With gasoline prices still skulking in the neighborhood of $3-a-gallon, despite oil priced above $80-a-barrel, political and economic leaders can pretend a little while longer that things are okay on the real life American scene. But between the dollar tanking in response to the Federal Reserve's Easy-Money-for-Big-Players policy, and the start of the home-heating season, you can be sure we are headed up to the $4-a-gallon range for happy motoring fuel before New Years.
There is still broad disagreement among commentators as to whether we are headed into a wild inflation or a grim deflation, but the emerging pattern looks to me like a big ocean wave that gathers itself into a high cresting peak and then collapses under its own weight — that is, a technical wild inflation resolving into the low slop of people unable to buy anything. However you cut it, and from whatever angle you look at it, the bottom line will be a steeply lower standard of living for most Americans.
Of course, the US government's official inflation index is worthless, since it doesn't factor in the two vital commodities that normal people can't live without: food and gasoline. But measured against meaningful indexes, there's no question that the dollar is rapidly hemorrhaging value. Last week, the dollar reached new lows against the Euro ($1.40+ to one), oil ventured past $82-a-barrel, and gold topped $740 an a troy ounce. Food commodity prices have also been soaring, with the price-per-bushel of wheat topping $8 — meaning more expensive Hot Pockets for American microwave food junkies in the season ahead.
It appears that Fed Chairman Bernanke's interest rate cut was designed mostly to help bail out the big banks, which are in desperate need of cheap loan money to cover the losses that they are suffering from not being able to unload tons of worthless mortgage-backed-securities. Secondarily, the Fed governors might hope that their lowered rates would soften the blow of re-sets on millions of adjustable-rate mortgages — but mortgage rates have de-coupled from Fed rates, so that may just be whistling past the graveyard. The next two months will see a much bigger wave of re-sets than months previous, and the re-setters themselves have to figure in some idea of real inflation if they don't intend to lose money on those contracts — and whoever these parties are at the re-set end, after years of slicing, dicing, re-bundling and re-selling, they are not liable to be in a charity business of buying houses for people at a loss to themselves in interest rate differentials. So, bottom line again, those poor shlubs who signed "creative" mortgages are going to get re-set upward pretty steeply whatever the Federal Reserve does. The political fallout from folks getting tossed out of repossessed houses is sure to get worse.
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There's also no guarantee that the Fed rate cuts will rescue any big banks, investment houses, or hedge funds. Sooner or later, to either meet redemptions or admit losses, they'll all have to roll out those mortgage-backed securities, CLOs, and other fraudulent items currently hiding in their books, and ask the world what they're worth paying for. The world will answer by wrinkling its collective noses at the odor emanating from these bundles of financial offal, and that will determine whether some of these outfits stay in business or sink into the mire of financial history.
For some of these outfits, like Bear Stearns, their fate looks already sealed. It was one thing for Bear Stearns to sponsor two loser hedge funds. The reason hedge funds are unregulated, by the way, is because in theory they are only patronized by extremely wealthy clients who are presumed to know what they are doing and whose choices are thought to not require regulation. But when Bear Stearns turned around a week after their funds tanked and blew a raspberry at these investors by saying "we registered these operations in the Cayman Islands where your lawyers can't touch us, so fuck you" — when Bear Stearns did that, it took the short-end benefit of blowing off some legal fees over the long-term prospect that no one in their right mind would ever invest in a Bear Stearns fund ever again.
Meanwhile, on the inflation side of the question is the hard-to-refute idea that a lot of non-American persons and organizations will probably not sit on a lot of saved dollars and dollar-denominated debt paper with said dollar losing value every day. At first, these dollars would come back into the US chasing assets-for-sale, meaning that foreigners could buy up a whole lot more American companies, giving them ownership in something tangible rather than a boatload of depreciating bonds. The Kingdom of Dubai tried this last week in making an offer to buy 20 percent of the Nasdaq. God knows what else might go up for sale out there. Maybe the Chinese will take the New York Yankees off ailing George Steinbrenner's hands. Maybe the Metropolitan Museum of Art will sell its whole collection to Japan — they seem to like that stuff. But the net effect would be a flood of dollars coming back into the US chasing assets. Meanwhile, the price of a gasoline fill-up and a jar of jam would go ever higher for ordinary Americans.
On the deflation side is what happens after this wave collapses, and that would be a national fire-sale of plain "stuff," as desperate families from Maine to Honolulu try to liquidate all the toys they purchased over the last twenty years in order to keep a roof over their heads and some food on the table — cars, boats, snowmobiles, flat-screen TVs, leaf-blowers, iPods, you name it. A lot of that stuff will be either unsellable — because there will be be way more sellers for these things than buyers — or they will be sold at extreme bargain-basement discounts. The net result is what they call a deflationary depression. Too few scraps of money seeking too many things for sale. Nobody doing any business. Jobs and incomes dissolving in the process.
All these things will be occurring against the background of an increasingly desperate energy predicament that will probably introduce many as-yet-unfactored problems into the equation — such as, what happens as the oil export crisis gathers force and we begin to get supply-and-allocation disturbances... ? Or what happens when the US military starts competing with agri-business and commuters for oil? Or what happens geo-politically when the contest for dwindling oil supplies from the exporting nations begins to affect relations between the major importers, namely, China, the US, Japan, and Europe? Or what happens politically on the domestic scene as times get hard and the public looks for targets to direct their righteous wrath against?
What all this comes down to is the sense of a nation absolutely fooling itself that it can carry on in the way it is used to. I'm hardly an advocate of the US giving up and committing suicide. What I advocate is a broad recognition that reality is compelling us to change our behavior. Reality is trying to tell us that we can't run an economy based on nothing more than investment schemes without directing investment into activities that produce things of value. Reality is telling us to be very worried about living arrangements that can only function with copious imports of oil from people who are disgusted with us. Reality is telling us that we can't divert our food crops into making motor fuels without people becoming unable to afford either fuel or food. Reality is telling us to redirect our culture more toward things-we-do-with-other-people and less toward things-we-do-with-new-things. Reality is telling us to shift from avoidance behavior and denial to engaging with reality in order to lead lives that are consistent with reality.
The next several weeks are liable to be a time of great stress as these realities become increasingly undeniable. I imagine the public chatter will become increasingly delusional as the wave crests. When it it finally comes, the shock of recognition that we are a bankrupt nation will present itself at first as a great silence. The public's collective jaw will fall open, but no sound will come out. That will be the true moment of shock and awe.
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