Shock and Awe

September 24, 2007
     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.

Comments

[Kickaha]

As the Great Depression of the 1930's began, communities of displaced homeowners sprang up--called "Hoovervilles" after the inffectual President Herbert Hoover.

Do I see some "Bushvilles" on the horizon?

[scott]

I think it is worth noting that food and energy have historically been left out of the inflation equation because they have historically been STRENGTHS in that America has been rich in resources and FED policy was that these items low pricing because of our ability to produce in excess of consumption so that inflation would not be skewed DOWNWARD. Now that food and energy are weaknesses because of Americas obvious dependence on imports and globalizations upward pressure on commodity prices there is no danger of falsly skewing inflation figures downward infact maintaining these policies is a testament to the FEDs bias toward the status quo of globalization versus the interests of Americans.

[DaveL]

finally be able to to get me that big screen highdef sony i been hankerin fer. little boot leg cable box, be good to go.

actually, i'm hoping i can pick up one of these at a nieghborhood yard sale. ya never know when a little aerial intelligence might come in handy.

http://diydrones.com/

DaveL

[Movenonup]

It would be great if JHK was right about the "shock and awe," but I don't know. Denial is tough stuff. If there was a discreet collective moment of "shock and awe" I wonder if that would get us out of Iraq? We entered with a "shock and awe strategy" we would then leave with one.

Or does shock and awe scare us so bad that we openly own what we are about and say "Screw democracy, give us the f***ing oil." Now that is a war worth fighting!!! Start the draft now! Who's signing up? Anyone?

[ConservativeGreen]

Fuck Jim! I re-read every paragraph twice to comprehend all the EOTWAWKI chewiness in todays posting. Your crystal ball must be amazing.

CBC had a in-depth report from Cleaveland that said 1-in-10 homes have been repossessed. That will be the death of so many formerly great cities. Gutting America and its will. (Witness Soviet style secret prisons, monitoring of ordinary citizens).

Naomi Klein's latest speaks of how the globalist exploit disaster to further their agenda.

http://www.naomiklein.org/shock-doctrine

Greed feeds these disasters, and the rich elite further their own agenda. The masses are swindled and bought off.

I hope that you are right, that many will wake up to the realities, but I fear they will not. This would require understanding that the rule of law has been subverted, Americas primary value Greed is causing them to be hated around the world, worship at the alter of progress and oil has left the entire nation without any ethical ground what so ever.

America is still addicted to oil, but it has not hit rock-bottom. The credit card cash advances still buy gasa-crack, the in-laws are still enabling the destructive behavior and the board of directors still hasn't recognized that the CEO is snorting coke in the executive bathroom with $100 bills while being blow by Arabs.

[American]

Another thoughtful look into a likely future.

As per usual, I'm a bit puzzled by Jim's assertion of hyper-imminence. Weeks? Not months, or some single-digit number of years?

The whether question of SHittingF has been answered pretty well, and each Monday morning I'm curious to hear Jim's angry, sarcastic, honest arguments in favor of "whether = yes."

But next week, or mid-2008, or even eight (or fifty, for that matter) years from now doesn't make a hell of a lot of difference in the long view.

Unless people use the available time to make helpful "other arrangements." Which I'm not expecting.

[American]

Speaking of stupid people, I heard Wolf Blitzer on the (XM) radio interviewing a French diplomat, I think the foreign minister.

Within three minutes, I heard Blitzer 1) insist that he really wanted to make the best of his rare opportunity, speaking with the diplomat... and 2) ask the diplomat a question about Freedom Fries.

We're on the verge (be it in weeks or years) of getting pretty much what we deserve.

[Loveandlight]

"Do I see some "Bushvilles" on the horizon?"

Or depending when the crest of the wave of which JHK speaks hits us, some Hillary-Hiltons?

[Alan]

I agree with Movenonup about the denial. I think most people will stay in denial even after the wave crests and falls.

"This can't be happening."

There will be a lot of people who will glimpse where this is heading and shut their eyes tight because they don't want to see the age of mindless consumerism die.

[kahunabear]

With the US dollar now trading around parity with the Canadian dollar, I thought you might all enjoy "American in Canada"

http://www.stockmania.com/2007_09_24_archive.html

[Abrey]

Dear Jim:

Thank you for another thoughtful essay on the current state of modern day America. I wonder when the general public will come to realize just how much you care about our country; and when the general public will start doing something about changing our ways. But as you intimate, we first have to hit bottom before we can start going forward. At various times in our country's history we have as a nation turned ourselves inward and ignored the rest of the world. I am wondering whether the next few years will see the reemergence of that mindset.

Abrey

[montysano]

I perceive some awakening among the slumbering masses; whether it's too-little-too-late remains to be seen. Certainly, last week was a political wakeup. The Dems, typically dismisses as spineless and pathetic, have succeeded in putting that notion to rest. They are fully and completely Part Of The Problem, signed up and on the bandwagon.

Let me also second what commenter conservativegreen recommended above: Naomi Klein's "Shock Doctrine". Read it and suddenly a great many things come into clear focus.

[dale]

Scott,
I think you are missing some of the nuance in what I'm saying.

I don't equate PO with a potential "die-off" or doomer worldview. PO is not only possible it is inevitible. I see PO as a challenge, not unlike many challenges man has faced.

Recently I posted a link to an analysis of a quite revolutionary automobile that is approaching market in Europe. There was not one comment on that automobile in response. What that tells me is that most posters here are not looking for any possible solutions, only for something more to help convince them of the coming apocalypse. So, I don't think my view, which is essentially open, would equate with failing to see the possibilities, but perhaps the opposite is true. After all, a belief in a coming apocalypse would hardly encourage such optimistic behavior as looking for solutions.

I am essentially a skeptic, that is to say; what you stop questioning becomes a religion. There are many signs of that drift on this blog.

[JLee]

I am more amused that some people think that the coming fuure will be just another fun challenge. What just like the fun and challenge of winning a TV dance show? Or did you mean Jeopardy?

[Nudge]

JLee, there's reason why Jeopardy can't be played as a card or board game around the campfire, or the woodstove, for them fortunate enough to have a dwelling.

Hello again Dale. As I recall, the miracle-car post received relatively little attention here because it left so much unstated. Was it an electric car? If so, the 800-lb gorilla in the room was all about where all that extra electricity is going to be generated. You may as well have posted a link to something that uses dilithium crystals. We would have all ignored it since there's noplace to get such crystals. For that matter, how many hydrogen fill-up stations are out there?

Have you ever done the math on the caloric equivalent of all the gasoline burned in this country for transportation activities? (betcha you haven't) And then, if you're decently encumbered by a brain of sorts, you might want to figure out how many more power plants we'd have to build to make that much more energy. Hmm, well, I did (the notes are at home but I can get to them later) and we'd have to roughly double our outlay of some 16,000+ power plants here in the United Parking Lot of America. And that's assuming that the batteries work "perfectly", with 100% of the charging energy being recoverable through discharge. (In reality, the best is usually 60% recoverable, so instead of 16K new power plants make that 26K.)

Do you see any big push to build thousands of new power plants? And from where would come the stuff to fuel them?

Dale, no offense, but I'm beginning to agree with MOU (especially after seeing the stuff that Scott dug up from your previous posts) that you're just another troll. That or you're a really lame kool-aide distributor. Take your pick.

Nudge out for now.

[Nudge]

Oops, meant "there's no reason why" in that line about Jeopardy.

[scott]

Dale, I view "revolutionary" automobiles with skepticism first because it echoes the theme of growth in that we "need" to replace our current fleet in order to maintain the status quo. This line of thinking simply replaces a problem with a problem moving forward the notion that since energy markets are getting tight we can still extrapolate the American way globally if we increase efficiency. Growth in China alone will eat up any potential energy savings before the plan ever gets off the assembly line much less global saturation.

We need to be thinking outside the current box of measuring success in terms of growth. As I said before doable alternative infrastructures will not be implemented unless they operate within the framework of our current economic growth model.

By the time we accept the idea that this model is fatally flawed it will be too late.

[rubbersoul45]

This is the way the world ends
This is the way the world ends
This is the way the world ends
Not with a bang but a whimper.

[scott]

I just googled rubbersoul45 and got this:http://rubbersoul45.deviantart.com/journal/10043070/

tehehe yay luke! my birthday is next week too! happy birthday to us!

we can drive! yay!!

are you getting your permit on your birthday? i am!! hehe

love you so much xoxo =-)

[DaveL]

http://www.bestcyrano.org/THOMASPAINE/?p=317#more-317

the real deal is that we live among the dales of the world, the insane. they think that thier blood scacifices will appease the gods and allow them to drive special cars to heaven. don't listen to them and or thier more popular mouthpieces. remember they are insane and they crave blood. your's will do.

DaveL

[FARfetched]

$4/gal (average across the US) by the end of the year? Maybe if we get another Katrina or two, and then not for very long. Or the gummint grows a brain *and* a spine and raises gas taxes. Otherwise, I'm not sure how it would happen. Demand is still rising, but it's beginning to crest — I'm seeing it in the rising numbers of motorcycles (and even a bicycle or three) on the commute, hearing it from in-laws driving less. SUV sales are down.

I'm also not nearly as certain as you are that resets are going to jump interest rates dramatically. While you're correct that whoever is holding the paper isn't doing it for their health, they can see the difference between losing $400K all at once and losing $200K over the next 25 years. If they foreclose, they're holding a property that will sit (likely unmaintained and deteriorating) that they have to sell, probably at a steep loss. If they eat some interest, they get a performing loan and don't take such a huge hit to the bottom line.

Hyperinflation followed by hyperdeflation is certainly a plausible scenario, though, especially if wages don't rise along with prices. If wages rise as well, the mortgage issue could be moot because people could pay off their loans with the trunkload of cash they bring home from work. If wages *don't* rise, people will simply stay home — why work for essentially free?

As far as foreigners buying up everything… well, the US has had stuff nationalized out from under us before. That sword cuts both ways. If things get as bad as you write here, it will happen because the voters will demand it.

[Holmes, I presume]

DaveL, thank goodness you're back. A voice of reason to hopefully convince others to just say no to this vicious circle jerk of trying to converse with the mad. wombat was trying to make the same point yesterday, as was I the day before that. Even with your skilled intervention, alas, this and other great battles will have to run their natural course.

[seancb]

dale, if your post was 100 or 200 comments down the page, some of us don't have enough spare time in a week to read that far.

However, regarding automobiles, I think the general consensus of the comment posters here is not that we are "not looking for solutions" as much as that we are "looking for REAL solutions".

As has already been posted in response to you... real solutions do not include alternative technologies that allow continued use of the private automobile and the sprawl that goes with it.

[Gary49er]

As I read JHK I feel his basic message is that we need change - our course is headed for trouble - so do something different.
So -- Dale and I try to indicate some possible changes on the horizon, reasons to think more positively - and what do we get? You know - you all do it!
The slam we get is "continue the status quo". Did Dale say that? - I did not.
Myself, I like Odd Ball in Kelly's Heroes, not only the positive vibes part - but the get out of trouble part. (can be done)
I too had hoped to find an open mind or two around here - seems I was mistaken Dale. So if you want to keep trying - go ahead - I fear these people do not want to listen.
The clique part of this blog is too entrenched in the fear, and react accordingly. JHK has found a timely topic to sell paper - good for him and his message.
I do not care if the door hits me on the way out!...............

[CarlostheObscure]

Bravo, Jim....you're right as rain with this post....