Between a Rock and a Hard Place


The U.S. Financial System is predicated on the continued growth of the economy, as well as a consistent level of continued inflation.

Each week, the investing public is pummeled with data: Housing starts, auto sales, chip sales… a myriad of reports on the numbers of widgets sold in a given time frame the aggregate of which is the gross domestic production (“GDP”) of the U.S. economy. Still, to my mind, nothing sums it all up like “housing/autos”. The correlation between the performance of each other and the overall economy is complete.

Can “housing/autos”, and by extension, the U.S. economy, grow if oil and natural gas production/imports cease growing? Not for long. Are we at that critical juncture at this moment? The data do not look encouraging. So let’s examine the likely consequences resulting should this sad state come to pass circa 2006-07. In no particular order, this would include, but not be limited to:

1. The U.S. budget deficit would explode
2. At some point after this, foreign investors would cease to fund U.S. debt
3. The price of imports would soar. Today’s $60 sneakers from China might be $200
4. Interest rates would have to rise high enough for domestic savers to be encouraged to save enough to fund our debts.
5. The purchasing power of the dollar would plummet
6. Unemployment would rise substantially
7. Mortgage defaults would rise substantially
8. The cost of food and energy would rise substantially
9. The financial markets would get rocked
10. The housing and auto industries would collapse
11. Vacancy rates of commercial properties would rise to unprecedented levels

Our financial system is more leveraged, by far, than it has ever been. In 1970, the share of the Standard & Poors 500 Index total earnings represented by financial institutions was about 5% - today that number is approximately 50% if averaged over the 5 year period 2001-2005. From “Rosey the Riviter” of the 1940’s and 50’s, when roughly half of the manufactured goods sold in the international trade bore a “Made in America” stamp, America has become a nation of money lenders, stockbrokers, insurance, and real estate salesmen – with the token contractor thrown in for good measure. This is not a rant about politics. This rant is about the exposure we have constructed for ourselves in the 21st Century American economy. Any shock to the financial system will devastate our present day economy in ways that would not have been possible 30 years ago. Like it or not, we are conducting an experiment in uncharted territory the many possible outcomes of which leave much to be desired, to say the least. And an “energy tsunami” is headed our way.

What to do? I am precluded from making specific strategy recommendations in this forum. However, you can educate yourself – and filter the flow of misinformation from the spoon-feeding media that might be clouding your judgment. Most of the data that really matters on energy is to be found at a couple of government agency web sites, the Energy Information Administration of the U.S. Dept. of Energy and Europe’s International Energy Agency. Some very worthwhile consumption data is available from the BP Statistical Review (it would be best to disregard BP’s reserve data in my opinion. Non of the reserve data is independently audited or verified – BP merely reports the data provided by the various Oil producing nations, none of whom have an incentive to tell the truth). Get a copy of the “Hirsch Report” issued by the U.S. Dept. of Energy in February 2005 (which likely prompted the “America is addicted to Oil” speech). You can spend some time at the websites - theoildrum.com and energybulletin.com – great stuff. Scientific papers from the major research universities are available on line. If you email me, I will be happy to send you what I feel most pertinent.


Menatt (at) yahoo (dot) com