HULK SMASH!!!
Yessss
I've been wondering about the gathering storm. When is it going to break? Usually, recessions hit NYC before the rest of the country, but I don't see that happening this time around. Too many people are way over extended and are just on the brink of losing it all.
Liddy Dole in a three-way with Rumsfeld and Wolfie? A perfect storm? Let's hope not.
But, due to the crappy post-recession jobs recovery, asset bubble led inflation means that Greenspan will have to hike interest rates in the middle of a fairly weak labor market.
Oh, like it's my fault.
Storms a'coming for sure. Bankruptcy bill? Check. Brownshirts whipped into a frenzy? Check.
OT but apropos of an earlier thread, now at http://www.halturnershow.com/, alongside a pic of cops arresting a 10-year-old Schiavo protester:
These cops are enabling the death of a completely innocent, totally helpless woman, Terri Schiavo, who is being systematically starved to death. They deserve to be shot in the head and killed!
I'm keeping all these cop photos in case I decide to do something to them later on.
What I think is really ironic about the economic situation in America--and something that has recieved no comment to my knowledge--is that when one looks at the increased military funding for the Iraq debacle in the last two years (~80 billion per year) and divides that by the approximate GNP of the US (11-12 trillion dollars), then the entire "growth" in GNP (~3-4% per year) can be accounted for by military spending.
Even more humorous is the fact that the money for Iraq has been emergency supplementals which are off-budget and deficit spending.
Yet it is called "growth" despite the fact that the "growth" was debt financed.
i don't see how we're going to avoid a major economic hit somehow. consider no end in sight to the rise of gasoline, credit cards maxed out (credit card cos are supposedly raising their minimum payment 40%), ridiculously priced homes. a couple of missed payments somewhere and it's an easy slide down. and now with this bankruptcy bill, i think there will be a huge increase in foreclosures in a couple of years.
expensive money makes my life a bitch.
So, when the break finally comes, we can only expect it to be met with apathy. People won't believe it until they lose their jobs.
All in all, the admin has done a great job of disequalization. The common man can't declare bankruptcy, but superempowered individuals like Cheney can lop off their failing corporations, Scott-free.
We need an equal rights amendment in this country...for its people.
when people lose their homes through foreclosure, what typically happens to them? are the majority eventually able to buy another home, or do they slip into becoming life long tenants?
bkny, You are correct about the foreclosures, but more importantly, many will be forced to sell to get out from under. They would be the lucky ones... if the needed deflation occurs in real estate, only those with payments lower than comparable rent would be holding on, even if they're upside-down on equity.
yoyoyoyoyo,
nice picture, but I think he is only really talking about the guy with his hands on the kid, if you catch my driftwood.
Okay, I'm trying really hard to understand the Roach article. but I don't know what "Basis points" are--anyone care to help? thanks.
That halturner site is in a state of full blown, frothing at the mouthbreathing, bombast. My god that man is one sick assed puppy.
He is back to his hatefull violence advocatin' self. And to think I had no idea who this idjit was until today.
I can tell from the comments today that the country is going to learn a lot about economics in the near future... Too bad my finance degree isn't in high demand...yet.
Basis points are 1/100 of a percentage point.
In other words, 25 basis points is 0.25%
Common terminology in finance/bond market etc.
I suspect that deep in its heart, the Federal Reserve knows what’s at stake for the US -- and for the world -- if the asset-dependent American consumer were to throw in the towel. Unfortunately, that takes us to the ultimate trap of global rebalancing -- a realignment of the world that requires both higher US real interest rates and a weaker dollar. Should the Fed fail to deliver on the interest rate front, I believe that the US current-account correction would then be forced increasingly through the dollar. And that would redirect the onus of global rebalancing away from the American consumer onto the backs of Europe, Japan, and China. Call it a “beggar-thy-neighbor” monetary policy defense -- pushing the burden of adjustment onto someone else
This is what some Fed governors were pointing toward last week or the week before with their talk of a "global saving glut" being the cause of the U.S. current-account deficit.
kent walking bat flying moon, good point, hadn't noticed that .... I did however notice another Turner comment farther down the page, alongside a pic of (white) cops arresting another kid:
These guys deserve to have the shit kicked out of them, and that Hospice ought to be blown up by a truck bomb.
Thank you, reality check bouncer.
TJ
Basis Points are fractions of percents. 10 basis points equals 0.1%. Hence when the Fed raises the over night rate by .25% (the rate at which banks borrow money from eachother) they are actually increasing the overall rate by 25 basis points. Part of the goal of the Federal Reserve is to keep inflation in check and they do this by restricting the money supply. WHen banks have to pay more to borrow $, they offset this by charing the client more which makes things more expensive overall. Right now the major concen in economic circles is inflation and the only way to slow it down is to raise rates faster....... Bottom Line: Roach wants the Fed to raise rates fater.
I think the inflation fears are a little overblown at this point. Yes, energy prices have taken a bite but until we see wage inflation, I don't think the Fed will raise much more than a couple of times. The bigger worry is future consumer spending. Consumers are tapped out at this point and a possible 2006 recession will make hurt spending cause corp. profits to fall, layoffs, stock market decline, and the Fed reversing the rate hikes.
So, basically, Roach is saying that the Fed waited too long to raise interest rates and is doing it too slowly?
thank you too, anybody. Apologize for my ignorance, but it's not my field, and the best way to learn is to ask.
yoyoyoyoyo,
Yeah I saw that and had to leave before I gouged out my eyes.
Can any goopers find anything as venal and hatefilled on a lefty website?
Rhetorical of course. This guy is trying to singlehandedly out-hate the LGF crowd.
Guys, here is an absolute MUST-read on this....go to the post titled "The Maestro: Living History"
http://cunningrealist.blogspot.com/
The real test was always the exit strategy = bankruptcy bill (CYA).
Eat the Rich.
Did the Fed wait too long to raise interest rates? Well, the mega-inflation in real estate (let's face it, this is everyone's highest single cost monthly) started in 1998. I don't want to blame Clinton, but housing prices galloped after that time in most areas.
We're stuck with an overvalued, asset-based economy. It'll either blow or deflate slowly, I'm praying hard for the latter.
When rates go up, it'll be bitter medicine. Greenspan must've been photographed coming out of a no-tell motel to go along with this. He's ruined us.
Stephen Roach is deemed "pessimistic" most of the time by the rah-rah monitarists (Milton Friedman crowd) and, obviously, the Bush enablers.
Interestingly he lays this at the feet of the "equity bubble" of the "late '90s" - or Greenspan's inaction thereto. Not that I disagree - lots of people were warning that the "new paradigm" was an old Ponzi pyramid - but it wasn't a "fun" argument, so they went unheeded.
How many people took their money off the table when Yahoo was at $200. or how many sold JDSU in the $90s? How many public (and private) sector retirement plans were invested in Enron and MCI Worldcom, to name just two "new paradigm" companies?
I wish like hell that what's probably coming would be headed off or somewhat ameliorated by a sane tax policy - but, you know, hey, this is the ownership society.
That's "monetarists". duh
I think Roach is saying that the responsible thing would be to raise rates faster. When in the last four years has the US ever taken the responsible course of action?
Knowing *, there is no question that the US will try to take the easy way out. Greenspan will do his bidding.
I believe that the US current-account correction would then be forced increasingly through the dollar. And that would redirect the onus of global rebalancing away from the American consumer onto the backs of Europe, Japan, and China.
That, however, will only minimize harm to the US in the very short term. Maybe until after the midterm elections, or even until 2008.
Goodbye dollar.
Goodbye french wine.
Hello to 20 million newly unemployed in Europe.
Hello, $10/gallon gasoline.
The "ownership society"? That's the one where 1% owns everything?
Roach has been a bear for years. His most dire predictions tend, fortunately, not to come true. Which is not to say he should be ignored, but I think you have to keep his bearish sentiments in mind when reading his stuff.
Reality C B,
"That's the one where 1% owns everything?"
The very one!
Reality Check, I agree with you, I have no idea what made Greenspan drink the Bush&Co Kool-aide! For almost his entire career Greenspan has worried about our Government's inability to to run a budget surplus, then all of a sudden he changed gears in 2003 to support the lastest round of tax cuts. IMO he somehow bought onto the whole pious image Bush claimed. What I want to figure out soon is what the next economic craze will be? Now's the time to get in.
The worst of the mega-inflation in real estate came after the 2001 tax cuts...the cuts that were "supposed" to create jobs. They didn't. The wealthy took the cash and ran up asset prices instead, hoping to create "wealth."
It's all an evil part of the house of cards they've set up... it won't work, Duh-bya and his bunch will fail, in the footsteps of pappy.
"The wealthy took the cash and ran up asset prices instead, hoping to create "wealth." "
Yeah. For themselves.
As usual.
Does anybody(else) know, or has one heard and percentage breakdown on how many homes have been purchased within the last two years using 5 yr Interest only ARMS? The only figure I've heard is 68% which came from an unreliable source.
Well, exactly, Cosmic. It's all about control for the Buscists. The entire equation revolves around control. They want a serf-class citizenry. The destruction of the middle class seems to be the aim of every single policy they implement.
ARMs are way prevalent, and worse, use of interest-only loans are way up too. I don't have exact percentages, but these "tools" have only worsened things.
The real-estate market can maintain about 3% inflation without ill effects. We haven't seen a year that "normal" in many years, maybe 1994. So it's all artificial, and it's hurting us. Greenspan did it.
Anybody,
"then all of a sudden he changed gears in 2003 to support the lastest round of tax cuts."
Amazing, isn't it, how the intellectually lazy, incompetent George W. Bush has managed to mesmerize even the most rational, deep-thinking conservatives?
As probably everyone knows, Paul Krugman has called Greenspan a partisan hack for this, and, frankly, I can't think of another reason why Greenspan would sign off on round 2 of the tax cuts.
The whole Rand-docent thing gets a lot of play. Greenspan's gray matter (oh, there goes THAT subject again) is every bit as impressive as Rand's, but she had the aura, the magnetic pull, which he, on his most charming day, will never have. He seems to support the Objectivist worldview, tho.
My best guess is that we've all been had - the bottom 99%, that is.
Reality Check Bouncer, not only have the superwealthy elitists taken the cash Dubya's benighted tax cuts gave them, I am firmly convinced they've moved the money offshore. The "investments" in the US economy during the last four years have been a joke, mostly in real estate. Without a doubt the real estate boom of the early 'oughties spurred much hiring of construction workers, trades craftspeople, etc., just the sort to vote for Dubya in 2004. They will learn soon what type of economy his and Greenspan's policies have created and nibble bitterly of its fruit.
The next step in this is to move our money offshore. Or into gold bullion... but is that tin-hat thinking? What is the rational course of action?
Fact is we plain don't know where the U.S. and world economies are going because we're in uncharted territory. Even if you don't factor in the real elephant in the living room—the sudden emergence of China and India as massive consumers of scarce resources such as oil, natural gas, and iron—there's less reason than usual to credit economic predictions. Politics aside, the situation is down right scary and would be so even if our government were following more prudent economic policies.
PrahaPartizan,
" I am firmly convinced they've moved the money offshore."
Yes.
And Kerry, in one of the policy proposals with which I most heartily agreed with him, wanted to curb offshore dodges for companies and individuals, too, I assume.
Bill Gates switched to Euros, after the USA gave him a big wet kiss and a mother of a tax cut -
real loyal, these "owners."
But no one gets it - and they won't until the axe falls.
It's making me sick.
Cosmic,
Slightly OT, but what is almost equally amazing is the lack of acknowledgement NBC gives when they let Andrea Mitchell report on our Gov't. She's married to Greenspan! The laziness comes in the form of a lack of Forward thinking. Those who've I've talked to that have borrowed via an Int only ARM believe they'll simply sell their house in three years and CASH IN WHOO HOOO! Of course they don't put any thought to where they will live after the sale, not to mention the possiblity that the house may not sell at all.
I'm sick here, too, not ready for the change personally, which I probably share with the ilk of this thread.
Well, I'm outta here, thoughts of basement living in my future.
Jim Harrison,
" Politics aside, the situation is down right scary and would be so even if our government were following more prudent economic policies."
I agree.
One of the veteran posters here, Elaine Supkis, is adamant that the fossil fuels crunch is the signal issue of the era.
Our wake-up call was the '73-'74 oil embargo when there still was time to re-tool our economy toward conservation and R&D.
Big Oil, however, rules the planet. No matter that new wealth would have been created to replace oil money.
They always get their way. Now look at the mess we're in.
Anybody,
"not to mention the possiblity that the house may not sell at all."
Think the Chinese want to own residential real estate?
There is always hope, I believe, but on the down side, the whole frigging country is going to look like Gary, Indiana (and no disrespect meant to Gary).
Greenspan didn't suddenly change in 2003; he's been a hack for most of his career.
[I'd say "all," but I'm guessin' he made one or two well-reasoned decisions over the years.]
I seem to recall a Bu$h tax plan for corporations to come into being this year. Corp's are to get a one time tax break to bring their offshore moneys home at 5% tax. Supposedly this will repatriatate tens of billions of dollars in the near term. Hopefully this will work to spur reinvestment in the U.S.. Restrictions on use of the cash disallows dividends, CEO pay, options etc.. But for some reason I don't trust them enough to believe it.
Just back from the UK, where a small cup of Starbucks black coffee was $3,
which is exactly twice the US price. All other prices are similarly doubled.
Take your European summer vacation now, as it will only get worse.
Take your European summer vacation
I seem to remember a word called vacation, goes with something like paycheck?
Cosmic
Yes, there is always hope, and if the last 196,000 years of human existance is any indication, life will go on. Knowing this one could also assume that there will always be "Beenie Babies" to trade for ridiculous amounts of money. The goal is to get in and out before the masses even catch on (like the one's turning houses today).
OT and speaking of changes to tax laws, does anyone know the story behind this change?
Deduction for Discrimination Suit Costs — A new deduction is available for those who pay attorney’s fees and court costs in connection with discrimination suits. Taxpayers can take the new deduction whether they itemize or not. The deduction cannot exceed the amount includible in income for the year on account of a judgment or settlement resulting from the discrimination claim. Generally, personal legal expenses are not deductible, but an employee who incurs legal expenses related to doing or keeping his job could deduct these expenses on Schedule A as a miscellaneous itemized deduction. However, under The American Jobs Creation Act of 2004, an individual with legal fees and court costs arising from a discrimination suit may deduct the costs directly from income on the front of the tax return; this is known as an above-the-line deduction.
Under this new deduction, amounts paid for attorney’s fees and court costs are deductible in computing alternative minimum tax, and are not subject to the 2 percent floor on miscellaneous itemized deductions or the overall limitation on itemized deductions. The Act, signed into law on Oct. 22, 2004, describes the discrimination claims qualifying for this new deduction. Only costs paid after Oct. 22, 2004, for judgments or settlements occurring after that date qualify for this deduction.
But for some reason I don't trust them enough to believe it.
1watt
Yup:
Layoffs Seem to Conflict With Tax
Break Meant to Propel Job Growth
By STEVEN D. JONES and MICHAEL RAPOPORT
DOW JONES NEWSWIRES
March 10, 2005; Page C3
http://online.wsj.com/
article_em...HcKWDm4,00.html
There is more evidence that a tax break intended to boost U.S. jobs isn't getting the job done.
Consider several major companies that say they are considering bringing home hundreds of millions of dollars in foreign profits under a tax holiday that is part of the American Jobs Creation Act passed last year. These include National Semiconductor Corp., Sun Microsystems Inc. and Colgate-Palmolive Co. -- all of which recently cut staff. These companies' example calls into question how effective "repatriation" will be in spurring new jobs, adding to already reported concerns about the wiggle room the law gives companies in how to spend the money.
1watt,
"But for some reason I don't trust them enough to believe it."
Good thinking on your part.
BushCo may be forced to turn on its "base", however, by promoting such a plan. There is, indeeed, a cash crunch.
That said, which noble corporations do you suppose will buy into the plan that won't allow repatriated $ to be used to support lifestyles of the rich and famous?
The concern, from what little I see, is to maintain elite communities where the CEO class can live safely - God knows their kids don't have to attend public school - and to hell with the United States of America. To them, the middle class is a prosaic fiction, belonging to another era. We've served our purpose. Not get out of their way.
Roach gives voice to the analysis held by many ultra bears. A group which contains many sorts of radicals, often of the right. For the most part progressives and liberals make it a point of honor to disunderstand finance, monetary matters including monetary history and huge swaths of macro economics. While this is a noble position it has left them and the opposition, nominally now identified as the Democratic party,defenseless. Defenseless in the face of all matters economic.
That Roach resides inside the belly of the beast, Wall Street is amazing. I cannot explain it.
It is impossible to overstate how bad the economy may get. We are in dangerous waters, as dangerous as any in our history. If depression comes then you must know there is no political alternative like there was in the 30s. It's too late for that. The means and methods of control are too strong. The power too wealth too concentrated in the corporate structure itself.
The state is failing and corporations have replaced it. The failed state is overtly the goal of this crowd in power.
As a culture, we've been increasingly focused on mindless consumerism fueled by increased (and subsidized) global trade. The upcoming shock will bring us back down to earth in terms of a sustainable economy (based on new energy models, local production, etc.)and a return to values beyond shopping and appearance. So not such a bad thing in the long run. It's the transition that will be tough, depending upon one's attachment to those old values.
For the most part progressives and liberals make it a point of honor to disunderstand finance, monetary matters including monetary history and huge swaths of macro economics.
Hmm. Don't think so.
asset bubble led inflation means that Greenspan will have to hike interest rates in the middle of a fairly weak labor market
All of which bodes well for Dems in 2006. Greenspan always goes too far, and chokes off growth entirely.
Jorma,
" The failed state is overtly the goal of this crowd in power."
Agree with you 100% there - except where the state serves their needs.
However, liberals and progresives DO understand finance - but the philosophies -Keynes for one - aren't in vogue.
There is an entire generation of finance types reared to worship at the altar of Milton Friedman and his fellows.
They're running nearly everything in this era of asset ownership and a "services" economy. The liberals know what's up - but they're powerless to change anything substantive - unfortunately.
I hope against hope that something bedsides massive unemployment will revitalize liberalism.
This is not like the '30s, though. No way.
monica:
As a tax professional, I'm embarassed to admit I have not heard of this change, but it is an issue of fairness. Under prior law, the full damage settlement from a lawsuit had to be included in income, ie., the full amount BEFORE attorney fees were paid. The attorney fees were deductible, as noted, on Schedule A Misc. Deductions.
THE CATCH: Under the Alternative Minimum Tax rules, Miscellaneous Deductions are NOT deductible for the purposes of computing the AMT. The net effect was that the recipient of the settlement ended up paying taxes on the attorney fees, which could effectively wipe out the net amount of the settlement.
I'm surprised they made this change, since it helps winners of "frivolous" lawsuits.
Hope this helps. Would you happen to have a link to the info about the change?
Selah.
Captain Hack Greenspan at the helm of the USS Titanic...yowsir..full steam ahead!
If you add in the end of cheap oil, then yes, you have a perfect storm.
Captan Dubya's been loading the life boats with the 1st Percentile Passengers. I wonder where it is he believes they will paddle off to.
I've become very interested in macro economics over the past 5 years. In part due to the fact that I finished graduate school and had to start taking on major changes in my personal finances, and in part due to natural curiosity. Nonetheless, I thought I'd add to some of the discussion here.
Here are some interesting facts:
45% of federal government T-bill and T-bond debt is held by foreigners as of 2004. Up from about 15% 20 years ago. Most of the foreign debt is held by the japanese. On March 10th of this year, the Japanese prime minister hinted that it may be time for Japan to diversify its foreign currency reserves. If they did, it would start a nice currency value drop. Perhaps even a panic if China and Korea followed suit. This would make the US dollar worth much less on the world market and drive inflation.
Our personal annual savings rate (as a percent of disposible income)has dropped below 1% this year. It was around 10% 25 years ago and has been dropping ever since. Greenspan knows this, but last year he didn't seem to think that it was much to be concerned about. Unless, of course, rates rise. With rising rates, and with a good portion of personal debt financed by variable rates (even credit card companies that advertise "fixed" rates can and do legally change them...just not as fast,) we can expect that to go negative in a few years. Which translates into less consumer spending and more bankruptcies. I find the timing of the bankruptcy bill peculiar, seeing as the fed is in the middle of raising rates. I think the credit card companies and banks *know* there is going to be a significant jump in bankruptcies in the next few years. Your representatives have been bought on this one, at the cost of 10's of thousands of American families.
The housing market won't implode because A) homes take time to buy and sell B) they are physical property that gets occupied by people and C) housing is still in demand due to an ever-increasing population. It does not, however, take a PhD to see the similarities of the dot-com implosion and a housing bubble bursting. Far too many people have been far too greedy with real estate investments. It eventually gets over-valued. With long term rates about to rise, it won't be long before those half-million dollar homes stop selling. Rising long-term rates (which is a goal of the fed), coupled with stagnant salaries and low savings rates = people who can't afford interest payments on expensive homes.
Luckily the size of our economy and the fact that we don't live in a vacuum (with regard to foreign investment/trading) will prevent collapse and bankruptcy of our government. But I think things are going to get tight for a good number of years to come. Sort of like what happened in the 70's, only with more personal debt.
Dig it.
Steve Roach has been bearish for a considerable period. His analyses however, tend to be based on economics. There is an oft repeated phrase about monetary system corrections, "It doesn't matter until it matters, and then it is all that matters". Translation: the shitstorm hits all of a sudden.
On the real estate front, there are far more frightening activities beyond interest only loans. Ordinary people are speculating and flipping new construction. This tends to keep driving prices upwards as people believe real estate won't ever go down in price. It will. And when it does there is going to be a chain reaction.
When people lose houses to foreclosures, assuming there is still income, they MAY be able to rent. Lots of landlords do credit checks and won't rent to someone who has walked away from an obligation.
If people want to see what the rest of America is in for in the coming years, just take a look at those in the tech sector. When the market crashed in 2000-1 (we held out until Jan 2002), hundreds of thousands of techies who rode the dot.com bubble to high paying jobs, big houses and lots of debt were suddenly left high and dry. The number of tech jobs decreased by 80%. Whole budding tech belts, including the Research Triangle, Austin and outer MA 128 (actually, 495) mostly dried up. Those who had no problem remoting their jobs were the worst hit, as the boonies were worse than the worst.
We were left in the latter situation. Despite 20 year in Sillycon Valley, Boston and DC, my spouse, remoting a six figure job from Maine, couldn't find even an entry-level local job after the dot.com meltdown. We did exactly what Duncan mentions - liquidated one 401K after another. Our mortgage has been in arrears for more than 6 months now - we're planning on selling (realtor comes this week), but had we not, we'd be foreclosed upon in a few more months, despite Eric finally landing a job (a research job at a Little Ivy, which, ironically, he can remote when we're on the road.) While we have little money at the moment, we're essentially land-poor; the housing market in Portland is still one of the hotest in the country, and if we can sell before the bubble bursts, we'll walk away with a healthy investment profit.
We'll be the lucky ones, in my estimation. While life has been tough for the past 3 years, we've had time to get used to it and adapt...and still come out in the black. Much of the US workforce hasn't yet felt this level of pain, and I feel for them and their future. Sadly, it looks as though we'll be welcoming too many to our world.
Roach has been on about this for a while. And lefty economists like Max and de Long think he's on to something. Get your ass out of debt before this thing hits and interest rates go through the roof.
When Mr. K8 and I both saw the headline that said credit card companies (Wachovia and Bank of America) were doubling the amount required as the monthly minimum payment...
we both looked at each other and said the exact same thing -- What do THEY know that we don't? It seems they're anticipating a time, coming soon, when folks won't be able to pay their bills AT ALL, and want their money NOW before the excrement hits the fan.
How does one invest in bankruptcy attornies?... When (not if) the California housing market crashes, it'll be a blood bath.
Great post, great thread. Much food for thought. This is why I keep coming back here...
Thanks to all.
One of the veteran posters here, Elaine Supkis, is adamant that the fossil fuels crunch is the signal issue of the era.
Our wake-up call was the '73-'74 oil embargo when there still was time to re-tool our economy toward conservation and R&D.
Big Oil, however, rules the planet. No matter that new wealth would have been created to replace oil money.
Ah jeez, not this canard again.
First, to put my credentials on the table: undergrad economics, political science and specialized in radical global political economy with a particular interest in the global political economy of oil.
Now: There was no oil "crunch"! Supply outstripped demand throughout the "oil crisis" its just that the Middle East conflict led to a massive rise in the price of oil based on perceptions of future risk to supply. That's how the oil market has worked for 30 years. It's perceptions of risk in the Middle East that drive prices (and in turn are a primary -- and politically generated -- source of inflation).
Funny the timing between the drumbeat of war in Iraq and the threat of global deflation in the wake of the dot com bubble...
Also, whoever said those on the left don't understand macro-economics is fucking moron. Ever heard of radical political economy? Like say, neo-Marxist, neo-Gramscian, etc.? Or that there are entire schools of pure economics such as neo-Marxian economics, neo-Keynesians, etc?
Ever heard of Galbraith? Jeez.
The thing that I think everyone's missing is this: Forget about deflation. It isn't going to be allowed to happen. Are you kidding? Deflation in the context of a debt load more than twice (in real terms) what it was on the eve of the great depression? It would make the 20's look like a fucking picnic!
All that's necessary to stave off deflation is to ramp up conflict in the Middle East (like say...oh...I dunno...bombing Iran so they embargo the U.S. or fill the straits of Hormuz with mines). 90-120$ a barrel oil would work quite well enough in durning deflation to stagflation.
IOW look for a repeat of the 70's, not hte 20's.
Lorenzo,
"It's perceptions of risk in the Middle East that drive prices..."
Can't argue with that point exactly, but what of coming shortages? Hubbert oil peak? Charles Maxwell's analyses? Demand for fossil fuels from Japan and China?
I am not an economist nor an expert on the middle east, but there's more to this quandary than our need for cheap oil, or perhaps our quandary is complicated by the rise of powerful political factions in the middle east that weren't present in '70s. They don't play by the rules.
And what about the Cheney energy task force which purportedly divvied up the Iraq oil fields - some for Connoco Phillips, some for Chevron.... and they BLEW it!
The place is a disaster.
BUshCo is pitifully inept. What makes you think they can steer us out of the possible coming storm?
Just curious, really. Not trying to bait you.
Free market/capitalism equals a game of Monopoly. Until the players decide they have had enough, the property/stock/money will keep accruing into fewer and fewer hands until the whole ball of wax is owned by one conglomerate/person. It has to be corrected because capitalism postulates only one goal: an individual's interest in maximizing personal consumption. But a society based on individual greed isn't one that can last. It will shatter and tear apart. How come Ann Coulter has an adam's apple?
Cosmic Rays:
Can't argue with that point exactly, but what of coming shortages? Hubbert oil peak? Charles Maxwell's analyses? Demand for fossil fuels from Japan and China?
Well you're talking about the difference between the medium-run (3-5 years) and the very-long run (20+ years) here. In the very long run, yes, physical demand/supply, peak oil, etc. are all very important but in the 3-5 year timespan, the price of oil is almost wholly politically, rather than purely economically, determined. The evidence for this case is pretty substantial. If you look at the physical supply/demand data dating back to 1965 you will immediately see that the price of oil (in nominal and inflation adjusted terms) shows no consistent correlation with supply/demand. At all. Using a more technical analysis, if you ran a regression on the numbers you'd get a very very low correlation in quantifiable terms (i.e. an R^2 of maybe .1 if even that).
In other words the price of oil from 1965 until today and in the near future you see that supply/demand doesn't drive the price of oil. As I mentioned earlier, durring the so called oil crunch there was never an actual shortage, supply significantly outstripped demand the entire time.
Thus, if you cannot locate the cause of the price of oil in supply/demand like you can in regular commodities you also immediately render OPEC irrelevant, which the data also supports (Charting OPECs production movements against the price of oil since 1965 shows a consistent pattern of OPEC following, rather than leading, the price. That is they tend to *react* to price movements rather than initiate them)
Also a major point to note here is that the interests of OPEC and of big oil are one and the same. They profit from high oil prices not low oil prices. At the end of this post I'll give the link to an accessible piece from the political-economist whoose work enlightened me on this issue to back up this and the rest of my claims BTW.
And so we come to it: If it isn't demand/supply and isn't OPEC then just what the hell *is* driving the price of oil? The answer is clear enough: Middle East conflict. There is a consistent correlation between Middle East instability and the price of oil, a strongly positive one. This is quite logical as conflict creates perceptions of future risk to supply, and since the base price of oil is set on a futures market it is expectations of the future that drive prices. Obviously the perception that the Middle East is aflame with conflict will have a strong tendency to increase perceptions of risk and of risk to future supply and thus drive up the futures price, which in turn drives up the prices for all other oil derrived goods (i.e. the price of gas at a gas station is actually primarily based off of the price of crude oil on the futures market. That's why if crude goes up today, you'll see gas prices follow very quickly, irrespective of the price the gas station paid for the gas actually physically present)
You also may note that there is a secondary implication to the price of oil (and the profits of oil exporting countries in the Middle East) being dependent on Middle East conflict: They start rolling in it when there is conflict, so they tend to spend a good part of that windfall on guns. Armament companies profit handsomly from this same phenomenon and thus you could argue that Big Oil is part of the military-industrial complex in that Big Oil and Big Arma share similar interests (i.e. conflict, and especially Middle East conflict is good for both)
Furthermore, you might notice that Oil/Arma heavily favor GOP candidates and especially GOP candidates hawkish on the Middle East...like...say...the current administration who had been planning to invade Iraq (along with Big Oil) since the very start of their administration (documentation will be provided at end of comment).
You may be surprised to learn that big oil themselves vehemently opposed the privatization of oil fields in Iraq, but as I noted, their interests are aligned with OPEC.
I blogged about this, including linking to an academic piece on it on my own blog here
Agree with Cosmic Rays.
Lorenzo refers to economics in the context of infinite resources. Oil depletion and the hard rails it entails add uncertainty on how things will turn out. Name a time in U.S. history where we had finite resource constraints like this?
The apologist Kudlow stated a few days ago: http://lkmp.blogspot.com/2005/03...ey-and-
oil.html
"The Veep was not overly concerned with the economic threat of $60 a barrel oil, correctly noting that oil use in today’s economy is only about half of what it was 25 years ago."
That is a big LIE. Larry Kudlow twists the numbers around like rottinni.
Since 1973, we have managed to cut in half the amount of oil necessary to generate a dollar of GDP. At the same time, however, we have doubled our level of consumption. Thus, despite massive increases in the energy efficiency over the last 30 years, we are more dependent on oil than ever.
Get off the crack, Kudlow.
Lorenzo,
thanks so much for your thoughtful info and links.
I just got my April issue of Harper's magazine and there is an article by Greg Palast revealing that Iraq was in the works from day #1. (Haven't read it yet) Possibly your link references that, too.
And hell, yes, I'd argue that Big Oil is part of the military-industrial complex. (And that supernova of the military-industrial complex, The Carlisle Group ...)
This is such an enormous issue - not going to go away either!
Great post!!
Lorenzo,
I read your blog. Amy Jaffe also said this
"These people are acting irresponsibly, in my opinion, scaring people," she said. "They said a few years ago that Russia would peak, and now we know the amount of resources there is much greater than we previously imagined."
Planning takeover of Iraqi oil-fields while saying that? She's a tool of somebody's agenda.
Overall your theory makes a bit more sense, but it violates Occam's razor. Diminishing oil supplies provides a simpler argument.
W H T,
"Larry Kudlow twists the numbers around like rottinni."
He's just the worst. Mercifully, my days of compulsory CNBC viewing are behind me.
Kudlow failed the Louis Rukeyser charm course, too.
Science isn't the only casuality of the "faith" movement. The fundies are sincere, however. Nuts - but sincere. Kudlow is an old-fashioned liar. He KNOWS what he's saying is BS - or should know.
FDr tried to change the banking laws in the New Deal to force banks that had foreclosed on defaulted mortgages to always resell the property -- rather than hold on to it forever, once they'd foreclosed.
He failed -- the law was on the books until the early 1980s federal bank law revisions. The American BAnker newspaper made it a front page article (which isn't indexed anywhere now, near as I can tell).
The AMerican BAnker article wrote that the banks had been fighting that New Deal regulation and it had taken them 60 years to verturn it.
But why not?
The FED has been targeting employment whenever it senses a whiff of inflation for the past 25 years.
jeebus.
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