All Fall Down

      God knows what manner of deals went down this past weekend in the Hamptons wine cellars and below-decks among the Chesapeake Bay sailboat fleet. All these hidey-holes must have been dank and fetid with the sweat of mortal fear. Will the US Government declare itself a subsidiary of General Electric? Will Vlad Putin be roped in to save Goldman Sachs? Meanwhile, the whole noisome rat maze of international counter-party deals was taking on sewer water and rodents of every nationality were seen leaping for daylight all over the fusty old motherlands of Europe. A cascading collapse of international finance is underway. While many fixers may jump heroically into the tumbling wreckage hoping to rescue this-and-that, the outcome by Friday is liable to be an unrecognizable smoldering landscape of the G-7's hopes and dreams.
     Some big questions for the week: will the Euro survive as a currency? Will the rush into the US dollar continue even as the US financial system dematerializes in a Fibonacci fever of accelerating de-leveraged infinitude? Will the remaining Big Boyz, Goldman Sachs and JP Morgan succumb to the counter-party hemorrhagic fever? Will great rows of lesser banking dominoes now start clacking onto their faces? Will all fifty states follow the leads of California and Massachusetts and line up at the US Treasury's hand-out window. Will the entity that calls itself the civilized world be left at week's end with anything resembling money?
     Your guess is as good as mine. We've entered the realm of phase change, where everything is slipping and nothing has settled. The final result, when the dust settles -- and that may not be for weeks to come -- will certainly be a poorer western world. Will it be so poor that it can no longer afford to import anything? Including oil from the land of the date palm? If so, we are really in for a rough ride, poised as we are at the edge of the heating season here in the temperate regions. Notice, by the way, that the $700 billion just approved by congress to bail out Wall Street is exactly the same sum of money that we send to the oil exporting nations this year.
     Will millions stop receiving paychecks due to the turmoil in banking? It's certainly possible, starting with the poor drones in Mr. Schwarzenegger's motor vehicle bureau and eventually ranging to every payroll office in the land. Will Sarah Palin's fellow Six-packers line up around the parking lagoons of the suburban banks trying desperately to withdraw the last seventy bucks in their checking accounts? (And will their thoughts in the event be: this economy is fundamentally sound....) Will the supermarket shelves of chipoltle-flavored crunchy snacks and power drinks go empty as truckers refuse to deliver their loads without up-front payment? And how long does it take a hungry public to turn mean?
     We could see a parallel problem in the motor fuel supply sector. So far, gasoline shortages have only appeared in parts of the Southeast USA, due to interruptions caused by two hurricanes. If the oil tankers quit offloading now for lack of credible payment, then the whole nation will get an interesting lesson in the shortcomings of the suburban development pattern.
      The candidates' debate Tuesday night should be interesting. I don't expect too much give-and-take on the subject of East Ossetia this time around.
     Even at this point, the current crack-up in world finance makes the 1929 crash and the events of the 1930s look in comparison like an orderly small town auction of somebody's grandmother's effects. Back in that sepia day, America had plenty of everything except ready cash. We had, especially, plenty of our own oil, and -- you're not going to believe this but it's true -- the stuff was selling for as little as ten cents a barrel, it was so abundant. And yet still, America in the 1930s plunged into a dark depression of inactivity, loss of confidence, and impoverishment.
     This time around, things could get more disorderly. Personally, I think we may be beyond the reach even of fascist authoritarianism, because unlike the programmed industrial masses of the 1930s, we are unused to regimentation, to lining up at the factory gates and the movie theaters. Back then, society was so regimented that everybody wore uniforms in-and-out of the military. Look at movies from the 1930s. Every man-jack wore either a necktie and hat or overalls. The industrial masses behaved like termites. Once unemployment hit, they were waiting to be told what to do, to line up for something. It worked fabulously for Hitler, who took every advantage of this mentality. Luckily, the US went for Roosevelt (both FDR and Hitler entered office the same winter of 1933, by the way). FDR was more like everybody's kindly Uncle Frank, and his reassuring persona enabled Americans to suck up their bad luck and altered circumstances. Many of them retreated to the family farm (which still existed then) and waited things out -- and, anyway, the melodrama of the Great Depression soon resolved in the Second World War when Hitler's love of regimentation led him into military misadventure. He shouldn't have picked a fight with someone who had so much petroleum -- end-of-story.
     Okay, what happens here and now? To this point (9:am Monday October 6, 2008) events have been proceeding under a veneer of still-just-barely-credible authority. We (as represented by congress) have allowed Mr. Paulson to advance and activate his remedies. As things unspool further, he will be out of credibility, perhaps in a few days, and it's unlikely that his successor will have any either. Mr. Bernanke has simply gone AWOL. Notice, he has vanished from the media landscape. We may soon be hearing the declaration of various "emergency" measures involving the allocation of food and the rationing of oil products. The Big Bailout of last week may be partially rescinded as it becomes obvious that it has had no effect -- I believe about half the $700 billion has already been allocated, which is to say: lost. I realize these things sound pretty extreme. But forces have been set in motion and momentum rules. One thing for sure: the American public is about to undergo a severe mood adjustment. There will be fewer American Idol fans and worshippers of Donald Trump by the close of business on Friday.

Comments

[Saint Bif]

First Dude!

[LaughingAsRomeWasBurningDown]

> Will the US Government declare itself a subsidiary of General Electric?

I thought it already was...

JHK, Great post this week!

[LaughingAsRomeWasBurningDown]

NEW YORK (CNNMoney.com) -- Stocks were in for a bruising Monday after a deepening financial crisis in Europe heightened worries about a global economic slowdown.

The S&P, Dow and Nasdaq futures - trading that gives an indication of how stocks may move in the early going - were sharply lower about one hour before the open. That followed a broad sell-off around the world on Monday.

[steve duncan]

Others have commented but it bears repeating: bin Laden's 9/11 plot has worked masterfully. He wasn't without help though. Bush played his part by squandering years of relative budget sanity under Clinton, first by giving away as much money as he could to the rich and following up by spending us into penury with dual wars in Afghanistan and Iraq. It will be too rich if McCain steals the ballot and continues these policies. He'll have to resort to international piracy to have the funds for chasing Islamic demons all over the globe but he'll damn well try. And if Obama prevails? He'll be like the volunteer director of a homeless mission. He'll split his time between begging for help and sweating away in the kitchen trying to figure out how to feed 100 people with food enough for 50.

[2020Vision]

Things not too good on this side of the pond either.

Most European stockmarkets fell 5% on opening as a fresh wave of nervousness hits the traders.

Iceland is suffering badly - and has stopped trading in all financial shares.

German Government will not proceed with legislation to protect depositors savings - despite Angela Merkel's promise over the weekend.

Russia's benchmark RTS exchange stopped tradin for an hour following a 14% slump. The other Micex exchange closed following a 15% slump.

General mood in UK/Europe is for leaders to come up with an overall plan, come clean on the extent of the black holes in the balance sheets and stop this series of knee-jerk, Band-Aid fixes for the next bank to start to wobble.

I guess there just not enough little Dutch boysleft to stick their fingers in these leaky dykes.

Joe Public in Euroland is just starting to get to grips with the concept of Fractional Reserve Banking, X 30 leveraging and the coming together of several inconvenient exponential functions.

Things are certainly heating up in the global financial meltdown.

Autumn weather now starting to cool with the first frosts. Domestic heating oil and gas bills all up 25%, with threats of power cuts - let's just pray fora mild winter.

Meanwhile our gas prices remain obstinately above $7.50 per gallon.

Is this the start of Jim's Long Emergency?

[Riddick]

As usual Jim right to the chase. If Americans have not figured it out by now, then it can be spelled out rather simply...TSHTF! Oil, dollars, euros, pretzels...they are all bound up in the same confidence game. This game is almost over thanks to a great many playerz cheating. What else should one expect in unfettered laissez-faire capitalism where the only rule is who makes the best of his utmost greedy desires.

It will be fun to watch the impending debate as I am under-whelmed by both candidates. Barrack sounds a lot like several long-winded professors I have encountered in the far past and that good Christian wife dumper McCain that stellar West pointer who graduated 895th out of a class of 899 (Admiral material I'm sure).

If anything close to what Jim describes begins to unravel during this week the sheeples may actually be interrupted from the munching on Angus burgers and avidly watching sports and Idol. The question may form in their brains concerning how they may pay for future Angus burgers if their job shoveling asphalt patch in cracked pavement suddenly evaporates.

Wow, I now believe that PO will be delayed awhile by demand devastation due to the economy and then....BOOM, just as we recover from the early 21st Century "Greed and Excess Fest" PO will hit and change everything for good.

Got bunker?

[Riddick]

"Autumn weather now starting to cool with the first frosts. Domestic heating oil and gas bills all up 25%, with threats of power cuts - let's just pray fora mild winter."

Doesn't look to be shaping up for a mild winter, at least for much of the US.

http://www.msnbc.msn.com/id/26380907/

http://www.farmersalmanac.com/weather/USA-Northeastern-weather

[Dr.Doom]

What is it about October's and why is this one not so surprising? Seems as though the markets opened and then closed, for some reason.

[LaughingAsRomeWasBurningDown]

Ebay cutting 10% of its employees. Guess even the cyberspace yard sale is finding fewer customers. Likewise for the real world counterparts from what I can see.

[baileyalexander]

Germany and co will follow Ireland's desire to break EU rules and cover savings. We bank in Germany, they probably will. France is sort of admitting they're in a recession and oil is tanking so Putin's place is a bit unsteady. The UK is crashing because they could only go go for so long.
Can't imagine Iceland can convert to euro, but who knows, it's all fluid and volatile in this global market.

[Mike]

Jim,

I hope that when the shit really starts hitting what they have taken to calling the "real economy" (i.e. things, as opposed to those ever more pointless dollars), I will still be able to crack open my can of whatever foodstuff and keep reading this.

There is some comfort to be found in this strange brotherhood of people who recognize the end of the empire for what it is.

Cheers.

[asoka]

Jim,

Interesting that your time frame is reduced to "by this Friday" when most of the post indicates nobody knows what is happening, as evidenced by so many questions starting with "Will...?"

I think by Friday nothing will have changed. The one trillion-dollar finger in the dike will hold for three to four months and then another trillion will be voted on and this could go on for two to three years until the next president has a chance to actually change the economy into one less dependent on oil and more productive of things of real value.

Of course, I am guessing much the same as your post this morning.

[TroutBum]

Hey Jim,
Everybody knows the US Govt. is wholly owned by Goldman Sachs!

[Consultant]

We all are going to feel this, but I'd say anyone under the age of 50, is going to have an especially hard time. That's a lot of people.

The under 50 group doesn't remember adult life without credit cards. A time when most people had to live within their means. If you didn't have the money for something, you didn't buy it. You saved for it. If it was too costly, you lived without it. You made do.

This new downward spiral is going to psychologically unhinge this group as it takes out the super surplus of malls, outlet stores and vacation spots that no longer have nearly enough customers.

People are resilient. But this is happening so quickly. Memory and experience count for something with us humans. If the only way of life you know is taken away-quickly-will you be able to cope. My guess is some will, most won't.

50 and under group, time to sit up.

[David Mathews]

Now is not the time to worry, nor is it time to mourn. I would not encourage anyone to gloat, either, because the most terrible predictions are materializing at an ever-accelerating pace.

I encourage everyone to relax. The future is going to be tough and we probably won't survive, so make the best of today.

As for myself, I take great comfort in the knowledge that humankind's destructive power is now in decline, and that Nature is going to make decisions for humankind from now on until that tragic day in which our species has finally gone extinct.

There's no future in humankind, but Life does go on:

http://www.flickr.com/dmathew1

[David Mathews]

Dow 9993! About time, too ... but how soon before the Dow reaches 4000?

[ramps]

There's that saying about giving a bunch of monkeys typewriters and sooner or later they'd come up with literature. I guess we might be en route to what happens if you give a bunch of monkeys lots of paper money....?

[The Wonk]

From the Huffington Post:

Almost a million more people participated in the federal government's food stamp program for the needy between April and July, according to the U.S. Department of Agriculture, which oversees the program.

The latest federal statistics indicate that nationally, participation in the low-income nutrition supplement program rose from 28.08 million in April to 29.05 million in July, the last month for which the figures are available, a department spokeswoman said.

That's a lot of people. There is a lot of hurt. Let's not gloat.

[DanaJ]

Holy Cow! The Holy Dow dropped below 10-Thou!
Do i have 9500, 9500 anyone? 9000
8500, 8500, 8000
Howz about 7500, 7500 7000
lets have 6500, 6500 anyone 6000...

Wow, this must be the "Reverse Auction" they were all talking about in action....

[DanaJ]

Owww! Its actually not funny, the Holy Dow dropped 200 points while I was just sitting here, now down almost 500.
Its my (& yours) IRA evaporating, going up in smoke there.

Geeezz....

[LaughingAsRomeWasBurningDown]

And the real action is supposed to be tomorrow, if you believe the halfpasthuman guys.

[FARfetched]

Entertaining as always, JHK. But there was one word that popped into my head as I finished up: inertia. Of course, "too big to fail" really means "too big to fail all at once" or perhaps "too big to fail without knocking over a lot of other stuff" and this is what we're seeing. Still, a dead chicken is too stupid to realize it's dead right away, and so it flops around for a while (what I call the Dead Chicken Dance). Likewise, even if the financial system is truly dead, it's going to take a while for it to realize that and lay down quietly.

Part of what will slow down the demise of the banking system is the lack of participation by J6P. 100 million people running to the bank to withdraw their $70 each amounts to $7B, or 1% of what we (that is, you and me and J6P) handed to the banks on Friday. So while bank runs might look impressive from the outside, on the whole there's not a whole lot of impact to be had there. J6P could have a far greater impact on the system by simply going on strike: buying nothing but food, paying nothing but utilities, and blowing off all loan/credit card payments.

Assuming that we're headed for an economic crash — and that seems pretty likely at the moment — we can say both that we've hit Peak Oil and that it doesn't matter at this point. As demand falls out from under OPEC, the producers will cut production and (given the geological constraints that got us here) will never get it back to current levels. If and when there's a recovery, demand will climb again and *then* we'll run into issues.

Although the initial conditions have been yanked out from under me, I'm continuing FAR Future… think of it as an alternate universe now. ;-)

http://farmanor.blogspot.com/2008/10/far-future-episode-54-iraq-and-ruin_06.html

[inquisitivemind22]

One of the reasons that October is a risky month for the markets (under more normal conditions) is that mutual funds end their fiscal year. Given how huge mutual funds are, this can lead to a lot of selling. This year, though, how many funds can still have positions on left to sell?
Regarding 9/11, Bush, and the wars on terror: The Republicans have been selling Americans fear and unfortunately, we have been buying it. It’s sad to me that the Republican party works like a heard of sheep- if one faction of them is doing something, the rest go along in tandem without asking questions or demanding accountability. (Kind of reminds me of the Nazis, really) and here we are 8 years later.
To me, the Bush years have been a total liability because not only did the admin wreck housing, global finance, and countless other things, they also missed opportunities to work on energy polices and health care. It’s so sad to me that the US has been without a national health care plan since 1993, when the Clintons first went before Congress trying to work something out. In 2000, the nation was in good shape. Today, we are on the brink of belonging to the 3rd world. (Not to insult anyone in the 3rd world.)

[LaughingAsRomeWasBurningDown]

inquisitivemind22, I think the phrase that someone coined last week sums it up best, we are now living in a banana republic with nukes.

[emergentink]

How about a little silver lining? This economic meltdown will make personal seat licenses at new stadiums a lot harder to sell and therefore less expensive. That's great news for Joe Sixpack. When they take his home and plasma TV he'll have a place to sit!