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For the tiny fraction of people who
actually pay attention to real events -- those, for instance, who know the
difference between Narnia and Kandahar -- the final
hours of 2007 leading into the fog-shrouded abyss of 2008 must induce great
racking shudders of nausea. Has there ever been a society so exquisitely
rigged for implosion? The whole listing, creaking, reeking edifice stands
like one of those obsolete Las Vegas pleasure palaces awaiting a mere pulse
of electrons to ignite a thousand explosive charges perfectly placed to blow
away the structural supports.
The inertia holding everything together that I described
in last year's forecast finally melted away at mid-summer and events began
spooling out of control. Specifically, the massive tonnage of debt-backed
securities circulating through the financial sector stood revealed for the
mostly worthless bales of paper they truly are, and the investment community
was left suspended in mid-air, grinning unconvincingly, like Wile E. Coyote
thirteen yards beyond the edge of the mesa, with a sputtering grenade in each
hand and an anvil tied to his ankles.
The whole second half of 2007 in the ranks of finance was a
desperate rear-guard action to stave off the inevitable work-out. The fiasco
over at Bear Stearns was instructive. Not long after two of their hedge funds
blew up in August, the company announced that the funds had been chartered in
the Cayman Islands and were therefore beyond the reach of official US legal
machinery -- meaning, forget about lawsuits, you losers, chumps, and suckers
who bought into our jerry-rigged scams... submit your complaints to the Tough
Noogies desk and begone
with you! This dodge might have benefited Bear Stearns in the short term, but
in the long term it's hard to see why anybody would ever after cast one red
cent in Bear Stearns' direction (in the life of this universe or several like
it).
The summer's blow-ups were followed by truckloads, boatloads,
and helicopter loads of rescue "liquidity" delivered through autumn
by the Federal Reserve and other central banks in a continuing effort to
allow investment houses, mortgage originators, reinsurance firms, and other
companies trafficking in suspect paper to avoid declaring greater losses. Then
the foreign sovereign wealth funds jumped in with five billion here, ten
billion there, coming away with big chunks of ownership, but of what? Of
companies with liabilities in excess of assets? Mostly, these desperation
moves worked to paper over virtual bankruptcy through the crucial Christmas
holiday, when yearly bonuses are doled out, which spared the boards of
directors from having to explain why executives were lined up at the loading
docks filling their Lincoln Navigators with stupid dope piles and knots of
the shareholders' loot.
On
the ground out in the heartland, in the anxiety-drenched, over-valued beige
subdivisions of California and the ennui-saturated pastel McHousing
tracts of Florida (not to mention the pathetic vinyl outlands of Cleveland
and Detroit) a mighty keening welled forth as mortgage rates adjusted upward,
and loans stopped "performing," and "for sale" signs
failed to turn up buyers, and sheriff's deputies showed up with the rolls of
yellow foreclosure tape, and actual ownership of the re-poed
collateral entered a legal twilight zone somewhere north of the Florida State
Teacher's Pension Fund and south of the Norwegian Municipal Councils'
investment portfolios. What a mighty goddam mess
was left out there by the boyz at the Wall Street
genius desks, who engineered a magical system for eliminating risk from the
capital markets -- only to see it leak back in from a million holes and seams
and collapse the greatest bubble ever blown.
In the background, the US dollar sank to record lows against the
euro and the pound sterling, the price of oil
jumped 56 percent across the year just grazing the $100-a-barrel mark,
drought punished the American southeast and Australia's grain belt, floods
ravaged Texas and England, the polar ice shrank dramatically, but the US
escaped any major hurricane action for a second year in a row.
Except
for the murder of Mrs. Bhutto just a few days ago, the international scene
was supernaturally quiet. Even Iraq
fell into a torpor, variously attributed to utter
exhaustion among the warring factions or to the US troop "surge" under
general Petreus. Iran
got a surprise clean bill-of-health on its nuclear bomb-making activity from America's own
investigators, to the consternation of Mr. Bush & Co. The non-human
denizens of Planet Earth didn't have such a good year. Honeybees, Yangtze river dolphins, and house sparrows took big
hits, and Al Gore went up another suit size (as well as winning part of the
Nobel Prize for his Powerpoint show). Which brings
us finally to the heart of the matter: what's coming down the pike starting
tomorrow, January 1, 2008?
Down and Dirty
I shudder to imagine how things will play out now as we turn
the corner into 2008. Not to put too fine a point on it, but my little walnut
brain can't imagine any scenario in which the US economy doesn't end up on a
gurney in history's emergency room. It's not necessary to rehash the
particulars of the Greenspan bubble-blowing disaster. The outcome is what
concerns us. The web cables have been blazing for months with arguments as to
what form the workout will take. There's little disagreement about the
fundamentals at the housing end of things.
The housing market is in a death spiral. Eventually, the
median price of a house will have to fall back to the median income, and it
has a very long way to go, perhaps 50 percent. Until that happens, houses
will be generally unsellable. At the same time, of
course, an anxious finance sector will be offering fewer mortgages and on
much more rigorous terms, so there will be far fewer qualified buyers even
for distress sales. And the median income itself may soon not be what it has
been. The whole equation has changed. As the painful re-pricing process plays
out, many owners/sellers will be upside-down and under water in what they owe
on the mortgage in relation to the value of the house they occupy. Quite a
few may have lost jobs and incomes along the way. Most of these unfortunates
would be better off just mailing in the keys and walking away. But in so far
as these awful liabilities are peoples' homes, full of all their stuff and
their childrens' stuff, not to mention being the
repository of all their previously-imagined wealth, as well as their hopes
and dreams, walking away is psychologically more
easily said than done.
Surely in this election year, schemes will be advanced to
bail out these poor suckers. But the beneficiaries of such a putative bail
out would be far outnumbered by the home-owners still making mortgage payments,
plus property taxes jacked up during the recent orgy by greedy public
officials, and I don't think this majority would stand for the unfairness of
seeing their neighbors simply let off the hook on
their obligations. Perhaps the one thing that congress could do is change the
insane law that treats foreclosures like some kind of bizzaro
capital gain and piles additional huge tax demands on people who can no
longer afford to buy their kids a frozen burrito. The issue of what to do
about the dispossessed will be so politically red-hot that it could upset the
election process --but I get a bit ahead of myself.
One thing the public doesn't get about the housing debacle is
that it is not just the low point in a regular cycle -- it is the end of the
suburban phase of US
history. We won't be building anymore of it, and those employed in its
development will have to find something else to do. Now, unfortunately the
whole point of the housing bubble was not really to put X-million people in
so many vinyl and chipboard boxes, but rather to ramp up a suburban
sprawl-building industry as a replacement for America's dwindling manufacturing
economy. This stratagem ran into the implacable force of Peak Oil, which not
only puts the schnitz on America's whole Happy Motoring
/ suburban nexus, but implies a pervasive trend for contraction in everything
from the daily distances we can travel to the the
very core idea of regular economic growth per se -- at least in the way we
have understood it through the age of industrial capital.
But to return to my point, something like 40 percent of all new
jobs after the year 2000 were created in the final burst of suburban
expansion -- everything from the excavators to the framers to the
sheet-rockers, and then the providers of granite countertops, the sellers of
appliances and furnishings, and cars to service the far-out new subdivisions,
and so on. This is the end, therefore, not only of the production
"home-builders," but perhaps everything from Crate and Barrel to WalMart, too, eventually.
By
the way, the housing collapse was only one phase of a more generalized real
estate debacle, because the commercial side of the business has also begun a
nauseating slide into non-performance and equity destruction. In other words,
we built way too many strip malls, power centers,
and office parks. God knows what will happen to the owners of these white
elephants, or the mortgage and lien holders of these things -- but as one wag
remarked to me some years ago as we both gazed upon a forlorn abandoned strip
mall outside of Tulsa, "...we don't need that many evangelical roller
rinks...."
What happens out there on the housing market scene will
certainly redound in banking and finance and whatever still constitutes the US
economy generally. The fears and uncertainties surrounding all credit-backed
tradable securities derive first from the millions of troubled home mortgages
dangling slowly in the wind. These fears and uncertainties will multiply as
defaults commence in commercial real estate, and desperate individuals next
enter a wave of credit card default, all of it, too, securitized and
sprinkled all over the world. None of this stuff has yet been priced into the
public disclosures of the many troubled banks and bank-like companies holding
it. Nor does anyone really know how this is affecting the hedge funds, and
their staggering leveraged positions in things that are looking more and more
like quicksand. I can't imagine that quite a few major banks will not
collapse in the first half of 2008. It is hard to escape the conclusion that
many hedge funds will also blow up, given the unsoundness of their
counter-parties' positions, not to mention the frailty of the bond reinsurers. But the death of more than a few hedge funds
could easily unwind the entire global finance system -- meaning a period of
destructive chaos followed by a set of severely different institutional
arrangements, with untold loss of imagined capital wealth along the way and
big changes in everyday life. The world has never really been in a situation
like this before and it is impossible to say what it might lead to. But there
is no doubt that the American public has enjoyed an artificially high
standard of living in relation to the value of what we actually produce -- fried
chicken, hair extensions, and the Flaver Flav Show -- so the conclusion is pretty self-evident.
Others have said (and I concur) that 2008 will be the year that
the issue of Peak Oil not only takes stage in the forefront of American
politics, but pushes global warming aside as the most immediate threat to the
"modern" way-of-life. There is every reason to believe that the
world has arrived at its all-time oil production peak -- and some
statisticians would even pin-point the exact moment as July 2006. Since then
a few new and crucial story-lines have emerged to allow us to understand what
is happening out there on the world oil scene.
One story-line is that only "demand destruction" among
the world's poorest nations has kept the oil markets functioning
"normally" among the OECD nations and the rising Asian players. Even
so, oil priced in US dollars more than doubled in 2007. It remains to be seen
whether demand destruction in a wobbling US economy -- with the suburban
builders crippled -- will keep oil prices from jumping into the uncharted
territory beyond $100-a-barrel. But two other forces are in operation now.
One is the growing oil export problem, soon to be a crisis. It
now appears that exports, in nations with surplus oil to sell, are going down
at an even steeper rate than production declines. Why? They are
using more of their own oil. The population is growing robustly. The
Saudi Arabians are building the world’s largest aluminum
smelter and many chemical factories. This takes a lot of oil. Russia,
another big exporter, saw its car sales jump by 50 percent in 2007. Mexico
is depleting so rapidly, and using so much more of its own oil, that it might
be out of the export game altogether in three years. That will be bad news
for the US, since Mexico is tied with Saudi
Arabia as America's number two leading
source of oil imports. Remember, the US now imports close to
three-quarters of all the oil we use.
The second new factor on the Peak oil scene is "oil
nationalism." It is prompting countries like Norway
and Russia
to husband more of their own resources as the awareness hits that they are
past peak and might want to keep their own motors humming further into the
future. Oil surplus nations are also trending more toward selling their oil
on the basis of long-term contracts with favored
customers rather than just auctioning the stuff off on the futures market. This
makes oil a much more important element in geopolitical power politics. Note
that the US
may not enjoy "favored customer" standing
among many of these nations.
Matt Simmons, the leading investment banker to the oil
industry, predicted at a major conference in October that the US is much
closer to encountering a problem with chronic spot shortages of oil (and
gasoline, of course) than the public realizes, and Simmons says that this
supply problem will be extremely disruptive in every imaginable way --
economically, politically, and socially. Most of the commentators I take
seriously see the price of oil oscillating in 2008 between $80 and
$160-a-barrel. Simmons says Americans will keep sucking up the price
increases, but they will probably freak out over spot shortages.
I have no idea how presidential election politics will play out
in 2008. It must be obvious that so many nasty pitfalls lie out there in the
months ahead that something's got to shake up the current scripted mummery
among the contenders. The current batch of candidates will soon find their
story-lines and pre-cooked messages out-of-date as the nation faces crises in
finance and energy (at least). Given the uneventful geopolitical scene of the
past 18 months (since the Hezbollah-Israel War and up to the murder of Mrs.
Bhutto in Pakistan), odds are that the US will have more rather than less
trouble from the rest of the world in 2008-- especially if our own financial
recklessness trips up the global economy.
Back in the early days of George W. Bush, even before 9/11, I
used to joke with my friends that Bill Clinton would return as the Emperor
Bill the First. The joke doesn't seem so funny anymore with Hillary off and
running. I never liked the way she muscled her way into a US senate seat -- sending the message, in
essence, that there was not one genuine New York resident qualified for the job. But
there is so much more about her I dislike now, starting with her presumption
of dynastic entitlement to the annoyingly phony way
she nods her head (like one of those old "drinky-bird"
toys) to put across the idea that she is a fabulous "listener." I
write this a few days before the Iowa
caucuses and then the New Hampshire
primary. New York's
Mayor Bloomberg is suddenly making noises again about entering the race as an
independent. That might lead to a situation as fractured as the one in 1860
that saw a multi-party scuffle send Lincoln into office (or the election of
1912 when Teddy Roosevelt made a credible run on the independent Bull Moose
line). At the moment, I'd like to see both John Edwards and Barack Obama roll on. The mere
thought of a president Huckabee gives me the
chilblains, and the rest of the Republican pack I would not want to have as
my county supervisor.
In any case, whoever ends up in the oval office will preside over one king-hell of a clusterfuck.
In the immortal words of TV's erstwhile "Mr. T," I pity da fool
who gets elected into this mess. There will be a whole continent full of
bankrupt, re-poed, and idle former WalMart shoppers, many of them with half of their skin
tattooed and many of that bunch all revved up to "roll heavy and gun
up" against the folks who screwed them.
Which leads me to my penultimate
observation of the moment: 2008 will be the year that celebrity wealth goes
into hiding. A land full of people crying into their foreclosure
notices will take a dim view of the Donald Trumps and P. Diddys
luxuriating out there and may come looking for scalps -- though in the case
of Mr. Trump they'll be sorry they woke up the wolverine that lives on his
head. Basically, though, I'm not kidding. Conspicuous displays of wealth will
be so "out" that Mr. Diddy might take to
club-hopping in a 1999 Mazda. Lindsay Lohan and
Paris Hilton may have to double-up living in a minuteman missile silo to keep
the angry mobs of fans-turned-vengeful-berserkers away.
Okay, my final comment. After being chastised endlessly about mis-calling the DOW in 2006 (I said 4000), I have learned
my lesson about making numerical predictions for the stock markets. So let's
just say there is no fucking way that the DOW, the NASDAQ, and the S & P
will not end the year 2008 absolutely on their asses. The charade of
permanent prosperity based on getting something for nothing is over. That
sound you hear out there is reality knocking on the door. It has been
standing out in the cold for a long time and it is not happy with us.
By :
James Howard Kunstler
www.kunstler.com/
James
Howard Kunstler has worked as a reporter and
feature writer for a number of newspapers, and finally as a staff writer for
Rolling Stone Magazine. In 1975, he dropped out to write books on a full-time
basis.
His
latest nonfiction book, "The Long
Emergency," describes the changes that American society faces in the
21st century. Discerning an imminent future of protracted socioeconomic
crisis, Kunstler foresees the progressive
dilapidation of subdivisions and strip malls, the depopulation of the
American Southwest, and, amid a world at war over oil, military invasions of
the West Coast; when the convulsion subsides, Americans will live in smaller
places and eat locally grown food.
You
can purchase your own copy here : The Long
Emergency . You can get more from James Howard Kunstler - including his artwork, information about his
other novels, and his blog - at his Web site : http://www.kunstler.com/
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