The Share-Strangled Banner at Half Mast

“Crash!” says one tabloid.

“Black Monday,” proclaims another headline.

Yesterday saw stocks collapsing in almost all time zones. It was the worst one-day fall in Britain since September 11th, says the Financial Times.

“Panic sparks plunge in global markets,” says today’s FT headline.

This morning, markets in Asia are still falling. Stocks in Indonesia are off 8%. Shanghai is down 4%. Hong Kong shares fell 8%. And in India, they had to close the Mumbai stock exchange after shares fell 9.8% in the first minutes of trading.

Oh say does that share-strangled banner yet wave

O’er the land of the free lunch…?

We’re talking about our own “Crash Alert” ensign…the one in black and blue colors…with a skull and crossbones on it. The poor flag is a bit tattered. A bit faded. A bit lonely. But there it is…

What is most astonishing about the current meltdown in stocks is the astonishment with which it is greeted. Don’t people know that stocks go down as well as up? Guess not…

But one time zone – Eastern Standard Time – was spared yesterday…thanks to Martin Luther King. It was a national holiday in the United States of America. So, Wall Street missed the panic…at least, for 24 hours. But today is a different story all together…

The Fed cut rates 75 basis points a week before their regularly scheduled meeting next week. This is the biggest cut since 1982, after rates had been driven up to 20 percent to fight inflation.

“The committee took this action in view of a weakening economic outlook and increasing downside risks to growth,” the Federal Open Market Committee said in a statement.

The Dow was down 450 points this morning – but our Trade of the Decade prevailed. After hitting a three-week low yesterday, gold rallied after the Fed announcement, up to $874.64 an ounce – up ten dollars from yesterday. Other commodities didn’t do so well though…oil and based metals took a tumble, as did agricultural commodities.

Yes, dear reader, the top in the credit cycle was reached – probably about nine months ago. Now, we’re on the downhill run. The goal is not to make money on this slope…but to avoid accidents. Watch out for trees and rocks…check the brakes…put on your seatbelts…and try to arrive at the bottom in one piece. Then, you can begin to make money again. At least, that’s the traditional formula.

Typically, assets go down in price during a credit contraction; as the mistakes of the exuberant period are corrected, things turn out to be worth less than people thought. Relatively speaking, the value of money goes up. People have less faith in business plans, in anticipated rates of return, in earnings estimates, in credit ratings, and in sophisticated financial instruments…and more faith in cold, hard cash.

But that’s where this story gets a little fishy. The cash people know is not as cold and not as hard as it once was. And now…surely, this jolt to equity markets is going to put more pressure on both Bush and Bernanke to come up with ways to heat up…and soften up…the green paper. Today’s Wall Street Journal tells us that more and more economists are saying the coming recession could be “severe.” And the head of the IMF came out and said that the international financial crisis had become “serious.”

It’s no surprise that the Fed cut rates before their regular meeting later this month. Congress may get behind Bush’s fiscal stimulus quickly too. Neither initiative is likely to restore the glory years of the boom…but they could do great damage to the dollar.

Asian exporters and the oil exporters in the Gulf have trillions of dollars. Until now, they took the decline in the value of the dollar with grace and good humor. First, they believed the fall in the greenback was gradual and limited…and second, they saw how it enabled them to increase sales to North America. But now, things are changing. They are going to see the feds acting in desperation…and they are going to worry about a big, uncontrolled decline in the value of their reserves. Plus, with America entering a recession, they can expect to see no further sales gains.

This suggests to us that that dollar in particular…and paper currencies, generally…may not be the cold, hard cash you want to hold. Maybe gold won’t be so bad, after all…find out how to pad your portfolio with the yellow metal – for just a penny per ounce.

*** More thoughts? You want more thoughts?

Well, first our colleague Dan Denning sends this old classic from the ’70s…Dan Akroyd pretending to be President Jimmy Carter on Saturday Night Live and 30 years ahead of his time:

“President Jimmy Carter: Good evening. On Tuesday, we Americans will have the opportunity to exercise our role as citizens in a free democracy. Yet, only a third of the eligible voters will actually cast ballots. The other two-thirds are, in a sense, very lucky. Because they do not know what’s going on.

“Last week, I delivered a message on inflation. Since then, the dollar has dropped in value, the stock market has sustained record losses, and the whole Dow price index increased 0.9%. In other words, our economic system is screwed, blued and tatooed! We just have to face the fact that there is simply no way to fight inflation in a capitally-intensive, highly-technological, conflict-riddled, anything-for-a-thrill world of today. That’s why, tonight, I want you to try to look at inflation in an entirely new way: Inflation is our friend.

“For example, consider this: in the year 2000, if current trends continue, the average blue-collar annual wage in this country will be $568,000. Think what this inflated world of the future will mean – most Americans will be millionaires. Everyone will feel like a bigshot. Wouldn’t you like to own a $4,000 suit, and smoke a $75 cigar, drive a $600,000 car? I know I would! But what about people on fixed incomes? They have always been the true victims of inflation. That’s why I will present to Congress the ‘Inflation Maintenance Program’, whereby the U.S. Treasury will make up any inflation-caused losses to direct tax rebates to the public in cash. Then you may say, ‘Won’t that cost a lot of money? Won’t that increase the deficit?’ Sure it will! But so what? We’ll just print more money! We have the papers, we have the mints. I can just call up the Bureau of Engraving and say, ‘Hi! This is Jimmy. Roll out some of them twenties! Print up a couple thousand sheets of those Century Notes!’ Sure, all these dollars will cause even more inflation, but who cares? Everyone will be a millionaire!

“In my speech last week, I said that America would have to undergo an austerity program, but since this revolutionary new approach welcomes inflation, our economy will be free to grow, and we can spend, spend, spend! I believe the watchwords for the ’80s should be ‘Let’s Party!’ And in that spirit, I’d like to say, ‘Live, from New York, it’s Saturday Night!'”

*** “Interestingly,” says Short Fuse, reporting from the Sundance Film Festival, “one of the taglines that we’ve batted around for I.O.U.S.A. is, ‘The party’s over.’ Seems pretty fitting right now, eh?

“The festival has been going quite well thus far – every one of our five screenings is entirely sold out…and Super-Size Me’s Morgan Spurlock attended our premier this past Saturday.

“But what was really amazing,” continues Short Fuse, “was what happened at the screening on Sunday. After each film is a Q&A, where Patrick Creadon, the director, Addison Wiggin, who is the executive producer, and the films two ‘stars’ – U.S. Comptroller General David Walker and the Concord Coalition’s Bob Bixby – answer questions from the audience.

“When Mr. Walker took the stage, the crowd at the Park City screening got to their feet and gave him a standing ovation.

“The reviews have started to come out on the movie…and summed up I.O.U.S.A. pretty well, in my humble opinion. They called it ‘crucial viewing for anyone who claims to care about America.'”

More to come…in the meantime, you can get your I.O.U.S.A. updates here:


*** What will happen when the feds really go to work on the dollar? Ben Bernanke has pledged to drop money from helicopters, if that is what it takes to head off a Japan-like slump.

Mr. Market wants a correction. The feds want to stop it. And never before have the feds had so many ways and means to try – all of which depend on reducing the value of the dollar in order to encourage the illusion of prosperity.

Here, we sense a pause – for clarification – is in order. When the feds speak of “stimulating” the economy with lower rates and rebates, they are merely speaking the humbug language of modern economics. The only thing that really stimulates a consumer economy is more consumer spending. And consumers can only do their consuming if they have money. So, the only thing the feds can do is to give them more money to spend. But the feds don’t have any real money. All they have is the machinery of credit and inflation – they can make borrowing less expensive, in nominal terms…and they can “print up” more pieces of green paper and distribute them to the public. That is to say, the only thing they can do is to inflate, lowering the value of each bit of currency in circulation.

The greenback floats on air; theoretically, the financial authorities can create a gust of wind and push it in any direction they want. A few years ago, a Paul Volcker might have resisted; he might have urged the Fed to protect the currency and curb inflation. But Tall Paul is now in the private sector…warning his clients to take cover. Some years ago, too, a few die-hard Republicans might have opposed a fiscal stimulus package as just more reckless spending from the Democrats. But now it is the Republicans who propose the stimulus…and there is only a single member of Congress who won’t go along – Dr. Ron Paul.

Nothing stands in the way of destroying the dollar…except Mr. Market himself.

It is shaping up to be a grand show. Mr. Market on one side. The market manipulators on the other. We don’t know how it will turn out…but we are pretty sure there will be blood on the mat when it is over.

Until tomorrow,

Bill Bonner
The Daily Reckoning
London, England
Tuesday, January 22, 2008

The Daily Reckoning PRESENTS: In the recent market shake-up, it has become clear that Americans can’t keep doing what they’ve been doing: buying more stuff they can’t afford, eating more bad food that will kill them, and driving more miles than circumstances will allow. James Kunstler lets us in on what we can do, below…

by James Howard Kunstler

The dark tunnel that the U.S. economy has entered began to look more and more like a black hole recently, sucking in lives, fortunes, and prospects behind a Potemkin facade of orderly retreat put up by anyone in authority with a story to tell or an interest to protect – Fed chairman Bernanke, CNBC, The New York Times, the Bank of America… Events are now moving ahead of anything that personalities can do to control them.

The “housing bubble” implosion is broadly misunderstood. It’s not just the collapse of a market for a particular kind of commodity, it’s the end of the suburban pattern itself, the way of life it represents, and the entire economy connected with it. It’s the crack up of the system that America has invested most of its wealth in since 1950. It’s perhaps most tragic that the mis-investments only accelerated as the system reached its end, but it seems to be nature’s way that waves crest just before they break.

This wave is breaking into a sea-wall of disbelief. Nobody gets it. The psychological investment in what we think of as American reality is too great. The mainstream media doesn’t get it, and they can’t report it coherently. None of the candidates for president has begun to articulate an understanding of what we face: the suburban living arrangement is an experiment that has entered failure mode.

I maintain that all the “players” – from the bankers to the politicians to the editors to the ordinary citizens – will continue to not get it as the disarray accelerates and families and communities are blown apart by economic loss. Instead of beginning the tough process of making new arrangements for everyday life, we’ll take up a campaign to sustain the unsustainable old way of life at all costs.

A reader sent me a passel of recent clippings last week from the Atlanta Journal-Constitution. It contained one story after another about the perceived need to build more highways in order to maintain “economic growth” (and incidentally about the “foolishness” of public transit). I understood that to mean the need to keep the suburban development system going, since that has been the real main source of the Sunbelt’s prosperity the past 60-odd years. They cannot imagine an economy that is based on anything besides new subdivisions, freeway extensions, new car sales, and NASCAR spectacles. The Sunbelt, therefore, will be ground-zero for all the disappointment emanating from this cultural disaster, and probably also ground-zero for the political mischief that will ensue from lost fortunes and crushed hopes.

From time-to-time, I feel it’s necessary to remind readers what we can actually do in the face of this long emergency. Voters and candidates in the primary season have been hollering about “change” but I’m afraid the dirty secret of this campaign is that the American public doesn’t want to change its behavior at all. What it really wants is someone to promise them they can keep on doing what they’re used to doing: buying more stuff they can’t afford, eating more bad food that will kill them, and driving more miles than circumstances will allow.

Here’s what we better start doing.

Stop all highway-building altogether. Instead, direct public money into repairing railroad rights-of-way. Put together public-private partnerships for running passenger rail between American cities and towns in between. If Amtrak is unacceptable, get rid of it and set up a new management system. At the same time, begin planning comprehensive regional light-rail and streetcar operations.

End subsidies to agribusiness and instead direct dollar support to small-scale farmers, using the existing regional networks of organic farming associations to target the aid. (This includes ending subsidies for the ethanol program.)

Begin planning and construction of waterfront and harbor facilities for commerce: piers, warehouses, ship-and-boatyards, and accommodations for sailors. This is especially important along the Ohio-Mississippi system and the Great Lakes.

In cities and towns, change regulations that mandate the accommodation of cars. Direct all new development to the finest grain, scaled to walkability. This essentially means making the individual building lot the basic increment of redevelopment, not multi-acre “projects.” Get rid of any parking requirements for property development. Institute “locational taxation” based on proximity to the center of town and not on the size, character, or putative value of the building itself. Put in effect a ban on buildings in excess of seven stories. Begin planning for district or neighborhood heating installations and solar, wind, and hydro-electric generation wherever possible on a small-scale network basis.

We’d better begin a public debate about whether it is feasible or desirable to construct any new nuclear power plants. If there are good reasons to go forward with nuclear, and a consensus about the risks and benefits, we need to establish it quickly. There may be no other way to keep the lights on in America after 2020.

We need to prepare for the end of the global economic relations that have characterized the final blow-off of the cheap energy era. The world is about to become wider again as nations get desperate over energy resources. This desperation is certain to generate conflict. We’ll have to make things in this country again, or we won’t have the most rudimentary household products.

We’d better prepare psychologically to downscale all institutions, including government, schools and colleges, corporations, and hospitals. All the centralizing tendencies and gigantification of the past half-century will have to be reversed. Government will be starved for revenue and impotent at the higher scale. The centralized high schools all over the nation will prove to be our most frustrating mis-investment. We will probably have to replace them with some form of home-schooling that is allowed to aggregate into neighborhood units. A lot of colleges, public and private, will fail as higher ed ceases to be a “consumer” activity. Corporations scaled to operate globally are not going to make it. This includes probably all national chain “big box” operations. It will have to be replaced by small local and regional business. We’ll have to reopen many of the small town hospitals that were shuttered in recent years, and open many new local clinic-style health-care operations as part of the greater reform of American medicine.

Take a time-out from legal immigration and get serious about enforcing the laws about illegal immigration. Stop lying to ourselves and stop using semantic ruses like calling illegal immigrants “undocumented.”

Prepare psychologically for the destruction of a lot of fictitious “wealth” – and allow instruments and institutions based on fictitious wealth to fail, instead of attempting to keep them propped up on credit life-support. Like any other thing in our national life, finance has to return to a scale that is consistent with our circumstances – i.e., what reality will allow. That process is underway, anyway, whether the public is prepared for it or not. We will soon hear the sound of banks crashing all over the place. Get out of their way, if you can.

Prepare psychologically for a sociopolitical climate of anger, grievance, and resentment. A lot of individual citizens will find themselves short of resources in the years ahead. They will be very ticked off and seek to scapegoat and punish others. The United States is one of the few nations on earth that did not undergo a sociopolitical convulsion in the past hundred years. But despite what we tell ourselves about our specialness, we’re not immune to the forces that have driven other societies to extremes. The rise of the Nazis, the Soviet terror, the “cultural revolution,” the holocausts and genocides – these are all things that can happen to any people driven to desperation.


James Howard Kunstler
for The Daily Reckoning

Editor’s Note: 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 Daily Reckoning