Burning Down the House

     Behind all the blather and bullshit about the Federal Reserve's rescue gambits and the machinations of the ratings agencies, and the wiles of foreign sovereign wealth, and the incomprehensible mysteries of markets, and the various weather forecasts of a gathering "recession" is the simple fact that the USA is a way poorer nation than we imagined ourselves to be six months ago. The American economy has been running on the fumes of "creatively engineered" finance (i.e. new-and-improved swindling) for years, and now these swindles are unraveling. In their aftermath, they leave empty wallets, drained bank accounts, plundered retirements funds, boiled away capital reserves, worthless stocks, bankrupt companies, vandalized housing tracts, ruined families, and Wall Street executives who are still pulling down multimillion-dollar pay packages despite running their companies into the ground.

     We're burning down the house and kidding ourselves that there is a remedy for it. All the rate cuts and loans to big banks and bank-like corporate organisms, and "monoline" bond insurers, and mortgage mills amount to little more than a final desperate shell game to conceal the radioactive pea of aggregate loss. The losses are everywhere, and when you add up seven billion here and eleven billion there they probably amount to something like a trillion dollars in sheer capital evaporation -- not counting the abstract "positions" that the capital was leveraged onto by the playerz and boyz who mistook algorithms for productive activity.

     The shell game may run a few more weeks but personally I believe the timbers are burning. The losses are no longer "contained" or concealable. A consensus has now formed that we're in for a "recession." The idea is that, yes, this seems to be the low arc of the business cycle. Fewer Hamptons villas will be redecorated in the interim. We'll gird our loins and get through the bad weather and when the sun shines again, we'll be ready with new algorithms for new sport-with-capital.

     Uh-uh. Think again. This is not so much financial bad weather as financial climate change. Something is happenin' Mr Jones, and you don't know what it is, do ya? There has been too much misbehavior and it can no longer be mitigated. We're not heading into a recession but a major depression, worse than the fabled trauma of the 1930s. That one occurred against the background of a society that had plenty of everything except money. Back then, we had plenty of mineral resources, lots of trained-and-regimented manpower, millions of productive family farms, factories that were practically new, and more than 90 percent left of the greatest petroleum reserve anywhere in the world. It took a world war to get all that stuff humming cooperatively again, and once it did, we devoted its productive capacity to building an empire of happy motoring leisure. (Tragic choice there.)

       This new depression, which I call The Long Emergency, will play out against the background of a society that has pissed away its oil endowment, bulldozed its factories, arbitraged its productive labor, destroyed both family farms and the commercial infrastructure of main street, and trained its population to become overfed diabetic TV zombie "consumers" of other peoples' productivity, paid for by "money" they haven't earned.

        There is a theory (see Nouriel Roubini's blog) that a reform process will now ensue in the financial realm, new regulation and oversight of the same old familiar activities. This too, I'm afraid, will prove to be wishful thinking. The financial system will not be reformed until it lies in smoking wreckage, and when that "re-form" happens the armature of the re-organizing society will barely resemble the one that the previous burnt-down-house was designed to dwell in. Among other things, it will not support capital enterprise at anything like the scale that we became accustomed to lately. Globalism will be over. The great nations of the world will be scrambling desperately for the world's remaining oil supplies. It will not be a friendly contest, and anyone who thinks that current trade relations and capital flows will continue despite that is liable to be disappointed. (Are you reading this Tom Friedman?)

      Long before the mathematical projections of oil depletion play out, the oil markets themselves -- and all the complex operations that they comprise, such as drilling and exploration, and the movement of tankers around the planet -- will destabilize and seize up. We will no longer be any oil exporter's "favored customer." Many of the exporters will enjoy watching us suffer. Contrary to the political platitude-du-jour, the USA will never become "energy independent" in the way we currently imagine. Rather we'll become energy independent by being deprived of imported oil, and we'll be thrown back on our own dwindling supplies -- which means that we're not going to run our system of daily life the way it has been set up to run. When Americans can no longer run their cars on a whim, they will simply go apeshit and you can kiss normal politics goodbye.

     The financial system that emerges from this cataclysm, and the economy it serves (which is supposed to be the master of its capital deployment "arm," not its servant) will likely be modest to a degree that will shock and embarrass everyone currently connected with what we have lately called finance. If it even trades in paper, that paper will have to stand for something based in reality, either a productive activity or a genuine asset. It may take decades for this society to even regain the confidence necessary to operate such an elementary system -- or it may not come back at all, at least as far as the horizon lies before us. That's how bad the mischief and the damage has been.

      It's not hard to understand why the Bernankes, Paulsons, Lawrence Kudlows and other public representatives of capital keep pretending that everything is under control. On the other side of their pretenses lies disorder and hardship. One wonders, of course, what they really see in their private minds' eyes. Do they actually believe that the statistics issued by their serveling agencies amount to a plausible picture of reality? Are they so lost in their fantasies of "management" that they think they're controlling events?

     My guess is that their credibility is spent. In the weeks ahead, nobody will know who or what to believe. We may even run out of questions to ask as we just all collectively stand there in a thrall of wonder and nausea, watching the nation's financial house burn down.

Comments

[Dave]

gabbagabba hey!

[Tangurena]

Bernanke, like the rest of the bush administration is trying to delay the day of reckoning until the next administration. Like the bankrupt wargasm in Iraq, they want to pretend that they were "winning" until the next guy took over. The key to survival as a member of this administration is blind unswerving loyalty to the fuhrer and the rest of the lemming pack.

[David Mathews]

In other news:

Exxon Mobil and ConocoPhillips have suffered an injustice. How can we let these good little corporations suffer an injury inflicted by Hugo Chavez?

Doesn't Venezuela know that their oil is our oil? We had to teach this lesson to the Iraqis ... America purchased the eternal ownership of Iraq's oil with the blood of 150,000 Iraqis.

Seems a small price to pay for such a valuable resource!

***

After committing so many crimes and spilling so much blood the United States of America has earned a depression.

I doubt that Americans will remain peaceful with each other as the economy collapses. Americans are extremely violent and well armed.

Too bad our nation did not spend their last two hundred years teaching Americans to live peacefully with each other rather than building a culture of violence suitable for a nuclear-armed global empire.

[Dave]

excellent finance doom and gloom. how about a little ecological collapse and population crash next time. there is no hope in these areas either ya know.

[scott]

Yeah, I don't think we/they realise just how bad this economic downturn is going to get. I hear all the talk of "when the market comes back." It will never come back to resemble what it has been even without PO. Emerging economies will forever be consuming a larger share of global capacity while the U.S. will consume less of everything.

For all the talk of alternative energy economies, the fact remains that the global economy is running and will continue to run on conventional energy, and any investment of conventional energy for alternative energy will result in a net loss of conventional energy.

Since there is so much top down control, high rates of production and consumption will be maintained globally despite a downward spiralling U.S. energy dependant interconnectedness economy.

Yeah, there is some smart cookies runnin' thangs at the top, like that Kudlo guy you mentioned -- they'll keep the oil flowin at the highest rates possible no matter how bad it gets in the U.S.

[umass82]

The ponzi scheme is collapsing as they always do, the bigger they are he longer it takes and the harder they fall.

I look at the more appropriate house burning analogy as one in which the occupants are burning it down bit by bit, stranded in the winter burning first the furniture and then the rest to keep warm at the end nothing is left.

[msjanket]

Jim, this piece of yours this week is blunt yet incredibly penetrating. Our FantasyLand is living on fumes now, enjoying slightly lower gas prices for the present. We can again drive with impunity as our gas prices have "stabilized" for a time.
It won't take much to upset our apple cart, however. We are in a metastable time period where we can shit the bed in an instant, no warning before.
Our beloved Connecticut casinos are making less and less over the last several months. New buildings are going up and are near opening at both casinos, so prosperity will soon return to Indian lands.
I saved a fair passel of money over my career, will it be worthless? I'm of the feeling that I must keep working until I can no longer muster mental or physical energy. Like, no retirement at all. I'm not bitter, I have to eat and be sheltered.
To think we lived during the best of all times in this country and now we will see prosperity vanish is simply boggling.
Who has some optimism to share with our discussion?

[kahunabear]

The Magic of Inflation

http://stockmania.com/?q=node/2089

[bud4wiser]

JK writes: “ “This new depression, which I call The Long Emergency, will play out against the background of a society that has pissed away its oil endowment, bulldozed its factories, arbitraged its productive labor, destroyed both family farms and the commercial infrastructure of main street, and trained its population to become overfed diabetic TV zombie "consumers" of other peoples' productivity, paid for by "money" they haven't earned.” ”

James, old boy, you’ve done it again. What a “tasty phrase” to digest while eating my discount-brand oatmeal this morning. I sense, a little more urgency in this week’s essay.

And while I agree with all your forecasts, I strongly disagree with the timing. February 2009 is when the crooks and liars will be called out. And accordingly, we may see a 12,000 point DOW, which of course means the paper isn’t making bread any more.

But as you have noted in many previous writings, one has to respect the volume , the ultra-massive Jovian proportions of the current financial systems and give them their due in promulgating their demise.

The beginnings of your Long Emergency will reveal itself each year, just as seasons change – so will our prospects. Each summer, a little less fun, a little less Nascar, a little less profit all over “playground America.” Each winter, the thermostats are reading a degree or two lower. Each Christmas, the presents are smaller and less plentiful.

You keep expecting a global eco-auto-mo-oil crash, but all we’re going to get is a nation that slowly “runs out of gas.” Con men seldom make a scene as they back out of a nation filled with rubes.

[XER]

Cluster Fat Fuck Nation.

Too fucking bad.

Serves us right to suffer.

[DavidinLA]

ClusterDrunk Nation. I've noticed the past 3 months that practically all my fellow tenants in my apartment building (5 out of 7, anyway) are staying out at bars til 2:00 closing time. They come stumbling home at 2:30am, about five nights a week.

[Myzltpk]

I'm curious whether anyone has done the simple Algebra of Disintegration regarding this new depression. The housing bubble, the subprime mess and the depression are more closely linked than simply bad paper in big banks drying up available lending capital. E.g., Kevin Phillips pointed out the disturbing fact in his book "American Theocracy" that about half the money coming into the economy from "wage earners" during the period 2001-2006, the heyday of Bush's "ownership society," was actually re-fi and line of credit money, or Mortgage Equity Withdrawal (MEW). If the GDP is 70% consumerism, and if this stream of revenue has dried up (as it has), then as a first approximation of the contraction, about 35% of the economy should vanish more or less instantly, should it not? The current, very alarming consumer numbers being leaked out seem to confirm this trend. This first drop, however, will set in motion negative feedback loops of unemployment and further deflation, hammering on this -35% "floor" until we reach true bottom, which is probably a long ways beneath us. At about 3rd World, in fact.

[Movenonup]

Scott,

Apologies to other readers who don't care about this. Wanted to post this on the other strand but it got too late.

I am not rich (sorta poor compared to a number of you) but I am out of debt, own my house, car, no credit card stuff, etc. I have a retirement fund structured in such a way by my employer that I can't touch it until I retire. Read that, it won't be there, bye fucking bye ;-( .

So I have been looking at Silver, not Gold, as a way to anchor my dollar somewhere. I read a goldbug site claiming that while gold has gone up 67% in the last couple, silver has gone up 147%. I have heard there are fees you have to pay for cashing in Silver that you don't pay for cashing in your Gold. Maybe capital gains too. That would be something one would need to factor into the so called value of the PM.

What do you know or can you direct me?

[scott]

MOU,
http://www.sterling-trust.com/Portals/12/PDFs/stc_precious_metals_IRA_Info.pdf

I'm more of an off the books person myself but there are ways to defer taxes through IRA's.

[Brent]

Hi. I suggest that raw materials may not be the best thing in which to invest. I have no credentials, but my feeling is that you be better to invest in manufactured goods of high resiliency. By that I mean stuff that would be useful in very different social, technological and economic surroundings. Low electrical demand. Self-contained or combinable with other similar equipment. Could be mechanical, electrical or electronic as long as it isn't too fragile.

Those cheap laptops might be a good idea--there won't be any new computers being made if fabrication facilities to make CPUs and ASICs are too expensive to run any more (or their owners go bankrupt). But large batteries may be a short to mid-term investment. Any electrical equipment that can make a house or other small building able to run smoothly despite unstable grid behaviours.

Radios will probably become very popular again if the Internet and cable television become too expensive for regular people. Greenhouses for those of us in northern climates who suddenly have to make up for food shortages.

But especially small-scale electrical generation, especially for heating air and water and otherwise making homes more self-sufficient.

[FARfetched]

Personally, I think it will take longer than "a few more weeks" before the economy goes obviously & completely pear-shaped. First, there are a lot of people who are pretty much dedicated, full-time, to keeping the gravy train rolling. Sure, the engine is clacking a death-rattle, leaking oil and coolant like a patient in the terminal stage of ebola, and the cars are bucking from side to side as the train continues full speed ahead on worn out track. But it's swarming with mechanics spinning wrenches and applying bailing wire, keeping the contraption held together just a little longer as it lurches up the steepest mountainside ever, hoping the top is just barely hidden by that cloud ahead.

OTOH, I don't think Bush-league and his zombie army are going to be able to keep pretending everything is fine, GW is the greatest preznit evah, Iraq is turning yet another corner, etc. etc. They haven't succeeded at anything else, unless you believe they set out to destroy the US from the beginning, so why would anyone think they could hold it together long enough to make it the next guy's (or gal's) problem?

Here's my prediction: October Surprise. It won't be a pleasant surprise for anyone.

[scott]

You're probably right Brent,

Prices for raw materials are correlating with higher energy markets. More energy is not being made available for additional supplies needed to bring prices down for energy intense mining. More energy is being allocated for the American way all over the world and that will be sustained at the expense of everything else until it can't anymore.

We will not know exactly what the breaking point is for the American way of all out energy dependancy, but we do know that we are willing to jettison anything not directly connected to it in the triage process of maintaining it.

[upnatpishtim]

vist:
http://www.vagabondsalvage.com/solarcart/sc01.html
to see a portable solar PV electric generator for those off grid moments.
power lights, boom box, lap top.
or..television, home stereo dvd player.
a do it your self project.
of common (now) items.
salvage what you can from the fall
of westerness.
would you invest $800 - $1000
to have electricity that dont need
gasoline?
or play your video games?
solar PV generator will run power tools.
concept scalable to run frigs and vacuum cleaners.
you can make bees wax candles and churn butter. but it will be nice to have lights.
short link requires navigation:
http://vagabondsalvage.com/
for scabvengers everywhere.

[Gary49er]

I did not intend to revisit this however I will - with an apology to Nudge - I apologize.
I wondered how my question could be misunderstood so I thought about it - and figured it out.
Nudge quite eloquently explained why NOLA should not have been rebuilt. I agree. That was not my question. She seemed to think that it was the government's job to rebuild the city - any city?
That was my question - do you really "want" it to be the government's job to 'fix up' a location after a disaster - any location?
In my opinion, the government should help with rescue - aide - supplies to get on etc. The fixing up part is the job of other entities.

Nudge,I did 5 years of HRC, walked away at 14 yo. The doing was not may choice, the walking was.

[EEofDC]

"They haven't succeeded at anything else, unless you believe they set out to destroy the US from the beginning..." --FARfetched

Bingo!! We have a winner!!

"It’s not just that our tastes for foreign goods, including imported oil, vastly exceed our ability to pay for them. We are financing them through massive borrowing. On 7 November 2007, the US Treasury announced that the national debt had breached _$9 trillion for the first time. This was just five weeks after Congress raised the “debt ceiling” to $9.815 trillion. If you begin in 1789, at the moment the constitution became the supreme law of the land, the debt accumulated by the federal government did not top $1 trillion until 1981. When George Bush became president in January 2001, it stood at approximately $5.7 trillion. Since then, it has increased by 45%. This huge debt can be largely explained by our defence expenditures." --Chalmers Johnson

http://mondediplo.com/2008/02/05military

And for those r'n'r fans amongst us, another version of BDTH:
http://www.youtube.com/watch?v=JEhm3LZkS3k

[Lost Horizon]

The Chimpanator and Darth Cheney have tipped their hand as to how they and their wealthy criminal friends will weather the coming storm.

Just look at the "Green Zone" in the NeoCon wargasim wet dream of Iraq. It is the 'Mother of All Gated Communities' and the template for the upper class to build here in the home of the brave so they can withdraw into their privileged enclaves. It's not the Feudal system, it will be the new Futile System.

A friend said Bush was a man in a monkey suit.

Not True.

He's a monkey in a man suit.

[Mr. Purple]

David Mathews wrote:
"In other news:

Exxon Mobil and ConocoPhillips have suffered an injustice. How can we let these good little corporations suffer an injury inflicted by Hugo Chavez?"

Here's a link about some of that... the funny part is the the UPL doesn't seem to be the only place that depends on cheap oil to keep the mobs... pardon me, citizens... from rioting. Chavez may not even make it long enough to really laugh at the United States' misfortune. Couldn't happen to a nicer guy.

Venezuela Threatens `Economic War' Over Exxon Freeze

http://www.bloomberg.com/apps/news?pid=email_en&refer=latin_america&sid=a7GDgdeveDtw

[bud4wiser]

Answering all my own questions:

"Peak disconnect" transpired during the reelection process of GW in 2003, 2004. But Michigan's answer to McCain’s “jobs not coming back speech” proves Nascar America "still doesn’t get it."

Most of the babies born today will never drive cars more than 100,000 miles in their entire lifetimes. Most of us have.

If there is a "history" written beyond 100 years from now, it will record television and the automobile as the two most perverted technologies of all history. And let me tell you, it’s tough to beat out atomic bombs and weapons grade anthrax for evil goings on.

Coming up:

Just what does Rush Limbaugh want?

Should we give the neo-cons a chance to prove their points?

Can America instill enough “democracy” around the world to fore stall the effects of Peak Oil?

[Dr.Doom]

"Hotel California" as a metaphor for the UPL:

http://www.youtube.com/watch?v=IBJTNx5qrVU&NR=1

"you can check out any time you'd like, but you can never leave."

[DerekK]

Around here, first all the single-family houses went up for sale. Then, they started renting them (no buyers). Now - surprise - they're burning down.

You didn't used to drive 4 blocks and see 9 "for sale signs" and 2 burned-out houses. And a couple of moving vans.

As for the little "Price Reduced!" signs accompanying the "For Sale" signs (affixed at a jaunty angle to convey a "last-minute" feeling)....we know they're price-reduced. That's the whole point.

Awesome show great job.

I count these artifacts as I run my errands. Pathetic, yes, but I can't take any more NPR on the car radio, and it seems like the American Flag Neighborhoods are jamming WBAI.

It's often hard to tell which houses have been abandoned, but summer will fix that - the grass won't get cut.