"Far From Normal"

There is a tough truth that the American public needs to face: we have become a much poorer society and are now faced with the unavoidable task of making major changes in how we live. James Howard Kunstler explains…

Those were the words that Fed chairman Ben Bernanke used to describe the financial markets (and by extension the economy) these heady spring days when everybody else with a rostrum, it seems, has pronounced the so-called liquidity crisis contained. There’s a great wish for American finance to return to business-as-usual – raking in fantastic fees for innovating new modes of tradable paper, and engineering mergers and buy-outs that generate huge fees plus $100 million kiss-offs for corporate CEOs in the noble struggle to dismantle America’s productive capacity – but apparently events are still out of hand.

The Federal Reserve itself has been instrumental in promoting abnormality by doing everything possible to prevent the work-out of bad debts in the system. Since money is loaned into existence, and loans are debts, the work-out of bad debt suggests the discovery that a lot of money has disappeared – which is exactly the case. The Fed has postponed the work-out by sucking up truckloads of impaired, untradable securities in exchange for loans to giant banks who don’t have enough cash on hand to pay their janitors.

Personally, my theory has been that the specter of peak oil pretty clearly implies the inability of industrial economies to continue producing real wealth in the customary way. In the face of this, either consciously or at a more mystical level, the worker bees in banking recognize that, in order to maintain their villas in the Hamptons, money has to be loaned into existence some other way (than in the service of industrial productivity).

We’ve tried just about everything else. There was the so-called service economy, an attempt to replace manufacturing with hamburger sales. Then there was the information economy, in which work would be replaced with knowing about stuff. Then there was the tech thing, which was about bringing internet companies that existed only on the back of cocktail napkins to the initial public offering stage of capitalization – which allowed a few-hundred-or-so thirty-year-old smoothies to retire to vineyards in the Napa Valley, while hundreds of thousands of retirees lost half the value of their investment portfolios. Then there was the housing boom, which was all about the creation of more suburban sprawl under the theory that houses (or "homes" in the jargon of the realtors) represent an obvious sort of wealth, and therefore that using houses as collateral would allow humongous sums of money to be loaned into existence – along with massive fees for structuring the loans into bundles of bond-like thingies.

This has all failed now because the racket went too far. Every possible candidate for a snookering got snookered. Too much collateral for which there were no takers went into the ground. The insane run-up in house values made a downward price movement inevitable, and as soon as the turnaround happened, it fell into the remorseless algebra of a deflationary death spiral. More importantly, however, this society ran out of tricks for loaning money into existence and instead began to experience the pain of money thought-to-be-in-existence being defaulted into a vapor – and worse, these defaults led to logarithmic chains of money destruction in its places of origin, the investment banks that had created the racket.

The important part of this is that the money is gone. What makes matters truly eerie is that the "bubble" in suburban houses has occurred at exactly the moment in history when the chief enabling resource for suburban life – oil – has entered its scarcity stage.

The logical conclusion of all this is not what the American public wants to hear: we have become a much poorer society and are now faced with the unavoidable task of making major changes in how we live. All the three-card-monte moves at the highest level of finance lately amount to an effort to avoid the unavoidable, acknowledging our losses. Certainly the political fallout of all this will be awesome. But it’s not about politics, really. It’s about the entire society’s inability to form a workable new consensus of reality.

It’s hard to predict how long these institutions at the heart of our economic system can linger in the "far from normal" limbo of pretending that money has not been defaulted out of existence. Since the same process is underway in Great Britain and Spain, places beyond the control of Bernanke, Secretary Paulson, and the Boyz on Wall Street, and since actions and reactions there will affect the destiny of money here, its hard to escape the conclusion that we’re at most months away from the brutal recognition that Wall Street has managed to bankrupt itself (and, by extension, the United States). This is dark heart of the matter of which no one dares speak.

Meantime, on the ground, everyone in the land sees the gas pumps levitate beyond the $4 hash mark, and notes with bugged-out eyes the double-digit price stickers on common supermarket items, and feels the rush of blood from the extremities when some check-out clerk at the Wal-Mart declares that a certain proffered credit card is maxed out, and some strangers in overalls – the neighbors say – managed to hot-wire the GMC Sierra in the driveway, and took it away….

The candidates for president will have a lot to talk about. I wonder if they’ll dare to.

Regards,

James Howard Kunstler
for The Daily Reckoning

May 28, 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.

The big news today is happening on the highways…

But first, let’s look at the basic figures.

Yesterday produced a weak rally in the stock market – with the Dow up 68 points. Oil lost $3, to close at $128. The dollar rose slightly. And gold got whacked for a $17 loss, but still closed above $900.

You’ll remember how we left you yesterday…we hope you remember, because we can’t. But we think we said that the U.S. consumer should be cutting back. His energy is much more expensive. His food is more expensive. His house is going down in price. He can’t borrow as he used to. He has to cut back, we keep saying; he has no choice. And when he cuts back, the United States has to go into a slump. And here we agree with Warren Buffett; it will be longer and deeper than most people think.

We agree with George Soros too; the slump will result in a "noticeable decline in living standards" for most Americans.

But as we signed off, we noted that we were waiting for the evidence…the proof that the consumer is cutting back.

Now we have it. And it comes from the highways.

"Steepest drop in driving since ’40s," says a CNN headline item.

According to the report, Americans drove 11 billion miles less this past 12 months than they did the year before.

In the 1940s, the reason for the cutback in driving was obvious to everyone – the country was at war. The auto companies practically stopped making cars so they could turn their production to tanks, jeeps, and trucks. Oil too was diverted from leisure use in the 48 states and used to power ships and airplanes.

But after the GIs came home, they got married, bought cars, filled up their tanks, and headed for the open road. Every year since, until very recently, the national odometer showed more miles driven than the year before.

Now, something big has happened…for the first time since WWII, Americans are driving less.

America’s truckers, too, are pulling off the road. A report in the New York Times says that many cannot afford to fill their tanks. Diesel fuel is selling for as much as $5 a gallon. This puts the cost of filling a 250-gallon tank well above $1,000. And many truckers fill their tanks three times a week.

Naturally, the auto industry has to downshift. Not only because gasoline is so expensive, but also because the average household is struggling to pay its other bills too. After it pays the interest on its debt, it has less left over than ever before. And then, it has to pay for food, gasoline…and other things, many of them imported. Of course, food and energy are rising sharply, but until recently Americans could count on low-cost Asian producers to cut prices on our imports. Now, import prices are rising at 14.8% – the highest rates since the early ’80s.

We’ve already accused the official numbers of lying; now we call Bill Gross, who runs the biggest bond fund in the world, PIMCO, to the stand, to help make our case.

"If we calculated inflation the same way other countries do it, our CPI would be 1% higher," says Gross. (Bond yields would be 1% higher too, he notes.)

Prices are going up more than the official numbers tell us, in other words. About the only thing that is going down, for the typical American, is the price of his house. And here the news that house prices are going down more than we thought too. The latest survey results from Case/Shiller show the average house in America’s largest 20 cities down 14.4% in March over a year earlier – the largest drop on record.

Who can blame the lumpenconsumer for getting down in the dumps? Everything that we warned him about is happening to him. His bills are coming due…his assets are going down…and his income is falling.

Yes, dear reader, that too. The job numbers show a modest decline in employment. What they don’t show is the many people who are "self-employed" who are having a hard time finding work. One of the great benefits of the Internet was that it allowed workers much more flexibility. Many found they could leave the 9-to-5 office routine, move to the beach or the mountains and still continue to work online. Here in London, for example, there are probably thousands of Americans who are enjoying life in the city, while continuing to work via the worldwide web. We see them in Starbucks, for example, with their heads down and their laptops up. Freelance work was a big advantage for the former employee, because it allowed him to go where he wanted when he wanted. It was a relief to the employer too because it permitted him to reduce internal office costs and fixed expenses. But in a downturn, the easiest thing for an employer to cut is the out-of-office staff. He can just send them an email!

Often these freelance consultants are mature workers who then find it very difficult to get back into the regular market.

"Out of a job and out of luck at 54," begins an article on the subject in today’s press. Apparently, there are many thousands of people who are "too young to retire, too old to get a new job," says the report.

Curiously, these facts and circumstances are not showing up in the stock market. Instead, they are showing up in consumer confidence numbers – which continue to sink. Traditionally, stock indices and consumer confidence numbers coincide. When stocks go up, people are confident; when they go down, they lose heart…but not necessarily in that order. In 2005, however, the numbers began to diverge. Stocks rose. Confidence fell. Investors saw clear sailing. Consumers saw rough seas.

Who’s the better weather forecaster? We’ve put our money on the consumers.

*** Another item from the automobile sector. An auto dealer south of Kansas City has tried to motivate buyers by offering a free gun with every new auto. Predictably, the European press regards this as more proof that Americans are all gun-crazed yahoos.

We don’t know why they needed more proof. We thought the matter had been settled; of course Americans are gun-crazed yahoos. At least, the best of them are.

A gun can be a useful accessory in an automobile. You never know when you will need it. How about when you are driving down the road in West Virginia, for example? You see a nice 6-point buck out in the field. You can just roll your window down and take a shot. If you get him, you can quickly stash him in the back of the pickup and put a tarp over him, before the game warden comes along. Or, how about when you’re driving late at night and having a hard time staying awake? Everyone knows it’s unsafe to drive when you’re sleepy. So try a little target practice at the beer cans along the side of the road; that’ll help wake you up – especially when you see the blue and red lights swirling behind you. There are probably lots of other uses for a gun in an automobile that never occurred to us.

*** As mentioned in these pages, if you’re going to give advice…you have better be prepared to get some. Now, the head of China’s banking regulators says the West has to get its banking house in order. So far, reports colleague Manraaj Singh, banks have written down some $380 billion of subprime related debt. Of that, only $1.3 billion was in Chinese banks. "They must be doing something right," he opines.

"But who knows what is hidden in Chinese bank balance sheets," we replied.

*** Poor Maria. Our daughter spent three years in theatre school in London. Then, almost immediately after graduation, she got the lead role in a little theatre on the South Bank of the Thames. But since then, nothing.

An actor’s life is misery, as near as we can tell. The work is irregular at best. Rejection is a fact of life…along with poverty. Harrison Ford gave up. He was getting an odd part here and there…not enough to support himself. So, he switched to carpentry, helping to build props and sets for the film industry. Finally, someone offered him a role in a movie. He turned it down; he could make more building stage sets, he replied. The producer gave him an extra $10…and he agreed. Finally, in Star Wars, after many years of hard work, he got his big, big break.

"I don’t know what is wrong," said Maria. "I work so hard to get the parts. And then, they say I’m too tall…or they want a blond…or someone not so pretty…or someone prettier. I don’t know what to do…but I’m running out of self-confidence. It’s one rejection after another. I don’t think I can take it much longer."

Maria is working a part-time job as a bartender in a pub, just to earn money. But once or twice a week she tries out for a role in a play or a movie. When the movie calls for an English girl, she puts on her English accent. When it calls for an American, she switches to Americanese. Last week, she almost had the role of a Russian prostitute.

"I was perfect for that part," she said, almost sobbing. "I had the accent down pat…I looked like a Russian prostitute…I even copied some of their gestures…but I didn’t get it."

Then…

"Daddy," she began a conversation last week, "this just isn’t working out. I’ve got to do something new. I’m not getting any work here. And I’m at the beginning of my career. If I can’t get any work, I won’t have a chance to learn. I won’t get better. And I won’t have a career. So, I’ve decided to give up."

"Give up? I thought acting was all you ever wanted to do. It’s all you ever talked about. It’s all you’re trained for."

"No…not give up on acting. I’m giving up on London. I’m going to LA."

In September, Maria is setting off…leaving for the West Coast. For the first time in her life, she will be separated from her family for a long time.

Poor Dad.

Until tomorrow,

Bill Bonner
The Daily Reckoning
May 28, 2008

P.S. Addison and Short Fuse just sent us this note from Washington, D.C., where they just interviewed Alan Greenspan for I.O.U.S.A.

"We arrived at Dr. Greenspan’s office a bit early, and were sitting in the waiting room when the doors opened…and in walked the Maestro himself. He surveyed the four of us and said, ‘Ah. A formidable crew.’"