The end of the beginning of the end

Despite today's short covering rally, we are a long way from being in the clear.

I have spent the last several months concentrating my blogs on the coming housing/mortgage/financial system blow up... but now that it is here, I want to get back to the bigger "gorilla in the room" - OIL.

The over supply of housing and housing credit could hardly have come at a worse time.  Let's take a walk down through history, shall we?

The U.S. was a CREDITOR nation (until the 1970's) and an OIL EXPORTING NATION (up until the 1960's).  In the 1970's, the U.S. domestic production of Oil began its inexorable decline, and by NO COINCIDENCE the U.S. budget deficit exploded ever since into the monkey we now have on our backs.  

During this time, the "Yes Men" advising our Presidents (remember, these guys (the presidents, that is) were for the most part Lawyers,  with an Actor and a Spook thrown in for good measure, not economists or Wall Street types) that we could "grow" our way out of the accumulating debt - and that was TRUE, as long as the U.S. could continue to grow its supply of imported Oil.  Therein lies the rub... we can't.  As a matter of simple mathematics, not only is the U.S. unable to grow its Oil imports, but Oil imports into the U.S. are in significant decline to date in 2008 from 2007.  I expect this trend to continue, and even accelerate.

In the final analysis, the U.S. finds itself with a large budget and trade deficit that needs to be financed either by an expanding GDP - OR - taxes.  Now "GDP" is in the "eye of the beholder".  GDP does not have to be REAL, an unethical government can use INFLATION instead of real GDP... and if THAT fails (Inflation is truly the lessor of two evils)... then the U.S. heads into a deflationary/monetary contraction event, something that TPTB will want to avoid at all costs, if they want to maintain their positions.

And there it is, and that is where we are now.  Nothing in the government's bailout plan addresses this issue - not that there is much they could do.  If the government publicly ADMITS that the U.S. is in the beginning throws of an Oil import crisis, the US$ would plummet.  Considering the gyrations that the Fed and Treasury did to get the US$ to trade up against the major currencies and precious metals (precisely because Paulson and Bernake could see this even from miles away, even while proclaiming "the U.S. banking system is sound"... remember that one?) prior to enacting the RTC thing... well, let us just say that it would be counter productive.  So they cannot come out and address the 800 pound gorilla, and everything else is the financial equivalent of a Princess stepping on your foot in the middle of a dance as compared to the Gorilla stomping your face in.  Gee, thank goodness TPTB are addressing that clumsy Princess.

Back soon.

Mentatt (at) yahoo (d0t) com

P.S. on 9/20/08 My friend Jeffrey Brown, otherwise known as Westexas sent me an email correcting my data point.  As it turns out, the U.S. became a net oil importer in the second half 1940's.  My bad.  Thanks Jeff!