Clusterfuck Nation by Jim Kunstler

The Risk Economy

      My new novel of the post-oil future, World Made By Hand, is available at all booksellers.
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As the West's industrial regime sputters toward a cheap-energy-crackup conclusion, there have been attempts to recast what our economy is actually about, how to account for whatever wealth we manage to produce, and project what our society will actually be organized to do in the years ahead.

       For a while in the 1990s, the idea was a "service economy," kind of like the old fable of the town whose inhabitants made a living by taking in each other's laundry -- only in our case it was selling hamburgers to tourists on vacation from their jobs making hamburgers elsewhere, or something like that.

     Then came the idea of the "information economy" in which making things of value would no longer matter, only the processing and deployment of information (sometimes misidentified as "knowledge"). This model seemed to suggest a yin-yang of software engineers who made up games like "Grand Theft Auto" serving the opposite cohort of people who bought and played the game. If nothing else, it certainly explained how lifetimes could be frittered away on stupid activities.

     That illusion yielded to the housing bubble economy, which actually did produce a lot of things, but not necessarily of value -- for instance, houses made of particle board and vinyl 38 miles outside of Sacramento. It was a tragic and manifold waste of resources, as well as an insult to the landscape. But the darker side of the housing bubble lay in the world of finance, where a vast empire of swindles was constructed to support the Potemkin facade of production homebuilding.

     Now we are in a strange period when those swindles are unwinding. The people who run the finance sector -- the Wall Street investment banks, hedge funds and ratings agencies, the Federal Reserve, and the US Dept of the Treasury -- in desperately trying to prevent the unwind, have rapidly ramped up another new economy based entirely on the buying and selling of risk. Risk, as a pure abstraction unconnected to any real capital activity, is all that's left to buy and sell after all other plausibly practical vehicles for finance have failed.

     While a lack of transparency in the individual risk vehicles has been an object of complaint over the past year, the system as whole is transparently absurd. The system is also abstruse enough to prevent most mortals (including many employed in the system) from understanding its operations. But the general public and the news media are virtually helpless to intervene in this last gasp racket, so the probability increases that it will do tremendous damage to whatever remains of the US economy.
     One feature of the risk economy is the Federal Reserve's new willingness to absorb any sort of crap collateral in exchange for massive cheap loans to insolvent companies and institutions. The Fed has, in effect, made itself the world's largest financial shit-magnet. It has already taken in a few hundred billion in securities based on non-performing real estate loans, and has now opened the window to securities based on non-performing credit card debt, car loans, and other miscellaneous IOUs still drifting un-hedged in the banking ether.

      It's a mark of our collective desperation to avoid the consequences of so much reckless behavior that no credible authorities have stepped up to denounce this racket -- no Fed governor, no politician of standing (including the candidates for president), no newspaper-of-record. The Attorney-general of New York, Andrew Cuomo, may be quietly cooking up some cases in the deep background, but the SEC and the federal banking regulators hung up their "out-to-lunch" signs on this long ago.

       Meanwhile, the basic situation is this: the world is awash with bad investment paper. The standard of living in the US can't be supported on debt anymore. The people of the US don't produce enough real value to service their debts. Institutions can no longer be supported on debt gone bad. Something's got to give -- meaning something has to bring the US standard of living down to a level consistent with our declining actual wealth.

      Everything else going on right now is a dodge. The Fed maneuvers, the "coordinated actions" of the western central banks, the postponements of default, the non-disclosure of contents in bank portfolios, the pretense that risk alone is a kind of fungible resource that can be endlessly traded to generate fees -- all this fucking nonsense will only make the eventual unwinding much worse.

     Personally, I doubt that it can go on more than a few more months. The velocity of everything is going up past the "red line" where things really fly apart. The increased velocity of non-performing mortgages and deadbeat credit card accounts is one thing that can't be hidden or escaped. America will feel and see very vividly when the repossession teams rush families from their homes, when the pickup truck is taken away, and when the pink slip appears in the pay envelope. Meanwhile all the higher-end banking shenanigans will only debase the dollar and make it more difficult for people already in distress to buy gasoline and food.

     If the bankers and treasury officials collude to prop up one more failing big bank a la Bear Stearns, the political fallout for Wall Street could be lethal. In any case, I think we will have a way different sense of ourselves as a society by the time the election comes.

   

Belief System

          My new novel of the post-oil future, World Made By Hand, is available at all booksellers. ____________________________________                         

      A friend asked me how come the public apparently grasps the reality of climate change but can’t seem to wrap its collective brain around the unfolding oil crisis.

        I'm not convinced that the public does grasp climate change. It's perceived, perhaps, as a background story to daily life, which goes on regardless. Are you even sure Hollywood didn't invent it -- and maybe some boob at Time Magazine is selling it as though it were really happening?

      Few have anything to gain by espousing denial of climate change. It's hard for most people to tell if they have been affected by it. It doesn't quite seem real. Those who actually make gestures in the face of it –- screwing in compact fluorescent lightbulbs, buying Prius cars -- end up appearing ridiculous, like an old granny telling you to fetch your raincoat and rubbers because a force five hurricane is organizing iself offshore, beyond the horizon.

     The public appears aggressively clueless about the peak oil story. They do not accept any threats to the motoring regime. The news media is surely not helping sort things out. I saw a remarkable display of ignorance on CNN last week when the new resident idiot-maniac Glenn Beck hosted Teamster Union boss James Hoffa and they agreed that the oil companies were to blame for high fuel prices. To put it as plainly as possible, Beck doesn't know what the fuck he's talking about, and it's disgraceful that CNN gives free reign to this moron to misinform the public. It's perhaps equally amazing that Hoffa doesn't know we have entered a permanent global oil crisis based on demand having outrun supply. These two idiots think that if Exxon-Mobil built a new refinery down in Louisiana, everything would be fine, diesel fuel would go back down to 99 cents a gallon, and it would be Christmas every morning.

      This has been a pretty remarkable month, actually, with all the problems of "The Long Emergency" accelerating impressively. Oil is now testing the $120 mark, the airline industry is imploding (largely over fuel costs), the housing scene has reached a degree of collapse unseen since the 1930s, food shortages have strayed out of the Third World and begun to affect Japan and the USA, bats are dying of a mysterious disease in the Northeast, and the Arctic sea ice is shrinking away to nothing.

     We're in a strange collective psychic bubble. We'd like to forget about all these troubling rumors of hardship and bad weather and just get on with the daily task of making a living and paying for stuff and enjoying our customary entertainments. The comforting ceremonies of everyday life seem to continue. The freeways are still full of cars. Nancy Grace comes on TV dependably at 8 p.m. and is there deploring the latest pervert arrest. The baseball season has ramped up and the teams are criss-crossing the nation in their chartered airplanes. The stock market is actually going up -- what's wrong with that?

       But there's an equally eerie vibe out there that things are seriously out-of-whack. We're on the edge of something. We're at the entrance of a dark passage where some of the ceremonies of daily life meet resistance. You go to the WalMart and five of your six credit cards are refused. Uh oh. It begins to dawn on you that you're spending a quarter of your take-home pay filling up the gas-tank every week. There's no dial tone when you pick up the telephone. How could all the supermarkets in town be out of rice? The local hospital just declared bankruptcy. The neighbors down the street auctioned off all their furniture in the driveway last week. Why does the cat pick up so many ticks these days?

        Events are not through with us this year. They'll keep moving where they will whether we believe in them or not. I'm hardly even convinced that it matters who wins the presidential race this year. It could end up being the world's biggest booby prize.  

Blind Spot

  My new novel of the post-oil future, World Made By Hand, is available at all booksellers.

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     I happened to be flying into Minneapolis the very day that Northwest Airlines announced its merger with Delta --Delta to be the more senior (more equal) partner -- in effect, to absorb Northwest and run its operations. Many observers are not optimistic that the merger will rescue these companies in any case, since both airlines are financial basket-cases, but it's a sort of last-ditch effort to save them both.

    It was less than great news up around Minneapolis, Northwest's corporate headquarters. A lot of people I talked to were anxious that Delta would cut service to a lot of little cities in the upper Great Lakes and northern prairie region, places like Duluth, Grand Forks, Green Bay, Traverse City and many other towns. Instead of one or two flights a day, they may end up with one or two a week, or none at all, they feared.

     The Northwest pilots were none too pleased, either, because Delta was making noises about their own pilots seniority counting for more than Northwest's pilot's seniority in terms of preferred assignments and scheduling. In fact, the Northwest pilots were so pissed off they threatened to scuttle the merger.

     That part of the country is a big region of wide open spaces Things are very far apart. You wouldn't want to drive a car from Des Moines to Rapid City, even if gasoline was a good bit less than the $3.50 a gallon it is now. Driving around the prairie is especially tedious -- and dangerous because of the tedium. The landscape is boring. The roads are dead straight and mostly dead flat.

     It happened, also, that I got a little guided tour of Minneapolis from the author-shlepping service that my publisher engaged. We rode past the old Minneapolis central train station. He said no trains stop there anymore (there's a dinky afterthought of a station next door in St. Paul). Anyway, the only train that comes through the Twin Cities is the pokey once-a-day Amtrak to Seattle.

     In other words, this region of the country has next-to-zero railroad service. Can we pause a moment here to ask: exactly how far does America have its head up its ass? Do you get the picture? Can you connect the dots? The airline industry is dying and absolutely no thought is being given to how people will get around this big country -- except to make the stupid assumption that we can just drive our cars instead. Even during the several days I was around Minneapolis, no news media or politician raised the subject of reviving passenger railroad service.

      In point of fact, these are exactly the kind of trips that would be better served by rail, anyway -- the towns that are less than five hundred miles apart. The travel time between trains and planes would be comparable, considering the two hours or so that you have to add to every airplane trip because of all the security crap, not to mention the delays. As a matter of fact, USA today ran a front page story two days after the Delta / Northwest announcement saying "Air Trips Slowest [now than] in Past 20 Years." Subhead: "Trend likely to persist as congestion worsens."

     One big reason for the airport congestion, of course, is that the runways are cluttered up with planes making trips of only a few hundred miles. This has been a problem for quite a while. Periodically, it gets so bad that the media gets all excited and sometimes (last summer, for instance) the President makes a statement deploring it. Since the current president is a knucklehead, it apparently hasn't occurred to him to get behind a revival of the passenger rail system. But Mr. Bush is apparently not the only elected knucklehead in this country, because absolutely nobody is talking about this.

     Now get this: we are sleepwalking into a transportation crisis. As I already said, the airline industry is dying. The price of petroleum-based aviation fuel is killing it. And forget the fantasies about running it on bio-diesel or used french-fry oil. Driving cars will not be an adequate substitute, either. It's imperative that this country gets serious about restoring the passenger rail system. We can't not talk about it for another year. We must demand that the candidates for president speak to this issue. If you who are reading this are active reporters or editors in the news media, you've got to raise your voices behind this issue.

Slip of the Tongue

    My new novel of the post-oil future, World Made By Hand, is available at all booksellers.

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   Barack Obama caught hell last week for daring to tell the truth about the ragged thing that the American spirit has become. He said that small-town Pennsylvania voters, bitter over their economic circumstances, “cling to guns or religion or antipathy to people who aren’t like them” to work out their negative emotions. He might have added that the Pope wears a funny hat (see for yourself this week), and that bears shit in the woods (something rural Pennsylvanians probably know). Nevertheless, in the manner lately prescribed for those who slip up and speak truthfully in public (and in contradiction to the reigning delusions), Obama was pressured to apologize for his statements.

      The evermore loathsome and odious Hillary Clinton, co-owner of a $100 million personal wealth portfolio, seized the moment to remind voters what a normal, everyday gal she is -- who would never look down on the small-town folk of Pennsylvania the way her "elitist" opponent had -- forgetting, apparently, that the Clinton family's consigliere, James Carville, famously described the Keystone State as a kind of redneck sandwich with Pittsburgh and Philadelphia as the bread, and Alabama as the lunch meat in between.

      As I mull over all this, I begin to think that Hillary is exactly what the USA deserves and, that should she manage to winkle away the nomination and get elected president, the outcome would be instructive and salutary. For one thing, she will be buried under an avalanche of political woe, beginning with the basic financial insolvency of everything in the nation except the Clinton family. Then she would proceed straight into an oil-and-gas clusterfuck that could take this society back to the eighteenth century economically.

      This would have the positive effect of forcing the American public to look elsewhere for governance than the usual parties in Washington, D.C. It's time for a national purgative, anyway. In fact, it's way overdue. Are the Democratic and Republican parties anymore necessary than the Whigs? Neither of them can really articulate the problems we face (and when their honchos slip up and come close to the truth, they're persecuted for it).

      A President Hillary will also go a long way to defeating the popular delusion that a world ruled by female humans would be heaven-on-earth. (It would be more like one of those chaotic single-parent households in Section-8 housing, ruled by a harried and distracted mom, with a shadowy man in the background molesting the little ones while she was off working at the WalMart.)

      I'm very sorry that Barack Obama apologized for his remarks. It compromised his authority. They were truthful and correct. He might have added that the anxious and bitter lower classes were also neurotically hung-up on cars, and that his first act as president would be to shut down the Nascar tracks by executive order in the interest of national energy security.

     It's been illuminating to see how almost nobody has come to Obama's defense in this matter -- hardly anyone in the press, anyway. It shows what the mainstream media's interest in the truth is (close to zero).

     In the background of these sad and sordid campaign doings, the financial sector -- and the dog's-body economy that the wagging financial tail used to be attached to -- is whirling steadily down a big wide culvert, along with the rest of the debris shaken loose by the spring rains. Congressman Barney Frank and Senator Chris Dodd have been putting together mortgage rescue schemes that are gut-bustingly hilarious because they don't seem to take into account the basic fact that nobody knows who the lending parties to all those distressed mortgages really are. (Hint: they're not the "servicing" companies who send out the default notices.) So when they say that the government will "negotiate down" the principal owed on a house hemorrhaging dollar value, who exactly did they have in mind as the negotiating partner?

      These are issues that would, in a more mentally-healthy republic, occupy center stage of the political conversation -- not whether a cohort of Cheez Doodle addicted rural Pennsylvania morons prays out loud for God to shoot all the Mexicans.
 

 

Rust and Sun

    My new novel of the post-oil future, World Made By Hand, is available at all booksellers.

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     Last week I sojourned in two parts of the country that might have been separate nations: Wilkes Barre, Pennsylvania, and Austin, Texas.

     Misfortune hit Wilkes Barre hard twice in recent history. The first time was one day in 1959 when coal miners working a vein under the Susquehanna River made an error in judgment and poked a hole up through the river bed, flooding miles of interconnected mineshafts under half the county. For days after that, workers threw in every kind of material at hand to close up the hole in the river bottom -- gravel, boulders, parts of old buildings, whole trucks -- but nothing availed until the mines drank up all the river water they could hold. That was the end of the anthracite industry in Wilkes Barre. More than 30,000 miners lost their paychecks forever.

     The second calamity was Hurricane Agnes in 1972, which strayed inland and lingered viciously in the folded hills of the Susquehanna watershed. This time the river flowed over its banks and drowned the city center. Something like 60 percent of the pre-WW2 architectural fabric went for a swim, a lot of it very grand stuff. Federal disaster aid completed the job. It paid to bulldoze the flood damaged buildings and replace them with the sort of awful concrete boxes (and lollipop street lamps) that expressed perfectly the bureaucratic loathing for the very idea of city life and almost guaranteed a failure to recover both economically and psychologically.

      The city remains in poor shape, with those bad newer buildings (now aging badly), and the "missing teeth" of more recent demolitions, and a sagging population base. But I liked the young professionals I met there who are working to revive this very damaged place. They were intelligent, and cheerful despite the difficulty of their task. They clearly loved their town. They were free to move elsewhere, had even been to college elsewhere, but had returned to their old city in the valley to make a stand. And they had worked tirelessly to actually get a few good new things built.

     A few days later, I flew off to Austin, Texas, to check in on the annual meeting of the Congress for the New Urbanism (the CNU) an organization of architects, town planners, and developers who have been working heroically for two decades to counter the death spiral of suburbia with a more sustainable vision of the human habitat. Each year the CNU moves its national meet-up to a different city so the members can see what's really going on around the country.

     For all of its reputation as a lively place, Austin's city center didn't add up to much. Of course, there was the famous Sixth Street strip of music joints, which in recent years has morphed into a perpetual party scene in the mold of Bourbon Street in New Orleans -- except in the case of Austin, the buildings themselves are little more than packing crates with bars and bandstands, while the side streets are adorned with rows of port-a-johns reeking in the impressive heat of the Texas spring.

     The rest of the city center is emblematic of all the blunders that poorly-trained municipal planners have imposed all over America -- overscaled office towers set back from the street behind meaningless landscaping fantasias, blocks of buildings that present blank walls to streets, and along one weird block, an extremely narrow sidewalk with new street trees planted right in the center, making it impossible for two people to walk together side-by-side. Here and there new condominium towers stood, with cafes on the ground floor, and a number of additional ones were under construction, which was well and good -- except they were gigantic towers. I'm not keen on towers. They deform the urban fabric and they will certainly lose functionality as we leave behind the fossil fuel age. There were plenty of vacant lots, too, between the state capitol dome and Lake Austin. The downtown streets were all six-laners, of course, many of them one-way, which prompted the motorists to drive as if they were on an expressway.

      The convention center itself was a thing built to such a pharoanic scale that Rameses the Great might have commissioned it for his villa in Easthampton. It was a quarter-mile walk from the front of the ballroom to the coffee set-up in the rear -- and this was one of the smaller ballrooms. The larger ones were occupied by some kind of intramural sports association convention full of people wearing sideways hats and weird, calf-length athletic shorts. The Sunbelt is all about sports, where the social aggression seething below the surface has been channeled.

     All this was hardly the fault of the New Urbanists, who came there mostly to look and learn, and continue the process of refining their agenda for the years ahead. More and more they are coming to recognize the discontinuities we face in the form of peak oil and climate change. On these points, the leadership may be even more radically active than the membership. The ideas from meetings they held in Austin about how to meet these problems will continue to radiate through the country. They are probably the only group of professionals in America that I know of -- including the professional environmentalists -- who have a coherent vision of how America might physically arrange daily life in the terrible aftermath of the fossil fuel fiasco. Their ideas have the power to galvanize our otherwise lame political debates of the season. Nobody else in America is really thinking about what we'll do when the cardboard signs appear on the convenience store pump racks saying "out of gas...."

     Austin is exactly the kind of place in America that will get into trouble when that happens. It'll have to find something else to do with itself besides hosting drinking contests on Sixth Street every weekend night for visiting motorists. Much smaller Wilkes Barre, too, will struggle to find its way, but the one thing it surely isn't burdened with is an outsized sense of its own wonderfulness. How will these different regions of the nation find a common purpose as we slide into the long emergency? How will our political candidates find the language to articulate our predicament? They might start by listening to the New Urbanists.

Upscale

      My new novel of the post-oil future, World Made By Hand, is available at all booksellers.

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     Things continue to slip, slide, and shift strangely Out There.
     Last Wednesday, a bunch of peeved mortgagees protesting government favoritism in the Bear Stearns case entered the lobby of the company's (soon-to-be-former) headquarters building in midtown Manhattan. While it might not seem like much, I view the symbolic "penetration" of this corporate stronghold as the very first sign of a much broader citizen revolt against the extraordinary protections being shown to crapped-out investment banker boyz -- at the expense of millions of equally crapped-out poor shlubs facing the default and re-po of their McDwelling places.

     Occupying an office building lobby peacefully in broad daylight is one thing. Wait until summer gets underway and The New York Post gossip page resumes its coverage of hijinks in the Hamptons. The executives of Goldman Sachs, J.P. Morgan / Chase, and other dealers in fraudulent securities, plus the art world and show biz glitteratti who party together out there, might all find themselves the object of considerable grievance and resentment as the beaching season ramps up, and the limos roll around the charity lobster roasts, and the guests stray down the lawns, chardonays in hand, to plot divorce from their over-leveraged husbands.... God knows what seekers-of-vengence will be creepy-crawling the privet plantings along Gin Lane in the crepuscular gloom, searching for trophy wives to garrote.

     Perhaps a bankrupt landscaping contractor from Lake Ronkonkoma, recently stiffed by a hedge fund manager over the installation of a half acre of pachysandra, will be arrested on the Wantagh Highway with blood on his sleeves and a high-C piano wire in his pocket. The non-Hampton precincts of Long Island, which make up more than 90 percent of the fish-shaped appendage to New York State, will be full of angry re-po victims, and the Hamptons lie at the very dead-end tail of the geographical fish. Will the banker boyz attempt to flee by yacht? And where might they escape to? Newport, Rhode Island? Labrador. . . ?

      I maintain, of course, that the media (and the public itself) has no idea how quickly things might get weird in this country -- or how weird they might get.

      Now bear with me while I shift gears. The past five days I went to a pretty major environmental conference put on by the Aspen Institute in their odd little mountain town -- and nobody needs to tell me how un-correct it was that I flew all the way out to Denver and then drove a rent-a-car the size of a humpback whale deep into the heart of the Rocky Mountains to attend this thing. (I assure you, I wasn't paid to go.) The Institute grounds -- which looked like the set of a 1950s Raymond Massey movie about the future -- were thick with many eminentissimos of Climate Change (minus Al Gore) and activists in "green" politics, more generally. The latest frightful measurements of retreating glaciers, vanishing species, and creeping deserts were proffered and everybody was suitably impressed by the acceleration of scary conditions facing the human race.

        Being such a formal conference, though, with the putative mission to advance understanding and set agendas-for-action, a great effort was made through the medium of panel discussions to set forth various "initiatives" to deal with all the scariness, especially by enlisting the agencies of the US Government -- and most especially with the prospect of a new administration sweeping out the detritus of Bush-dom next January.

      I confess I found most of these well-intentioned proposals utterly implausible, along with their trains of hopes, wishes, and fantasies. The main conceit is that we can keep all the normal operations of the American Dream humming by some "non-carbon" related energy source -- in other words, run WalMart without oil, methane gas, or coal -- and that all the forces of government and capital can be marshaled to make that happen. The secondary conceit is that they would accomplish these things in an orderly process, harnessing "new technology," as though it were a higher sort of school science fair.

      My own opinion is that these birds have the scale issue wrong. The exigencies of the Long Emergency imply that virtually everything organized at the grand scale will tend to wobble and fail as the problems of energy scarcity and climate change converge. Institutions from the federal government to WalMart to the University of Arizona will face increasing impotence, incompetence, and bankruptcy. Vesting our hopes in propping up activities run at that scale is bound to be disappointing, to say the least, and the precursor to social upheaval to go a bit further. There's probably a lot we can do at the finer and more modest scale, but that is not the scale that conferences like this focus on-- in particular because so many of the participants are current or former high-up government wonks themselves. Anyway, the scale of global distress tends, by plain inference, to invoke the wish for global "solutions," however detached from reality they may be.

      At the center of all this conferencing was the movement's lead eco-guru, Amory Lovins of the Rocky Mountain Institute (RMI), located just up Highway 82 from Aspen. Lovins's long-running emblematic project with that outfit is something they call the "hyper-car," a car that gets such supernaturally great mileage that it will save the human race's threatened Happy Motoring program from extinction. The hyper-car program, which RMI still trumpets to this day, has, of course, the unintended consequence of promoting future car dependency -- which is about the last thing that America needs -- but that hasn't prevented RMI from pushing it. Beyond that, Lovins's RMI program-for-America resembles an actuarial exercise in "carbon credits" and other statistics-based fantasies aimed at inducing theoretically rational behavior among the WalMart executives (and "greening" up WalMart has been another of RMI's consulting projects -- I'm not kidding).

        Here lies my third dissent from what I heard at the conference: since America is bankrupting itself so comprehensively at every level, the wished-for "funding" for the green rescue program will not be there in any case.  Capital itself, as represented by Wall Street, is flying to pieces this year as its stock-in-trade of paper certificates loses legitimacy in the face of the overwhelming fact that the society behind that paper will be decreasingly capable of producing surplus wealth -- which is what capital is. The unwind of "positions" now underway among the big bankz is the process of previously anticipated capital accumulation vanishing down a black hole. It will be gone forever.

      This is the year we find that out. Bear Stearns was not the only sick puppy in the kennel. When another one wobbles and crashes, will the Federal Reserve step in again and accept its worthless CDO paper as collateral on another $30 billion loan, and another, and another, and so on? And will the individual mortgage default homeowner shlubs just watch all this go down on CNBC without any action beyond "penetrating" the lobby of a Manhattan skyscraper? I don't think so. What goes down in the Hamptons will go down in Aspen, too.

Black SwaNS Everywhere

     After a one-day reprieve from total meltdown in the financial markets, news media cheerleaders for the most reckless gang of bankers in world history declared the crisis over on Good Friday (with the markets safely closed). Whew, that's a relief. Problem solved. And just in time for baseball season, too, so none of the Banker Boyz have to sell their sky box leases.  

Commodities Drop, Rally in Dollar, Stocks Vindicate Bernanke

 

      What is meant by "meltdown," by the way, since the word is used so promiscuously by myself and others. I'd define it as the shock of recognition that many big institutions are worse than flat broke and are therefore powerless to conduct normal operations. By "worse than flat broke" I mean they are so deep in hock that all the accountants who ever lived, in the life of this universe and several others like it, using the fastest parallel processing computers ever built, could not keep up with their compounding accelerating losses (now approaching the speed of light).

      The current vacation from reality on Wall Street may last a few more days, or even a couple weeks, but it seems as though a whole flock of black swan events is circling the sky over Financial-land and is about to blot out the sun. By black swan, I refer to the concept popularized by Nassim Nicholas Taleb in his recent book of that name, namely unexpected events of  great power that tend to change the course of history.
     For the moment, with the crisis "contained," and the Boyz getting ready to air out their Hampton villas for the coming season, we are once again primed to be blindsided by potent random events that nobody saw coming. The trouble is, there are enough potent potential fiascos already visible on the horizon.

      The mortgage fiasco is still just gathering steam as it moves from the non-payment stage to the default and repossession level on the grand scale. Even the political wish to bail out feckless mortgage holders will stumble on the mammoth clerical task of administrating the process, especially since we've barely begun to sort out who actually holds the mortgages after they've been minced into a fine mirepoix of securities off-loaded onto countless dupe "investors" ranging from municipal funds in obscure corners of foreign nations to countless public employee retirement plans.

     No matter how the authorities try to "nationalize" the sucking chest wound of bad mortgages, the body of finance will flat-line -- and the American public will get stuck with the bill from the intensive care unit. Those who, for some weird reason, continue to pay their way and meet their obligations, will be none too pleased to pay for misdeeds of the deadbeats and their banker-lenders. This portends a taxpayer rebellion, which may translate into a voter rebellion.

      It's too bad the current presidential candidates have been unable to address the unfolding economic nightmare. Their collective silence on the matter suggests that they don't have a clue what to say about it. As the nightmare plays out and black swans flock in to blot out the sun, and the hedge funds come a'tumbling down, and more big banks blunder into black holes, and businesses big and small across the land shutter up their operations, and the unemployment rolls swell, and families are thrown out of their houses even when bailouts are supposed to be saving them (but the bureaucracy can't get the paperwork done in time) -- well now, they are going to be one pissed off bunch of people. What will they do at the conventions? Our outside the conventions?

      In the deeper background of all this is the all-important oil story that nobody in politics or the media wants to pay attention to. Notice that in the fervid unloading of assets this past week, as investors dumped their positions in the commodities markets, the price of oil remained stubbornly above $100-a-barrel when it was all over on Thursday afternoon. Well, maybe they'll ratchet down a little further this week, but the trend line will prove to continue remorselessly upward in the months ahead.

      Peak oil is for real. The supply can't keep up with global demand, even if it dips in the USA. And more portentous sub-plots develop in the story every month. Export rates are falling at a steeper rate than depletion rates. The exporting nations are not only buying more cars and running more air-conditioners, they also need to use more energy to lift the oil they've got out of the ground.

      Another sub-plot is the fact that the equipment used world-wide to drill for oil and recover oil and move oil around the planet -- all that equipment is now so old and rusty that it can barely do the job, and it is going to start failing altogether unless investments are made to replace it, which nobody is making.

   By the way, Americans blame the familiar private oil companies for all the trouble with oil in their lives -- Exxon-Mobil, Shell, et al -- but they don't seem to know that oil nationalism is in the driver's seat now. The old private "majors" are only producing five percent of the world's oil. The rest is coming from the national companies -- Aramco, Petrobras, Pemex, et blah blah -- and the very operations of the oil markets are entering a phase of radical instability as they move away from auctioning their stuff on the futures markets and start making long-term favored customer contracts instead.

      The bottom line is that high prices for oil is hardly the only thing America has to worry about. Pretty soon the US will have to worry about getting the oil at any price -- meaning, we're in for shortages and supply disruptions sooner rather than later.

      Also unbeknownst to most of America, the financial markets reflect all this instability around the basic resource of oil because industrial economies like ours are set up in such a way that they can't run without cheap and reliable supplies of the stuff. So the least little twitter in the reality-based world of peak oil means that everything to do with money and capital investment will naturally go batshit, since our expectations for increased wealth -- i.e. "growth" -- are predicated on the activities driven by oil.

     It will be interesting to see what new machinations are unveiled this week. Whatever else this catastrophe is, it's a good show from the cheap seats.

A Real Freak Out

   

Note: This is the official publication week of my new 'post-oil' novel, "World Made By Hand," a vivid depiction of life in The Long Emergency.  Visit the book's website:

     Things are getting very weird very fast -- and will probably get even weirder, faster, as the train wreck of bad debt meets the Saint Paddy's Day Parade of bacchanalian excess at the grade-crossing of destiny. The train is carrying America's financial system, but the engine driving it is peak oil, because declining energy resources necessarily means declining capital wealth -- and declining value of all the institutions, instruments, and markers that denote that wealth or hope to profit by trading in it. The fiasco leads straight to the necessary reinvention of American life on other terms and by other means.
      I've maintained for a long time that, even among those who recognize we have a big problem, there are many impediments to imagining a credible outcome. One thing I've noticed is that in any given public meeting (or lecture hall) you can divide participants into two groups: those who believe we will 'high-tech' our way out of this predicament; and those who believe we'll organize our way out.
     I don't subscribe to either point of view, strictly speaking. Both POV's assume that there will be an orderly transition between where we're at now and where we're headed. They're tainted by the kindergarten ethos of entitled happy endings and outcomes, which has been the chief operating system for the Baby Boomers, a therapeutic bias for placing 'good feelings' ahead of reality -- which also has obliterated the tragic sense of life that acts as the only brake on humanity's inherent hubris.
     Ultimately, in my view, the issue of what happens next will be settled not by the fantasies of the algae-biodiesel geeks or the wishful thinking of the sustainable futures organizers, but by the natural, self-organizing properties of a society responding 'emergently' to new circumstances. One of the implications of destiny-as-emergence is the probability that we will try any damn fool thing besides the right things to keep the old game going for a while -- even in the face of obvious failure.
     I'm sure our political leaders will mount a campaign to rescue the futureless infrastructure of suburbia. It will necessarily be an exercise in futility. But it has already started. That's what the swindle of ethanol has been all about. And the touting of hybrid cars, and the flimflam of "energy independence." Even the "environmental" crowd" squanders most of its attention these days on how to keep all the cars running on something other than gasoline. They don't question the assumption that we will remain a car-dependent society.
      As much as I loathe the suburbs in their grotesque late-stage efflorescence, I can understand why those stuck in them would wish to defend their misinvestments. I just hate to think of the political consequences when their disappointment catches up to the reality that the suburbs will not be rescued. And by that I mean not just the houses but the way-of-life associated with them and all its accessories, furnishings, and activities. Bewilderment will soon turn to rage out in the highway-strip-and-cul-de-sac empire.
     Now, apparently, we'll also opt for a bail-out of all those who tried to become rich by getting something for nothing at both ends of the Ponzi scheme called the housing bubble -- the "little guys" who signed mortgage contracts they could never hope to pay off, and the Wall Street playerz who bundled these hopeless contracts into fraudulent securities (and their enablers in the ratings agencies, plus the hedge fund smoothies who tried to cash in by using recondite algorithms to dissolve the risk associated with imprudent lending.) The bail-out is likely to accomplish nothing except the more rapid bankruptcy of government at all levels and a second Great Depression at ground level (worse than the first one).
     Over the weekend, the Federal Reserve engineered a $30-billion dollar Saint Paddy's day present for the JP Morgan bank by handing them the corpse of Bear Stearns. The object of the game is to prevent the "assets" of Bear Stearns from going to the auction block, on which they would be discovered to be nearly worthless, which would instantly render all similar assets held by the other big banks to be similarly worthless, and would result in a universal margin call that would pretty much unwind the hallucinated "wealth" acquired the past ten years.
      Despite the heroics around the fate of Bear Stearns, it looks like the financial system is tottering anyway. Perhaps the last trick left in the rescue bag will be the 100-basis-point drop in the Fed rate rumored to be announced tomorrow. It won't help any of the big banks, since their problem is holding liabilities in excess of assets. Almost certainly it would crater the US Dollar.
     The next thing in store for America, in my opinion, will be a rather new surprise: oil-and-gasoline shortages. While frightened money pours into the oil futures markets, driving the price up, strange behavior will start brewing in the actual physical allocation process. Imports of oil and gas to the US may not be as reliable as it had been when America seemed to be a solvent nation. The exporters may be changing their terms of doing business with us -- and that's nearly two-thirds of all the oil we need. The public would probably suck up oil price increases indefinitely, but shortages are going to be something else. A real freak out.

   

Going Going. . . .

      The feigned cluelessness in Paul Krugman's Sunday New York Times column ("The Face-Slap Theory") about the meltdown in finance is a good index of the cringing mendacity now emanating from those in service to the centers of power. I doubt an editor, or the publisher, Mr. Sulzberger, had to whisper in his ear to soft-pedal the situation. I don't even believe anything like his job depends on it. Krugman's glossing-over the truth is just social cowardice. He doesn't want to be called out dissing fellow members of his club.

      Krugman avers to the Federal Reserve's two previous big efforts since August to bail out the insolvent banks, insurers, and hedge funds with cheap loans as "slaps in the faces" of these wobbling corporations -- "yo, wake the fuck up!" -- as if narcolepsy was their only problem. (Try that with a wino on the sidewalk outside the Port Authority bus terminal and see if he immediately signs up for rehab and a high school equivalency program.) Krugman calls the club's latest plan -- for the Fed to just suck up their impaired and worthless collateral in exchange for more cheap loans -- as a "third slap," saying, with all the panache of a midwestern Rotary Club secretary, that "the third time could be the charm." Had the monkeys already flown out of his butt as he wrote that, I wonder.

     The line in Krugman's column I love best, though is this one: "Last month another market you’ve never heard of, the $300 billion market for auction-rate securities (don’t ask), suffered the equivalent of a bank run." He presumes that his readers go along with his pretense of innocence. We've never heard of the municipal bond market and it's too complicated to explain so "don't ask." Is he writing for the "newspaper of record" or Highlights For Children? Maybe it would be a good thing if readers of The New York Times asked what the fuck was going on in these markets so they could yank their depreciating dollars out and deploy them elsewhere or convert them into something of value.

     Well it was a bad week on the money scene in what is sure to be a worsening year. Paul Krugman and his fellow club members can pretend that the hallucinated finance economy is not really flying to pieces. After all, he / they are trying to avert panic. But, as noted previously in this space, the only thing we have to fear is not fear itself. We have to fear the consequences of actions by a banking leadership that has shown the grossest irresponsibility (and an American public that has been conditioned to expect a steady diet of getting something for nothing).

      The US faces a pretty stark choice right now: it can let the losers take their losses -- both the big institutions who created and traded in fraudulent securities, and all the "little guys" who borrowed too much money trying to get rich quick, or trying to live like the millionaires they see on TV. We can let them go down, and suffer the consequences of their bad choices (and maybe prosecute some of the culpable bankers and corporate executives), OR, in an effort to let these losers off the hook we can wreck the whole machinery of capital by making our medium-of-exchange worthless.

     The people in charge -- both in and out of government -- can't face the losses, so for now they've apparently decided to wreck the currency. The dollar has lost two percent of its value against the Euro just in recent weeks, as cheap loans from the Fed pour into the black hole on Wall Street (never to be seen again). Other soft-pedalers in the media claim that the financial markets have "already priced in" yet another expected .75-point interest rate drop by the Fed this week, but I'm confident that such a move will only accelerate the dollar's vanishing act.

     I'll admit, it's hard to believe what's going on in the American finance sector. But incredulity in the face of a rare catastrophe isn't the same as pretending that it's not happening. A whole flock of black swans is flying in front of the sun. Don't expect to work on your tan this month.

Campaign Blues

        While it's gratifying to watch Hillary Clinton melt back into her senate seat -- in the process foiling the ascent of Emperor Bill the 1st -- one can't help but feel that that the contest for president is taking place in a different "world-line" (shall we say) than the melt-down of the US financial sector, and with it, the US economy.

        Whoever wins on November 5 will wake up to preside over a different America than the schematic one he was debating about during the primaries and the election. The long campaign will beat a path straight into the long emergency. The new president will inherit a wrecked banking system, an economy in freefall, a wobbling world oil market, and an American public extremely ticked off by its startling, sudden impoverishment. (This is apart from whatever melodramas spool out on the geopolitical scene.)
     The president-elect will quickly realize that the number one problem is not that Americans can't afford health care -- it's that they can't afford anything, because their income is evaporating in terms of both lost jobs and a dollar that is racing toward worthlessness. They'll be hard put to pay for food and gasoline, nevermind Grandma's emphysema treatments. They will be walking away from home ownership -- or yanked kicking and screaming by default-and-repo -- and any government scheme devised to abridge their mortgage contracts will only undermine basic contract law that has made mortgage lending a credible thing in the first place. And that too, of course, would redound straight to a real estate sector already in price free-fall, with no one willing or able to think about buying a house.
     As Obama and McCain go at it through the next eight months, they will likely focus on our situation in Iraq. (Calling it a "war" now is imprecise.) As merely one commentator among thousands, I'm not satisfied that either one of the contenders has defined his position on this coherently. Obama is disposed to get the US military out of there as quickly as possible. He's right that the sheer awful cost of the adventure is one big factor in wrecking US finances while it erodes our standing in the world. But with our Iraq garrison shut down, he'd better be prepared for a further breakdown in Middle East stability and the oil markets that depend on it -- meaning, the basis of American life for four generations, dependable oil imports, will sharply end. That would accelerate the disorderly abandonment of our massive misinvestment in suburban living, and also ramp up the anger and resentment of the public grieving over its lost entitlements.
     McCain's contrasting hundred-year plan does not take into account the severe impoverishment and exhaustion of the military itself, not to mention the overall purpose of the adventure -- to keep suburban life and all its accessories running in the homeland -- which is an exercise in futility under any terms. McCain would have to confront the terrible paradoxes of the war, namely that thousands of legs have been blown off for the sake of WalMart, which company will be hemorrhaging customers anyway, as incomes wilt, at the same time that WalMart's own operating system -- the "warehouse on wheels" -- surrenders to the reality of five or six dollar-a-gallon diesel fuel. In any case, the implosion of the US economy during the next eight months will overshadow whatever we decide to do in Iraq, and that cratering will be laid directly at the feet of the Republican party. If the party survives that, which I doubt, it would a long time before anybody trusted it again.
     Whoever wakes up as the next president on November 5 will have to preside over the comprehensive reorganization of American life. The big question is whether he can persuade the public to let go of its sunk costs, and all the sheer stuff that represents, and move ahead in a unified way that doesn't end up tearing the nation apart. The danger is that the public will want to mount a kind of last stand effort to defend a way of life that has no future under any circumstances, and they will ask the president to lead that last stand.
      To avoid that deadly outcome, the new president will have to be equipped with a realistic vision of what this society can actually do to survive the discontinuities that circumstances present. This will require him to confront the prevailing delusion that the US can become "energy independent" in the sense that we can run WalMart on something other than oil from foreign lands. The new president would have to carefully restate American expectations and goals -- for instance, not to keep all the cars running at all costs, but to get us living in places where driving is not mandatory. I'm concerned that the American people will hate the new president if he tells them the truth: that an old way of life is over and a new one has to begin now. We're about to find out how much "change" the public can really stand.