to work.)
In any case, finance for the purpose of deploying capital has prevailed as reality among people who use the implements of the dinner table, but something weird has happened to it in recent years. It has entered a stage of grotesque, hypertrophic metastasis that now threatens the life of the industrial organism it evolved to serve. Its current state can be understood in direct relation to the run-up to peak oil (peak fossil fuel energy, really, since coal and gas figure into it, too). The oil age, we will soon discover, was an anomaly. Many of the things that seemed "normal" under its regime will turn out to have been rather special. And as the beginning of the end of the oil age becomes manifest, these special things are starting to self-destruct pretty spectacularly.
For one thing, finance in the past twenty years has evolved from being an organ serving a larger organism to taking over the organism, becoming a kind of blind, raging dominating parasite on its former host. Or to put it less hyperbolically, it has become an end in itself. That is what they mean when they say that the financial sector has been "driving" the economy. A feature of this ghastly process has been the evolution of financial instruments into ever more abstract entities removed from reality-based productive activities. Stocks and bonds were understood to represent direct investment in enterprise. Sometimes the enterprise was a failure, and sometimes the people running it were swindlers, but no one doubted that common stock represented the hope for profit in a particular venture like making steel or selling laxative chemicals. The new "creatively-innovated" financial "derivatives" of recent years are now so divorced from any real activities or product that often the people trafficking in them don't understand what they're supposed to represent. I'd bet that more than half the people in the New York Stock exchange any given day could not explain the meaning of a credit default swap if a Taliban were holding their oldest child over a window ledge across Wall Street.
The innovation of mutant financial "products" is a symptom of the "crack-up boom" that characterizes society's response to peak oil. The main implication of peak oil for an industrial economy is that the 200-odd-year-long expectation for continued regular growth in combined energy-activity-and-productivity at roughly 3 to 7 percent a year under "normal" conditions -- that expectation is now toast. Under the new regime of peak oil and its aftermath, regular energy depletion, society can expect no further industrial growth but only contraction, and all the certificates, instruments, and operations associated with the expectation for further industrial growth lose their legitimacy. Seen in this light, one can then understand the temporary value of these mutant financial derivatives. They allowed participants to conceal the fact that these "investments" were not directed at productive enterprise. They also provided a cohort of sharpies with "vehicles" for converting the leftovers of the industrial economy into assets for themselves -- a form of looting, really. Hence, the employees of Bear Stearns, Goldman Sachs, and Merrill Lynch gave themselves $50-million Christmas bonuses for trafficking in these inscrutable non-productive financial gimmicks, and were able to acquire fifty-room East hampton houses, Gulfstream jets, and impressionist paintings.
Of course, the aftermath might not be so pretty for these guys, since the next thing they may acquire could be long prison sentences. If they flee prosecution in their Gulfstream jets, they will not be able to take their Hamptons estates aboard with them. Those who remain may live to see mobs with flaming torches outside their windows, as in the "Frankenstein" movies of their suburban childhoods. But this has yet to play out.
For the moment it appears that we have entered the climax of the crack-up. The slick and inscrutable derivative vehicles infesting the ledgers of the investment banks, are now being systematically revealed as frauds of one kind or another, and, self-evidently lacking in worth. The process now underway is gruesome. The sheer dollar losses involved are almost as incomprehensible as the phony operations and instruments that they are derived from -- twelve billion here, nine billion there. As the late Senator Everett Dirkson once quipped, "sooner or later you're talking about real money...." Or are we? Is it money or "money." And if it's "money," what will become of it? And of us? How will it allow us to live?

November 5, 2007
Ignoring the Obvious

One of the biggest laughs of the season came out of a New York Times business section story last Tuesday by reporter Michael Grynbaum, who wrote, "Oil is on a steady march toward toppling the inflation-adjusted high of $101.70 it set in April 1980, analysts said, though many are at a loss as to what keeps driving the price." (Italics mine.) Actually, lots of people know what is driving up the price -- just not anybody who works at that once-august and now-clueless newspaper. It can be stated simply -- the demand line has crossed the supply line -- though that simple fact has many curious ramifications.
Among the most subtle is a theory out of Doug Noland's latest Credit Bubble Bulletin (published every Friday).

There are literally trillions of dollars of liquidity sloshing around the world keen to hold “things” of value. Liquidity sources include the massive central bank reserve holdings as well as funds at the disposal of the sovereign wealth funds. Importantly, the more apparent becomes U.S. financial fragility, the keener they are to stockpile real 'things'. . . . Indeed, it should be noted that this is the Federal Reserve’s first attempt at reflation where U.S. securities are not the speculators’ or foreign central banks’ asset class of choice . . . . Not only is the pool of potential global buying power unparalleled in scope. It is fervidly attracted to tangible assets -- as opposed to U.S. securities -- and is highly speculative in character. At the same time, an unwieldy global boom is stoking unprecedented demand in China, India, Asia generally, and the other “emerging” markets including Russia and Brazil. Throw in various weather related issues and energy production constraints and the prospect for some very serious bottlenecks and shortages has developed.

In short, foreigners stuck holding dollars that are hemorrhaging value would rather spend them on something other than dollar-denominated financial paper, and nothing is more crucial to the maintenance of industrial economies than oil. Noland's theory comes on the heels of reported oil and gasoline shortages in China, bad enough to have caused some civil unrest -- and bad enough for China's leadership to want to spend some of its vast US dollar reserves bidding up oil prices in the open markets to quell that unrest.
This is nothing more complicated than hoarding behavior on a global scale, a mounting crisis of frightened self-interest that has already been well-described by investment banker Matthew Simmons. Simmons was only one of many analysts who spoke at the mid-October Houston conference put on by ASPO-USA (the Association for Study of Peak Oil) -- to which The New York Times failed to send a reporter. Simmons has also said that the American public (and its leaders) will probably not "get" the fundamental problem with oil until rising prices are joined by spot shortages -- i.e. gas station lines, which will represent hoarding behavior on the basis of individual motorists.
Behind the hoarding dynamics are several clear circumstances.
One biggie is the growing export crisis, described by geologist Jeffrey Brown. Countries like Saudi Arabia and Mexico that sell oil to importing nations like The USA and Japan are using more of their own oil and producing less. Mexico's trajectory is so steep (due to the severe depletion of its giant Cantarell oil field) that it could easily go from being America's Number 3 source of imports to zero in less than five years. The anticipated yearly growth in worldwide oil demand next year will equal 80 percent of the USA's entire oil production.
The export crisis is only an additional layer on top of the general peak oil situation, but it illustrates the way that complex systems we depend on -- and oil markets are one -- are liable to wobble and fail just as the world comes off the all-time oil production peak for good. Finance is another complex system and it, too, is entering a stage of robust instability. Food production is yet another, with a grain scarcity that has driven wheat prices to all-time highs. The roster of complex systems entering phase change is long and gruesome.
Another big element behind rising oil prices is oil nationalism. The old "major" oil companies -- Exxon-Mobil, Shell, BP, Chevron, et cet -- now only account for about five percent of world oil production. The other 95 percent comes from nationalized oil industries like Saudi Aramco, Mexico's Pemex, Petroleos de Venezuela, and Brazil's Petrobras. Russia's Lukoil and Rosneft are effectively state-controlled. Not only is worldwide oil in depletion (past peak) generally, but most of the remaining oil is controlled by entities that are inclined to both withhold (hoard) some remaining oil for their own future use and to direct whatever oil they do sell into places other than open auctions on the futures markets. Selling oil to favored customers will be an extremely potent instrument of geopolitics in the decade ahead, and is only one aspect of a desperate global resource contest that could turn ugly and violent. For the moment, though, its meaning for the US is that the two-thirds of our daily oil supply composed of imports is in jeopardy.
Another big element of the oil price story is the condition of the equipment used all over the world for getting it out of the ground, moving it around the globe, and refining it into useful byproducts like gasoline and aviation fuel. The world is woefully short of drilling rigs, and the cost of steel is way up. The demand for new equipment is out-of-sight. The existing worldwide inventory of equipment can be fairly described as decrepit. As Simmons points out, there is a frightening gap between the need for investment in new rigs, tankers, and refineries and the money available to just keep production at current levels. The outlook is grim. In fact, the worldwide lack of will to invest in oil industry equipment is itself a symptom of the crack-up of global finance as a complex system under duress. On top of the equipment problem is a human resource problem: the world us not producing enough oil technicians and engineers to keep up with production, let alone increase it, and every year another wave of senior specialists retires out of the system.
Beyond these parts of the oil price story are even more sub-plots, like the political strife in Nigeria that effectively holds its oil industry hostage, not to mention the fragile state-of-affairs throughout the Middle East, and dare we leave out the insane habits of America's Happy Motoring utopia.
There is really no excuse for The New York Times and the rest of the mainstream news media to not understand what is going on out there. The pervasive cluelessness is a symptom of another complex system out of whack -- the system that informs us what's going on. Meanwhile, the danger mounts. The heating season is underway and the furnaces are clanking. Many Americans will have to start choosing whether to pay their mortgage, fill the tank of the Chevy Suburban, buy that brick of Velveeta, or pay the heating oil guy. It looks like China will be spending more of its accumulated dollars bidding up the price of oil (or making favorable contracts with foreign suppliers) instead of buying Freddie Mac bonds. The USA could not find itself in a less favorable position among all these forces roiling the scene. It certainly can't afford to continue its pathetic pose of cluelessness.

October 29, 2007

When historians glance back at 2007 through the haze of their coal-fired stoves, they will mark this year as the onset of the Long Emergency – or whatever they choose to call the unraveling of industrial economies and the complex systems that constituted them. And if they retain any sense of humor – which is very likely since, as wise Sam Beckett once averred, nothing is funnier than unhappiness – they will chuckle at the assumptions that drove the doings and mental operations of those in charge back then (i.e. now).
The price of oil is up 53 percent over a year ago, creeping up now toward the mid-$90-range. The news media is still AWOL on the subject. (The New York Times has nothing about it on today’s front page.) The dollar is losing a penny a week against the Euro. In essence, the American standard of living is dropping like a sash weight. So far, a stunned public is stumbling into impoverishment drunk on Britney Spears video clips. If they ever do sober up, and get to a “…hey, wait a minute…” moment when they recognize the gulf between reality and the story told by leaders in government, business, education, and the media, it is liable to be a very ugly moment in US history.
One of the stupidest assumptions made by the educated salient of adults these days is that we are guaranteed a smooth transition between the cancerous hypertrophy of our current economic environment and the harsher conditions that we are barreling toward. The university profs and the tech sector worker bees are still absolutely confident that some hypothetical “they” will “come up with” magical rescue remedies for running the Happy Motoring system without gasoline. My main message to lecture audiences these days is “…quit putting all your mental energy into propping up car dependency and turn your attention to other tasks such as walkable communities and reviving passenger rail….” Inevitably, someone will then get up and propose that the transition to all-electric cars is nearly upon us, and we should stop worrying. As I said, these are the educated denizens of the colleges. Imagine what the nascar morons believe – that the ghost of Davey Crockett will leave a jug of liquefied “dark matter” under everyone’s Christmas tree this year or next, guaranteed to keep the engines ringing until Elvis ushers in the Rapture.
The educated folks – that is, the ones subject to the grandiose story-lines of techno-triumphalism taught in the universities – are sure that we’ll either invent or organize our way out of the current predicament. A society that put men on the moon in 1969, the story goes, will ramp up another “Apollo Project” to keep things going here. One wonders, of course, what they mean by keeping things going. Even if it were hypothetically possible to keep all the cars running forever, would it be good thing to make suburban-sprawl-building the basis of our economy – because that’s the direct consequence of perpetually cheap energy. Has anyone noticed that the housing bubble and subsequent implosion is following the peak oil line exactly?
It’s a bit harder to discern what the assumptions really are among leaders in the finance sector, since so much of their activity the past ten years has veered into sheer fraud. The story line that everyone is putting out – from the Fed chairman Bernanke to the CEOs of the Big Fundz – is that American finance is a python that has swallowed a few too many pigs, but if we jigger around interest rates a little bit more, and allow some more money to be lent out cheaply, the python will eventually digest the pigs and go slithering happily on its way along the jungle trail with a burp and a fart. From this vantage, one sees a rather different story: more like a gang of human grifters sweating through their Prada suits as it becomes increasingly impossible to conceal massive losses incurred through overt reckless misbehavior. My own guess is that a lot of these boyz will be in line for criminal prosecution before too long.
The political assumptions one hears are the most astoundingly naïve and ridiculous, especially the ones that involve other countries and our relations with them. NY Times followers no doubt believe, along with Tom Friedman, that the global economy is now a permanent fixture of the human condition, and that soon it will transform itself into a colossal engine of “green” (i.e. benign) commerce. Friedman and his followers tend to forget the second law of thermodynamics when spinning their fantasies of a world that can harmlessly manufacture and market an endless number of plastic salad shooters from one side of the planet to the other without incurring any losses to the health of said planet.
My own assumptions are somewhat different. I think we’re likely to see a lot of nations scrambling for survival, initially manifesting in a contest for the world’s dwindling supply of oil (and oil-like substances). For instance, when viewing the globe, few people consider that Japan currently imports 95 percent of its fossil fuel. Japan has been a “good boy” among nations since its episode of “acting out” in the mid-20th century and has enjoyed a long industrial prosperity since then. But what happens when there is not enough oil in the world to be allocated rationally by markets among the powerful nations? Will Japan just roll over and die? Will they shutter the Toyota factories and happily turn to placid tea ceremonies. I think Japan will freak out, and it’s hard to predict exactly who will feel its wrath and how.
Similarly, Europe. Americans view Europe as a kind of theme park full of elderly café layabouts swaddled in cashmere as they enjoy demitasse cups in the outdoor cafes of their comfortable art-filled cities (some of them not long ago rebuilt from rubble). Europe has let America do its dirty work for it in the Middle East for the past decade while enjoying tanker-loads of oil coming up through the Suez Canal. Europe has only had to make a few lame gestures in defense of its oil supplies. But the North Sea oil fields, which for twenty years have hedged the leverage of OPEC, are crapping out at a very steep rate. Sooner or later Europe will freak out over oil, and geo-political flat-earthers will be shocked to see that all the nations of café layabouts can mobilize potent military forces. God knows whose side who will be on, exactly, when that happens, and where America will stand – if its own military is not so exhausted that it can even stand up.
Personally, I think the world will be growing a lot larger again, and less flat, and that eventually America will find itself isolated once again between two oceans – though incursions by desperate foreign armies in one way or another, is not out of the question as the great struggle for resource survival gets underway. In time, however, I think the current Great Nations of the world will lose their ability to project power in the ways we’ve been conditioned to think about it.
In the meantime, our own nation has become a society incapable of thinking, and the failure at all levels of rank, education, and privilege is impressive. If you listen to the people running for president – many of them overt clowns – you’d think that that all the comfortable furnishings of everyday life can continue with a few tweaks of the dials. They are cowards and it is possible that they perfectly represent a whole nation of cowards who deserve cowardly leadership. The danger, of course, is that when a non-cowardly leader finally does step forward in a desperate America, he will not shrink from pushing around a feckless people, or doing their thinking for them.

October 22, 2007
Peak Universe

The big Peak Oil conference of the year took place in Houston last week – but before we get to the substance of that, a few words about where we were. It is hard to imagine a more horrifying urban construct than this anti-city in the malarial swamps just off the Gulf of Mexico. And it is hard to conceive of a more desolate and depressing urban district, even of such an anti-city, than the utter wasteland around Houston’s convention center.
Luckily, we didn’t have to enter the convention center itself across the street -- a baleful megastructure the size of three aircraft carriers, adorned with massive air-conditioning ducts to counter Houston’s gym-sock-like climate. And when I say “street” you understand we are talking about four or six-laners, with no curbside parking, which is the norm for this town. The effect is that every street behaves like an extension of the freeway at the expense of pedestrians – but pedestrians have been eliminated anyway because in ninety percent of Houston’s so-called downtown of glass towers there are no shops or restaurants at the ground-floor level, only blank walls, air-conditioning vents, parking ramps, and landscaping fantasias. We were informed that in parts of downtown there existed a network of air-conditioned underground corridors with shopping, but that everything in it closed at 7 p.m. when the last office workers straggled home. Anyway, none of it extended as far as the convention center. The rest of district was devoted to surface parking.
It has often been stated that Houston’s ghastly development pattern comes from having no official zoning laws. But all it really proves is that you can achieve the same miserable results of typical American boneheaded zoning with no zoning – as long as you don’t give a shit how people feel in their daily environments.
The convention center itself, though, demonstrated something beyond even that degree of thoughtlessness. Its pharaonic hugeness was a metaphor for the fatal grandiosity at the heart of contemporary life in American today, the utter disregard for a scale of human activity consistent with what the planet has to offer within its ecological limits – and of course the oil issue was at the center of that story.
Oh, one final thing about Houston life per se. Judging by the local items in the daily newspaper, the so-called city enjoys a level of mayhem that makes Baghdad look like a Sussex garden party. Sample headlines: “10 Charged in Burglary Spree,” “Pit Bull Shot Dead After Pony Attack,” “Jury Gives Man Life in Carjacking Death,” “Two Killed in Home Invasion.” One particularly insane story told of a man who shot and stabbed a visiting friend who “dissed” his dog. We didn’t see any of that action around the convention center's Hilton Americas, where the ASPO conference actually took place, but the news didn’t exactly make you want to venture out beyond the lobby. Anyway, you couldn’t buy a stick of gum within a mile walk of the place, and the thought of traipsing past all those surface parking lots in 90-degree heat was like an invitation to reenact the Bataan Death March.
It was a sublime coincidence of fate and history that throughout the ASPO conference, the price of a barrel of oil surged up through the high eighty-dollars range and briefly touched $90-a-barrel on Friday (just as the stock market was tanking by 360-odd points). It was also interesting that as all this action was unfolding, MSNBC was running an interview with Senator Larry Craig (R. Idaho), lately accused of soliciting sex from a policeman in an airport toilet. Apparently what the nation really wants to know about is the Senator’s self-described “wide stance” in bathroom technique. Perhaps when Craig is finally forced from his senate seat, he can get a job as a “personal toilet coach,” and become the pioneer in a whole new realm of self-improvement science, teaching others how to assume the manly “wide stance” and become more effective leaders.
So, while the price of oil ratcheted up hour by hour, the ASPO conference members heard from an impressive range of experts who have been leading the public conversation on the Peak Oil story – with no help from the mainstream media or the political sector. Among them were Robert Hirsch, co-author of the now-famous 2005 Hirsch Report, commissioned by the US Department of Energy, which, much to the consternation of its sponsor, first told the nation in no uncertain terms that it was heading for a catastrophic set of disruptions in “normal” American life if we heedlessly continued energy business-as-usual. Hirsch went a little further now, two years on, than he had in his famous report, predicting a future of “oil export withholding,” panicked markets, and allocation disturbances that would make the 1973 OPEC embargo look like a golden age.
Matt Simmons, the leading investment banker to the oil industry, who has worked tirelessly to lift public awareness of Peak Oil, also raised the specter of shortages, telling the audience that market allocation problems in the near future would almost certainly induce “hoarding behavior” among the public that would cripple the economy, lead to enforced rationing, and shock the nation. Simmons compared the current public mood over energy issues to a “fog of war.” He also repeated his oft-stated opinion that the drilling rigs and other equipment used around the world to pump oil out of the ground are so uniformly old and decrepit that they pose a problem every bit as dire as peak oil itself. In the meantime, he said, to offset climbing prices, the developed nations have lately dipped so deeply into their accumulated stocks of crude and “refined product” that some countries may breach what is called their “minimum operating levels.” Offstage, he told me, “We’re too preoccupied trying to figure out the exact date of the peak. Meanwhile, we’ll drain the gasoline pool and it will be gone forever.”
The other most significant contribution came from Texas geologist Jeffrey Brown who presented a full-blown version of his theory that world export rates from the countries with oil to sell are liable to decline so much more sharply than their actual production decline rates that the world would be thrust into an oil export crisis within the next five years – and that this export crisis would turn out to be the defining condition of the Peak Oil story.
There were plenty of other fruitful contributions on subjects ranging from the future of the airline industry to reviving passenger rail service, to the question of nuclear power. And there was one real clunker presentation by a shill from the Toyota corporation, designed to blow green smoke up the audience’s ass about the future of happy motoring (Toyota’s products will save it from Peak Oil).
For coverage of the particulars, visit, the nation's best energy discussion website.
If there were reporters from the mainstream media present at this event, I didn’t run into of them. They are apparently uninterested in the fate of industrial economies, at least as long as Senator Larry Craig is out there on the frontiers of toilet coaching science, and Britney Spears is still sparring with K-Fed, and Diddy is beating people up in nightclubs, and others are murdering their friends for dissing their dogs.

October 15, 2007
The Casino Syndrome

The current mania to expand legalized gambling around the country is a clear symptom of how desperate and crazy this society has become. In a culture where anything goes and nothing matters, it is perhaps hard for the public to understand what's wrong with it. The gambling "industry" itself has very successfully masked its pernicious nature by putting across the idea that it is just another form of innocent "entertainment," on a par with pro sports, theme parkery, and Hollywood. In fact, gambling, or "gaming," as it cynically calls itself, has hijacked elements of all these other activities to conceal its main business, which is the systematic hosing of those who can least afford to be hosed.
What's wrong with state-sponsored gambling is simple: it promotes the idea -- inconsistent with the realities of the universe -- that it's possible to get something for nothing. It is unhealthy to an extreme for a society to make this idea normal because it defeats another idea that a society absolutely depends on for survival -- namely that earnest effort matters. It conditions the public to magical thinking -- a characteristic of children-- and disables their ability to function as adults. The expansion of gambling is especially tragic at a time when this society faces epochal economic problems that threaten its existence, and by this I mean the permanent global energy crisis that will require us to reorganize virtually all the crucial activities of daily life. This is a time when the nation can least afford to disable adult thinking and earnest effort.
I was out in Iowa last week, in the vicinity of Waterloo, where the John Deere corporation has laid off hundreds of workers in recent years. The town's solution to this problem was to invite a casino to town, and it now stands out above the cornfields like a grinning Moloch, mocking the aspirations of those who remain in the area -- and reinforcing the other foolish and destructive activity going on there, which is the corn-to-ethanol racket aimed at propping up American car dependency. Of course the idea that the backwaters of Iowa might compete with Las Vegas or even the ghastly Atlantic City for gambling tourism is laughable, so who exactly did the local officials imagine would be patronizing the blackjack tables of Waterloo at eleven o'clock in the morning?
Plans are on the table all over the US for ever more casinos. In New York, campaigns are underway to put a big new one in the depressed Catskills, and another on the site of what is currently the squalid Aqueduct racetrack in the borough of Queens. We have a video-slot-machine operation here in Saratoga in what used to be a harness racing track, and every day it is filled with retirees pissing away their grandchildren's college tuition (in exchange for "excitement"). Next door in Massachusetts, new governor Deval Patrick is working tirelessly to set up casinos in the de-industrialized cities of Springfield and Brockton (and Boston, too) -- as a painless substitute for productive work. The Illinois state senate just passed a bill that would put casinos in downtown Chicago and allow additional "riverboats" along the Mississippi River -- really just barges moored in fixed locations.
Of course, practically every state has some kind if lottery. I have not been in a so-called convenience store (i.e. gas station with snacks) the past year without standing in a long line of grubby, pathetic people spending their scant dollars on lotto tickets (and cigarettes) -- instead of paying the utility bill that would perhaps allow them to bathe and apply for a job.
I don't entertain fantasies that gambling can be eliminated from any society, but inviting it to operate in the mainstream under state sponsorship is just tragically stupid. There is a rightful place for gambling: on the margins of society -- and the crippling ideas that go hand-in-hand with it belong on the margins, too, like the belief that it's possible to get something for nothing. Real political leadership would take stand on this, even if it was unpopular.
Anyway, I predict the time is not far off when an even-more-desperate public itself recognizes that we can't afford either the systematic hosing or the suicidal thinking that comes with gambling. They are going to shut it down. When they do, they will do it harshly and violently. They will turn on those behind it and blame them for promoting the idea that anything goes and nothing matters.

October 8, 2007
The Grass Roots Syndrome

Because I wrote a couple of books about the design of cities (and the shortcomings of suburbia), a lot of blather comes my way about what towns around the nation are planning for the future -- and, off course, I hear plenty on the subject in my own town, Saratoga Springs, New York, which is a classic "main street" type town. I also happen to travel a lot and actually see what's going on far from home. Almost everything I see and hear is inconsistent with what I think reality has in store for us.
Most American towns, including my own, are obsessed to the point of mania with the issue of parking and more generally the management of cars, and much of their spending is directed to those ends. Municipal leaders (and the public they serve) have no idea what kind of problems the nation faces with oil. Because life in the USA has worked a particular way all their lives, they assume that it will continue to operate that way. Not only will they be disappointed as happy motoring spirals into history, but they will create a lot mischief in the meantime in planning things based on faulty assumptions.
My own town, for instance, relies heavily on tourism, in particular tourism based on happy motoring. There is not the slightest apprehension among the people here, or our leaders in city hall, that automobile-based tourism may not be happening as soon as five years from now. All our political energy is being expended in fighting about what kind of parking structures we will build (with borrowed money) and where to put them, and how these things might incorporate some secondary uses, such as police offices. We have also been debating plans for the expansion of our modest convention center -- in connection with added parking structures. It seems to me that one of the first things to go as the US economy contracts, along with its energy supply, will be activities like boat shows and optometrist's conventions.
Now this town happens to be on a railroad line that connects New York City to Montreal. Before 1950, it was the main way that people came to this town. These days, we get one train a day in each direction. The trains are invariably late, and not just a little late, but hours late. The track bed is in miserable shape and, of course, Amtrak is a sort of soviet-style management organization. There is no awareness among the public here, or our leaders, that we would benefit from improving the passenger railroad service, and around the state of New York generally there is no conversation about fixing the railroads. (Governor Elliot Spitzer is preoccupied these days with arranging to give driver's licenses to people who are in the country illegally.) We are going to pay a large penalty for these failures of attention.
Another aspect of all this has to do with our assumptions about land development. Here in my town, and elsewhere around the country, the assumption is that suburban development will continue just as it has the past sixty years. This assumption is shared both by the developers themselves and their opponents. The developers expect the current "downturn" to reverse before long. From the opponents' point of view, the assumption is based on their legitimate fears and heartaches about what they've seen heedless development do to the American landscape. Consequently, whatever mental energy is left after the parking debates get tabled is dedicated to fighting over projected suburban expansion.
My personal view about this is apparently radical -- though I am a man of modest habits and philosophy. My view is that the suburban project, per se, in the United States is over, finished. Like, totally. You can stick a fork in it. What you see is basically all that we're going to get. Not only do we not need anymore of it, but we have way too much of what is already on the ground. We don't need anymore suburban housing pods, and the ones already out there are going to hemorrhage value (and usefulness) as far ahead as anybody can imagine. We need more retail like we need 300-million holes in our heads. Ditto suburban office capacity. Ditto new roads and highways.
The projects that people see under construction now are things that went through the torturous permitting process at minimum a year ago and generally even further back. I would imagine that many of the developers of these few remaining projects -- whether they are condo villages or strip malls or chain store "power centers" -- are in deep melancholy as they read the news and desperately search for tenants. Their lenders must be equally depressed -- and in some cases cutting off further injections of capital. What remains is what bankers call "the workout" -- where the financial chips fall when people's hopes and dreams collide with reality's separate agenda.
In connection with the imminent collapse of our investments in suburbia is the fate of all the laws and codes that have governed the creation of it. I think it is a waste of effort at this point to attempt to reform what we generally refer to as "the zoning laws." They will simply become irrelevant. As we get in trouble with oil, and driving becomes more of a problem, it will be self-evident that regulations geared to keeping cars happy can no longer be followed. My guess is that for a period of time we will see a condition of stunned paralysis in the council chambers and planning boards. Eventually, if we are lucky enough to retain effective local governance, a new consensus will emerge that will be more reality-based by necessity.
In saying this, I imply that societies go through cycles of collective thinking that range from being fairly consistent with reality to being dangerously out of whack with it. We're at the latter end of the cycle these days. One of the symptoms of this is the fact that so many Americans believe the only thing wrong with America is George W. Bush, and that if only we could wiggle out of "his" war, every day would be Christmas, with Nascar around-the-clock, time-outs for shopping sprees down the aisles of the Target store, 5000-square-foot houses for all (for $750 a month), and three BMWs parked in the driveway. . . with fries, and supersize it!
In reality, there's a lot more wrong with how we live and how we think about how we live than the mere presence of George W. Bush at the head of the federal government. Our expectations are deeply out of phase with what the earth can provide for us and what the future has in store for us, and this failure of our collective imagination goes down to the grass roots.

October 1, 2007
Two Clues for the Clueless

The first clue came during a routine NPR news broadcast on Friday, which had presidential candidate Mitt Romney retailing the shopworn idea that our nation "is dependent on foreign oil." We've heard this a million times, of course, and we accept it without thinking. But if you venture forward mentally one baby step, you will quickly come to see that, no, this dependence on foreign oil is not itself the problem. The problem is that we have adopted a living arrangement so hopelessly centered around cars and incessant motoring and one of the consequences is an addiction to oil, which we happen to have a declining supply of in our own land.
In other words, the problem is not the fact that two-thirds of the oil we use comes from other nations, but is about our own behavior in our own nation. In a reality-based existence, it is more effective to modify one's own behavior than to try to govern the behavior of other sovereign individuals and entities. It ought to be a test of anybody applying for the position of president to realize this, and to communicate it to the public. One might expect a Republican candidate to artfully avoid this reality -- since car-dealers and suburban sprawl developers are among the heartiest Republicans. But it's disgraceful for the Democratic opposition to ignore this reality.
The gravest problem this nation faces, therefore, is the inability of the American public and its leaders to confront the fact that we can't continue to live the way we do -- and, by the way, when I say "leaders," I don't restrict myself to political leaders. Our failures of leadership are comprehensive, including leadership in my nominal sector, journalism. For two weeks in a row, the price of oil on the futures markets has closed above $80-a-barrel, and for these two weeks The New York Times Sunday Business Section has failed to run one story on the consequences of oil rising into this uncharted territory of high price. Are the Times editors on crack? Surely $80-plus oil will thunder through the American economy.
The second clue for the clueless came over the weekend when President Bush declared that the chaos reigning in America's airports had reached such an intolerable level that the federal government might have to step in and whip the airlines into shape by regulating routes and apportioning flights. Again, the inability of the public and its leaders to extend a thought one inch beyond the horizon of a given problem is really striking. It's as if the entire nation had suffered a lobotomy -- and perhaps we have, through the agency of excessive TV-watching.
Has it occurred to anybody that if we could run choo-choo trains between cities a few hundred miles apart -- say from Cleveland to Columbus Ohio -- we could decongest the airports overnight? That, by so doing, Americans could travel much more pleasurably and affordably between the places they travel to most often? It certainly hasn't occurred to anybody running for president, or any of the editors-in-chief in the news media, or even any executive in what remains of the the railroad industry. But I'll try to boil it down to a digestible sound byte for them: the best way to relieve the current agony of air travel is to get the passenger trains running again. Let the airlines do what they do best: really long-range trips. Let trains do the rest. We will consume less foreign oil. The jobs now hemorrhaging out of the US auto industry could move into the passenger rail and rolling stock sectors. Everybody will be much happier.
The people I know complain endlessly about how stupid President George W. Bush is, and how badly he has lied to the public about this or that. But a casual observer from Mars would have to conclude that President Bush perfectly represents a nation that shows such a thoroughgoing incapacity for thought, and such an aversion to the truth about its own behavior. A people so hopelessly unwilling to get its act together deserves to suffer.

September 24, 2007
Shock and Awe

With gasoline prices still skulking in the neighborhood of $3-a-gallon, despite oil priced above $80-a-barrel, political and economic leaders can pretend a little while longer that things are okay on the real life American scene. But between the dollar tanking in response to the Federal Reserve's Easy-Money-for-Big-Players policy, and the start of the home-heating season, you can be sure we are headed up to the $4-a-gallon range for happy motoring fuel before New Years.
There is still broad disagreement among commentators as to whether we are headed into a wild inflation or a grim deflation, but the emerging pattern looks to me like a big ocean wave that gathers itself into a high cresting peak and then collapses under its own weight -- that is, a technical wild inflation resolving into the low slop of people unable to buy anything. However you cut it, and from whatever angle you look at it, the bottom line will be a steeply lower standard of living for most Americans.
Of course, the US government's official inflation index is worthless, since it doesn't factor in the two vital commodities that normal people can't live without: food and gasoline. But measured against meaningful indexes, there's no question that the dollar is rapidly hemorrhaging value. Last week, the dollar reached new lows against the Euro ($1.40+ to one), oil ventured past $82-a-barrel, and gold topped $740 an a troy ounce. Food commodity prices have also been soaring, with the price-per-bushel of wheat topping $8 -- meaning more expensive Hot Pockets for American microwave food junkies in the season ahead.
It appears that Fed Chairman Bernanke's interest rate cut was designed mostly to help bail out the big banks, which are in desperate need of cheap loan money to cover the losses that they are suffering from not being able to unload tons of worthless mortgage-backed-securities. Secondarily, the Fed governors might hope that their lowered rates would soften the blow of re-sets on millions of adjustable-rate mortgages -- but mortgage rates have de-coupled from Fed rates, so that may just be whistling past the graveyard. The next two months will see a much bigger wave of re-sets than months previous, and the re-setters themselves have to figure in some idea of real inflation if they don't intend to lose money on those contracts -- and whoever these parties are at the re-set end, after years of slicing, dicing, re-bundling and re-selling, they are not liable to be in a charity business of buying houses for people at a loss to themselves in interest rate differentials. So, bottom line again, those poor shlubs who signed "creative" mortgages are going to get re-set upward pretty steeply whatever the Federal Reserve does. The political fallout from folks getting tossed out of repossessed houses is sure to get worse.
There's also no guarantee that the Fed rate cuts will rescue any big banks, investment houses, or hedge funds. Sooner or later, to either meet redemptions or admit losses, they'll all have to roll out those mortgage-backed securities, CLOs, and other fraudulent items currently hiding in their books, and ask the world what they're worth paying for. The world will answer by wrinkling its collective noses at the odor emanating from these bundles of financial offal, and that will determine whether some of these outfits stay in business or sink into the mire of financial history.
For some of these outfits, like Bear Stearns, their fate looks already sealed. It was one thing for Bear Stearns to sponsor two loser hedge funds. The reason hedge funds are unregulated, by the way, is because in theory they are only patronized by extremely wealthy clients who are presumed to know what they are doing and whose choices are thought to not require regulation. But when Bear Stearns turned around a week after their funds tanked and blew a raspberry at these investors by saying "we registered these operations in the Cayman Islands where your lawyers can't touch us, so fuck you" -- when Bear Stearns did that, it took the short-end benefit of blowing off some legal fees over the long-term prospect that no one in their right mind would ever invest in a Bear Stearns fund ever again.
Meanwhile, on the inflation side of the question is the hard-to-refute idea that a lot of non-American persons and organizations will probably not sit on a lot of saved dollars and dollar-denominated debt paper with said dollar losing value every day. At first, these dollars would come back into the US chasing assets-for-sale, meaning that foreigners could buy up a whole lot more American companies, giving them ownership in something tangible rather than a boatload of depreciating bonds. The Kingdom of Dubai tried this last week in making an offer to buy 20 percent of the Nasdaq. God knows what else might go up for sale out there. Maybe the Chinese will take the New York Yankees off ailing George Steinbrenner's hands. Maybe the Metropolitan Museum of Art will sell its whole collection to Japan -- they seem to like that stuff. But the net effect would be a flood of dollars coming back into the US chasing assets. Meanwhile, the price of a gasoline fill-up and a jar of jam would go ever higher for ordinary Americans.
On the deflation side is what happens after this wave collapses, and that would be a national fire-sale of plain "stuff," as desperate families from Maine to Honolulu try to liquidate all the toys they purchased over the last twenty years in order to keep a roof over their heads and some food on the table -- cars, boats, snowmobiles, flat-screen TVs, leaf-blowers, iPods, you name it. A lot of that stuff will be either unsellable -- because there will be be way more sellers for these things than buyers -- or they will be sold at extreme bargain-basement discounts. The net result is what they call a deflationary depression. Too few scraps of money seeking too many things for sale. Nobody doing any business. Jobs and incomes dissolving in the process.
All these things will be occurring against the background of an increasingly desperate energy predicament that will probably introduce many as-yet-unfactored problems into the equation -- such as, what happens as the oil export crisis gathers force and we begin to get supply-and-allocation disturbances. . . ? Or what happens when the US military starts competing with agri-business and commuters for oil? Or what happens geo-politically when the contest for dwindling oil supplies from the exporting nations begins to affect relations between the major importers, namely, China, the US, Japan, and Europe? Or what happens politically on the domestic scene as times get hard and the public looks for targets to direct their righteous wrath against?
What all this comes down to is the sense of a nation absolutely fooling itself that it can carry on in the way it is used to. I'm hardly an advocate of the US giving up and committing suicide. What I advocate is a broad recognition that reality is compelling us to change our behavior. Reality is trying to tell us that we can't run an economy based on nothing more than investment schemes without directing investment into activities that produce things of value. Reality is telling us to be very worried about living arrangements that can only function with copious imports of oil from people who are disgusted with us. Reality is telling us that we can't divert our food crops into making motor fuels without people becoming unable to afford either fuel or food. Reality is telling us to redirect our culture more toward things-we-do-with-other-people and less toward things-we-do-with-new-things. Reality is telling us to shift from avoidance behavior and denial to engaging with reality in order to lead lives that are consistent with reality.
The next several weeks are liable to be a time of great stress as these realities become increasingly undeniable. I imagine the public chatter will become increasingly delusional as the wave crests. When it it finally comes, the shock of recognition that we are a bankrupt nation will present itself at first as a great silence. The public's collective jaw will fall open, but no sound will come out. That will be the true moment of shock and awe.

September 17, 2007
Shocked, shocked!

Alan Greenspan's memoirs are being flogged across the airwaves, bandwidths and printing presses, and the cohort of those who comment on public affairs in these media are shocked by the Maestro's confessions -- first, that a housing bubble emerged out of his leadership in the banking sector, and second that the Iraq war is about oil. As usual, they're getting it all wrong -- about as wrong as Al himself got it. But that is the way of things in this age of cultural dissipation and gross cognitive dissonance.
Greenspan claims he had no idea that his cutting of interest rates to near zero would produce any irregularities in the US economy. Apparently he hadn't noticed that the Big Fund Boyz called him "Easy Al" for a reason. Or that when you introduce nearly free "money" (as in "available for lending") into a system of financial trade, the recognition of risk tends to evaporate. As the nation's chief bank regulator, Greenspan also apparently failed to notice the upsurge in dodgy lending practices previously only seen among mafia loan sharks, drug dealers, or twelve-year-olds playing Monopoly.
But the really funny part of all this is that the media columnists are acting as though the American public got hoodwinked by Al. Which raises the question: just what the fuck was the public thinking when they bought half-million dollar houses on salaries under 60-K, taking out no-money-down, interest-optional balloon mortgages and other tricked-up contracts? The answer is: they walked into these arrangements with their eyes open because they thought they could get something for nothing. They thought the trend of steeply rising house prices would continue indefinitely and enable them to wiggle free of any hazard by flipping their houses to an endless supply of greater fools who would be there waiting to turn the very same trick. And the smoothies downstream in the mortgage and banking rackets were no less guided by avarice when they cooked up their formulas for bundling half-baked mortgages into tranches of tradeable securities. Easy Al may have failed to notice what was going on here, but then so did everybody else from The Wall Street Journal to the Securities and Exchange Commission.
This, of course, represents an insidious psychology. It could only happen in a culture that has come off the rails mentally, so to speak, as ours has in the sense that nobody has any sense of consequence, neither the leaders nor those who affect to follow the leaders. The leading religion in America is not evangelical Christianity, it is the worship of unearned riches, and its golden rule is the belief that is is possible to get something for nothing. Its holy shrines are Las Vegas and Wall Street. (And, by the way, has anybody heard the evangelical Christians complain about Las Vegas? They complain about a lot of things, but are themselves among the greatest believers in unearned riches -- given their preference for prayer over earnest effort in the service of solving life's problems.)
No, the American public, including the cheerleaders in the media, have only themselves to blame for the bitter harvest now underway in the asset and credit markets. And thus it would be a salutary thing for Baby Jeezus, or the forces of nature, or whatever powers guide the universe, to now kick the shit out of them, so to speak, financially, because that is exactly what the American public is full of, from top to bottom, from George W. Bush at his lonely desk on Pennsylvania Avenue to the pitiful, bankrupt householders of Orange County and Boca Raton.
Now, as to the shock of Al's revelation that the Iraq war is about oil -- the media and the public have got this all wrong, too. The logic here seems to be that because the Iraq war is about oil it is therefore unnecessary, optional, a mistake, an indulgence, something we should not dirty our hands in. In fact, the Iraq war is not about oil, per se, so much as it is about America's behavior here at home, about the choices we make for how we live on this continent. None of those who complain most loudly about our military presence in Iraq have advanced any proposals for reforming how we live here -- and hence for our enslavement to oil, much of the world's remaining supply of which happens to be in the neighborhood of Iraq. When these complainers start complaining about the ubiquitous acceptance of suburban sprawl and abject car-dependency -- and this includes the environmental boy scouts out there who want to get merit badges for buying hybrid cars -- then they will deserve to be taken seriously. Until then, the American people have got exactly the grinding war that they deserve. Let them whine about it all the way to the Nascar tracks, and let them console themselves with giant plastic bottles of Pepsi Cola and buckets of chicken raised on corn grown with oil byproducts.
On CBS's "60-Minutes" show last night, Greenspan, in his new role as a private sector economic consultant made predictions for the coming months in the US economy. He declared that the financial sector would get over the current credit squeeze as if it were a mild case of indigestion brought on by one too many fried won-tons at the all-you-can-eat buffet, a mere burp, allowing the public to move on to the crab Rangoon and a helping of General Tsao's chicken. This gets back to the previous point about the Iraq war and oil in particular. Al doesn't get it. CBS's sycophant reporters don't get it. Nobody gets it. We are entering the zone of the long emergency in which the primary resource needed to run the industrial economies will become scarce, expensive, and profoundly destabilizing to markets and to normal life, such as it is known in this country. And the current problem in the markets is a reflection of the resource bankruptcy we are facing. Our problems are not about credit, they are about permanent insolvency.
In his old age, Alan Greenspan's face -- once darkly handsome in his youthful years as a jazz musician -- has taken on the strange appearance of a circus clown. Something about the way his lips have settled into a kind of thick fatuous smile, even when he is apparently not amused by anything. Is it one of God's clever little tricks to leave him looking like a clown in his valedictory years, or has his face just resolved into the perfect embodiment of leadership for a clown nation?

September 10, 2007
The Disinformation Society

One question that readers ask me often is why the mainstream media is doing such a poor job of reporting the nexus of the global energy emergency and the turmoil in global finance. I maintain my "allergy" to conspiracy theories. There isn't any clique of top-hatted Wall Street biggies with monocles joining with with gray-suited CIA-types to intimidate editors with tongs and electrodes. American culture has become self-dis-informing.
As my friend Peter Golden (blogger at Boardside) puts it so well: "When people lie, they know they are doing something wrong. But when they just make things up, there's no consciousness of right or wrong at work. It seems morally okay to live in a fantasy world -- and this is much more pernicious to the public discourse than lying."
My friends, who are mostly ex-hippie, yuppie progressives, have been locked in prayer to exorcise the evil spirit of George W. Bush for six years, but they fail to recognize a more comprehensive failure of leadership in every sector of American life, and especially in the ones where a lot ex-hippies-now-yuppies run things. Our political leadership may be deplorable, but so is our leadership in business, education, the arts, and especially the media.
The poster child for this is The New York Times. In their reporting on the world oil situation, they have consistently and uncritically swallowed the public relations handouts of Daniel Yergin's Cambridge Energy Research Group (CERA), a wholly-owned PR shop serving the oil industry. Laziness doesn't even explain this. It's bad editorial leadership. It's a failure to ask the important questions.
On Friday, the oil futures markets closed a dollar-and-change away from the all-time record high price (the same day the Dow Jones Industrial Index fell 250 points.) Today's (Monday's) lead headline in the NY Times Business Section is "Disney to Test Character Toys for Lead Paint." Well, I hope we get that situation straightened out so that civilization can continue with a full supply of Disney action figures under the Christmas trees -- and forget for a minute whether Grandma will be able to drive to the WalMart in December, or whether WalMart will be able to keep the diesel tanks filled for their "warehouse-on-wheels, or whether both Grandma and the Assistant Manager of her local WalMart are three months in arrears on their re-set mortgage payments, and maxed out on their Discover cards. . . .
To me, there seems to be an obvious correlation between the current failures in the financial markets -- in particular the credit sector -- and the gross failure of leadership across the board in American life. Ultimately, credit depends on legitimacy, and so does authority. They are tied together. For years, both have been immersed in fantasy rather than reality.
How does one otherwise account for the remarkable disappearance of standards in lending among the human beings who lead banking institutions? All the banking executives didn't wake up one morning missing sixty IQ points. And yet neither can one say that they all woke up one morning with evil intentions to work wickedness in the world. They simply became subsumed in a fantasy that there was no material difference between borrowers with a proven ability to pay back loans and borrowers with no record of credit-worthiness. And they got rid of the problems that might have ensued by selling off wholesale bundles of good-and-bad loans to willing buyers (other banking executives) further down the line, who in turn sold certificates representing these bundles to willing executives in pension groups and money markets. It became normal. It was justified at the tip-top of American leadership by the Explainer-in-Chief saying that it was a good thing for as many Americans as possible to own their own house.
Did the American media report on this chain of dangerous fantasy? Not in the least. They were simply mesmerized by the amazing, supernatural rise of nominal house prices, and the fantastic flow of paychecks from the production home-builder's payroll offices, and the fabulous cash-out re-fi's that sent streams of revenue to the Crate-and-Barrel furniture outlets, and the Williams-Sonoma catalog headquarters, and the plastic surgery parlors.
All this occurred against the background of what has come to be called Peak Oil, the turnaround point in global oil production, and indeed the all-time high-point of world oil consumption, which can be dated precisely now (in the rearview mirror) as having topped absolutely in July of 2006 -- the exact moment, incidentally, that a gigantic pin first pierced the outermost molecules of the soapy film that held the housing bubble together.
Oil production (all liquids, including natural gas byproducts, tar sands, what-have-you) are down now by more than a million barrels a day. We've only experienced it so far in the juddering rise of oil futures prices. Over this brief period of time since the absolute peak, the losses of supply have been yielded in the world's poorest societies, who simply drop out of bidding for oil supplies.
What the mainstream media is missing now is the prospect of a really swift worsening of the problem as exports from the major oil producing nations fall off at a sharper rate than their production declines. This idea has been articulated best by Dallas geologist Jeffrey Brown over at The Oil (and for one particular discussion of it go to this blog at Jeff Vail's Energy Intelligence site).
The mainstream media is also failing to get the connection between the supreme commodity that allows the world's industrial economies to operate, and the credibility of a financial sector whose chief mission is to finance the operations of industrial economies. In the absence of any real prospect for growth in America's industrial economy, the financial sector dreamed up a system in which we could invest in the manufacture of investment instruments instead of productive activity per se. And so all the expertise and time of those working in the financial sector has gone into the production of tradable debt vehicles based on abstruse formulas that almost nobody could understand (especially the people buying and selling them).
All this dangerous fantasy gained legitimacy because for a while it seemed to pay off. Ordinary citizens could acquire houses much bigger and better-equipped than their incomes justified. And mortgage originators and bankers made whopping fees in enabling the action. And higher-up bankers in the chain derived un-heard-of bonuses from leveraging the securitized debt from all that, and politicians basked in the glow of a seeming hyper-prosperity, and professor Bob Bruegmann at the University of Illinois declared suburban sprawl a good thing, and even The New York Times, while staggering in news-gathering effectiveness against the Internet, was able to rake in enough advertising to build an unnecessary new headquarters skyscraper in Manhattan.
The dream is over now. Reality-based moral hazard is returning (literally) with a vengeance. Right and wrong are going to matter again and a lot of people who put these things aside for a while are going to suffer.

September 3, 2007
Crunch Time

Like a lot of observers in thrall to the agony of the financial markets, I have been commenting on less-than-the-Big-Picture in recent weeks. The Big Picture is the health of American society, which includes both its economy and culture. In healthier times, finance was but one part of the economy, the means for raising capital investment to apply to productive activity. For the past two decades, we have allowed it to become an end in itself.
As US manufacturing decamped to low-labor-cost nations, we turned increasingly to the manufacture of abstruse investment schemes designed to create "value" ingeniously out of thin air rather than productive activity. These succeeded largely because of the momentum of legitimacy American institutions accumulated in the years after the Second World War. The rest of the world believed our ingenuity was backed by credibility. That momentum has about run out.
You will hear about central banks and hedge funds and derivatives and mortgage backed securities, and all kinds of jargon, but the issue will really come down to matters other than finance. Are we building a society with a future? Does our culture affirm life or yearn for destruction? Are our daily ceremonies and rituals meaningful or empty? Are our hopes and dreams consistent with what reality has to offer? Can we look in the mirror and say that we are upright people?
I think we are in trouble with all these things. But I doubt we can give up our current behavior without going through a convulsion. The psychology of previous investment is, for us, a force too great to overcome. We will sell the birthrights of the next three generations in order to avoid changing our behavior. We will blame other people who behave differently for the consequences of our own behavior. We will not understand the messages that reality is sending us, and we will drive ourselves crazy in the attempt to avoid hearing it.
I haven't changed my view of what is happening to us. We have run out our string of stunts and tricks in the money rackets. We've spent our legitimacy. The rest of the world will strive mightily to get free of their obligations to us, including their respect for the value of our currency. The meta-cycle of suburban development, including the "housing" and all its accessories in roads and chain stores, is hitting the wall of peak oil. The suburban build-out is over. This will come as an agonizing surprise to many. The failure to make infinite suburbanization the permanent basis for an economy will rock our society for years to come. Hundreds of thousands of unemployed men with pick-up trucks and panoplies of power tools will feel horribly cheated. I hope they don't start an extremist political party when the re-po men come to take their trucks away.
Even under the best circumstances, with a nationwide change of heart, and really wise leadership, America would find it difficult to make the necessary changes that new reality requires. Of course, reality will force us to make these changes whether we're on board with the program or not. The only variable is how much turmoil may ensue in the process. If we resist doing what reality commands, our trouble is certain to be worse.
What does reality command? Well, first of all (and especially for the benefit of the enviro-progressives I have met recently, who want gold medals for buying hybrid cars) we'd better drop the idea that there is any way whatsoever to preserve our system of happy motoring. The car as a mass market phenomenon, and enabler (dictator, really) of all our daily life arrangements, is finished. We'd better find something else to talk about, or the American future will amount to little more than a colossal circle-jerk on an increasingly unfixable freeway. I am hugely worried (obviously) that even the intelligent-and-educated fraction of our society cannot focus on anything but how to keep all the cars running. A failure to drop this, and move on to more practical endeavors, will lead automatically to a failure of reasonable politics in this country. It is already manifest in the abysmal failure of the Democratic candidates for president to address the looming oil import crisis that will certainly be underway as soon as any of them is inaugurated.
Reality commands that we prepare to rebuild our small towns and small cities and downsize our gigantic metroplexes. Reality commands that we get serious about local food production and local economies. Reality commands that we rebuild the kind of public transit that people will be grateful to travel on. Reality commands that we prepare to rebuild our harbor facilities for a revival of maritime trade, using ships and boats that do not necessarily run on oil. Reality commands that we put an end to legalized gambling, in order for the public to re-learn one of the primary rules of adult life -- that we generally should not expect to get something for nothing.
The trouble we are seeing in the financial sector is largely a result of blowback from tens of millions of people who tried to get something for nothing. It is a circumstance that is now beyond the control of the Bushes, Paulsons, and Bernankes. Their intended-to-be-soothing statements on Friday will not hold back the implosion of cascading defaults and cumulative insolvency. A few "poster children" may be symbolically rescued to try to prop up confidence in this-or-that paper, but an awful lot of other people and institutions will just go down, unfortunately, because of their own bad choices.
A strange new meta-reality will assert itself in America: that shit happens. We will see the ruined people and feel bad about them, but we will not be able to un-do the shit that has happened to them, that they have brought upon themselves. This is how the idea of moral hazard returns to a society that has lost its way. Meanwhile, there is too much to do for the survivors to sit around wringing their hands and being crybabies. You can start by taking all the mental effort that you are currently wasting on the subject of cars, and how to run them on fuels other than gasoline, and instead focus your energy on how to rescue our political institutions so that a truly informed public can reconstruct a bankrupt society into a living and credible republic.

August 27, 2007
Back to School

Bad financial paper, like rust, never sleeps.
We may be in the traditional torpor zone of late summer when the whole nation takes off on vacation, but worms are still turning in the compost heaps of securitized alphabet debt (MBSs, CDOs, CLOs, et cetera) behind the glass banking towers in places like Wall Street, London, Frankfurt, and Shanghai, and the odor from all this garbage blowing 'round the world grows stronger by the day.
Transfusions of loss-cover-loans from the Federal Reserve have enabled the The Big Fund Boyz to spend a last weekend or two rubbing elbows in the Hamptons with transcendent beings like Diddy and Kelly Ripa. The Boyz gather along the dunes at twilight, bongs in hand, to gaze at Hedge Fund Island, looming off-shore in the gray Atlantic mist, and they notice something alarming: the island, which the BFB's built themselves over the past ten years, seems to be either floating out to sea or perhaps just sinking!
The scores of billions of dollars and euros that central banks have poured into the maw of losses lately will only paper over the essential problem for another few weeks, at most. The damage to global structured finance has been done, and it can be stated rather precisely: a widespread recognition that it's not possible to get something for nothing, after all. And that when you hold a lot of paper that was gotten for nothing, and put it up for sale, nothing will be offered for it. What a surprise.
The task of people holding power now in the finance sector (which itself may be a conceit at this point) is to manage the rapid dissolution of hallucinated wealth in such a way that as few people as possible notice that x-trillions in dollar denominated pixels have vanished from the hard drives. Sooner or later, though, millions of shlubs dependent on pension checks, or annuities, or monthly payouts of one kind or another will notice that something has stopped landing in the mail box. Re-po men with bad haircuts and tattoos will be driving other peoples' cars to the auction barn. Young people accustomed to thrilling paydays will discover that their services are no longer required in the mortgage origination business, and will instead have to memorize dozens of excruciating formulas for different sorts of beverages more or less based on coffee. Millions of realtors will enter second childhoods as they move back in with Mommy and Daddy, who themselves must now change their plans, since it is no longer possible to flip the 1956-vintage raised-ranch in Hempstead to buy that half-million condo in Maui.
Reality is biting hard. As with the little marmot caught in the Gray Wolf's jaws of death, the body simply surrenders and God's grace of physical shock softens the translation from free-willed joyful creature to dead meat. That is where we are at here in the final days of August, 2007. Digestion follows. The Big Fund Boyz and all their minions will end up as mere worm castings in the aforementioned global compost heaps.
Terrible shocks are going to rip through the socioeconomic fabric of the USA as we turn the corner past these late summer doldrums. The fiasco of bad debt won't be contained. The choices for those who find themselves financially underwater in the fall of 07 will be 1.) liquidation, 2.) bankruptcy, or 3.) destroy whatever remains of confidence in the US dollar in order to erase debt by hyperinflation. People holding power don't like the first two, which translate into Depression (let's make it capital "D.") When a nation turns into a fire sale from sea to shining sea, and bankrupt citizens don't even have enough cash-on-hand to buy things desperately cheap -- well, that's a Depression. Everybody from Fed officials to news editors have favored the softer term "recession" the past half century because it implies a mere pause in the inexorable march of progress toward economic nirvana. That's not what we're heading into.
There will be so many assets up for sale across the USA in the months and years ahead that the very sun in the heavens will take on a K-Mart blue-light-special glow. Houses with miles of granite countertops, Maybach automobiles, cabin cruisers that burn thirty gallons of diesel an hour, and much much more. There will be so much slightly used (or barely "pre-owned") stuff for sale that manufacturing another unit of anything (or importing it) will seem like a sick joke. Alas, there may be very few buyers, at least here among the current natives of North America. And so you get "new pricing," and a deadly downward spiral.
Of course, all that creates a problem for the masses of human beings who theoretically support themselves by working to produce new things of value to be bought and sold . But let them watch Nascar! Let's take whatever little remains of our tax revenues (or bonding ability) and build a dozen more speedway ovals around the country, and tweak the stock car engines so those suckers can run on ethanol, and shower the fans with Little Debbie snack cakes as they count the laps. Bring on Britney Spears or Paris Hilton at half-time (do they have half-time in Nascar?) and let Justin Timberlake cut their hearts out on the hood of a Dodge Avenger. Believe me, the public will be so deliriously entranced by the spectacle, they won't notice anything else going on in the background of our nation.
This is how America enters the Long Emergency -- in a Nascar rapture, with Jesus directing the pit crews and the Holy Ghost working the barbeque concession.
I apologize for what has been a rather excessive spewage of mixed metaphors this week, but the extreme abnormality of events has just got me going. The bottom line, though, is simple and straightforward: things may appear normal for the moment, but we are heading into a shit-storm as sure as Sam Walton's descendents contracted to buy all the three-ringed loose-leaf binders made west of the international date line. America, you're about to go back to school the hard way.

August 20, 2007
Hot Shots

The Federal Reserve seems to be manufacturing an impressive supply of "greater fools" to go along with the dribs'n'drabs of credit that it is dropping into the sucking chest wound that the economy has become for the body politic. The Fed's idea, I suppose, is that if they lend a little money to the geniuses who engineered the latest (and probably last) bubble of the cheap oil age to cover their present losses, then the US economy will "right itself." What I think they don't get is that finance has virtually become the US economy -- if you subtract it, there is nothing left besides hair-styling, fried chicken, and colonoscopies. By "righting the economy" do people mean the ability to keep running a transparently fraudulent set of rackets that have nothing whatever to do with financing real productive activity?
By "greater fools" I mean, of course, buyers willing to step up and purchase securities that other people are shedding as if they were smallpox blankets. But even the Fed's supply of greater fools may prove insufficient when it becomes evident how much bad paper really is out there, and how it has been allowed to contaminate every tradable niche in the banking and investment house of horrors. I don't think we've begun to hear the disclosures.
The destruction continued globally last week, with dark portents for this week, and indeed for the rest of the year. The much-mentioned "carry trade" -- borrowing Japanese yen in massive bales at ridiculously low interest and stashing the money in places where returns are higher -- got rocked as stock markets shuddered and currency spreads began to go this way and that way. This could not have been healthy for the derivatives geniuses, whose algorithms get the flu every time the temperature changes on a trading floor somewhere, and for whom the carry trade has been a sort of money strip-mining operation in recent years. Last week's action must have burst a lot of cell walls under those high foreheads. The Big Fund Boyz have been scrambling to paper over the damage. But sooner or later, the strength of the unwind will surpass their ability to pretend everything is okay. My guess is they will do just about everything except put their worthless MBS-and-other-crap-paper on the auction block -- and then we'll get two things: straight-up announcements of capitulation and insolvency, and addenda to the effect that, oh, by the way, our fund was incorporated in the Cayman Islands, out of reach of the US courts, for those of you credulous slobs out there who were thinking of suing our asses, so fuck you (and won't that work nicely for the US financial sector's greater legitimacy).
Speaking of the Cayman Islands, they are about to get hammered by Hurricane Dean. Those Potemkin offices where the Boyz incorporate their mystery funds may not even be standing by three o'clock. But speaking of Hurricane Dean raises some interesting parallel issues. Texas may be breathing a sigh of relief with the storm's present course calculated to take it over the Yucatan Peninsula and into Mexico. But, as you can see from this article on, it's a real Scylla and Charybdis situation. The US Gulf oil fields and the Houston refinery universe may not get smacked, but it looks like Mexico's Cantarell oil field will get roached instead. With Mexico being our number two source of oil imports, and with oil imports being almost 75 percent of our daily oil supply, and with the Cantarell field being 60 percent of Mexico's oil production -- well, you see how that goes. Nobody really seems to know what has kept crude oil trading just barely into the $70 range at the height of the driving season, but the two main speculations are 1.) "demand destruction" among tapped-out American consumer-motorists and 2.) desperate Big Fund Boyz ditching positions in the oil futures markets to raise cash to cover their losses elsewhere. In any case, Dean does not look good for oil prices in the US slouching toward Labor Day.
These things prompt me to say that we are firmly in a zone of pronounced instability in global finance. I have to guess that the losses and imbalances in the funds are now too grave to correct. The Federal Reserve has got to chose whether to let these outfits sink, or whether to sink the US dollar trying to bail them out. The kind of penny-ante "helicopter drops" of "liquidity" they've made the past two weeks may actually accomplish both, only just a bit slower. By this, I mean that the damage may not occur all at once but be stretched out into the Fall of this year. Anyway, the massive amounts of adjustable mortgage resets coming down through Christmas, will blow out many more cell walls in the ailing body politic. And let's not forget that one Hurricane (even a Cat-5 howler) does not a whole hurricane season make.