On February 22, the stock market gave a hiccup, a belch...and plunged 70 heart-stopping points. Oh, there was a fast recovery and everybody tried to pretend that, oh no, they weren't REALLY nervous, but the relief on Wall Street was almost palpable. Back to business as usual...except not quite.
Now we're into the beginning of April, the first quarter is history and the Dow Jones Index has been in the toilet for four full weeks, which is starting to make even veteran market analysts a trifle squeamish. After hitting an all-time high in mid-month, the price of a barrel of light sweet crude oil backed off...only to finish at the closing bell yesterday perched upon a new record plateau. Knowledgeable insiders are now talking in hushed and desperate voices about Peak Oil.
"Well, ya got trouble, my friends, right here I say trouble right here in River City..."
The very first indication I got that all was not well came about 10 months ago, "Former Maryland State Senator Sounds Alarm On US Dollar."(
http://www.newswithviews.com/NWVexclusive/exclusive20.htm) It was the writer's assertion that the Federal Reserve under Alan Greenspan was deliberately enabling the onset of fiscal chaos to further some sinister but unspecified agenda put forth by a mysterious group of New World Order conspirators. Now, that was just a little too far over the line into tinfoil hat territory to suit me, despite the inclusion of a number of truly disturbing and wholly verifiable facts. I didn't give the piece much credence.
Four months later, fresh warnings emerged from across the pond in a three-part article by Larry Elliott and David Teather from Britain's guardian newspaper. "Americans Living On Borrowed Time," they claimed. (http://www.guardian.co.uk/business/story/0,,1335120,00) Hmm...
The outcome of our presidential election apparently stirred major concern everywhere--except clueless Crawford, Texas, of course--and the dire predictions began coming fast and furiously. Paul Craig Roberts, a conservative who was Assistant Secretary of the Treasury for Economic Policy under Ronald Ray-Gun, announced a "Coming Currency Shock" in mid-November which immediately got my attention. (http://www.counterpunch.org/roberts1116204.html)Not even a week later, Paul Krugman, Princeton Economics Professor and a man I respect, told Reuters news agency in an interview that "Economic Crisis [was] A Matter of When, Not If" and I began to understand that this might be something I needed to know more about. (http://www.truthout.org/docs_04/printer_112404V.shtml)
It was only when Stephen Roach, chief economist at banking giant Morgan Stanley, proclained in the Boston Herald on November 23rd in front of the whole world that America had only about a 10% chance of escaping an economic "Armageddon" that I realized it was time to get scared in earnest. Armageddon, for the Biblically-challenged, is where the last decisive battle between good and evil is supposed to take place. (Rev 16:16) It's the end of the world, okay? Use of such a highly charged word by a staid banker-type was more than merely unusual...and it should have served as a wake-up call to all and sundry. That it did not do so says all you need to know about our current state of media-induced de-sensitization.
Since then, the dark, dismal forecasts have been coming thicker and faster--at least one every week--and the arrival of the new year has brought almost constant alarms from heavy hitters like Warren Buffett and George Soros. As of March 1, 2005, Bridgewater Associates, a manager of more than $100 billion worth of institutional and hedge funds has been issuing warnings in its DAILY reports.
We can no longer afford to ignore this, folks. A preponderance of evidence continues to forecast massive financial upheaval in the very near furure...and it may have already begun. This diary is a sincere attempt to examine the causes, possible severity and ramifications of such an upheaval.
Let me say at the outset that I am NOT an economist. Matter of fact, math has NEVER been my strongest subject; sometimes I have to take my shoes off when I'm counting over ten. Nonetheless, I'm a quick study. I could always read the writing on the wall...and lately it's been nothing but bad. No less a person than David Walker, comptroller general of the United States, literally our chief auditor, had declared that America's public finances are in shambles...and getting worse. (http://www.macleans.ca/topstories/world/article.jsp?content=20050307_101541_101541) As of February, the US national debt stood at $7.7 trillion dollars and this year the Congressional Budget Office is predicting another record deficit of $427 billion or $1.2 billion EVERY SINGLE DAY! Low interest rates right now keep the cost of borrowing all that money relatively low..but this cannot continue. Even the cock-eyed optimistic estimates put out by the White House suggest that in another five years the interest alone will cost us $314 billion a year. Yikes!
Those low rates have confounded experts who have sought to explain them with a number of theories, all ominous. (http://www.keepmedia.com/pubs/Newsweek/2005/03/07/738234?extID=10032&olID=213) This cheap credit seems to have created a housing "bubble." Last year, US home prices rose 13% according to one survey. In Nevada they rose 36%, in California 27% and in Florida 20%. You've got what's called a bubble when today's sellers assume continuing large increases. If people think prices will be 20% higher in a year, they're willing to pay 19% today. If others share that assumption, however, today's prices will ALREADY be higher. Betting the farm on future appreciation is a fool's game. The reality is that when today's run-ups are based on unfounded belief in tomorrow's run-ups, the self-feeding frenzy has historically gone sharply into reverse. Higher housing prices have supported consumer spending when home-owners borrowed against their equity. (Keep all this in mind, please. It's critical to a full understanding of our current predicament and I'll be coming back to it.)
Those projections of indebtedness, it should be noted, DO NOT include the costs of our present military campaigns in Iraq or Afganistan nor do they address the very real possibility that we might invade Iran or Syria...or both. And the administration has lately been doing some sabre-rattling in the direction of Venezuela right here in THIS hemisphere. During his campaign, Mr. Bring-Em-On proposed cutting the budget deficit in half by 2010. Not gonna happen. He wants to make his present tax cuts to millionaires permanent plus implementing NEW ones that are being promised even now. (Personlly, I have seen NO conclusive proof that this man is not deeply and irreversibly psychotic...)
What, exactly, do deficits mean to Mr. & Mrs. Average American? Well, when our government spends more than it collects in tax revenues it has only three options: It must raise taxes, print money or borrow it. In the final analysis, deficits mean future tax increases, pure and simple. Despite the anti-tax rhetoric of the Rip-Off Republicans, our government consumes more of the private economy than EVER, except during World War II. Deficits also lead inexorably to inflation because the Fed needs to create more fiat dollars to keep the government afloat....which makes every dollar you own worth less. Stagflation, anyone? (http://www.lewrockwell.com/paul/paul1238.html)
It isn't just the deficits, though, however menacing they might seem. The US economy, irrevocably bound to the global economy, is vulnerable to complex and interlocking forces. The stock market is nothing more than an imperfect indicator of fiscal success based on two factors--how much corporations make by selling their products or how much they make by selling their stock. It's not difficult, then, looked at from this prespective, to understand that the market reflects nothing more than confidence, both business and consumer, being made manifest. When confidence is high and consumption is steadily increasing, the market goes up. Very simple. (This is one of the unsustainable pillars upon which capitalism is based...but that's another diary for another time.)
I like to keep an eye on the Dow/Jones Index; I think it gives a clearer indication of trends. Purely a personal opinion...and I've been wrong before. The Dow's recent slippage, from nearly 11,000 just about a month ago to around 10,400 on April Fools Day (Sure fooled them!) tells us that confidence is shaky right now and people are uncertain. In fact, most of the Dow's first quarter loss has come in March, a very bad omen for the start of the second quarter...and the rest of the year.
This fact is underscored by the news that Europe is bracing for an upsurge in bankruptcies and corporate debt default as the number of companies rated at the lowest end of the junk bond scale reaches record levels. This means that the end of the global credit boom is almost certainly at hand and that bankers, struggling to complete risky bond issues, are making some brokerage houses skittish. ("Growing Fears Credit Boom May Implode" Financial Times, 3/13/05 and "US Bankruptcies 'To Surge' Amid Junk Bond Deluge" Business Times Online, 2/24/05)
The value of the dollar worldwide is nearly at its all-time lowest point...which occurred--wouldn't you just know it?--back in 1992, during the administration of Fearless Leader's father. To demonstrate precisely how precarious circumstances are, remember that back in February, as I referred to in the opening, stock markets in New York, London, Paris and Frankfurt plummeted while gold and oil prices spiked on the rumor--the mere rumor, mind you!--that the central bank of South Korea was diversifying its holdings away from dollar-based assets. The shot heard 'round the world! Currency traders dropped the dollar like a hot potato, fearful that the central banks of Japan and China might follow suit. The Koreans, witnessing the panic they had wrought with ill-concealed glee, repudiated the rumor and things settled down uneasily...but the hair-trigger of dollar instability stood revealed for all the world to see.
Our stock market and real estate market, overvalued as they are, offer NO compelling reason for foreign investors to accumulate dollars...and many reasons to sell them off. Once that huge supply and weak demand scenario begins, there is literally no telling where it might end; the value of dollars on the world market could plunge by as much as half, devastating us and shaking the world economy to its very foundations. ("The US Dollar's Days as the World's Reserve Currency Are Numbered" PrudentBear.com, 3/22/05, Guest Commentary by Peter Schiff) Overnight, those cheap goods at Wall-Mart and your favorite dollar store will shoot up in price. Interest rates will also head for the stratosphere...and heavily indebted Americans with adjustable rate mortgages will be trying to sell homes they can no longer afford even as rising mortgage rates reduce buyers. (http://www.counterpunch.org/roberts03012005.html)
The first stone of the first avalanche--of the many that will follow--might well be the demise of General Motors. On the Ides of March, GM stock fell from $34 per share to $30, more than 10% in one day! The market cap, or real value of the company, is now down to $16 billion. Worse yet, GM has $300 billion in debt; they don't only sell cars, through their GMAC arm they also sell loans. The yeild on their debt is 4.54 points over Treasury Bonds and is in grave danger of being downgraded...which only means that they're doomed. Headed for inevitable bankruptcy. At that time, they'll default on their bondholders and become a $300 billion blow-up, worse than Enron, Global Crossing, HealthSouth and K-mart. Put together. Interest rates will go through the roof and you'll see that frenzied selling of dollars I mentioned just above. After GM declares bankruptcy--and that could take anywhere from three months to a year--you'll be able to watch the implosion and disintegration of the dollar. This is where that housing bubble I spoke of much earlier comes into play. You see, the re-finance game and the bull market in housing it created have thus far postponed the consequences of the largest stock market bubble in history. Although the Fed and the rest of the government succeeded in postponing the fallout from the massive misallocation of capital that took place, they have also succeeded in compounding and exacerbating the consequences. We have attempted to speculate our way to prosperity, it didn't work...and the time to pay the piper is nearly at hand. The excesses of the bubble will soon be cleared away and we will slide into the depths of crushing recession and the bottom will drop out of the stock market. The Fed is trapped. Greenspan cannot cut rates when the trouble starts because he has already created a decent-sized inflation problem. These developments will likely be self-reinforcing...and particularly damaging when the housing bubble bursts and housing prices join the decline. Look out below!! (http://www.fromthewilderness.com/free/ww3/032105_world_stories.shtml AND http://www.moneycentral.com/content/P111845.asp?Printer)
All of this chaos will take place against the backdrop of soaring oil prices. Whatever you paid the last time you filled up your tank might have seemed outrageous and exorbitant...but mark my words, you'll look back on it in a year with wistful longing. Right now, a barrel of light sweet crude is $57+ per barrel and specultions of $105 by the end of the year are rampant. A full year from right now, you can expect gasoline to approximately double in price.
For the first quarter of 2005, ExxonMobile made more money than any other corporation on the face of the Earth. This will only continue. Auto makers are already seeing marked sales declines in their least fuel-efficient models. Another prediction: Those gas-guzzlers will go the way of the Brontosaurus once and for all within two years. Increases in oil prices will also translate into higher prices on ALL transported merchandise: Everything you buy at the store will cost you more. Everything. All utilities will go up because electricity is generated, for the most part, by fossil fuel-driven equipment, water and gas are pumped by electrical pumps. There is no escaping the fact that the lifestyle we have grown accustomed to is built on the promise of cheap, unlimited oil. They lied to us, didn't they? Oil is a finite resourse; there's only so much of it in the ground.
And why is all of this happening right now? Because--and you're REALLY not going to want to hear this one!--we're running out of oil. The International Energy Agency has already proposed drastic cut-backs in automobile use as a measure for easing oil-supply problems...but it's only a stop-gap, temporary fix. Band-aid. Fifty years ago, Dr. M. King Hubbert plotted the oil deplation curve that today bears his name. The Hubbert curve accurately predicted the peak of United States oil production in 1971. Sure enough, right on schedule, there was the energy crisis of the Jimmy Carter presidency that was one of the major contributing factors in his defeat at the polls in 1980. It wasn't his fault, folks; he was as much a victim as the rest of us. He did, however, come up with a comprehensive energy plan (http://www.pbs.org/wgbh/amex/carter/filmmore/ps_energy.html) and, to show how serious he was about conservation, he had working solar panels installed on the White House roof. (Gasoline prices doubled immediately, but it was determined that we could continue with our flagrantly wasteful ways using imported oil. Ronald Ray-Gun scrapped the Carter plan, removed the solar panels and told Americans and industry, in almost as many words,to let 'er rip! Big mistake.)
Hubbert's curve foretold that WORLD production of crude oil would peak between 2005 and 2010. Looks like he hit the jackpot again...but this time there will be no reprieve. This is it. There is no telling now how far or how fast gas prices will ascend; all that can be said for sure is that THIS party's over.
Is there any doubt now that the Iraq invasion was NOT about weapons of mass destruction or Middle East democracy? It was about seizure of the petroleum resources that are to be found there. "It's the Crude, Dude," proclaims the title of a new book by Linda McQuaig. Last year, demand for oil from the burgeoning economies of both China and India--which, between them, have somewhere near three BILLION people--rose sharply and ended forever the possibilities of cheap oil. They'll be able to adapt, however, because they are just getting accustomed to industrialization and they are still flexible enough to adapt to newer energy sources. We are not. Through a combination of corporate greed and Republican venality, our oil-based society has been locked into place.
We're now racing against time, friends and neighbors. With the oil spigot running dry, can the United States develop and implement alternative energy sources fast enough to keep our civilization from crumbling back into the Dark Ages? I don't know.
I hope so...but I just don't know.
(http://www.truthout.org/issues_05/032105EA.shtml AND http://msnbc.msn.com/id/7304437/site/newsweek/print/1/displaymode/1098/)
ALSO: "The Long Emergency" by James Howard Kunstler, Rolling Stone Magazine 3/24/05 AND "The Energy Crunch To Come" by Michael T. Klare Mother Jones, daily mojo. 3/22/05