Easthampton Burning?

In the typhoon of commentary that’s blown around the world a step behind the financial tsunami that’s wrecking everything, two little words have been curiously absent: “fraud” and “swindle.” But aren’t they really at the core of what has happened? Wall Street took the whole world “for a ride” and now a handful of Wall Street’s erstwhile princelings have shifted ceremoniously into U.S. Government service to “fix” the problem with a “toolbox” containing a notional two trillion dollars. This strange exercise in financial kabuki theater will shut down sometime between the election and inauguration day, when the inaugurate finds himself president of the Economic Smoking Wreckage of the United States. What will happen?

I have thought for some time that things could get dangerously out of hand in America, despite our exceptionalist notion that we are immune to the common plot-lines of history. For starters, inauguration night will seem more like Halloween, as those two little words fly in to haunt the new president. So, a large and looming question is: Who will be appointed the next attorney general of the U.S. (to replace the human sash-weight currently occupying the office), and how soon will the federal marshals be scouring the wainscoted hallways of Goldman Sachs, JP Morgan Chase, not to mention a thousand Greenwich, Connecticut, hedge fund boiler rooms, with man-sized nets?

A storyline is already emerging to the effect that these birds really didn’t quite know what they were doing in grinding out that multi-trillion dollar basket of alphabet securities sausage (a theme on Sunday’s 60 Minutes broadcast). Nobody will buy that line of BS, though — and certainly not in the courtroom where, for instance, Mr. Hank Paulson will have to answer why his own firm of Goldman Sachs set up a special unit to short its own issues. It will be edifying to see how they answer.

In the meantime, however, millions of Joe-the-Plumber types will have gotten their pink slips, slipped helplessly into foreclosure, watched the repo men hot-wire their Ford pickups, and eaten down the kitchen cupboard to a single box of Kellogg’s All-Bran (which had been sitting there for eleven years infested with weevils). They will be watching the official proceedings in the federal courtrooms with jaundiced eyes as they hunch in their tent cities, in the rain, sipping amateur-brand raisin wine bartered for a few snared rock doves. How long before the hardier ones among them venture out to Easthampton with long knives and matches?

It will bring little satisfaction though, and the disappointment could lead to a more inchoate outbreak of civil disorder that would be more like a free-for-all of vengeance and grievance. There will be a great outcry for the new government to “do something!” Perhaps that will finally bring the troops home from Iraq — only for them to find that the Homeland has become Iraq….

If the financial system completes its self-destruction — and that’s looking more and more like a real possibility — there will be several pretty awful consequences. One is that the United States will be forced to declare bankruptcy by repudiating its own debt. All those who took refuge in U.S. Treasury bonds and bills will be like folks who sought shelter from a tornado in their out-house. That would go hand-in-hand with a massive currency inflation that is likely to follow the current phase of compressive liquidating deflation — in which every possible asset is being sold off for less than its face value. That process is self-limiting due to the finite supply of real salable assets. The trillions of dollars injected into the system while this is happening must eventually snap-back as people shed the last fungible article and compete for necessary commodities like food and fuel with dollars that are suddenly plentiful but worthless. At some point, the government may have to summon up a new currency. I don’t think it will be anything like the “Amero” which the paranoid fringe incessantly mutters about as part of their fantasy in which the U.S., Mexico, and Canada all join up to become one country. But any “new dollar” would probably have to be backed by gold.

As we discover ourselves to be a much poorer nation, one of my correspondents put it: “the bogus risk-swapping economy must be replaced by a net value-added economy.” That means actually making things, growing things, and rebuilding things, and that can only begin to happen if we do not stupidly sucker ourselves into a war with other nations who are liable to be extremely ticked off at us for destroying the global economy, but also competing with us for a dwindling supply of resources that are not equitably distributed around the world.

This means especially oil. I hope you’re enjoying the temporarily cheap prices at the gas pumps, because this is purely a function of the compressive deleveraging that is going on right now, as contracts and positions held in energy markets are being dumped by everybody and his uncle to raise cash to meet margin calls. My guess is that oil and its byproducts will become much more difficult to get in the months ahead — not just more expensive, but literally not available. The current falling price of oil has little to do with the real supply and demand fundamentals. It’s simply a function of the markets being in near-total disarray. We’re running on current inventory, and running it down. In the background, all kinds of peculiar and terrible things are happening. The entire apparatus of allocation and distribution is being thrown out of whack. The smaller tanker operations are going bankrupt. The “less-developed” nations are heading back to the 17th-century level of daily life without electricity. The oil exploration and development projects that were planned for hard-to-get oil netting $100-a-barrel minimum — in places like the deepwater Gulf of Mexico, Siberia, and Central Asia — are being shelved, which means the world has less of a chance to offset coming depletions in old fields.

The bottom line of all this is that we in the U.S. could find ourselves in a situation of shortages, hoarding, and rationing. This would pretty much kill off whatever remains of the previous shuck-and-jive economy — hamburger sales, theme park visits, NASCAR weekends — while it makes obvious the failures of our suburban living arrangements (and drives the value of housing there closer to zero). My pet project of restoring the American passenger railroad system might seem pretty minor in the face of all this, but it’s at least a place to start that will accomplish several things: allow people and things to get places without cars and trucks; put many thousands of people to work at many levels doing something of direct, practical value; and be a small step in rebuilding confidence that we are a society capable of accomplishing something.


Jim Kunstler
October 30, 2008