Tuesday, December 23, 2008

Forget the Recap; Look Ahead

I cannot recall being more negative on the state of the U.S. economy, and I have been quite negative for some time...

Let me state the obvious (so that I can get where I am going):

The U.S. Financial System collapsed in 2008 for all intents and purposes, and we now have a a U.S. GOVERNMENT Financial System. In 2009, the U.S. ECONOMY will collapse.  Not Armageddon, mind you... by this I mean extremely high unemployment, under consumption (savings), and contracting GDP.  While this is bad, the real risk is "Commercial Collapse".  Commercial collapse is the issue that is FREAKING our officials out.  It is the reason that U.S. Treasury Secretary feared the U.S. would have to enact MARTIAL LAW.  (Perhaps you missed that.  Well, here is one of the links in a major publication.  You can google plenty of others).

Commercial collapse would occur when small and mid sized businesses refuse to extend each other credit, i.e. when the local heating oil company will not deliver to homeowners or the local food wholesaler will not deliver to the local deli or bodega except COD (Cash On Delivery).  There are not enough Federal Reserve Notes (Dollar Bills, Cash) to facilitate a COD system.  I give this scenario a a better than 50/50 probability of unfolding, at least in part.  The Fed and Treasury are not going to sit idly by in this scenario... we would likely have a Federal Reserve Bank branch on every corner, in every McDonalds and Walmart to avert this crisis... the unintended consequence of this are mind numbing.

It may appear to the public that the Oil crisis has passed.  NOTHING in the data supports that contention, quite the contrary.  Price is not necessarily a supply data point.  Our system of credit is collapsing, killing the economy and the marginal demand for oil.  That same issue has made most new production projects uneconomical, and the intersection of that X and Y graph is not terribly difficult to foresee.

This is beyond serious.

I want to point out several paradoxes that you should be aware of.  Most of us learned of the "paradox of thrift" in economics 101 - while savings may be good for the individual, if EVERYONE saved the economy will contract by the amount of the savings in the short term.  Remember those silly fire drills when you were in grade school?  While an orderly exit from a burning building might be the best way for the GROUP to increase survivability, that same strategy might not work out for a particular individual who might be better off panicking to avoid being burned to death.  A man on the Titanic would be better off dressing like a woman and enduring ridicule. 

Got it?  Now to my point.

Government authorities, business leaders, etc... did not step up to the micro phone in 2006 and say:  "Attention.  The housing market is going to crash, bring down the banks, and cause the stock market to crash.  Good luck."  No, they said: "Housing is CONTAINED".  Otherwise, telling the truth would do more harm than good to the greater number of people, even though a few of you might have been better off.  

What if there was not enough wheat and corn in inventory to get the population through to the next harvest?  Do you think you are going to hear about it on CNBC in some form of public broadcast?  Even if it were a SMALL POSSIBILITY, the powers that be would not mention it because hoarding is simply not an option for EVERYONE.  If EVERYONE tried to fill their gas tank in the next 12 hours, the system would run out in less time than that.  If EVERYONE tried to fill their pantries with enough food for their families for the next 6 months, we would have food riots TOMORROW.  While the same thing is true for your savings and investments, these are not nearly as important as food security.  Unfortunately, our government is not catching on in this regard.  This is up to you.

10% of the American people are now receiving food assistance in the "Food Stamps" program (although now it is a credit card, not stamps).  That number will, by estimate, likely double - or worse.  Now consider the outcome of my commercial collapse scenario and the reaction of these people.

Hope for the best.  Prepare for the worst.  Try to have fun in between.

Good luck!

Mentatt (at) yahoo (d0t) com


Anonymous said...

Dmitry Orlov is looking more relevant by the hour.

Maybe bureaucrat and his buddies will save us with a new New Deal. That is if the USfedgov remains a viable organization......a big if these days.

Anonymous said...

Very Good Post. What will happen if those 20% on food stamps find nothing to spend them on at thier local SuperMarket because of the lack of Commericla credit in the system?. There will riots and then there will be Marines and US Army troops in the streets of the cities. Its coming

Carl in Wisconsin.

bureaucrat said...

Someone mention my name? :)

Yes, the government, as has been said over and over, will do what it takes to make sure the majority of the people are fed at least. So long as the Jewel in Chicago stays open, the people can stay calm. And it is calm - I was at Jewel last night. It is LITTERED with sales stickers, and 2 for 1 offers. Why? Because there is a MASSIVE OVERSUPPLY OF EVERYTHING!! Including (processed) food products. Including energy. Prices are collapsing. Go to any store and ask for your favorite corn nuts. I bet they have it, or something similar, and it's on sale.

While we all were watching the energy situation, we neglected to also see the parallel economic situation: the massive credit bubble (a la Greenspan) popping, the 8-12% unemployment that is resulting, and the substantial stoppage of buying by exhausted spenders. While there are still lots of cars and trucks on the Chicago streets burning the cheap gas, people have stopped buying everything else. And what does "Austrian economics" say is going to happen next? RAMPANT inflation, when the trillions of (borrowed or printed) government bailout dollars start to be loaned out from the banks, who are hoarding them. Start thinking "how can I invest in higher prices" for energy or whatever, cause it is coming.

Anonymous said...

The Marines and Army troops cannot control Baghdad or Kabul- much less dependent populations who are rioting in Detroit, Miami, DC, NYC, Oakland, Chicago, Cleveland, etc.

The new "slimmed down" military does not have the manpower to control a single large ghetto uprising much less the whole US.

Besides, we can't shut down those 700+ US foreign military bases overnight in order to bring troops back home for riot duty.

zwick said...

As the above poster illustrated, they can'tpull thousands of troops home overnight, and even if they did what would happen? My guess is the men would desert and go home to take care of their families. We couldn't control Vietnam with 500,000 troops and massive air strikes, so how can anyone in gov. think anarchy will contained here? My guess is they don't believe it can be, so select units of elite troops will be used to guard certain gov. facilities and protect the rich.

Greg T. Jeffers said...

I do not believe in the anarchy argument. I was merely pointing out that our governement leaders were concerned about it.