Re Analyst, I’m sorry to tell you, but we are all in much worse shape than you seem to want to believe. I am curious how and why you think this country will recovery from the perfect economic storm that is brewing, as one would from a surgery. To continue your medical analogy, I don’t think we are going in for outpatient surgery; I think this patient is in trauma and is on life support.
Questions for you:
***A recent CNN survey revealed that the average American household has NINETEEN credit cards. Moreover, most of these people are using credit to purchase necessities such as food and gas. You have to ask yourself why this is happening. I’d be interested in your take on this. My take on this is that people are drowning in debt, are one paycheck away from bankruptcy and cannot remotely tolerate any major disruptions in their lives — be they layoffs, general inflation or skyrocketing fuel costs from oil disruptions.
Consumerism is the engine that drives this economy. But if you are carefully watching the leading economci indicators of late, you will notice that consumption is conspicuously DOWN…and dropping fast. People are literally tapped out. Equity lines are tapped out. Credit cards are tapped out. The U.S. — which needs to borrow 57B per day just to keep this ship afloat — is tapped out. So my question for you is, on what do you base your belief that we will merely suffer a period of stagflation from which we will recover as usual? What we are witnessing is an absolutely UNPRECEDENTED level of debt, by U.S. standards and by the standards of any country that has ever been in existence.
What is the light at the end of the table? Where will Americans suddenly find income that will allow them to (a) resume their spending on the basis of cash flow, NOT credit and (b) reclaim the middle class jobs that are moving overseas or simply being phased out altogether?
I am in one of the most recession-proof businesses — entertainment — and studio executives are fighting for their lives now. Hollywood is living in fear. They are battoning down the hatches. Disney has just laid off 850 employees, and article in the business section of yesterday’s LA Times sounded the alarm for an industry fighting to stay alive. Why? Because it depends on leisure dollars and advertising. People have to spend to make that happen. Historically, no matter what, people have always coughed a dime or two for entertainment. But all that is changing. Whether you want to believe it or not, the masses in this country are fighting to keep their heads above the waves — but no one wants to admit that this is happening.
*** We are not only dependent on others for oil, but also for our very financial existence. If foreign investors — principally the Chinese — didn’t show up to buy bonds one day, we’d be up a creek without a boat or a paddle. Powayseller is 100% right; this is not the position any super power has historically found itself in. Was Rome beholden to any of the lands upon which it cast the shadow of its empire? Did England rely on the good graces of India to survive? No. This is a fundamental sign of weakness, and it is simply delusional to believe otherwise.
Ah, but you say the Chinese have to keep buying dollars because they are dependent upon our appetite for their cheap goods. To that I say (a) our appetite is still strong, but our stomachs are full. We can only buy so much, and as Americans near their credit limits and interest rates invariably rise, China will face the reality that Americans simply can’t consume as much as they want indefinitely. The laws of economics will eventually prohibit this; and (b) China, like India and Russia, is not a fool. It knows that the dollar’s days are numbered. But rather than shift all of its reserves out of dollars immediately, it is accomplishing this same feat over time. Do your research and you will see that central banks all over the world have been gradually lowering their dollar reserves for the past 24 months. THIS IS A RECENT DEVELOPMENT. They are buying gold, Euros and other foreign currencies. Not coincidentally, the dollar has been steadily falling…
And more food for thought: Iran and Russia are now selling their oil exports in euros and rubles. It matters not if these exports amount to only 20% of world consumption; what matters is that this means that there is a need for 20% fewer dollars in the world. That means that we suddenly have more useless dollars floating out there. Coincidentally, shortly after Iran and Russia began their euro and ruble oil exchanges, the Federal Reserve — for the first time in U.S. history — decided not to publish M3, the measure of the national money supply. Re Analyst, why do you think our government would take such an unprecedented step at that particular time? If you think this is a coincidence, then I have some beachfront property to sell you in Nigeria.
The writing is on the wall. No one wants to be caught holding the funny money when the hammer falls. Faith, alone, keeps the dollar afloat, and all it takes is one major global disruption to challenge that faith. Information is shared instantaneously now, and markets can plummet in one business day. Make no mistake, the day will come when foreigners reach a level of security such that a dollar collapse will not spell doom for them. What they are slowly, quietly doing behind the scenes is preparing for the inevitable day.
***Lastly, with regard to your contention that we are only running out of cheap oil: cheap oil is the only oil that matters to the U.S., my friend. Because when the cheap oil is gone, the expensive stuff will easily cost us $100+/barrel. Do you really think Americans who are barely making ends meet and living on credit cards can stomach gas at $5.50/gallon? How much will it cost to bring food to market? What will become of airlines? Because that is the future. If you disagree, I’d love to hear your thoughts as to why you think Americans — and the economy and general — can withstand this paralyzing shock when we are virtually stagnating at $3.25/gallon.
And by the way, I am old enough to remember the price shocks of the 70s. Prices at the pump tripled when supply dropped by 10% — and that was more than 30 years ago. Imagine what our energy needs are now! So even though the Mideast only supplies 25-30% of U.S. oil, just think about what a 10% disruption will do to this economy today. Gas at $9/gallon? Fugghetaboutit. Americans would thrown in the towel. Social unrest wouldn’t be far behind. And if you doubt the last sentence, I have one word for you: Katrina. If a category 5 hurricane send one city into chaos, imagine what a category 5 financial hurricane all over the country could do. There’s a thin line between order and disorder. Think about it.
