All this goes to show is how completely the people in charge of things in the United States have lost their minds. They seem to think this mass exercise in pretend will resurrect the great march to the Wal-Marts, to the new car showrooms, and the cul-de-sac model houses, reignite another round of furious sprawl-building, salad-shooter importing, and no-doc liar-lending, not to mention the pawning off of innovative, securitized stinking-carp debt paper onto credulous pension funds in foreign lands where due diligence has never been heard of, renew the leveraged buying-out of zippy-looking businesses by smoothies who have no idea how to run them (and no real intention of doing it, anyway), resuscitate the construction of additional strip malls, new office park “capacity” and Big Box “power centers,” restart the trade in granite countertops and home theaters, and pack the turnstiles of Walt Disney world – all this while turning Afghanistan into a neighborhood that Beaver Cleaver would be proud to call home.

America loves the word “recovery” as only a catastrophically sick society can. “In recovery” is the new universal mantra of loser individuals and loser nations. Everybody in the USA is in recovery. Even Michael Jackson (he may have given up on somatic activity but, on the plus side, as the Rotarians love to say, he’s quit using drugs for once and for all, and the magazines have stopped publishing photos of him taken after 1990, when he turned himself into something out of the Hammer Films catalog).

To sum it all up, the US economy is in recovery. Paul Krugman says that we’ll soon realize that Gross Domestic Product (GDP) is growing. He actually said that on the Sunday TV chat circuit. Not to put too fine a point on it, but I would really like to know what you mean by that Paul? Do you mean that the Atlanta homebuilders are going to open up a new suburban frontier down in Twiggs County so that commuters can enjoy driving Chrysler Crossfires a hundred and sixty miles a day to new jobs as flash traders in the Peachtree Plaza? Do you mean that the Home Equity Fairy is going to wade into the sea of foreclosure and save twenty million mortgage holders currently sojourning in the fathomless depths with the anglerfish? Do you mean that all the bales of deliquescing, toxic “assets” hidden in the vaults of Citibank, JP Morgan, Bank of America, et al, (not to mention on the books of every pension fund in the USA, and not a few elsewhere) will magically turn into Little Debbie Snack Cakes on Labor Day weekend? Do you mean that American Express and Master Card are about to declare a jubilee on accounts in default everywhere? Do you mean that General Motors will produce a car that a.) anyone really wants to buy and b.) that the company can sell at a profit? Are you saying we get a do-over, going back to, say, 1981? Did we win some cosmic lottery that hasn’t been announced yet? What’s growing in this country besides unemployment, bankruptcy, repossession, liquidation, gun ownership, and suicidal despair? In short, are you out of your mind, Paul Krugman?

The key to the current madness, of course, is this expectation, this wish, really, that all the rackets, games, dodges, scams, and workarounds that American banking, business, and government devised over the past thirty years – to cover up the dismal fact that we produce so little of real value­ these days – will just magically return to full throttle, like a machine that has spent a few weeks in the repair shop.

This is not going to happen, of course. It is permanently and irredeemably broken – this Rube Goldberg contraption of swindles all based on the idea that it’s possible to get something for nothing. And more to the point, we’re really doing nothing to reconstruct our economy along lines that are consistent with the realities of energy, geopolitics, or resource scarcity. So far, our notions about a “green” economy amount to little more than blowing green smoke up our collective behind. We think we’re going to build “green” skyscrapers! We’re too dumb to see what a contradiction in terms this is. The architects are completely uninterested in the one thing that really is “green” – traditional urban design – and most particularly the walkable neighborhood. That’s just too conventional, not special enough, lacking in star power, not enough of a statement, boring, tedious, so not cutting edge! We blather about high-speed rail, but you can’t even get from Cleveland to Cincinnati on a regular train – and what’s more amazing, nobody is really interested in making this happen. All we really care about is finding some miracle method to keep all the cars running.

What we’ve been seeing is nothing more than a massive pump-and-dump operation in the stock markets, most of it executed by programmed robot traders, with the trading nut provided by taxpayers current and future. These shenanigans add up to new risks and fragilities so extreme that the next time a grain of sand catches in the exquisite machinery they will sink the USA as a viable enterprise. We will end up discrediting not just capitalism, but also the idea of capital per se, that is, of deployable acquired wealth. As this occurs, of course, events on the ground will give new meaning to the term “reality television.”

Regards,

James Howard Kunstler
for The Daily Reckoning

Financial Crisis Called Off originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

A broad consensus has formed in the news media and among government mouthpieces and even some “bearish” investors on the street that “the worst is behind us” in this tortured economy. This view is completely crazy. It will only lead to massive disappointment a few weeks or months from now, and that disappointment might easily transmute to political trouble. One even might call the situation tragic, except a closer look at the sordid spectacle of what American culture has become – a non-stop circus of the seven deadly sins – suggests that we deserve to be punished by history.

The reason behind this mass delusion is not hard to find: it’s based on wishing, especially the wish to retain all the comforts, conveniences, luxuries, and leisure that had become normal in American life. These are now ebbing away in big gobs for most of the population – while a tiny fraction of the well-connected pile on ever-larger heaps of swag, enjoying ever more privilege. Those in the broad bottom 95% were content as long as there was a chance that they, too, could become members of the top 5% – by dint of car-dealing, or house-building, or mortgage-selling, or some other venture enabled by easy credit and a smile. Those days and those ways are now gone. The bottom 95% are now left with de-laminating houses they can’t make payments on, no prospects for gainful work, repo men hiding in the bushes to snatch the PT Cruiser, cut-off cable service, Kraft mac-and-cheese (if they’re lucky), and Larry Summers telling them their troubles are over. (If I were Larry, I’d start thinking about a move to some place like the Canary Islands.)

Too many disastrous things are lined up in the months ahead to insure that we’re entering a new phase of history: The Long Emergency.

• Government at every level is worse than broke.
• Our currency, the US dollar, is hemorrhaging legitimacy.
• Inability to service old debt at all levels or incur new debt.
• Bad (toxic) debt lurking off balance sheets everywhere.
• The housing bubble fiasco is far from over.
• Commercial real estate fiasco just getting started.
• Unemployment rising implacably.
• So-called “consumers” unable to consume consumables.
• Crucial energy import supply lines fragile.
• Food supply subject to energy problems and climate abnormalities.
• A world full of other societies who would enjoy watching us fail and suffer.

When The Long Emergency was published in 2005, I said then that the greatest danger this society faced would be its inclination to gear up a campaign to sustain the unsustainable at all costs – rather than face the need to make new arrangements for daily life. That appears to be exactly what has happened, and it didn’t happen under the rule of some backward-facing, right-wing, Jesus-haunted crypto-fascist, but rather a “progressive” party led by a dynamically affable young man unburdened by deep cultural allegiance to Wall Street. Barack Obama has been sucked in and suckered. “Change you can believe in” has morphed into “a status quo you will bend heaven and earth to hold onto.”

Whatever else you might think or feel about Mr. Obama’s performance so far, this strategy on the broader question of where we go as a nation pulses with tragedy. What’s remarkable to me, to go a step further, is the absence of comprehensive vision – not just in the president, but in all the supposedly able and intelligent people around him, and even those leaders not in government but in business and education and science and the professions.

History is clearly presenting us with a new set of mandates: get local, get finer, downscale, and get going on it right away. Prepare for it now or nature will whack you upside the head with it not too long from now. Attempting to maintain anything on the gigantic scale will turn out to be a losing proposition, whether it is military control of people in Central Asia, or colossal bureaucracies run in the USA, or huge factory farms, or national chain store retail, or hypertrophied state universities, or global energy supply networks.

These imperatives are so outside-the-box of ordinary experience right now, that to drag them into the arena of politics can only evoke blank stares or nervous giggling. But whether we like it or not, these are the things that will really matter in the years ahead – not whether General Motors can ever make a profit again, or what Target Store’s sales figures are next quarter, or whether the latest high-rise condo-and-gambling complex in Las Vegas will be successfully marketed.

Here, in the dog days of summer, it seems to me that the situation in the USA is so fundamentally bad, so unpromising, so booby-trapped for failure, that I wonder if there has ever been a society so badly deluded as ours. We’re prisoners of our wishes, living in a strange dream-time, oblivious to the forces gathering at the margins of our vision, lost in a wilderness of our own making.

Anything can happen now. I certainly wouldn’t rule out international mischief as we arc around into fall. The air is so full of black swans that the white swan now seems like the exceptional thing. Whatever else happens, it sure will be interesting to see the public’s reaction to Wall Street’s announcement of Christmas bonuses. The folks at Rockefeller Center better be thinking about getting a fireproof tree.

Regards,

James Howard Kunstler
for The Daily Reckoning

Hunky Dory originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

For now, the “bottom” is in – that is, the bottom of this society’s ability to process reality. It may continue for a month or so, but events are underway that are beyond the command of personalities. We’re done “doing business” in all the ways that we’ve been used to, but we just can’t get with the new program. Let’s count the ways:

1. The revolving credit economy is over. It’s over because we can’t increase energy inputs to the system, which is one way of saying “peak oil.” Of course hardly anybody believes this right now because the price of oil crashed nine months ago, along with global manufacturing and trade. But nothing has changed on the peak oil scene – except perhaps that ever more new oil projects have been cancelled for lack of financing, which will boomerang on us (even if swine flu doesn’t) in the form of much lower future oil production. In any case, the credit fiesta is over, and the “consumer” economy with it, because industrial growth as we have known it is over. It’s over globally, too, though all regions of the world will not experience its demise the same way at the same rate.

The Asian nations may swap things around a while longer but China is basically up the creek without a paddle. They have less oil left than we have (which is saying, not much at all) and they won’t corner the rest of the global oil market without starting World War Three. Meanwhile, they’re running out of water and food. Good luck becoming the next global hegemon. Oh, and Japan imports 90 percent of its energy; India over 80 percent. Fuggeddabowdit.

Credit will not vanish everywhere overnight – even in the U.S.A. – because it is not distributed equally everywhere. But it will vanish in layers, and here in the U.S.A. a very broad layer of the lower and middle classes are now losing their access to it in one way or another – personally, in small business – and they will never get it back. Anyone who intends to thrive in the years just ahead had better plan on doing it on the basis of accounts receivable – and what they receive might not even necessarily come in the form of U.S. dollars. It may come in the form of gold or silver or in the promise of reciprocal services rendered.

This has enormous implications for two of the items in which our credit-dispensing operations are most deeply vested: houses and cars. Unfortunately, these are exactly the things that economic life has been based on for decades in our nation, which leads to the next categories:

2. The suburban living arrangement is over, along with all its accessories and furnishings. Taken as “all of a piece,” the suburban expansion was one sixty-year-long culmination of hypertrophy. We did it because we could. We won a world war and threw a party. We had lots of cheap land and cheap oil. It made lots of people lots of money and all its usufructs have become embedded in our national identity to the dangerous degree that the loss of them will provoke a kind of national psychotic breakdown. In fact, it already has. The completely unrealistic expectation that we can resume this way of life is proof of it.

The immediate problem is that we can’t build anymore of it. The next problem will be the failure of the stuff that already exists. The first stage of that is now palpable in the mortgage foreclosure fiasco and, just beginning now, the tanking of malls, strip centers, office parks and other commercial property investments. The latter will accelerate and become visible very quickly as retail tenants bug out and weeds start growing where the Chryslers and Pontiacs once parked. The next stage, which involves large demographic shifts in how we inhabit the landscape, has not quite gotten underway.

3. The Happy Motoring fiesta is over. You’d think that with Chrysler crawling into the bankruptcy court, and GM just weeks away from the same terminal ceremony, the news media would begin to suspect that the foundation of everyday life in this country was cracking. Instead, all we hear is blather about “market share” shifting to Toyota. News flash: not only will we make fewer automobiles in the U.S.A., but Americans will buy far fewer cars made anywhere. We’ll keep the current fleet moving a while longer, but when it’s too beat to repair, we won’t be changing it out for a new fleet – despite all the fantasies about hybrids, plug-and-drive electrics, and so on. The masses will be too broke to buy these things. What’s more, they will be very resentful of the shrinking economic “elite” who can afford them. And, anyway, our roads and highways are destined to fall apart very quickly because there is no way we can sustain the necessary rate of normal maintenance. Meanwhile, we remain completely un-serious about public transit – even about fixing the vestiges that still exist. The airline industry, of course, will be toast inside of five years.

4. Our food production system is approaching crisis. There’s no way we can continue the petro-agriculture system of farming and the Cheez Doodle and Pepsi Cola diet that it services. The public is absolutely zombified in the face of this problem – perhaps a result of the diet itself. President Obama and Ag Secretary Vilsack have not given a hint that they understand the gravity of the situation. It is probably one of those unfortunate events of history that can only impress a society in the form of a crisis. It also happens to be one of the few problems we face that public policy could affect sharply and broadly – if we underwrote the reactivation of smaller, local farm operations instead of shoveling money to giant “agribusiness” (or Citibank, or Goldman Sachs, or AIG…). I maintain that this may be the year that the crisis gets our attention, because capital is suddenly harder to get than fossil-fuel-based fertilizer.

All these epochal discontinuities present themselves, for the moment, as a season of muted “hope” and general apathy. The days are suddenly mild. We’ve resumed old and happy habits of grilling meat outdoors and motoring to those remaining places that were not blanketed with franchised food huts and discount malls. We have a new, charming president with an appealing family. Newly-minted dollars are flowing to the “shovel-ready.” The new bad news is less bad than the old bad news (or seems to be). And the year just past has been such a bummer that our hard-wired human nature tells us that good things must be just around the corner.

Personally, I think a lot of good things await us, but not the ones we’re expecting – not a return to buying Slurpees on credit cards. It will be very salutary to leave behind the junk empire we’ve accumulated and move into an epoch of quality and purpose. For the moment, though, our hopes reside elsewhere.

Regards,

James Howard Kunstler
for The Daily Reckoning

A Permanent Credit Contraction originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Does it mean that American “consumers” (so-called) are awaited momentarily in the flat-screen TV sales parlors with their credit cards fanned-out like poker hands, ready for “action?” Not too likely with massive non-performance out in cardholder-land, and half the nation’s electronics inventory wending its way onto Craig’s List. Are we expecting more asteroid belts of new suburbs carved in the loamy outlands of Dallas and Minneapolis, complete with new highway strips of Big Box shopping and Chuck E. Cheeses? Go to banking’s intensive care unit and inquire (if you can) among the flat-lining production home-builders and the real estate investment trusts on life support when they expect to rev up the heavy equipment.

The idea that we’re about to resume the insane behavior that induced the current epochal malaise of economy is so absurd it will only be heard in the faculty dining halls of the Ivy League. And if America is not picking up where it left off eighteen months ago – the orgy of spending future claims on wealth unlikely to accrue – then what is our destiny? Based on what’s out there in the organs of public thinking, it seems that we don’t want to think about it.

So many forces are arrayed against a return to the previous “normal” that we will be lucky, in another eighteen months, to still find ourselves speaking English and celebrating Christmas. What’s “out there” is a panorama of mutually reinforcing critical problems pertaining to how we live on this continent. Like the obesity, heart disease, and diabetes that plague the public, these problems are disorders of lifestyle habits and the only possible “cure” is a comprehensive revision of lifestyle. With the onset of spring weather and the cheez doodles and monster truck rallies and NASCAR tailgate barbeques and the drive-in beer emporiums all beckoning, can the public shift its attention from these infantile preoccupations to saving its own ass?

So far, the most striking piece of the economic fiasco is the absence of any galvanizing spirit among the millions getting crushed in the tragic unwind of our relations with money. It will be interesting to see, for instance, if there is any uproar over the evolving story of Goldman Sachs’ latest raid on the U.S. Treasury, after booking billions in taxpayer-funded payouts funneled through AIG, based on double-hedged credit default swaps. Such magic tricks are understandably hard to follow, but a dozen-or-so federal attorneys with a middling background in differential calculus might suss out the trail that leads from Ben Bernanke’s work station to Lloyd Blankfein’s cappuccino machine.

Something similar may be said in regard to revelations last week of White House economic advisor Larry Summers’ connection with a number of hedge funds shoveling millions into his deep pockets for showing up once a week to cheerlead their “innovations” – not to mention his shadowy visits to the Goldman Sachs gravy train even after he signed onto the Obama campaign. As long as the stock markets seem to rally – no matter what else is really going on in America – nobody will pay much attention to these disgusting irregularities.

Since it is that time of year, and I am haunting the gardening shop, one can’t fail to notice the many styles of pitchforks for sale. My guess is that the current mood of public paralysis will dissolve in a blur of blood and spittle sometime between Memorial Day and July Fourth, even with NASCAR in full swing, and the mushrooming ranks of the unemployed lost in raptures of engine noise and fried cornmeal. It doesn’t take too many determined, pissed-off people to create a lot of mischief in a complex society.

On the agenda in the second quarter of ’09 are ominous rumblings in the oil and food sectors. Half a year of cratered oil prices have decimated the oil industry and we’re driving at 100-miles-an-hour straight off a cliff into a new kind of supply crisis – even if industrial production and global exports remain moribund. So many drilling rigs are being decommissioned that the oil industry itself looks like it’s preparing for its own death, investment in exploration and discovery has withered with the credit markets, and the world may never recover from the year long hiccup in oil industry activity – translation: peak oil is biting back now with a vengeance. Its peakness will look peakier and the yawning arc of depletion beyond will look steeper and pose a threat to every globalized and continental-scale enterprise in the known world.

So many dire elements are ranging around our food production system (i.e. farming), from widespread drought and water table depletion to “input” shortages (especially fertilizers) to sickness in credit availability, that we’re all one bad harvest away from something that will make Pieter Bruegel-the-elder’s “Triumph of Death” look like Vanity Fair’s annual Oscar Party in comparison.

Barack Obama, charming as he is, had better drop his pretensions about kick-starting the old consumer economy, fire the Wall Street clowns and parasites who are running that futile exercise, and start preparing a US Lifeboat Economy aimed at reducing the scale and scope of our outlays so we can survive the coming siege of austerity. Meanwhile, I’m glad that he finally got a dog for the White House, because the President knows full well where to turn in Washington if you want some genuine love and affection.

Regards,

James Howard Kunstler
for The Daily Reckoning

The Coming Siege of Austerity originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

The Peak Oil story was never about running out of oil. It was about the collapse of complex systems in a world economy faced by the prospect of no further oil-fueled growth. It was something of a shock to many that the first complex system to fail would be banking, but the process is obvious: no more growth means no more ability to pay interest on credit… end of story, as Tony Soprano used to say.

There was a popular theory among Peak Oilers the last decade that the world would enter a “bumpy plateau” period when the global economy would get beaten down by Peak Oil, would then revive as “demand destruction” drove down oil prices, and would be beaten down again as oil prices shot up in response — with serial repetitions of the cycle, each beat-down taking economies lower — the only imaginable outcome being some sort of quiet homeostasis. This scenario did not play out as expected. It was predicated on a mistaken assumption that all systems would retain some kind of operational resilience while ratcheting down. Anyway, the banking system was mortally wounded in the first go-round and the behemoth is dying hard.

The last desperate act of the banking system in the face of Peak Oil’s no-more-growth equation was to engineer species of tradable securities that could produce wealth out of thin air rather than productive activity. This was the alphabet soup of algorithm-derived frauds with vague and confounding names such as credit default swaps (CDSs), collateralized debt obligations (CDOs), structured investment vehicles (SIVs), and, of course, the basic filler, mortgage backed securities. The banking system is now choking to death on these delicacies.

The trouble is that the EMT squad brought in to rescue the banking system — that is, governments — can’t remove these obstructions from the patient’s craw. They don’t want to drown in a mighty upchuck of the alphabet soup.

The collapse of complex systems is actually predicated on the idea that the systems would mutually reinforce each other’s failures. This is now plain to see as the collapse of banking (that is, of both lending and debt service), has led to the collapse of commerce and manufacturing. The next systems to go will probably be farming, transportation, and the oil markets themselves (which constitute the system for allocating and distributing world energy resources). As these things seize up, the final system to go will be governance, at least at the highest levels.

If we’re really lucky, human affairs will eventually reorganize at a lower scale of activity, governance, civility, and economy. Every week, the failure to recognize the nature of our predicament thrusts us further into the uncharted territory of hardship. The task of government right now is not to prop up doomed systems at their current scales of failure, but to prepare the public to rebuild our systems at smaller scales.

The net effect of the failures in banking is that a lot of people have less money than they expected they would have a year ago. This is bad enough, given our habits and practices of modern life. But what happens when farming collapses? The prospect for that is closer than most of us might realize. The way we produce our food has been organized at a scale that has ruinous consequences, not least its addiction to capital. Now that banking is in collapse, capital will be extremely scarce. Nobody in the cities reads farm news, or listens to farm reports on the radio. Guess what, though: we are entering the planting season. It will be interesting to learn how many farmers “out there” in the Cheez Doodle belt are not able to secure loans for this year’s crop.

My guess is that the disorder in agriculture will be pretty severe this year, especially since some of the world’s most productive places — California, northern China, Argentina, the Australian grain belt — are caught in extremes of drought on top of capital shortages. If the U.S. government is going to try to make remedial policy for anything, it better start with agriculture, to promote local, smaller-scaled farming using methods that are much less dependent on oil byproducts and capital injections.

This will, of course, require a re-allocation of lands suitable for growing food. Our real estate market mechanisms could conceivably enable this to happen, but not without a coherent consensus that it is imperative to do so. If agribusiness as currently practiced doesn’t founder on capital shortages, it will surely collapse on disruptions in the oil markets. President Obama at least made a start in the right direction by proposing to eliminate further subsidies to farmers above the $250,000 level. But the situation is really more acute. Surely the US Department of Agriculture already knows about it, but the public may not be interested until the shelves in the Piggly-Wiggly are bare — and then, of course, they’ll go crazy.

The recent huge drop in oil prices has left the public once again convinced that the world is drowning in oil — if only the scoundrelly oil companies were forced to deliver it at reasonable prices. The public has been consistently deluded about this for decades. What’s missing so far is for the president of the United States to lay out the reality of the situation in a dedicated TV address. I know a lot of you think that Jimmy Carter already tried this and failed to make an impression (and ruined his presidency in the process). I guarantee you that Mr. Obama will have to do this sometime in the next few years whether he likes or not, and he’d be well-advised to get it done sooner rather than later. And by this I don’t mean just vague allusions to “energy independence” or “renewables” in speeches devoted to many other issues. I mean telling the public the plain truth that we’ll never offset oil depletion and the intelligent response is to do everything possible to transition to walkable towns and public transit, not to sustain the unsustainable.

The alternatives — i.e. what we’re trying now — is to further delude ourselves into thinking that we can run Wal-Mart and the suburbs by some other means than oil. Despite all our investments in these things, we won’t be able to run them by other means, and the news about this had better get out before enormous disappointment turns into titanic rage. If Americans think they’ve been grifted by Goldman Sachs and Bernie Madoff, wait until they find out what a swindle the so-called “American Dream” of suburban life turns out to be.

This week, in the power centers of America, attention is fixed on the never-ending fiasco of AIG — a company whose main product turned out to be credit default swaps, and is now choking on them. Kibitzers on the sidelines of finance are forecasting a king-hell bear market suckers’ rally in the stock markets followed by a belly flop to Dow 4000 or lower. I myself called for Dow 4000 two years ago — and was obviously a bit off on my timing. All this is surely trouble enough. But while your attention is focused on Rick Santelli in the Chicago trader’s pit, or Larry Kudlow desperately seeking “mustard seeds” of new growth in financials, try to let one eye stray to the horizon where these other complex systems are working out their next moves. Farming. The oil markets. These are the coming theaters of alarm and distress.

Peak Oil: What’s Next? originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

This unfortunate phrase from President Obama’s otherwise sturdy inaugural address, echoed through my mind last week as I cruised the suburban outlands of Montgomery, Alabama. All the usual commercial furnishings of consumerist America hugged the flattish ochre and dusty-green landscape of played-out cotton fields where thirty feet of topsoil has washed away in the two hundred years since the mainly English settlers shoved out the native Alabamu, Coosa, and Tallapoosa. Along the low horizon, mall followed strip mall followed “lifestyle center,” book-ending the “one house” failed subdivisions of otherwise empty unsold lots in a cavalcade of floundering enterprise. It seemed at times as if the terrain was a kind of sea-like expanse, and all the retail boxes ghost ships drifting to oblivion.

They say that the banks have stopped calling in their loans on the commercial real estate, even though the owners of the malls and strip malls have arrived firmly in default. Calling in the loans would only pin another horrifying liability on the banks’ balance sheets. So all parties join in a game of “pretend,” that nothing has really happened to the fundamental equations of business life. Something similar goes on at the next level down, where the tenants of the malls and strip malls sink deeper into rent arrears every month, and the eviction process is simply postponed, while the stores themselves put off paying their vendors and suppliers – as the whole system, the whole way of life, enters upon a circle of mutual denial in a last desperate effort to forestall the mandates of reality.

How long will these games go on? This is the primary question that haunts the republic as we wait for new TARPS, and “bad banks,” economic stimulus packages, infrastructure renewal roll-outs, and other policy life-lines thrown out in guarded hopefulness to haul America out of a ditch.

The center of Montgomery was instructive, too. Not unlike any other city in the USA (pop. about 200,000), the former main artery of downtown commerce – Dexter Avenue, rolling out like a red carpet below the state capitol hill, where Martin Luther King’s early career kicked off in a modest red brick church, and where Rosa Parks famously refused to move to the back of her bus – this “main street” presented a sad sequence of empty shopfronts interrupted here and there by rather creepy amateur murals depicting the cruelties of slavery, as if a remonstrance to the politicos up the hill. Most of the buildings lining the avenue still stood burdened by the clownish facade re-doos and ghastly claddings of the 1950s, which had replaced the ordered classical-vernacular decorum of the original 19th century frontages. Once the malls had landed in the old cotton fields, and MLK moved on to Atlanta, Dexter Avenue was just left to rot in the memory trunk.

Here and there around the rest of the downtown, other weird experiments in American post-war anti-urbanism presented themselves, most notably a “building” designed to look like a small-scaled Death Star, all black reflective glass, canted concrete and steel walls – which turned out to belong to Morris Dees’ renowned Southern Poverty Law Center — deployed directly across the street from the modest white clapboard-with-green-shutters house once occupied by Jefferson Davis after Richmond fell and the Confederate leadership skeedaddled further south. There were a few recently-built government towers that looked like Nascar trophies. But the rest of the downtown – the parts not dedicated to surface parking – was the ubiquitous array of muffler shops, or restaurants and churches that looked like muffler shops.

With the city center thus nearly dead, and the asteroid belt of malls and strips on their knees financially, this emblematic sunbelt metro area finds itself in a pickle. Cotton being well-past decline, and having wrecked the soil, the “new” economy of recent decades dedicated itself to building car-dependent air-conditioned suburban sprawl – the perceived perfect antidote to a previous economic order based on serfdom, hook-worm, and inescapable heat. That now-not-so-new economy of sprawl, in turn, has come to a screeching halt, as a cruel destiny threw sand in the mechanisms of reliably cheap oil and revolving credit, and the gears seized up. A mood of ominous watching and waiting pervaded the city, but many of the movers-and-shakers had pinned their hopes on the chance that Mr. Obama’s stimulus bill would allow them to commence building a new freeway to the ocean on the Florida panhandle.

My journey continued on the Jesus-haunted blue highways, to that selfsame place, Walton County, Florida, where some of the most famous experiments in the New Urbanism were conducted beginning in the 1980s with the new town of Seaside. I had been there many times over the years, and I was called down to get a prize in the service of the movement, but it was a little disconcerting to see how the build-out had progressed.

The Seaside experiment began very modestly as the idea for a bohemian village of architects and artists in what was then an almost empty quarter of piney woods owned by the St. Joe timber company. Seaside was designed so beautifully that it attracted the attention of every thoracic surgeon and corporate lawyer between Nashville and New Orleans, and pretty soon Seaside became the Riviera of the sunbelt’s economic elite – and came in for gales of criticism for becoming that. The newer houses and commercial structures grew ever grander, as a Boomer generation status competition ramped up into the new millennium. Several more, ever-grander New Urbanist towns sprouted along the adjacent beaches, some of the most recent composed of immense mansions embarrassing in their opulence. The outcome was a little scary, especially now that the fortunes behind many of these mansions may be threatened by the multiplying fiascos of finance and economy overspreading the nation like a vicious plague.

The New Urbanists had not set out to build monuments to Yuppie-Boomer consumerism, but a peculiar destiny shoved them into that role for a while – even while they toiled elsewhere around the nation to reform town planning laws and generally provide an antidote to the fatal cultural cancer of sprawl, that is, of a settlement pattern guaranteed to comprehensively bankrupt our society. Anyway, the collapse of the housing bubble has affected the New Urbanists’ business, too, and this may turn out to be a very good thing because they can put aside the distractions of building very grand places to sop up ill-gotten wealth and focus on the issues that Mr. Obama’s people should have been paying attention to all along, namely, how are we going to reform the way we live in this country and what will be the physical manifestation of how we live in the decades to come.

The New Urbanists have preached for years that conventional suburbia would fail America in the long run, and that we’d have to prepare for this failure by restoring traditional modes of occupying the landscape. So far, the Obama team has not been willing to identify the suburban system as the heart of our economic problem. They can’t recognize it for what it truly is: a living arrangement with no future – and an economic, ecological, and spiritual disaster. It is, of course, the primary reason why we find ourselves in the deadly predicament of importing over two-thirds of the oil we use every day.

But then, more than half the population lives the suburban way of life, with its deadly mortgage traps, its mandatory motoring, and its civic disengagements. Nobody in power dares tell the truth: that we can’t live this way anymore.

But there are scores of places like Montgomery, Alabama, and thousands of traditional main street small towns that are sitting out there waiting to be re-activated. We need to do this much more than we need to build new freeways to the beach. Suburbia is not going to be abandoned overnight (even if it fails logistically and economically!) but we have got to arrive at a consensus about rehabilitating our forsaken small cities and small towns. The New Urbanists have gathered, organized, and codified all the principle and methodology needed to carry out this campaign. This should be their moment. Mr. Obama and his team should get with the program.

Road Trip originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Zounds! Public sentiment toward the accelerating economic fiasco has shifted, seemingly overnight, from a mood of nauseated amazement to one of panicked grievance as the United States moves closer to an apparent comprehensive collapse – and so ill-timed, wouldn’t you know it, to coincide with the annual rigors of Santa Claus. The tipping point seems to be the Bernie Madoff $50 billion Ponzi scandal, which represents the grossest failure of authority and hence legitimacy in finance to date in as much as Mr. Madoff was a former chairman of the NASDAQ, for godsake. It’s like discovering that Ben Bernanke is running a meth lab inside the Federal Reserve. And out in the heartland, of course, there is the spectacle of Illinois governor Rod Blagojevich trying to desperately dodge a racketeering rap behind an implausible hairdo.

What seems to spook people now is the possibility that everybody in charge of everything is a fraud or a crook. Legitimacy has left the system. Not even the legions of Obama are immune as his reliance on Wall Street capos Robert Rubin, Tim Geithner, and Larry Summers seem tainted by the same reckless thinking that brought on the fiasco. His pick last week for chief of the SEC, Mary Shapiro, is already being dissed as a shill for the Big Bank status quo. In a few days we’ll discover what kind of bonuses are being ladled out by the remaining Wall Street banks with TARP money and a new chorus of howls will ring out.

This is very dangerous territory. In dollar terms, the numbers being applied to the various problems are so colossal – trillions! – that the death of our currency seems assured. And in defiance of congress’s express intentions, none of the TARP "money" has been applied to its targeted purpose of buying up "toxic" (i.e. fraudulent) securities hidden in the vaults of banks, pension funds, and municipal portfolios.

George W, Bush’s personal bailout of General Motors and Chrysler is designed solely to postpone their bankruptcy and mass job layoffs until after the holidays. Otherwise, the $17.4 billion will probably be used by the companies to underwrite the extensive legal work required for the moment they must declare bankruptcy – when Mr. Obama is in the White House. Meanwhile, the President-elect has ramped up his job-creation target overnight from two to three million, and some observers are catching a whiff of Soviet-style economic engineering ("…we pretend to work and they pretend to pay us….").

The years since Jimmy Carter have produced an astoundingly flaccid public, sunk in various addictions and distractions, but this is about to change. The darkling mood of political protest and violent activism that saturated my own young adult years is scudding up again on the horizon. Mr. Obama’s pick for attorney general, the mild-looking Eric Holder, may be the key figure in the early months of the new government. If he doesn’t commence some aggressive investigations and prosecutions – beginning with Henry Paulson for insider trading when he was in charge of Goldman Sachs and shorting his own company’s mortgage-backed securities – then the whole Obama enterprise could fall under suspicion of illegitimacy. The bums who ran the US banking sector into a ditch have to account for their turpitudes. They can’t be allowed to hide under a TARP.

Unfortunately, the legal system, and probably the legislative system, will be so buried in procedural bullshit from the unwind of countless enterprises and institutions, and the sorting out of the remnants, that it remains to be seen whether this generation of people-in-charge can even embark on a fresh start of anything connected to real everyday life in America. All this is starting to alarm the tattered residue of the middle classes, and from here it’s a very short path to them being really pissed off.

When legitimacy erodes, anything goes. Nothing is respected including rules and personalities. The center doesn’t hold and the new vacuum there is a tumultuous place. The same crisis of authority and legitimacy is spreading from nation to nation now. Soon, China will contend with a discontented army of the unemployed. Greece has been in an uproar for two weeks. Belgium’s government just collapsed. Trade barriers are going up. Exports are falling away. The world’s energy markets are not immune to these disorders. I would expect problems with the currently seamless supply lines that bring America two-thirds of the oil we use. Even a mild disruption of oil supplies could attach an anvil to the ankle of an economy already falling off a cliff.

Right now, the overwhelming sentiment is to get this country back to where we were, say, ten years ago, when everything was humming nicely: Clinton nostalgia. We’re definitely not gong back there, though. It’s an idle wish. And any set of policies designed to lead in that direction will prove very disappointing. Our destination is a land of much smaller-scaled local economies. We could retain our federal ties if the federal government can scale back appropriately from the bloated, feckless enterprise it has become. Otherwise, it might only get in the way and make matters worse, and the public in one region or another of North America might reach a decision that they are better off without it. That would be what’s called a revolution.

Regards,

James Howard Kunstler
for The Daily Reckoning

James 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 get more from James Howard Kunstler – including his artwork, information about his other novels, and his blog.

December 23, 2008

Nothing particularly remarkable in market news yesterday. The Dow fell 59 points. Oil slipped $2.50…to close below $40 again. The euro climbed back to the $1.39 level.

Caterpillar said it was cutting back executive pay. Corporations have been embarrassed by how much they paid their managers. They paid the top people millions of dollars; you’d think, if they were getting that kind of money, they’d at least look where they were going. Instead, they drove the businesses right into a ditch.

The whole auto industry seems to have hit a telephone pole. GM and Ford saw their debt downgraded again. And Toyota forecasts its first operating loss in 71 years.

We’re coming close to the end of a remarkable year. And the wonders keep coming…

Last Friday, the Fed said it would make low cost loans to anyone who would help get consumer credit pumped up again. "This includes hedge funds," explained the report in the Financial Times, "which have never been able to borrow from the US central bank before."

Isn’t that nice, dear reader? The helpful people at the Fed are going to provide money so that hedge funds can speculate on consumer debt. Then, the Fed will have a new kind of "asset" on its books – a loan to a hedge fund. From the date of its founding in 1913 until just six months ago the Fed kept little more than U.S. Treasury debt in its vault. Everything else was considered too risky for America’s central bank.

But everything has changed in the last half year. The banks…the capitalists…and Wall Street have all been humbled. Now, politicians are in the driver’s seat – in Detroit…in Lower Manhattan…and all through the economy. And now the Fed has $1.5 trillion worth of the kind of "assets" that got the financial industry into trouble in the first place.

Want money? Ask the hacks in Washington! Get in line!

Need to decide what kind of car to build? Ask a Senator or a Congressman?

Need to figure out if you should make a loan…or not make a loan…what business should be saved and which one should be left to die? There’s some bureaucrat at the U.S. Treasury who will help make the decision.

At long last, the dream of the bankers who set up the Fed has been realized. If you want to control a society, get control of its money. Everybody needs money. Everybody wants money. And they’ll have to come to you to get it.

In a gold-backed currency system, people have to respect the golden rule: he has the gold makes the rules. That’s why the Roosevelt Administration confiscated gold in the ’30s; it wanted to make a lot of new rules.

But gold is limited…and hard to control. In political matters, it is uncooperative. Say you want to prop up a failing industry…or buy off a pressure group…or pay off friends? Where do you get the money? You only have so much gold…and you don’t want to waste it. So you tend to be careful. That’s why the feds turned to the kind of money you get from trees. Paper money is much more, shall we say, pliable… It is a go-along, get-along kind of money. It’s ready to pick up the tab for any party, no matter how outrageous…and ready to go along with any scheme…no matter how absurd.

And today, we have just the sort of situation for which paper money was invented. Absurd and outrageous. The feds want to hand out money; they need some cheap money to hand out. And since everyone needs money – in fact, at this stage of the crisis they are desperate for it – they’re ready to go along with anything the feds want.

This line of thinking is continued…below…

*** George W. Bush said last week that he had to kill capitalism to save it:

"We abandoned free market principles to save the free market system," he is quoted as saying.

Let’s see, how does that work…perhaps you could try a little hanky pank with your neighbor’s wife in order to save the sanctity of your marriage? Or rob a bank in order to prevent theft? Or eat a few extra desserts at Christmastide in order to keep slim?

We just don’t get it.

You might say you believe in Holy Salvation and still keep a rabbit’s foot in your pocket. But if you want to get into Heaven you don’t rape a nun.

At least, France’s president Sarkozy is more honest about it: "Laissez-faire, it is finished."

Yes, dear reader. Laissez-faire, we hardly knew ye. But now, free market capitalism is less respectable than rap music. State-directed capitalism is the new thing. In the space of barely six months, the U.S. government has taken effective control over the banks, the automakers, and the mortgage industry.

From Bloomberg:

"The Bush administration’s $13.4 billion rescue of GM and Chrysler is a fitting finish to a year in which governments around the world expanded their role in the economy and markets after three decades of retreat.

"The increase in the government’s role in the economy has been breathtaking. The U.S. looks set to rack up a budget deficit of at least $1 trillion this fiscal year, while the Federal Reserve has already increased its balance sheet by $1.4 trillion since last December. By way of comparison, U.S. gross domestic product last year was $13.8 trillion.

"Winding back the intervention may not be easy, says [Paola] Sapienza, (associate professor of finance at Northwestern University’s Kellogg School of Management).

"When Italy nationalized banks in 1933, ‘the architects who designed the system envisaged it as temporary,’ she says. ‘It was in place until the end of the 1990s.’ More recently, the Japanese government injected capital into banks to get them to lend to big corporations, keeping alive ‘the zombie companies that economists talk about,’ she says."

*** How will it all end?

Bloomberg has found an answer:

"’We’ll end a financial crisis with a fiscal crisis,’ says Vito Tanzi, former director of fiscal affairs at the IMF. ‘We’ll get out with very large public debt and very large public spending. That, for sure, will slow down the rate of growth for the next 10 years or so.’"

Not just a fiscal crisis. A money crisis.

Public spending will be financed first by borrowing…and then by printing. You’ll see Treasury bond yields – now at historic lows – shoot up. The dollar will collapse under the pressure. Gold will soar.

When will this happen? How will it happen?

No one knows. But the Economist says it could happen before the end of 2009. It is coming…but of that day knoweth no man.

*** Family update:

Henry came back from Charlottesville on Saturday. Jules arrived from Boston yesterday. Maria comes from Los Angeles tomorrow…along with Sophia, coming from London. From all over the English-speaking world, the family assembles for its Christmas holiday.

Jules gave this account of his trip over the Atlantic:

"It was horrible. I’m never flying American Airlines again. All of a sudden, we hit an airpocket…or something… It happened when the stewardesses were serving drinks. The drinks went all over the place. The stewardesses fell over. Everybody was screaming. A woman crawled along the corridor to get back to her seat. The captain got on the speaker and yelled at the stewardesses to take any available seat. One of the stewardesses at least kept calm and tried to help passengers. The others were in more of a panic than we were.

"I tried to say the Hail Mary…but I couldn’t remember the last lines…then, I thought my goose was cooked. I promised I would learn it if I were spared. And then, when the airplane settled down…it is amazing how silly I felt. Because I had been depressed. And now I was saved. I really felt good. And then, within 10 or 15 minutes, I forgot the whole thing. And I was depressed again."

Maria, trying to make it big in Hollywood, sends this report:

"I got a part in an ad… It’s not Shakespeare. But it’s paid work. It’s a commercial for Audi and they say they are going to run during the SuperBowl!"

Henry helpfully posted this note before his arrival: "Here’s a quick Christmas list. A lot of you are on a tight budget, what with this worldwide financial meltdown, so I’ve included items that can easily be shop-lifted…"

Until tomorrow,

Bill Bonner
The Daily Reckoning

Legitimacy Dwindles originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

God knows what manner of deals went down this past weekend in the Hamptons’ wine cellars and below-decks among the Chesapeake Bay sailboat fleet. All these hidey-holes must have been dank and fetid with the sweat of mortal fear. Will the U.S. government declare itself a subsidiary of General Electric? Will Vlad Putin be roped in to save Goldman Sachs? Meanwhile, the whole noisome rat maze of international counter-party deals was taking on sewer water and rodents of every nationality were seen leaping for daylight all over the fusty old motherlands of Europe. A cascading collapse of international finance is underway. While many fixers may jump heroically into the tumbling wreckage hoping to rescue this-and-that, the outcome by Friday is liable to be an unrecognizable smoldering landscape of the G-7’s hopes and dreams.

Some big questions for the week: will the Euro survive as a currency? Will the rush into the U.S. dollar continue even as the U.S. financial system dematerializes in a Fibonacci fever of accelerating de-leveraged infinitude? Will the remaining Big Boyz, Goldman Sachs and JP Morgan succumb to the counter-party hemorrhagic fever? Will great rows of lesser banking dominoes now start clacking onto their faces? Will all fifty states follow the leads of California and Massachusetts and line up at the U.S. Treasury’s hand-out window. Will the entity that calls itself the civilized world be left at week’s end with anything resembling money?

Your guess is as good as mine. We’ve entered the realm of phase change, where everything is slipping and nothing has settled. The final result, when the dust settles – and that may not be for weeks to come – will certainly be a poorer western world. Will it be so poor that it can no longer afford to import anything? Including oil from the land of the date palm? If so, we are really in for a rough ride, poised as we are at the edge of the heating season here in the temperate regions. Notice, by the way, that the $700 billion just approved by congress to bail out Wall Street is exactly the same sum of money that we send to the oil exporting nations this year.

Will millions stop receiving paychecks due to the turmoil in banking? It’s certainly possible, starting with the poor drones in Mr. Schwarzenegger’s motor vehicle bureau and eventually ranging to every payroll office in the land. Will Sarah Palin’s fellow Six-packers line up around the parking lagoons of the suburban banks trying desperately to withdraw the last seventy bucks in their checking accounts? (And will their thoughts in the event be: this economy is fundamentally sound….) Will the supermarket shelves of chipotle-flavored crunchy snacks and power drinks go empty as truckers refuse to deliver their loads without up-front payment? And how long does it take a hungry public to turn mean?

We could see a parallel problem in the motor fuel supply sector. So far, gasoline shortages have only appeared in parts of the Southeast USA, due to interruptions caused by two hurricanes. If the oil tankers quit offloading now for lack of credible payment, then the whole nation will get an interesting lesson in the shortcomings of the suburban development pattern.

The candidates’ debate Tuesday night should be interesting. I don’t expect too much give-and-take on the subject of East Ossetia this time around.

Even at this point, the current crack-up in world finance makes the 1929 crash and the events of the 1930s look in comparison like an orderly small town auction of somebody’s grandmother’s effects. Back in that sepia day, America had plenty of everything except ready cash. We had, especially, plenty of our own oil, and – you’re not going to believe this but it’s true – the stuff was selling for as little as ten cents a barrel, it was so abundant. And yet still, America in the 1930s plunged into a dark depression of inactivity, loss of confidence, and impoverishment.

This time around, things could get more disorderly. Personally, I think we may be beyond the reach even of fascist authoritarianism, because unlike the programmed industrial masses of the 1930s, we are unused to regimentation, to lining up at the factory gates and the movie theaters. Back then, society was so regimented that everybody wore uniforms in-and-out of the military. Look at movies from the 1930s. Every man-jack wore either a necktie and hat or overalls. The industrial masses behaved like termites. Once unemployment hit, they were waiting to be told what to do, to line up for something. It worked fabulously for Hitler, who took every advantage of this mentality. Luckily, the US went for Roosevelt (both FDR and Hitler entered office the same winter of 1933, by the way). FDR was more like everybody’s kindly Uncle Frank, and his reassuring persona enabled Americans to suck up their bad luck and altered circumstances. Many of them retreated to the family farm (which still existed then) and waited things out – and, anyway, the melodrama of the Great Depression soon resolved in the Second World War when Hitler’s love of regimentation led him into military misadventure. He shouldn’t have picked a fight with someone who had so much petroleum – end-of-story.

Okay, what happens here and now? To this point (9 AM Monday October 6, 2008) events have been proceeding under a veneer of still-just-barely-credible authority. We (as represented by Congress) have allowed Mr. Paulson to advance and activate his remedies. As things unspool further, he will be out of credibility, perhaps in a few days, and it’s unlikely that his successor will have any either. Mr. Bernanke has simply gone AWOL. Notice, he has vanished from the media landscape. We may soon be hearing the declaration of various "emergency" measures involving the allocation of food and the rationing of oil products. The Big Bailout of last week may be partially rescinded as it becomes obvious that it has had no effect – I believe about half the $700 billion has already been allocated, which is to say: lost.

I realize these things sound pretty extreme. But forces have been set in motion and momentum rules. One thing for sure: the American public is about to undergo a severe mood adjustment. There will be fewer American Idol fans and worshippers of Donald Trump by the close of business on Friday.

Regards,

James Howard Kunstler
for The Daily Reckoning
October 07, 2008

James 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.

"It’s pretty much all out war," said the chief financial economist at a large Japanese bank.

Yesterday, the battle was hot and heavy. By 8 PM last evening, the financial media was in a panic. An attack of stock market panics was rolling over the world. Japan was down 5%. India was down 4%. In Russia, they stopped trading twice. In Iceland, they stopped trading in financial shares all together.

By the time the battle reached Manhattan, the London press expected the whole island to be pulverized. And for a while, it did look as though U.S. stocks would be hammered to dust. The Dow fell 600 points at one point.

But by the end of the day, stocks were down…but not out. The Dow lost 363 points, to below 10,000. And this morning, there are signs of new life coming from Asia. One investor thought he saw a dove with a green twig in its beak.

What is going on?

The long-awaited sell-off seems to be here… Suppressed, denied, and delayed – Mr. Market is finally having his say. And he’s speaking so loudly, even the clowns are listening. This from Jim Cramer:

"Whatever money you may need for the next five years, please take it out of the stock market right now, this week. I do not believe that you should risk those assets in the stock market right now.

"I don’t care where stocks have been, I care where they’re going, and I don’t want people to get hurt in the market… I’m worried about unemployment, I’m worried about purchases that you may need. I can’t have you at risk in the stock market."

"I think what you have to do, if you can withstand it, is just ride it out."

It could be a long ride. By our reckoning, the bear market began in January 2000. Then it was held off by a huge barrage of cash and credit – which sent property prices soaring…and caused stock prices to rally. The Dow surpassed its January 2000 high – but only in nominal terms. Adjusted for inflation, stocks were still going down.

You remember our Trade of the Decade? Sell stocks on rallies; buy gold on dips. The second half of that trade has done very well. Gold rose from under $300 to over $900. Yesterday, it went up $25 – to $858. But lucky for you, it’s still available at a penny per ounce.

But the first half of the trade has never looked very good. We kept our "Crash Alert" flag on the mast and wondered – when will stocks fall?

It looks like they are falling now. Half the stocks on the NYSE hit new lows yesterday. Worldwide, stocks lost $2.2 trillion in value. The Russian stock market lost 22% in the last five days. Here in London, yesterday brought the biggest drop in FTSE history. And if this is the continuation of the major bear market that began in January 2000, it still has a long way to go. Typically, bear markets run for many years. After stocks peaked out in ‘66, for example, it wasn’t until ‘82 – 16 years later – that they finally hit bottom.

They have a long way to go in terms of price too. At major bottoms, stocks sell for 5-10 times earnings. This implies a Dow of less than half today’s level. Dow 5,000 – remember, you heard it here first!

But the war goes on. The forces of inflation (led by field marshals Hank Paulson and Ben Bernanke) are clearly on the defensive – desperately pumping cash and credit into the market to offset Mr. Market’s campaign of value destruction. The Treasury is blasting Wall Street’s bad debts – at a cost of about $700 billion. And the Fed itself seems to be firing all its ammunition at once. Bernanke told Barney Frank a couple of weeks ago that he had $800 billion to fight the war. And yet, here’s today’s headline from Bloomberg:

"Fed boosts cash auctions to $900 billion."

The Financial Times adds that the Fed is planning, for the first time, to make unsecured loans. Bloomberg goes on to note that the Fed’s balance sheet swelled more in the last week than ever before – to a record $1.498 trillion of ‘assets.’ What are these ‘assets?’ They used to be U.S. Treasury bonds. But the Fed is selling that relatively good paper to buy up the kind of paper that caused Bear Stearns and Lehman Bros. to go broke. It is bad enough – from a banking point of view – to be selling Treasuries in order to buy trashy credits and make loans against them. But now the Fed is going even further, making loans with no collateral at all. If the Fed were a publicly traded bank, we would rate it a sell. It isn’t public. But its money is. Be wary of it.

*** "Shoppers cut spending," says the New York Times. Analysts think we will see the first quarterly drop in consumer spending in nearly 2 decades.

"Crisis hits home," adds the Boston Globe.

Elsewhere in the financial news is collaborating evidence.

"Big discounts fail to lure shoppers," reports the Wall Street Journal. Restaurants are empty. Shopping malls are not even attracting strollers and gawkers – let alone people with money to spend. Auto lots are so quiet the salesmen take turns pretending to be customers – just to keep their skills at-the-ready. Even the private jet business is in a tailspin.

But don’t worry, dear reader. It’s not the end of the world. That’s just the way the world works.

Economist Irving Fisher described the process in 1933. When people get too far in debt, there typically comes a moment of panic when they rush to sell assets in order to pay it down. They know debt is a killer – especially when there is a danger they may lose their source of revenue. Then, as more and more people – and here we may as well be talking about big financial institutions – dump assets, prices collapse. This causes even more dumping. There’s a "stampeded to liquidity," said Fisher, as people try to raise cash and get rid of dodgy ‘assets.’

In other words, what is happening is just what you’d expect to happen. After a bubble, comes the crash. After a credit expansion comes a credit contraction. After life comes death.

So relax. It’s all a part of the plan…a part of the way things are supposed to work.

And of course, the authorities are supposed to do foolish and counterproductive things too. Misters Smoot and Hawley are always on call – ready, willing, and eager to make a bigger mess. Mr. Hoover is always in office too…with Mr. Roosevelt right behind him. They’re all more than happy to let the ‘up’ phase of a free economy take place. Heck, they’ll even claim credit for it. But come the ‘down’ phase – and they swing into gear trying to prevent it from happening.

*** Hedge funds are back in the news. Years ago, we explained how they were a "heads I win; tails you lose" business. The managers take big bets, because they are rewarded with a large part of the gains – typically 20% – if they win the bets. And if they lose, it’s not their money!

Sooner or later, the fund is bound to take a loss…and the customer is bound to pay for it. Sooner or later seems to be here now. Tontine Partners have lost 66% of their money so far this year. Copper River is down 55%. Maverick Levered is 35% in the hole. Tremblant is off 28%.

Hedge fund investors are going to regret giving all that money to the managers; they’re going to need it.

Until tomorrow,

Bill Bonner
The Daily Reckoning

All Fall Down originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

Why do the big deals always happen over the weekends? So the big boyz in government and finance can take off their neckties when they bargain with each other? So the markets will be closed and unable to register a response one way or another? So the shrinking fraction of the U.S. public that pays attention to anything besides NASCAR and pornography won’t catch the news Saturday evening?

This weekend’s big deal was the U.S. government taking over the "government sponsored enterprises" (GSEs) Fannie Mae and Freddie Mac that guarantee trillions of dollars in mortgages. The "guarantee" is supposedly accomplished by converting bundles of mortgages from the banks and loan companies that originate them (that make the contracts with the buyers of houses) into bonds that can be sold downstream. Risk was theoretically dispersed among the holders of these bonds. This all seemed to work during the long stable period when our cheap oil economy was chugging along, and house prices maintained a consistent relationship with incomes, and people paid their mortgages dependably. The whole system ran like a reliable machine – like a Chrysler slant-six engine!

Until the cheap oil age came to an end. Then, all parts of the system shook apart. It was the end of cheap oil that catalyzed the housing collapse and, by extension, the current huge financial crisis. But the run up to it was like a bounce off a high diving board into an empty pool. The bounce came around 2001 when it became apparent that the U.S. standard-of-living could not be maintained on incomes in a post-cheap-oil economy. The trauma of 9/11 prompted a new and utterly insane consensus to form that the US standard of living could be switched over from income to massive debt. All the normal brakes against irresponsible lending and borrowing came off – embodied in Alan Greenspan’s absurd statement that it was a good time to assume an adjustable rate mortgage when interest rates were at a historic low – meaning they could only be adjusted upwards. Why hold Greenspan responsible? Because he was at the apex of the authority vested with establishing norms, and he shoved our behavior into the realm of the recklessly abnormal, and he should have known better.

The public went along with it because "free money" and high living are fun. Their behavior was reinforced by other authorities – for instance, President Bush, who told Americans to go shopping after the 9/11 attacks. (They went shopping with credit cards.) Things really wobbled in 2005 – which was, coincidentally, the year of all-time world-wide peak conventional oil production – with hurricanes Katrina and Rita ripping through the Gulf of Mexico oil rigs as a dramatic highlight. (It was also the year that The Long Emergency was published.)

Since then, the U.S. economy and the financial part of it that became a nine hundred pound tail wagging a thirty-pound dog, has been held together with baling wire, duct tape, and band-aids. All the debt run up by all parties – home-owners, credit-card holders, business, banks, hedge funds, government – is not being paid back reliably, and all the leveraged arrangements that depend on it being paid back are coming apart. Thus, capital disappears. The wealth of a nation disappears. All that remains is the pretense that we are still a wealthy society

Fannie and Freddie are near the center of this black hole of debt. So far, the black hole has been "papered over" by the old stage magician’s trick of diverting the audience’s attention. The systemic wound that Bear Stearns represented, was covered up with a band-aid applied by the Federal Reserve’s exchange of loans for worthless securities. In fact, the capital of Bear Stearns actually did disappear – a mere residue of it, a few cents on the dollar, was shifted to JP Morgan as payment for taking the wrapper off the band-aid. But, basically, the money is gone.

Now, the same thing has happened with Fannie and Freddie, except that the scale is an order of magnitude greater. This time, the U.S. Treasury Department is assuming worthless paper and paying out much larger loans to enterprises that are functionally bankrupt. The exact nature of the government’s chartered "sponsorship" has always been ambiguous. Professional opinion has generally held that government backing was implied rather than explicit – but that’s a ridiculous internal contradiction that went unchallenged for decades as Fannie and Freddie’s Ponzi-style operation lumbered on (and their executives made off with obscene payouts). Now the government’s role has suddenly been made explicit. It will probably only make things worse, since the enterprises are too big and over-scaled to work under any circumstances, let alone insolvency.

One thing this points to is a truth that is uniformly overlooked by kibitzers: that what we developed over the past decade in America was not an "information economy" or a "consumer economy" but a suburban sprawl building economy, meaning an economy dedicated to building a living arrangement with no future. The climax of the sprawl building economy occurred in absolute lockstep with the climax of peak oil. You can date it virtually to the month – May, 2005. After that, the future asserted itself and all the financial expectations bound up with sprawl-building went up in a vapor – including the value of mortgages on suburban houses. Everything that followed has been an attempt to cover up this basic reality: that the way we live in America can’t continue.

The reason our energy debate is so hollow and idiotic is because we can’t face this basic reality. The fantasy-du-jour among both political parties is that we can become "energy independent." By this they mean we can keep on living the way we do by means other than oil. This is just not true. We have to make profound changes in everything we do from the way we inhabit the landscape to the way we produce our food. Lately, the only change we’ve shown any interest in is changing what our cars run on. But that is not going to rescue us, not even a little. Our inability to talk about anything else except the cars will drag us down into poverty and turmoil.

The housing market is not coming back. Ever. In the form that we knew it. The suburban project is over. That version of the American Dream is over. We’ll be a lot better off if we put aside dreaming altogether for a while and start focusing on reality instead – that part of the day when we’re awake and capable of actually doing things. We’ve got a lot to face and a lot to do.

The government takeover of Fannie and Freddie is just another papering-over of our fundamental problem – that until we embark on new ways of being a nation, of living differently and working differently on different things, the other nations of the world will not have confidence in us, or the paper we issue, and we will not really have confidence in ourselves.

I have believed all along – and said as much in The Long Emergency – that we would not get through this crisis without passing through a period of hardship. We’re entering it now. Even if the stock markets shoot up five hundred points today on the basis of the Fannie-Freddie deal (and the mistaken belief that our troubles are over), we are only at the beginning of a very painful workout. Personally, I think we’re in for financial carnage before the election. The Fannie-Freddie deal may be the place where the wheels really come off.

Regards,

James Howard Kunstler
for The Daily Reckoning
September 10, 2008

James 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.

Big tumble on Friday. Big rally on Monday. Big tumble on Tuesday.

Yesterday, the Dow fell 280 points, following a 289-point gain the day before.

We have a feeling the smart money is selling into this rally. Why? Because it is a bear market, and the smart money knows it…

The Daily Reckoning was right all along. At least, that’s the line we’re taking this morning. We said the stock market topped out in 2000 – and that it would be followed by a massive, long-term bear market. But for the past eight years, this bear market has been delayed…and disguised. It was delayed by the biggest tide of monetary and fiscal liquidity since The Flood. In a matter of months, the U.S. federal budget went from a couple hundred in surplus to several hundred in deficit – a stimulus of more than $700 billion.

Meanwhile, the Greenspan Fed cut rates to 1%…and only reluctantly increased them. In fact, they’re still lower than the inflation rate – 6 years later!

This boost of cash and credit held off a serious bear market decline. But it also brought about higher levels of consumer price inflation that disguised what was really going on. Though nominal prices remain more or less in line with where they were 8 to 10 years ago, inflation has knocked their real value down 25-30%.

Who noticed? And even now, people still believe they can get rich if they just hold "stocks for the long run." What they don’t realize is that the run can last longer than they can. The previous major peak in stock prices occurred in 1966. Investors then waited until 1982 – 16 years – for the next bull market to begin…and until 2000 for it to reach its apogee. Based on this arithmetic, the next bull market peak may not come until 2034.

What are we worried about? We just celebrated our 60th birthday. (About which, more below…) In 2034, we’ll be 86. We’ll just wait.

But if smart investors are selling stocks, what do they do with the money? Our advice has been to buy gold. From the looks of it, the smart money is not following that part of our advice. Yesterday, the price of gold fell $26 to $781.

The smart money is looking for safety. But it seems to think that it is better off in US Treasuries than in gold. Yesterday, while gold and stocks both dropped, Treasury bonds went up. The yield on the 10-year T-note fell below 3.6% (yields go down as prices go up). This makes us think the smart money is not as smart as it thinks. Our guess is that the credit of the world’s biggest debtor will prove less sure than they believe. The debts and financial obligations of the U.S. government continue to rise many times faster than the growth of the economy. Under the Bush administration, they’ve gone up faster than ever before in the history of the nation. We doubt that they will go up any more slowly if Obama is elected. Eventually, the United States will be recognized for what it is – a subprime borrower. And eventually, U.S. Treasury bonds will be looked upon as though they were Fannie Mae shares.

*** The U.S. government has just seized the mortgage lenders – Fannie and Freddie. How much that will add to the nation’s debts, we don’t know. No one knows. When the question was put to the man who should know – Hank Paulson – he replied: "We didn’t sit there and figure this out with a calculator."

Apparently, taking control of Mac and Mae was matter of national financial security, something you couldn’t put a price tag on. But the cost will be enormous. Sooner or later, someone is bound to get out a calculator.

As USA Today figured it, taxpayers are on the hook for trillions. You’d think you’d hear them squawking, with that kind of burden hoisted on their backs. But nobody really thinks he is going to pay for the housing bailout. Instead, the costs are expected to disappear – like the smell of cigarette smoke in a teenager’s room. Too bad, but the smell of debt lingers long after the money has been spent. Eventually, his mother opens the door.

"How will this end?" says Chris Mayer. "I suspect we [the U.S.] are on a path similar to that of Argentina. One day, we’ll have some major Argentine-style financial crisis. We’ll have Argentine inflation and a similar loss of faith in the banking system and the currency. The government will chew away and destroy a lot of wealth in the process.

"Hopefully, I won’t quote myself on that someday soon. In the meantime, though, I think one of the best things an investor can do is focus on buying useful and tangible assets that ought to hold their value against a depreciating paper currency. These assets include oil and gas, metals and minerals and land and water rights. The shares of the companies that own or find these assets ought to do well. Commodities will have their day in the sun once again."

*** Ouch. Lehman Bros. shares plunged to their lowest level in almost ten years yesterday, falling 45%. They reported a quarterly loss of $4 billion – their worst since going public, and second consecutive loss.

Clearly, the $7.8 billion in writedowns had a hand in pulling the investment bank down, but the execs are singing a different tune. They say that these numbers can be blamed on "attempts to shore up the company’s books."

CNNMoney.com reports: "During the quarter, the company said it drastically slimmed down both its commercial and residential real estate holdings by [settling] billions of dollars worth of assets as part of a multi-prong restructuring plan."

Despite this ‘multi-prong’ plan, which includes moving the firm’s commercial real estate assets into its own separate entity and reducing its residential real estate holdings by half, fears in the marketplace have not been quelled. The question on everyone’s mind: Will the bank reach the fate as Bear Stearns?

"The situation is not a pretty one," say our friends at Strategic Investment. "The big banks keep on revealing even bigger losses. Remember the knockout punch delivered by the S&L crisis in the 1980s? This is bigger. More than 2,500 banks, thrifts, credit unions and mortgage companies wrote a combined $1.5 trillion in subprime loans during the peak of the boom.

"When George W. Bush’s dad threw $150 billion at the S&Ls, it helped spark a three-year recession. What happens when Washington tries to defuse a multitrillion dollar time bomb?"

*** Your editor celebrated his 60th birthday on Saturday night. Elizabeth recorded the occasion in a letter to our daughter, now in Hollywood, awaiting her big break:

(Daily Reckoning sufferers are advised that this has nothing to do with money or other trivial matters):

"Dear Maria,

"I thought I would write to you about Daddy’s 60th birthday celebration in Annapolis while it is still fresh in my mind. It was a worthy pendant to the party at Ouzilly, though the setting was less magically beautiful, and though we missed you and Edward very much, and though there was no dancing and Daddy and Jules did not sing. Because of the threatened hurricane, the venue was changed from the boat to Londontown Publick Gardens (where I had a birthday party for Sophia about 18 years ago, when Henry was a little baby.)

"Tout Agora was there – though not quite, as we were only about 115 guests and Agora has about 500 employees worldwide. But the key people had been invited and were there: Mark Ford, Myles Norin, Matt Turner, Porter Stansberry, Addison Wiggin, Julia Guth, Laura Davis, Bob Compton (our financial controller), Daryl Berver, Jenny Thompson (health publications). The up and coming, to many whom I barely know. There were foreign publishers, like Annabel Koffman from South Africa, Ajit Dayal from India, and Vicki Burrill from Manchester, Toby Bray from London, Dan Denning from Australia, Martina Dunphy from Ireland, Catherine Dourlens from France, Laura Aramburu from Spain and of, course, our foreign associates, like dear Norman Rentrop, who gallantly offered me his arm crossing the paving stones so I would not trip! (I took it, so as not to hurt his feelings), and Helmut Graff. And there were many old friends: Doug Casey, Adrian Day, Lee Euler, Brian Smith, Jim Davidson, Kathy Peddicord, and even John Mauldin (who said he would send a case of barbecue sauce before his next visit!).

"We were supposed to leave for to the party at 6pm; there was a big yellow school bus which took Dad (accompanied by Jean) and the Agora contingents down to Edgewater, and others followed in cars. The party started with mingling on a porch. We were served delicious seafood hors d’oeuvres, including great big fresh shrimp. As you can imagine, I had very little time to really talk to anyone…

"We sat down in due time…Jean, Dad, and I had worked on a seating plan, so everyone had an assigned table, which mostly went well, I think…Daddy and I, naturally, were at the head table, and Dad was wedged in between Mark and Norman, while I got to sit between two charmers, Mark and Doug. Doug and I had a lively theological conversation. I think he was disappointed to find out that I am not much of a Christian dogmatist and his disbelief in the Immaculate Conception and the resurrection does not shock me. He’s been taking a course on the historical Jesus. He is like a big wide-eyed eager student, and despite his mockery of the ‘cannibalistic’ religion, I think he is a seeker of truth, and of God. It is part of what gives him great charm.

"Mark was the masterful master of ceremonies, and gave the whole event un bon ton…amusing, intelligent, sharp and affectionate. He introduced the toasts. The first was Norman’s…long, worthy…a tribute to his German thoroughness and intelligence, and of his affection for Dad. He ended by saying that since the invitation had excluded gifts for Bill, he would like to give me tw one a champagne glass (engraved with the date, etc.) to toast Daddy on Monday on his behalf and the other, an engraved silver photo frame. He ended with the Irish blessing, and many were the voices that joined in: ‘May the road come up to meet you, may the sun shine warm upon your back…’ That toast was followed by the first course and then we had a raft of toasts from Agora people…Addison and then Porter, each speaking of how grateful he was for the opportunity to develop ‘outside the box’ and of Dad’s generous spirit…and of his often absentminded approach to business. Porter gave a great little imitation of Dad ruminating over a crazy idea Porter had announced, turning up his eyes and pressing his lips together and finally responding, ‘What does it mean?’ Julia Guth paid me a sweet little compliment…she credited me for having been hired by Dad, who told her, she said, that he was going to take her on Elizabeth Bonner’s recommendation…because he always listened to me!

"My favorite toasts were those by Uncle Jim, Will, Jim Davidson and Mark. Uncle Jim congratulated Dad on being a good husband and father and a very good son, and, recalling how their mother had advised, ‘Be more like Fezziwig and less like Scrooge,’ concluded that Agora’s success showed how well he had heeded her counsel. Will gave a short toast in which he thanked his father for being such a rock of reliability, and recalled how impressed he had been as a child by the long trips Dad made every other weekend to pick him and Sophia up in Virginia. I was very touched that he should remember that effort.

"Jim, however, gave the most affecting speech. He recalled the early days…youth, starting the National Taxpayers Union together, and then, with a tear in his eye and a tremble of the lips, told how he had called upon Bill to sit with his mother after Dennis died, until Jim could get back from New Zealand. ‘Bill is my family,’ he said, ‘and I love him dearly.’

"Mark’s speech elegantly balanced wit and sincere affection for Dad. I thought it was great…Mark looked very handsome and fit, and spoke with fluidity and spirit. It was upbeat, optimistic, heartfelt.

"And then Dad spoke. He thanked many people and told little anecdotes about them. But his main theme was how lucky he had been in his life, a life in which incompetence and errors seemed to lead to new opportunities, and to work out for the best! As a crowning example, he told the story of how he and I got to know each other so many years ago. He and Jim had bought at auction an old Bentley, an aluminum body on a wood frame which, unbeknownst to them, was irreparably rotten. The car was a disaster from start to finish, and had been sitting on blocks in Hartge’s boatyard for a few years while various ill-starred efforts were made to rescue it. Finally, they decided to sell it at auction in Atlanta, Georgia, and Bill was to drive it down on a flatbed trailer. Jim asked if he would mind taking his girlfriend along so that he could meet her in Atlanta. (An amused chuckle from the audience.) Dad described how he started driving more and more slowly, how he lost his way and drove to Florida instead of turning west for Atlanta, and how finally -thank heavens! – one of the trailer tires went flat in the middle of the night. We never did get to Atlanta, but we spent two whole days together talking and laughing and acting out little sketches and altogether having a wonderful time. And laying the foundations for, later, falling in love. He asked me to stand up so everyone could ‘get a look at you.’

"After the dinner, as you might imagine, there was a continuation of the party at the hotel bar. I stayed until 1am, when I suddenly thought that if I did not lie down, Matt, our lawyer, would have to carry me to my room. Feeling a little woozy, I nevertheless retired with good grace. But I was an exception! After the bar closed, Jean, Sophia, Jules and Henry and many others partied in one of the rooms until the hotel security threw them out at 3 am. Tiffani Mauldin went and bought MacDonald’s meals for the crowd, and Henry told me that he was surprised by so many adults that he had thought were so straight-laced! In conclusion, it would seem that everyone had a good time.

"Well, darling, it was an occasion that I will always remember. And though we all missed you, you were present in our thoughts and in the minds of many guests. You have your own goals and your own life, but you are part of us and your aspirations are also our dreams for you.

With much love,

Mamma

That does it for us today. Until tomorrow,

Bill Bonner
The Daily Reckoning

Last Ditch originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.

The U.S. had taken advantage of temporary confusion in Russia, during the ten-year-long post-Soviet-collapse interval, and set up a client government in Georgia, complete with military advisors, sales of weapons, and even the promise of club membership in the Western alliance known as NATO. These blandishments were all in the service of the Baku-to-Ceyhan oil pipeline, which was designed specifically to drain the oil region around the Caspian Basin with an outlet on the Mediterranean, avoiding unfriendly nations all along the way.

At the time this gambit was first set up, in the early 1990s, there was some notion (or wish, really) among the so-called western powers that the Caspian would provide an end-run around OPEC and the Arabs, as well as the Persians, and deliver all the oil that the US and Europe would ever need – a foolish wish and a dumb gambit, as things have turned out.

For one thing, the latterly explorations of this very old oil region – first opened to drilling in the 19th century – proved somewhat disappointing. U.S. officials had been touting it as like unto "another Saudi Arabia" but the oil actually produced from the new drilling areas of Kazakhstan, Turkmenistan, and the other Stans turned out to be preponderantly heavy-and-sour crudes, in smaller quantities than previously dreamed-of, and harder to transport across the extremely challenging terrain to even get to the pipeline head in Baku.

Meanwhile, Russia got its house in order under the non-senile, non-alcoholic Vladimir Putin, and woke up along about 2007 to find itself the leading oil and natural gas producer in the world. Among the various consequences of this was Russia’s reemergence as a new kind of world power – an energy resource power, with the energy destiny of Europe pretty much in its hands. Also, meanwhile, the USA had set up other client states in the ring of former Soviet republics along Russia’s southern underbelly, complete with U.S. military bases, while fighting active engagements in Iraq and Afghanistan. Now, if this wasn’t the dumbest, vainest move in modern geopolitical history!

It’s one thing that U.S. foreign policy wonks imagined that Russia would remain in a coma forever, but the idea that we could encircle Russia strategically with defensible bases in landlocked mountainous countries halfway around the world…? You have to ask what were they smoking over at the Pentagon and the CIA and the NSC?

So, this asinine policy has now come to grief. Not only does Russia stand to gain control over the Baku-to-Ceyhan pipeline, but we now have every indication that they will bring the states on its southern flank back into an active sphere of influence, and there is really not a damn thing that the U.S. can pretend to do about it.

We could have spent the past ten years getting our own house in order – waking up to the obsolescence of our suburban life-style, scaling back on the Happy Motoring, reconnecting our cities with world-class passenger rail, creating wealth by producing things of value (instead of resorting to financial racketeering), protecting our borders, and taking the necessary measures to defend and update our own industries. Instead, we pissed our time and resources away. Nations do make tragic errors of the collective will. The cluelessness of George Bush is nothing less than a perfect metaphor for the failure of a whole generation. The Boomers will be identified as the generation that wrecked America.

So, as the vacation season winds down, this country greets a new reality. We miscalculated in Western and Central Asia. Russia still "owns" that part of the world. Are we going to extend our current land wars there into the even more distant and landlocked Stan-nations? At some point, as we face financial and military exhaustion, we have to ask ourselves if we can even successfully evacuate our personnel from the far-flung bases in Uzbekistan and Kyrgyzstan.

This must be an equally sobering moment for Europe, and an additional reason for the recent plunge in the relative value of the Euro, for Europe is now at the mercy of Russia in terms of staying warm in the winter, running their kitchen stoves, and keeping the lights on. Russia also exerts substantial financial leverage over the U.S. in all the dollars and securitized U.S. debt paper it holds. In effect, Russia can shake the U.S. banking system at will now by threatening to dump its dollar holdings.

The American banking system may not need a shove from Russia to fall on its face. It’s effectively dead now, just lurching around zombie-like from one loan "window" to the next pretending to "borrow" capital – while handing over shreds of its moldy clothing as "collateral" to the Federal Reserve. The entire US, beyond the banks, is becoming a land of the walking dead. Business is dying, home-ownership has become a death dance, whole regions are turning into wastelands of "for sale" signs, empty parking lots, vacant buildings, and dashed hopes. And all this beats a path directly to a failure of collective national imagination. We really don’t know what’s going on.

The fantasy that we can sustain our influence nine thousand miles away, when we can’t even get our act together in Ohio is just a dark joke. One might state categorically that it would be a salubrious thing for America to knock off all its vaunted "dreaming" and just wake up.

Until next time,

James Howard Kunstler
for The Daily Reckoning
August 19, 2008

James 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.

Today, we take a break. Yes, dear, dear reader…there will be little reckoning today. Short Fuse will write tomorrow’s issue – and then The Daily Reckoning is taking the rest of the week off, as Fuse and Addison are traveling to Omaha for the premier of I.O.U.S.A. Elizabeth needs help preparing for her big hullabaloo. We’re expecting about 150 people for a soiree on Thursday night, about which, more below…

Before we leave you, though…we have just a couple thoughts…

We’re sticking with our views and our investments – either until we’re proven wrong or we go broke, or both.

Our view is that the great dollar-based credit expansion of the last half-century is coming to an end. And our guess is that it will end with BOTH a bang and a whimper – that is, both a deflationary contraction…and an inflationary blow-off. A deflationary contraction is the market’s normal response to an inflationary boom. And an inflationary blow-off is the market manipulators’ normal response to a deflationary contraction; but, we hasten to add, there is no guarantee that they can pull it off.

So, as usual, we live in a world of great unknowns…and lesser unknowns…and things we don’t even know we don’t know. What we do know is that stocks have not yet bottomed out (they are nowhere near their low points)…and bonds are still expensive (people still lend to the U.S. government for 10 years at less than 4% – that’s substantially less than the current consumer inflation rate)…and the dollar is still treated with respect, even though its long-term value is zero. There is a lot that can go wrong that hasn’t gone wrong yet, in other words. Until it does, we’ll stick with gold.

*** "The worst is to come." Sometimes it’s nice to hear things laid out bluntly – and long time sufferers know that we aim to do that at The Daily Reckoning, as well. Former chief economist of the IMF, Professor Kenneth Rogoff is not one to sugarcoat or mince words. He told attendees of a conference in Singapore that in the worldwide credit crunch, "The U.S. is not out of the woods. I think the financial crisis is at a halfway point, perhaps. I would even go further to say the worst is to come."

Professor Glass-is-Half-Full went on to say: "We’re not just going to see mid-sized banks go under in the next few months, we’re going to see a big one – one of the big investment banks or big banks."

And the dark twins of mortgage finance didn’t escape unscathed, not by a long shot. Yesterday, on the heels of a report that suggested that the Treasury may have no choice but to nationalize Fannie and Freddie, investors began dumping shares.

The chance of nationalization of the mortgage giants scares the beejeezus of out foreign investors, especially our friends in Asia. And with good reason…while Japan wasn’t too exposed to subprime, they do hold around ¥9.6 trillion in bonds and mortgage-backed paper issued by finance groups. We all know that these securities aren’t guaranteed by the U.S. government. Whoops…

*** As if there wasn’t enough bad press for Fannie, David Hilzenrath at the Washington Post printed a pretty damning article, titled "Fannies’s Perilous Pursuit of Subprime Loans."

The article is definitely worth a read through, and here are some highlights to tide you over:

In a confidential memo to his board, chief executive Daniel Mudd (has anyone ever had a more unfortunate last name?) "said one of Fannie Mae’s achievements in 2006 was expanding its involvement in the market for subprime and other nontraditional mortgages. He called it a step ‘toward optimizing our business.’"

We know…yikes. But wait, it gets worse. The Post continues:

"Internal documents show that even late in the housing bubble, Fannie Mae was drawn to risky loans by a variety of temptations, including the desire to increase its market share and fulfill government quotas for the support of low-income borrowers.

"Fannie Mae documents from the period, obtained by The Washington Post, paint a picture of a company with the dual incentives of fostering affordable housing and making money, and of one caught between the imperatives of increasing its market share while avoiding excessive risk. In a bid to juggle these demands, the company’s executives took on risks they either misunderstood or unduly minimized.

"Fannie Mae aimed to benefit from subprime loans and expand the market for them – and hoped to pass much of the risk on to others, documents show. Along with subprime loans, which were typically issued to borrowers with blemished credit, the company targeted so-called Alt-A loans, which were often made with no verification of the borrower’s income."

And so on. While it’s not a pretty picture, the article doesn’t say anything that everyone didn’t already assume.

*** Meanwhile, back at home, people are already coming and going so fast – we can barely keep up with them. Jules came home last night. Henry is leaving today – as a first year student at the University of Virginia; he has to show up early. And as a "foreign student," he has to go earlier still.

"Are you sure you’re a ‘foreign student’?" we wanted to know.

"Yeah…I haven’t lived in the U.S. since I was 6 years old. And I’ve only studied in French. So I’m considered as a foreigner."

Tomorrow, cousins…daughters…and friends arrive for the big party.

The original reason for the party was a big birthday milestone. Your editor turns 60 in a couple of weeks. Then, we realized that most of our friends and family couldn’t make it to France…so we planned a another party for Annapolis, Maryland a week or two later. But since the party in France was already underway, we turned it into a "summer celebration." Celebration of what? Well, we’ll have some explaining to do…

Reality Bites Again originally appeared in the Daily Reckoning. The Daily Reckoning, a FREE daily e-letter, offers a "uniquely refreshing" perspective on the global economy, investing, and today's markets.