Economic Crisis : It's World-Wide and Long-Term

It's not getting better any time soon.
By Roger Baker / The Rag Blog / October 26, 2008

See ‘US government throws oil on fire’ by Henry C K Liu, and ‘What now?’ by Jim Kunstler, Below.

The economic crisis is worldwide and long-term and I think is likely to be at least as bad as the great depression or worse, because this time we are facing increasing natural resource limitations. In brief, far more long term global debt has been issued in the recent bubble era than it is really possible to ever pay back. The USA has been running $2 billion a day trade deficits, about half to pay for imported oil, for a very long time, and the per capita US consumer debt is something like $20,000, not counting the mortgage stuff. There is a global bank run as everyone tries to pull out of their investments, so everyone is dumping commodities and hoarding dollars; we are now in a deflationary spiral.

The most savvy economic analyst (from my point of view), always with lots of numbers and examples to illustrate his points, is Henry C. K. Liu. Here is a long description of the underlying economics of our current situation, the beginning of which follows with a link to the entire story:

US government throws oil on fire
By Henry C. K. Liu / October 23, 2008

Free-market fundamentalists have been operating in denial mode for more than a year, since the US financial sector imploded in a credit crisis from excessive debt in August 2007, claiming that the economic fundamentals were still basically sound, even within the debt-infested financial sector.

As denial was rendered increasingly untenable by unfolding events, champions of market fundamentalism began clamoring for increasingly larger doses of government intervention in failed free markets around the world to restore sound market fundamentals. For the market fundamentalist faithful, this amounts to asking the devil to save god.

Aside from ideological inconsistency, the real cause of the year-long credit crisis has continued to be misdiagnosed in official circles whose members had until recently tirelessly promoted the merit of small government, perhaps even purposely by those in the position to know better and in whom society has vested power to prevent avoidable disaster. The diagnosis misjudged the current credit crisis as only a temporary liquidity quandary instead of recognizing it as a systemic insolvency. (See Fed helpless in its own crisis / Asia Times Online / Jan. 26, 2008.)

The misdiagnosis led to a flawed prognosis that the liquidity crunch could be uncorked by serial injections of more government funds into intractable credit and capital market seizure. This faulty rationale was based on the fantasy that distressed financial institutions holding assets that had become illiquid could be relieved by wholesale monetization of such illiquid asset with government loans, even if such government loans are collateralized by the very same illiquid assets that private investors have continued to shun in the open market.

It is not that government officials know more than market participants about the true value of these illiquid assets; it is only that government officials with access to taxpayers' money have decided to ignore market forces to artificially support asset overvaluation, the original root cause of the problem. Instead of being the solution, the government with flawed responses backed by the people's money has become part of the problem.

President George W Bush told the American people on October 10 that "the fundamental problem is this: As the housing market has declined, banks holding assets related to home mortgages have suffered serious losses. As a result of these losses, many banks lack the capital or the confidence in each other to make new loans. In turn, our system of credit has frozen, which is keeping American businesses from financing their daily transactions - and creating uncertainty throughout our economy."

Skipping over the basic fact that the housing market has been declining because of a burst credit bubble, the president went on to identify five problems, the first of which is that "key markets are not functioning because there's a lack of liquidity - the grease necessary to keep the gears of our financial system turning. So the Federal Reserve has injected hundreds of billions of dollars into the system. The Fed has joined with central banks around the world to coordinate a cut in interest rates. This rate cut will allow banks to borrow money more affordably - and it should help free up additional credit necessary to create jobs, and finance college education, and help American families meet their daily needs. The Fed has also announced a new program to provide support for the commercial paper market, which is freezing up. As the new program kicks in over the next week or so, it will help revive a key source of short-term financing for American businesses and financial institutions."

Read all of this article here / Asia Times.

My own criticism of Liu is that he is mostly unaware of the profound economic implications of peak oil. It was a the sharp price rise in oil associated with a peaking in world oil production (peak oil is here now) that caused a global oil bidding war and cost-push inflation that finally sent the world economy into its current deflationary spiral. When the world economy is closely interconnected by finance capital, there are periodic global business cycles of overproduction, much like we have national recessions. Hundreds of trillions in derivatives have spread the risk of contraction everywhere.

It was about time for the hugely over-leveraged global credit bubble to lose steam, and sharply rising energy/transportation costs finally dragged the global economy down and initiated contraction, which is self-reinforcing on the way down. But sooner or later, maybe a year, all the newly created bailout money will get spent somewhere. My guess is that it will gravitate toward vital commodities like oil and food as declining oil production reasserts itself, and whoever has money will start bidding up these prices again. With decreasing oil, this is likely to reinitiate a raging bout of stagflation and then hyperinflation. You are quite unlikely to get a healthy recovery from a bunch of emergency bailouts aimed at the investment banks.

I will say the peak oil guys usually understand economics better the economists understand peak oil, probably since the latter are trained to ignore natural limits to growth. Kunstler is always fun to read and is one of the few who simultaneously understands peak oil and economics. Here's Kunstler's: "What Now?"

What Now?
By Jim Kunstler / October 20, 2008

It's fascinating to read the commentators in mainstream journals like The Financial Times and The Wall Street Journal all strenuously pretending that "the worst is over" (maybe... we hope... fingers crossed... hail Mary full of grace... et cetera). The cluelessness would be funny if it didn't involve a world-changing catastrophe. All nations that have reached the fork-and-spoon level of civilization are now engineering a vast network of cyber-cables that lead directly from their central bank computers to the Death Star that is hovering above world financial affairs like a giant cosmic vacuum cleaner, sucking up dollars, euros, zlotys, forints, krona, what-have-you. As fast as the keystrokes create currency-pixels, the little electron-denominated units of exchange are sucked out of the terrestrial economies into the black hole of money death. That's what the $700-billion bail-out (excuse me, "rescue plan") and all its associated ventures are about.

To switch metaphors, let's say that we are witnessing the two stages of a tsunami. The current disappearance of wealth in the form of debts repudiated, bets welshed on, contracts canceled, and Lehman Brothers-style sob stories played out is like the withdrawal of the sea. The poor curious little monkey-humans stand on the beach transfixed by the strangeness of the event as the water recedes and the sea floor is exposed and all kinds of exotic creatures are seen thrashing in the mud, while the skeletons of historic wrecks are exposed to view, and a great stench of organic decay wafts toward the strand. Then comes the second stage, the tidal wave itself -- which in this case will be horrific monetary inflation -- roaring back over the mud flats toward the land mass, crashing over the beach, and ripping apart all the hotels and houses and infrastructure there while it drowns the poor curious monkey-humans who were too enthralled by the weird spectacle to make for higher ground. The killer tidal wave washes away all the things they have labored to build for decades, all their poignant little effects and chattels, and the survivors are left keening amidst the wreckage as the sea once again returns to normal in its eternal cradle.

So, that's what I think we will get: an interval of deflationary depression followed by a destructive wave of inflation that will wipe out both constructed debt and constructed savings, scraping the financial landscape clean. There's no question that stage one is underway. But we can be sure the giant wave of money recklessly loaned into existence in just a few weeks time will wash back through the global economy leaving a swath of destruction.

And then what? The societies of the world will be faced with the task of rebuilding systems of fruitful activity, i.e., real economies based on productive behavior rather than the smoke-and-mirrors of Frankenstein-finance con games. In fact, excuse me while I switch metaphors again, because the Frankenstein story -- the New Prometheus -- is yet another apt narrative to inform us what we have done. We have "played" with financial fire and brought to life a monster now bent on killing us. One question that this metaphor-narrative raises is: when will the angry peasant mob storm the castle with their flaming brands and cries for blood from the makers of this monster? Rather soon, I think.

Perhaps, in some countries (maybe the USA, if we're lucky), this will take the more orderly form of systematic prosecutions, bringing to justice persons who perpetrated swindles involving the alphabet soup of investment "products" that have gone bad in so many accounts (and ruined so many individuals, institutions, and governments). I think it has already begun with the inquisitors summoning the shifty Dick Fuld of Lehman Brothers -- but there are hundreds of other characters like him out there, who scored untold millions of dollars in activities that were simply grand swindles. I wouldn't be surprised if, eventually, Treasury Secretary Hank Paulson found himself in the dock to answer how come, when he ran Goldman Sachs, there was a special unit in the company dedicated to short-selling the very mortgage-backed securities that another unit in the company was so busy pawning off to every pension fund on God's green earth.

Apart from orderly prosecutions (which can certainly turn harsh and cruel), there is the possibility of sociopolitical upheaval -- revolution, violence, civil war, war between nations, the whole menu of monkey-human mischief that afflicts mankind. We are not necessarily immune to it here in the USA, despite our cherished notion of exceptionalism, which would have us inoculated against all the common vicissitudes of history.

Anyway, prosecution through the courts, while perhaps satisfying the hunger for justice (or, more particularly, revenge), is not a productive economic activity. So, the question begs itself again: what will we do? Under the best circumstances we will reorganize our society and economy at a lower level of energy use (and probably a lower scale of governance, too). The catch is, it will have to be a whole lot lower. I think we'll be very lucky fifty years from now to have a few hours a day of electricity to do things with.

The energy story and its hand-maiden, the climate change situation, are both lurking out there beyond the immediate spectacle of the financial fiasco. Both these things imply pretty strongly that the economic relations currently unraveling will not be rebuilt -- not the way they were before, or even close to it. The best outcome will be societies that can practice small-scale "process-intensive" organic agriculture and equally small-scale process-intensive modes of manufacture in the context of very local sociopolitical networks. An accompanying hope is that we can remain civilized in the process. Personally, while I recognize the appeal (to others, not me) of the "singularity" narrative, which has the human race making a sudden evolutionary leap into some kind of cyborg-nirvana, I regard it as an utter bullshit fantasy that has zero chance of occurring, given our stark predicament.

But returning to the short term, or "the present," shall we say, there is the matter of how the US gets through the election and then the first months of a new government, even while the larger fiasco continues. I'm voting for Mr. Obama. While I believe he will make a much better president than the addled old mad dog Mr. McCain has become, I feel sorry for anyone who is placed nominally "in charge" of things this coming year. The best a President Obama can do is offer some reassurance to a public that is totally unprepared for the convulsion now upon us. Mr. Obama will certainly not have "money" to "spend" on any of the promised social support programs that have been endlessly debated. But he could clearly articulate the reality we're facing, and ask not necessarily for "sacrifice," as the common plea goes, but for something more and better: for bravery and resolute spirit, for intelligence and resilience, for kindness and generosity -- among a people long unused to consorting with the better angels of their nature. He's already begun to set the example by appearing in public with his sleeves rolled up. The change that has been in the air all year -- that Mr. Obama has talked so much about -- is coming in a bigger dose than anyone expected. I hope we're ready to get with the program.

[Jim Kunstler’s new novel of the post-oil future, World Made By Hand, is available at all booksellers.]

Source / Clusterfuck Nation

The Rag Blog