A Very Negative Take on the U.S. economic crisis

In stock market terms this article is exceedingly bearish. Nevertheless the article clearly points out some of the underlying problems causing the present problems. However, it remains to be seen whether the situation is nearly as dire as Kunstler makes out but at least along with his rhetoric he gives relevant arguments why the downturn could be much worse than the mainstream press portrays it.


Burning Down the House

by Jim Kunstler
Comment on current events by the author of The Long Emergency
(Atlantic Monthly Press, 2005)
www.kunstler.com (February 11 2008)
Behind all the blather and bullshit about the Federal Reserve's rescue
gambits and the machinations of the ratings agencies, and the wiles of
foreign sovereign wealth, and the incomprehensible mysteries of
markets, and the various weather forecasts of a gathering "recession"
is the simple fact that the USA is a way poorer nation than we
imagined ourselves to be six months ago. The American economy has been
running on the fumes of "creatively engineered" finance (that is, new
and improved swindling) for years, and now these swindles are
unraveling. In their aftermath, they leave empty wallets, drained bank
accounts, plundered retirements funds, boiled away capital reserves,
worthless stocks, bankrupt companies, vandalized housing tracts,
ruined families, and Wall Street executives who are still pulling down
multimillion-dollar pay packages despite running their companies into
the ground.
We're burning down the house and kidding ourselves that there is a
remedy for it. All the rate cuts and loans to big banks and bank-like
corporate organisms, and "monoline" bond insurers, and mortgage mills
amount to little more than a final desperate shell game to conceal the
radioactive pea of aggregate loss. The losses are everywhere, and when
you add up seven billion here and eleven billion there they probably
amount to something like a trillion dollars in sheer capital
evaporation - not counting the abstract "positions" that the capital
was leveraged onto by the playerz and boyz who mistook algorithms for
productive activity.
The shell game may run a few more weeks but personally I believe the
timbers are burning. The losses are no longer "contained" or
concealable. A consensus has now formed that we're in for a
"recession". The idea is that, yes, this seems to be the low arc of
the business cycle. Fewer Hamptons villas will be redecorated in the
interim. We'll gird our loins and get through the bad weather and when
the sun shines again, we'll be ready with new algorithms for new sport
with capital.
Uh-uh. Think again. This is not so much financial bad weather as
financial climate change. Something is happenin' Mr Jones, and you
don't know what it is, do ya? There has been too much misbehavior and
it can no longer be mitigated. We're not heading into a recession but
a major depression, worse than the fabled trauma of the 1930s. That
one occurred against the background of a society that had plenty of
everything except money. Back then, we had plenty of mineral
resources, lots of trained-and-regimented manpower, millions of
productive family farms, factories that were practically new, and more
than ninety percent left of the greatest petroleum reserve anywhere in
the world. It took a world war to get all that stuff humming
cooperatively again, and once it did, we devoted its productive
capacity to building an empire of happy motoring leisure. (Tragic
choice there.)
This new depression, which I call The Long Emergency, will play out
against the background of a society that has pissed away its oil
endowment, bulldozed its factories, arbitraged its productive labor,
destroyed both family farms and the commercial infrastructure of main
street, and trained its population to become overfed diabetic TV
zombie "consumers" of other peoples' productivity, paid for by "money"
they haven't earned.
There is a theory (see Nouriel Roubini's blog) that a reform process
will now ensue in the financial realm, new regulation and oversight of
the same old familiar activities {1}. This too, I'm afraid, will prove
to be wishful thinking. The financial system will not be reformed
until it lies in smoking wreckage, and when that "re-form" happens the
armature of the re-organizing society will barely resemble the one
that the previous burnt-down-house was designed to dwell in. Among
other things, it will not support capital enterprise at anything like
the scale that we became accustomed to lately. Globalism will be over.
The great nations of the world will be scrambling desperately for the
world's remaining oil supplies. It will not be a friendly contest, and
anyone who thinks that current trade relations and capital flows will
continue despite that is liable to be disappointed. (Are you reading
this Tom Friedman?)
Long before the mathematical projections of oil depletion play out,
the oil markets themselves - and all the complex operations that they
comprise, such as drilling and exploration, and the movement of
tankers around the planet - will destabilize and seize up. We will no
longer be any oil exporter's "favored customer". Many of the exporters
will enjoy watching us suffer. Contrary to the political
platitude-du-jour, the USA will never become "energy independent" in
the way we currently imagine. Rather we'll become energy independent
by being deprived of imported oil, and we'll be thrown back on our own
dwindling supplies - which means that we're not going to run our
system of daily life the way it has been set up to run. When Americans
can no longer run their cars on a whim, they will simply go apeshit
and you can kiss normal politics goodbye.
The financial system that emerges from this cataclysm, and the economy
it serves (which is supposed to be the master of its capital
deployment "arm", not its servant) will likely be modest to a degree
that will shock and embarrass everyone currently connected with what
we have lately called finance. If it even trades in paper, that paper
will have to stand for something based in reality, either a productive
activity or a genuine asset. It may take decades for this society to
even regain the confidence necessary to operate such an elementary
system - or it may not come back at all, at least as far as the
horizon lies before us. That's how bad the mischief and the damage has
been.
It's not hard to understand why the Bernankes, Paulsons, Lawrence
Kudlows and other public representatives of capital keep pretending
that everything is under control. On the other side of their pretenses
lies disorder and hardship. One wonders, of course, what they really
see in their private minds' eyes. Do they actually believe that the
statistics issued by their serveling agencies amount to a plausible
picture of reality? Are they so lost in their fantasies of
"management" that they think they're controlling events?
My guess is that their credibility is spent. In the weeks ahead,
nobody will know who or what to believe. We may even run out of
questions to ask as we just all collectively stand there in a thrall
of wonder and nausea, watching the nation's financial house burn down.
{1}: http://www.rgemonitor.com/blog/roubini/242906/
http://jameshowardkunstler.typepad.com/clusterfuck_nation/
http://www.billtotten.blogspot.com http://www.ashisuto.co.jp