GENERAL COMMENT FROM CARDIN:
There’s a new world a-comin’
Various life obligations have kept me from composing a detailed comment for this week’s installment of Headlines from the Meltdown, so I’ll let others do the talking for me, including Carolyn Baker, Richard Heinberg, and Eckhart Tolle (see below).
But if I were to write up a comment this week, it would surely focus on the fact that the past seven days’ worth of financial and economic news have been positively mind-blowing in the way they’ve highlighted the unprecedented nature of our unfolding economic catastrophe. On any given day, at any given hour, during the week of March 30 through April 5, you could visit a financial news site like Yahoo! Finance, Bloomberg, or any other, and be greeted with the schizophrenic-seeming spectacle of an unmitigated avalanche of dire economic news — job losses, epic write-downs, rampant inflation, failed companies, record foreclosures, surging bankruptcies, etc. — accompanied by stable or slightly rising financial markets.
What? Huh? What the hell’s going on here?
Exactly. It may well be that the markets’ unseemly performance was caused by widespread calls for a bottom. “It’s over! We’re saved! Everybody in!” So crowed many a pundit and financial news show host. But they proclaimed this in the face of an economic and financial monster show whose fundamental factors have done nothing but worsen. Indeed, they can’t do anything but get worse. This show is far from over.
Moving on to the people whose words I’m borrowing, first is Carolyn Baker, whose general worldview is a bit more radical than mine (visit her site, www.carolynbaker.net, to see this in action) but who still expressed my own thoughts and feelings quite well in a special note last week:
No more “evidence” of collapse is needed; it’s happening here and now with dizzying speed. I no longer feel a need to “convince” anyone; I’m simply sitting back and watching the inevitable unfold, and as I report the daily news, I can scarcely keep up with the events that have turned prophets into historians.
For years I have been talking about the Terminal Triangle-the convergence of Peak Oil, climate change, and global economic meltdown. In this moment, we are witnessing not only the accelerating severity of the triangle, but related crises such as Peak Water, species extinction, population overshoot exceeding the planet’s carrying capacity, and the madness of reliance on biofuels to alleviate energy depletion. Never in the history of this planet has such a juxtaposition of crises presented itself to its inhabitants. What we are witnessing is nothing less than Peak Earth.
Yep.
Next, from peak oil-journalist extraordinaire Richard Heinberg comes a statement from late last year, from the October 2007 edition of his regular “MuseLetter,” that explains the current economic scenario in a more potently compact and direct fashion than I’ve seen anybody else deliver. As you read this extended excerpt, note the way Heinberg hits upon multiple points — the increase in oil prices, the plummeting dollar, etc. — that have only grown even more pointed, more dire, more obviously a source or aspect of serious trouble, in the six months since he wrote.
It’s getting pretty damn obvious that the world is sliding head-first into the abyss at an accelerating rate, with most Americans as oblivious as ever. The latest indication of impending doom is a festering credit crunch brought on by the inevitable puncturing of a bubble puffed up over the past few years through the issuance of thousands of patently idiotic subprime, adjustable-rate, and interest-only mortgage loans.
The deeper story is that this is just the last of a series of bubbles that the US Federal Reserve has inflated in order to sustain for as long as was humanly possible a fundamentally unsound national financial condition.
As I explained in Chapter 2 of The Party’s Over, the US got rich exploiting its own resources and labor. Its most valuable resource — oil — went into decline forty years ago; since then, we Americans have tried to stay rich by exploiting other nations’ labor and resources, using leveraged trade rules, dollar hegemony, and military threats. All this time, we congratulated ourselves: we were living in a post-industrial information economy; they were doing the dreary, obsolete work of actually making things. They sweated and saved; it was up to us to spend and borrow. We served an indispensable function in the global economy as the consumer of last resort, as the engine of new debt creation (more debt equals more money in circulation — i.e., more GDP growth), and as the global cop keeping order in an unruly world (while also sneaking donuts and taking bribes). The Chinese burned their coal and poisoned their workers and environment to make our stuff, enabling us to enjoy a cleaner environment by keeping our coal in the ground, while they loaned us the money to buy cheap Chinese stuff with. Such a deal!
Life in bubble world was grand while it lasted. First there was the Third World debt bubble of the ’80s; then came the tech bubbles of the ’90s; and finally the real estate bubble of the ’00s. Along the way, Wall Street hoped for a little extra hot air from the privatization of Social Security, but even Americans weren’t stupid enough to sign onto that particular leveraged buyout. All during this time, suburbanites got used to having more gadgets and bigger cars and houses, even if they couldn’t actually afford them.
But now we’re at the end of the line. At last the rest of the world is coming to realize that it doesn’t really need Americans: the Chinese can consume, too, after all. And the Asians can’t really justify loaning us more money; we’re not going to pay it back — or if we do, it will be in devalued dollars. But those loans can also be looked at as investments: other nations have in effect bought US assets, which means that the wealth created from those assets will flow to the new overseas owners, not to Americans. What’s left to buy — other than a lot of soon-to-be-foreclosed real estate? And how much wealth will those assets produce once the bubble deflates?
It’s also clear now that there are alternatives to the dollar, including the euro, the yen, and the yuan. Not that the dollar won’t be missed; when it tanks, there will be as many financial casualties in Mumbai as Manhattan. But currency traders are clearly heading for the exits, and the last one out gets the booby prize — a bag of wooden nickels.
Yes, the rest of the world still must fear America’s awesome weapons of mass destruction: this mighty nation can certainly create an unholy mess when it means to, as it is demonstrating in Mesopotamia. But that doesn’t mean that other nations actually have to obey it any more. The US can bomb to smithereens any country it chooses, but it can’t always count on forcing that country to hand over its resources at gunpoint.
The dollar is hitting record lows. Gold and silver are hot commodities — always a bad sign for the reigning paper currency. There are rumors of possible bank failures (following a run on one British bank). If the Federal Reserve tries to solve the liquidity crisis by lowering interest rates, that just worsens inflation and exacerbates the dollar’s problems. If the Fed raises rates to prop up the dollar, that forces the banks and hedge funds to confront their mountains of worthless paper and leads ultimately to defaults, bank runs, and bank failures. Clearly the Fed fears the latter scenario more than the former, so by lowering interest rates this month it effectively pulled the plug on the dollar. The Saudis are now preparing to de-link their economy from the US currency, while China is quietly selling off dollar-denominated assets. One way or another, Americans are going to soon see a rapid decline in their real standard of living.
Of course, another big event this month was oil’s nose-bleed ascent to record-high prices, over $82US per barrel. Part of the price hike resulted from the dollar’s weakness, but – -as Goldman Sachs has pointed out — the main reason was simply that demand is up while supply is down. The May 2005 peak for the rate of production of regular crude and the July 2006 peak for all liquids are still holding. It may be that the technical maximum global rate of flow for liquid fuels is still a couple of years away, but in effect the peak is here now.
….But surely the single most important event of the month was the revelation that arctic sea ice is melting faster than even the most dire forecasts had predicted. This is significant because it shows the power of reinforcing feedback loops: as sunlight-reflecting ice melts, it leaves dark water in its place – which absorbs more heat, causing more ice to melt, and so on. This year’s minimum extent of ice was about one million square miles (as of September 16); the previous record low was 1.5 million in 2005. The rate of melting this year was 10 times the recent annual average. This month the Northwest Passage was ice-free for the first time in untold millennia. At this rate, the north polar region could be ice-free in summer by 2015.
Altogether, it was an extraordinary 30 days. Yet so far there’s been no instantaneous economic implosion, and there’s not much blood in the streets (except perhaps in Myanmar), and so the mainstream media can safely focus on the truly vital issues like O.J. Simpson’s current legal scrapes and Britney Spears’s performance at the MTV awards.
Many writers who discuss the sort of stuff that interests me (“reality” I think it’s called) wrap the unutterable sadness of it all in a crisp cellophane of cynicism. I’m guilty of that, too, from time to time — certainly in this little monthly summary. How else to make it somehow bearable?
And finally, even though I’ve quoted this here in the past, it seems entirely appropriate to re-quote some words from Eckhart Tolle in A New Earth, especially since Oprah has now exploded that book into stratospheric mainstream popularity via her decision not only to endorse the book but to make it the subject of a groundbreaking series of interactive classes delivered all over planet earth via streaming video, complete with Eckhart’s personal participation. I started reading Eckhart’s work nine years ago, and I never thought I’d see the day when I would hear him being talked about in general social conversation like I’ve heard everywhere recently, e.g., at my job, at Wal-Mart, at restaurants. Let’s hope the millions of people who are now being introduced to his teaching pay special attention to this part of his latest book, since it describes what’s going on now and what will continue to intensify in coming months and years:
The ego is destined to dissolve, and all its ossified structures, whether they be religious or other institutions, corporations, or governments, will disintegrate from within, no matter how deeply entrenched they appear to be. The most rigid structures, the most impervious to change, will collapse first. This has already happened in the case of Soviet Communism. How deeply entrenched, how solid and monolithic it appeared, and yet within a few years, it disintegrated from within. No one foresaw this. All were taken by surprise. There are many more such surprises in store for us.
…..A significant portion of the earth’s population will soon recognize, if they haven’t already done so, that humanity is now faced with a stark choice: Evolve or die. A still relatively small but rapidly growing percentage of humanity is already experiencing within themselves the breakup of the old egoic mind patterns and the emergence of a new dimension in consciousness.
….If the structures of the human mind remain unchanged, we will always end up re-creating fundamentally the same world, the same evils, the same dysfunction….Collective human consciousness and life on our planet are intrinsically connected. “A new heaven” is the emergence of a transformed state of human consciousness, and “a new earth” is its reflection in the physical realm. Since human life and human consciousness are intrinsically one with the life of the planet, as the old consciousness dissolves, there are bound to be synchronistic geographic and climatic natural upheavals in many parts of the planet, some of which we are already witnessing now.
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This is the 9/11 of economic crises
Time, March 27
It becomes clearer by the day that this is not your grandmother’s — or even Barack Obama’s grandmother’s — economic downturn. This time we start with a huge government deficit and record private debt, all run up when times were good and we should have been storing up acorns. This is one that begins with people losing their homes, which is usually the last act of the drama. This is one that is bringing back stagflation–that poisonous combination of economic slowdown and eroding currency we cured at a terrible cost back in 1981. When that red phone rings in the middle of the night, it probably won’t be the National Security Adviser saying Osama bin Laden has struck again. It will be the Treasury Secretary reporting that markets have opened in the Far East and the dollar has become worthless.
….We all know about the economist who predicted nine of the past five recessions. But you don’t want to miss this one. It’s going to be a whopper.
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This is the Big One, or, Time to Pay the Piper
Minyanville, April 2
I’d use the phrase “The Big One” to refer to what people will call this period in the future. This is where it all changed.
After years of credit inflation caused by excessively easy credit produced by central banks, around mid-2007 the major world economies, led by the U.S., finally began experiencing trouble in carrying all that debt. Debt levels in the U.S. reached six times their usual amount relative to economic production. As the credit began to deflate, liquidity driving asset prices quickly dried up. We’re now seeing those same central banks desperately attempting to reflate credit, only to see that borrowers are no longer in shape to borrow and lenders are no longer in shape to lend.
In fact, we’ve reached the point where banks and dealers in the financial system are forced to suck at the teat of the central bank credit machine in order to survive. Banks literally have no capital to support their declining asset values: the harder they suck at the teat, thus devaluing the dollar more and more, the more the collateral value declines. But even the teat isn’t enough. Dealers and banks are having to raise longer term capital at egregious rates, thus diluting future earnings even more, and this despite record low treasury rates.
….Yesterday some very large European dealers wrote off vast sums of debt. There will be more to come. But the market took it as the last write-down, just as it has in the past, and a vicious short covering rally ensued with the help of government hands behind the scenes. Desperation is everywhere. But don’t confuse a short covering rally in a bear market with a bottom in a bull market correction: the news will continue to get worse and the manufactured rallies will be fewer and fewer as deflation takes hold.
In all my years I have not seen anything like this.
….This story’s not about three 400-point rallies in the Dow over the last month or so. This is a much bigger story: one that will unfold over the next few years. Traders will get chewed up in market volatility, we will be fed new saving regulations by government bureaucrats, and the media will mis-inform us all along the way.
….The best advice I can give is the same. Stay out of debt, try to save money (even though the government is making it nearly impossible to do so) and keep risk low.
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The Great Depression: The Sequel
Andrew Leonard, Salon.com, April 2
A record number of Americans receiving food stamps. Gas prices at an all-time high, and staples such as milk, eggs and bread costing a prettier penny every week. The average number of Americans filing for unemployment benefits reached its highest level in two years last week, while just this week, construction spending fell for the fifth straight month and manufacturing activity shrank to its lowest level in five years. Real estate values are even plummeting in the Hamptons, and hedge funds started off 2008 with their worst quarter ever.
Most economists are no longer debating whether there will be a recession in 2008. Now, they’re arguing over when the recession started — was it last November, or December? — and how bad it’s likely to get. While they bicker, however, a far more terrifying economic specter from the distant past has sent a chill through the infosphere.
“We have not seen a nationwide decline in housing like this since the Great Depression,” said the CEO of Wells Fargo late last year. “It is now clear that the U.S. and global financial markets are experiencing their worst financial crisis since the Great Depression,” wrote economist Nouriel Roubini last week.
….The U.S. economy is not even technically in recession yet, either by the standard definition of two consecutive quarters of negative GDP growth, or as “officially” declared by the National Bureau of Economic Research. If we define a “depression” as a decline in GDP of 10 percent, then the U.S. is nowhere close.
But we could get there. In fact, it would be all too easy. All we have to do is ignore what the markets and other economic indicators are telling us right now and continue down the disastrous path we’ve been merrily skipping along for the last 25 or so years.
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USA 2008: The Great Depression
The Independent, April 1
[Cardin comments: This article may well be jumping the gun, but the very fact that a publication like The Independent would run such a story — and it was their cover story for the week — gives Americans who may be suffering from a serious case of national/cultural myopia a valuable perspective on how a great many people in the rest of the world are talking and thinking about the good old U. S. of A. One of my in-laws encountered this a few months ago when he took a business trip to Japan and found himself surrounded by concerned and sympathetic businessmen from various Asian countries, who, upon learning he was an American, immediately began to express concern and sympathy along the lines of, “Oooh, you’re American? How are you doing? How’s your business? How’s your family? Are you having problems? We hope you’re not in too much trouble! Good luck to you!”]
We knew things were bad on Wall Street, but on Main Street it may be worse. Startling official statistics show that as a new economic recession stalks the United States, a record number of Americans will shortly be depending on food stamps just to feed themselves and their families.
Dismal projections by the Congressional Budget Office in Washington suggest that in the fiscal year starting in October, 28 million people in the US will be using government food stamps to buy essential groceries, the highest level since the food assistance programme was introduced in the 1960s.
The increase -– from 26.5 million in 2007 -– is due partly to recent efforts to increase public awareness of the programme and also a switch from paper coupons to electronic debit cards. But above all it is the pressures being exerted on ordinary Americans by an economy that is suddenly beset by troubles. Housing foreclosures, accelerating jobs losses and fast-rising prices all add to the squeeze.
Emblematic of the downturn until now has been the parades of houses seized in foreclosure all across the country, and myriad families separated from their homes. But now the crisis is starting to hit the country in its gut. Getting food on the table is a challenge many Americans are finding harder to meet. As a barometer of the country’s economic health, food stamp usage may not be perfect, but can certainly tell a story.
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IMF Cuts Global Forecast on Worst Crisis Since 1930s
Bloomberg, April 2
The International Monetary Fund cut its forecast for global growth this year and said there’s a 25 percent chance of a world recession, citing the worst financial crisis in the U.S. since the Great Depression.
….”The financial shock that originated in the U.S. subprime mortgage market in August 2007 has spread quickly, and in unanticipated ways, to inflict extensive damage on markets and institutions at the core of the financial system,” the statement said. “The global expansion is losing momentum in the face of what has become the largest financial crisis in the United States since the Great Depression.”
….”The IMF’s forecast is now below the world economy’s longer-term trend so there is certainly some significance in what it is now seeing,” said Andy Cates, a global economist at UBS in London. “The world economy is slowing quite considerably and will be very different from what we’ve become accustomed to.”
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‘Seismic shift’ coming in banking industry, leading to permanent lower growth
Financial Week (Reuters story), April 4
However long or deep the credit crisis turns out to be, it will change the business of investment banking profoundly, probably for good. Unsurprisingly, it won’t just be bankers who suffer. The mortgage meltdown has led to a collective loss of faith in structured finance, credit ratings and the banking industry itself.
The upshot for banking: job losses, capital losses, balance sheets that need to be rebuilt, lower profit margins and an industry in search of a business model.
The upshot for the rest of us: besides the bill for what will be an ongoing bailout, expect more expensive and scarcer credit, perhaps even when the crisis is through, and possibly lower structural economic growth.
“We haven’t seen anything as bad as this in the 30-year period we looked at,” said James Davis at consultants Oliver Wyman, who recently conducted a review of investment banking with Nick Studer at Wyman and Huw van Steenis at Morgan Stanley. “You’d probably have to go back to the 1930s to get something quite as bad.”
….A lot of the pain implied in all this will be borne by bankers and bank shareholders. But not all. A banking system with more capital and better provision for rainy days, leaving investors to do more work in analyzing credit, and probably requiring better collateral and less aggressive assumptions, should add up to fewer loans made at a higher cost.
That would mean lower economic growth than would otherwise be the case, even once the current storm has passed.
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Rising Grain Prices Panic Developing World
The Washington Post, April 4
A spike in the price of rice and other food staples is triggering consumer panic, including food riots in Yemen and Morocco, and hoarding in Hong Kong.
Governments around the world have taken radical measures in recent weeks to control their countries’ supplies of rice. Egypt last week said it would ban all rice exports for six months. Cambodia has stopped all private-sector exports of rice, and India andVietnam also have imposed restrictions.
The price of grains — corn, wheat, and rice — has been rising since 2005 under pressure from farmers who would rather plant crops for biofuels than for food, the lack of technological breakthroughs in crop yields, and drought and disease. The sharpest increase has been this year, with the price of Thai rice, a world benchmark, nearly doubling since January, to $760 per metric ton. Some analysts expect that price to reach $1,000 in the next three months.
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People driving their cars to the end of the oil age
Canada.com, April 1
Gasoline-powered cars are driving humanity to the end of the oil age, leaving electric vehicles as the best weapon against global warming. This is the major conclusion in a dramatic international report written by a former Exxon insider and released Tuesday to Canwest News Service.
“Sometime during the year 2008, humanity will probably pass the point at which it collectively consumes 1,000 barrels of crude oil every second of every day. More than half of it — and the share continues to rise — is dedicated to the movement of goods, services and people,” said the analysis by physical chemist Dr. Gary Kendall, titled “Plugged in: The End of the Oil Age.” “Despite the pivotal role which oil is playing during the early years of the 21st century we are, without a doubt, entering the twilight of the Oil Age.”
….”It should be self-evident that the scale of the task is enormous, but the resulting benefits will be even greater, and that is surely the very definition of transformational change,” said Kendall in the 200-page report.
“We can choose to face up to this change, even embrace it, and stride purposefully towards an energy system which is clean, secure, and equitable. Or we might attempt to ignore it, eventually be overwhelmed by it, and suffer catastrophic consequences as a result of our collective lethargy.”
….[W]e’re now entering a kind of global emergency with respect to energy.”
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81% in Poll Say Nation Is Headed on Wrong Track
The New York Times, April 4
Americans are more dissatisfied with the country’s direction than at any time since the New York Times/CBS News poll began asking about the subject in the early 1990s, according to the latest poll.
In the poll, 81 percent of respondents said they believed “things have pretty seriously gotten off on the wrong track,” up from 69 percent a year ago and 35 percent in early 2002.
Although the public mood has been darkening since the early days of the war in Iraq, it has taken a new turn for the worse in the last few months, as the economy has seemed to slip into recession. There is now nearly a national consensus that the country faces significant problems.
….The dissatisfaction is especially striking because public opinion usually hits its low point only in the months and years after an economic downturn, not at the beginning of one. Today, however, Americans report being deeply worried about the country even though many say their own personal finances are still in fairly good shape.