Tuesday, July 01, 2008

Stayin' Alive

Remember the 70's?

I do.

I was born in 1967, so the 70's were my formative years.

Some of my first memories in life are of oil embargoes, gas lines, blackouts, riots, high unemployment, mass layoffs, Mom complaining bitterly about double digit inflation and double digit interest rates (which kept her from selling our old house and buying a newer one in a nicer neighborhood) and Dad pontificating about President Nixon taking us off the gold standard and Federal Reserve Chairman Arthur Burns creating a spiral of hyper-inflation with his monetary policies

I know, I know - a truly twisted childhood, which is why I'm in therapy now and working through those awful memories. But I'll save that story for another post and focus on this:

Watching the TV news or reading the papers these days, I'm starting to have deja vu all over again to my childhood.

I mean, have you seen these headlines?

Inflation fears spark global market rout

Reports show U.S. growth weak if not in recession

Geopolitical worries send oil above $143

Eurozone inflation soars to new high

Prices for commodities and oil likely to stay high

Broad Says Economy in Worst Slump Since World War II

I must not be the only person sensing something is wrong these days. Take a look at the consumer confidence chart for the last nine years:

Consumer expectations for the future are just as dismal - people expect their standards of living to continue to diminish as incomes fail to keep pace with price increases for food, energy, health care, and education costs for the overwhelming majority of Americans.

Notice that I haven't mentioned the one place in the economy where prices aren't going up - housing. That's because the Greenspan/Bush housing bubble created over the last few years that saw housing prices increase astronomically in many markets around the country is the root cause of so many of the economic problems we are facing today.

The theory goes like this: in the early part of this decade, Federal Reserve Chairman Uncle Alan Greenspan needed to create another bubble to replace the tech bubble. Though the economy was already tanking by the fall of 2001, the financial fall-out from the 9/11 attacks gave Uncle Alan all the cover he needed to decrease interest rates to historically low levels (1%) and keep them there for a long, long time. Cheap money solves lots of economic ills and there is little doubt that Greenspan's monetary policies, fully backed by the Bush administration, took the country out of the tech bubble and the 9/11 attacks and into a minor economic recovery.

The problem, of course, was that Greenspan had created another bubble to replace the last one - in this case, a credit/housing bubble. Couple the cheap money with lax lending standards and little accountability or oversight of the financial institutions and banking system lending that money and you get what we have today - banks and financial institutions dealing with lots of bad debt lent to people who shouldn't have been allowed to borrow money to buy houses they couldn't afford to buy. On top of that, Wall Street created all kinds of new "innovative" ways to chop up these debts and sell them to investors - including hedge funds, pension funds and ultimately even mom and pop investors - so everyone is getting to share in the fall-out from the bursting of the credit/housing bubble.

The Dow is down 19.9% in the last year and with futures showing a triple digit down opening, it looks like we will officially hit a "bear market" in the Dow today. Banks have been writing off billions of bad mortgages and while we have heard more than once that "the worst of the credit crunch has passed," it is becoming increasingly obvious that this is not so. Rumors swirled yesterday that investment bank Lehman Brothers could follow in brother Bear Sterns' footsteps and be put to a fire sale. Lehman's stock is down 70% in the last year. The Dow Jones Wilshire U.S. Banks Index was down 26% for the second quarter. Writedown rumors continue to swirl around Citigroup and a few other banks. There seems to be a lot of bad debt still in the pipeline that needs to be worked out before the credit crisis can truly be declared over and the financial system can heal itself.

To compound matters, the Federal Reserve's solution to the problem of falling housing prices, increases in homeowners defaulting on their mortgages and a slowing economy was to lower interest rates again and keep them there. The result has been a tanking dollar and sky-rocketing commodity prices.

Bill Fleckenstein sums up the current crisis quite well on MSN Money:

The aftermath of this housing/credit bubble is far different from that of the stock bubble. Now the lending institutions are swimming in bad debts. Homeowners have mortgages they can't pay, just as the assets (houses) behind those debts are dropping in price.

As if that weren't enough, consumers' paychecks are eroding, thanks to galloping inflation created by the money printing that fomented the housing bubble (and by the credit that Greenspan's replacement, Ben Bernanke, has subsequently thrown in to ameliorate the aftermath).

Thus $143 a barrel oil, $4.79 a gallon gasoline and record grain, corn, and soybean prices. With the Bush administration playing pre-election games with oil-supplier Iran (somebody has been leaking news of an imminent Israeli attack on Iran), you can bet oil and gas are going much higher in the near term.

Which brings me back to my memories of the 70's. Here we are with a president more unpopular than Jimmy Carter (23% approval in the latest LA Times/Bloomberg poll) in office, increasing tensions with Iran, American forces fighting overseas (remember those other two wars Bushie started in Iraq and Afghanistan that he never finished?) rising inflation, rising unemployment, rising oil, gas and food prices, falling incomes, falling home prices, a falling dollar, tanking consumer confidence and expectations for the future and an overall "malaise" around the country that has 80% of the country saying we are on the wrong track for the future.

Of course all this bad news means even worse news for the Republican Party which will be saddled with the blame for the economy (75% of people in the Times/Bloomberg poll blame Bush for the worsening economy.) Since this is an election year, you can bet that doesn't make the boys and girls in the White House and the RNC happy. And that's why you can bet that the Bushies will trigger some international event to try and take people's minds off the economic problems and overall malaise the country is suffering from. Cunning Realist thinks it's an attack on Iran that's coming. So does Sy Hersh. What better way t distract people from their problems than by ginning up another war against a Middle Eastern "Hitler".

Except that this attack, if it comes, will take oil well above $150 a barrel, maybe even to $200 a barrel. The LA Times looked at what $200 a barrel oil would do to the American economy and the consumer:

with oil closing above $140 a barrel Friday, more experts are taking those predictions seriously -- and shuddering at the inflation-fueled chaos that $200-a-barrel crude could bring. They foresee fundamental shifts in the way we work, where we live and how we spend our free time.

"You'd have massive changes going on throughout the economy," said Robert Wescott, president of Keybridge Research, a Washington economic analysis firm. "Some activities are just plain going to be shut down."

Besides the obvious effect $7-a-gallon gasoline would have on commuters, automakers, airlines, truckers and shipping firms, $200 oil would drive up the price of a broad spectrum of products: Insecticides and hand lotions, cosmetics and food preservatives, shaving cream and rubber cement, plastic bottles and crayons -- all have ingredients derived from oil.


With every penny hike in the price of gas costing American consumers about $1 billion a year, sharply higher pump prices would lead to "significant bankruptcies and store closings," said Scott Hoyt, director of consumer economics at Moody's Economy.com.

Consumer spending has held up surprisingly well in the face of skyrocketing pump prices -- bolstered in part, perhaps, by federal tax rebates. But the same day the government reported a 0.8% rise in May consumer spending, a research firm said consumer confidence had plunged to its lowest level since 1980 -- hinting at the catastrophic effect another big gas price surge could have on retailers and customers.

"The purchasing power of the American people would be kicked in the teeth so darned hard by $200-a-barrel oil that they won't have the ability to buy much of anything," said S. David Freeman, president of the L.A. Board of Harbor Commissioners and author of the 2007 book "Winning Our Energy Independence."

70% of the American economy is driven by consumer consumption. If the LA Times article is right and consumers wouldn't have the ability to buy much of anything with oil at $200 a barrel, economic conditions would get really ugly, really fast. And what could Helicopter Ben Bernanke do then? Take interest rates down to 0%? Surely that wouldn't help either the inflation problem, the tanking dollar or increasing commodity prices.

So will Bushie, DeadEye Dick, Condi and gang do it before they leave office?

If I had to place a bet on it, I'd say yes.

I mean, they forged the Niger documents and created all kinds of crapola about Saddam, didn't they? And they ignored the real threat to the U.S. ("Bin Laden Determined To Attack U.S.") while planning for the Iraq war. Then they used 9/11 as a perfect excuse for the Iraq misadventure.

So why wouldn't they create one more misadventure before they leave Washington?

Yes, if I had to bet I'd say something big surrounding Iraq is coming before the election.

But let's make the bet in euros.

The dollar isn't worth what it used to be, you know?
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