Bank bonus numbers are due out any day now. The revolt that I expected around the release of these numbers may come from a different place than I had imagined earlier — not from whatever remains of “normal” working people, but from the thought leaders and middling agents in administration (including the prosecutors) who, for one reason or another, have been diverting their attention, or watching and waiting, or making excuses for a couple of years now. When Frank Rich of The New York Times starts Calling for Robert Rubin’s Head, then maybe the great groaning tramp steamer of media opinion is turning in the water and charting a new course for the port of reality.

Anyway, the grotesque carnival of rackets and lies that the US economy has become — held together with the duct tape of stimulus cash, gamed accounting, mortgage subsidies, carry trades, TBTF bailouts, TARPS, TALFS, shell-game BLS reports, and MSNBC “green shoots” cheerleading — gives every sign of tipping into collapse at a moment’s notice. There are just too many obvious things that can go wrong, and that means there are many less obvious, hidden things that can go wrong, and isn’t it tragically foolish to tempt Murphy’s Law, since it operates so well without any help from us? The call is even going out lately for criminal prosecution of the current Treasury Secretary, Mr. Geithner, for Engineering AIG’S $14 Billion Credit Default Swap Payoff to Goldman Sachs as part of the AIG bailout. Okay then, why not Paulson, Bernanke, Blankfein…?

But the other rings of the circus are fully occupied by clowns and dancing bears, too. Even with sketchy-looking stock market prospects for 2010, it’s hard to explain why the world would run into US treasury bonds, especially a few months from now, after the initial rush-to-safety — that is, when you could just as easily buy Canadian or Swiss franc denominated short-term bills. And then what happens when the Federal Reserve has to eat all the uneaten treasuries, while it’s already choking to death on collateralized debt obligations and related worthless toxic trash securities? After all, the greenbacks we swap around are called Federal Reserve Notes.

Why would anybody think that the housing market is going to keep levitating? A big fat “pig” of adjustable rate mortgages (i.e. mortgages that will never be “serviced”) is about to move through the “python” of the housing scene, shoving millions more households into default and foreclosure. Meanwhile, local and regional banks are choking on real estate already in default that they are afraid to foreclose on and have been keeping off the market through 2009 in order to not send the price of houses down further and put even more households “under water” for houses worth much less than the face value of their mortgage. I doubt that the banks are doing this out of the goodness of their hearts, but whatever the motive, this racket of just sucking up bad loans can’t go on forever. At some point, a banking system has to be based on credibility, on loans actually being paid back, or it will break, and we are close to the breaking point.

The pathetic truth at the center of the housing fiasco is that prices have to come down further if any normal wage-earner will ever afford to buy a house again in America on anything like normal terms. Anyway, sooner or later the banking system is going to have to upchuck the “phantom inventory” of un-foreclosed-on houses, and sell them off for whatever they can get, or else a lot of banks are going to go out of business.

They may go down anyway, because the catastrophe of commercial real estate is following right on the heels of the fiasco in residential real estate. The vast oversupply of malls, strip malls, office parks, and other furnishings of the expiring “consumer” economy is about to become the biggest liability that any economy in world history has ever seen. Who will even want to buy these absurd properties cheaply, when they will never find any retail tenants for the badly-built structures, nor be able to keep up with the maintenance (think: leaking flat roofs), or retrofit them for anything? In a really sane world, a lot of these buildings would go straight to demolition-and-salvage — except that it costs money to do that, and who exactly right now will make a market for used cinder blocks and aluminum window sashes? I expect these places to become squats for the desperate homeless.

Then there are the bankrupt states, led by the biggest, of course — California and New York — but with plenty more right behind, whirling around the same drain (probably forty-nine of them with the exception of that fiscal Nirvana, North Dakota!). Even if they manage to con bailouts from the bailout-weary federal government, the states are still going to have to winnow down the ranks of their public employees (throwing more middle-class households into foreclosure and penury), while they hugely reduce public services, especially to the poor, the unwell, and the unable. That alone will redound into very visible realms of daily life from public safety (rising crime) to the decay of roads and bridges.

Perhaps the most troubling buzz in the air this first month of 2010 are rumors of coming food shortages due to widespread crop failures around the world in the harvest seasons of 2009 (Emergency Food Supply, Food Crisis for Dummies, 2010 Wall Street Predictions). If the US Department of Agriculture hasn’t flat-out lied about crop numbers in 2009, the signs are that their statistical reports are at least inconsistent with real grain storage numbers and commodities prices. And why would the USDA tell the truth if every other federal agency is reporting gamed numbers? Given the crisis in capital and lending, one also has to wonder how farmers will be able to borrow money to get their crops in this year.

Finally there’s the global energy scene. The price of oil starts this week over $83 a barrel. That puts it about $1.50 from the price “danger zone” where it begins to kill economic activity in the USA. Things and procedures just start to cost too much. Gasoline. Deisel fuel (and, by the way, that means another problem for food production going into the 2010 planting season). One especially eerie situation the past few weeks has been the de-coupling of moves upward in oil from moves in the value of the dollar. Lately, oil has been going up whether or not the dollar has gone up or down. Two weeks ago the dollar went below 1.42 against the Euro and today it’s above 1.45, and oil has been rising steadily from the mid $70 range all the while. 2010 may be the year that we conclusively realize that world oil demand exceeds world oil supply — and that global oil production cannot hold above 85 million barrels-a-day no matter what we do.

These are the things that trouble my mind at three o’clock in the morning when the wind rises and things bang around spookily. Gird your loins out there for a savage season or two.

Regards,
James Howard Kunstler

January 12, 2010

The Economy Has Six Months to Live was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.

It’s funny how fate can change so many lives. Just before the trip from Sweden, my great-grandmother contracted rheumatic fever, or what they used to call consumption. Nobody is really sure why. She was only 33. Sad to say, she died.

But there is another side to the story. The family was delayed from sailing to America as they mourned their loss. Thus, they missed sailing on the Titanic. And everyone knows what happened to the Titanic.

Later on, my grandmother and her family sailed into New York Harbor on a different ship. She remembered gazing at the Statue of Liberty. I returned with her in 1997, and we walked through Ellis Island together. We even found her name in the book they used to categorize everyone who came through, an experience that is truly chilling. Back then, everyone was processed at Ellis Island and made their way to the places where they had relatives. Typically, the Swedes and Norwegians went to Minnesota, and that’s how yours truly ended up being born there.

Fast-Forward: Doing More With Less

The light that burns twice as bright burns half as long. And America has burned very brightly for a long time. As the resource battles begin to heat up, we are already seeing where some of the major battle lines will be drawn, and it’s not a pretty picture. The simple fact of the matter is the world’s resources — not just oil — are dwindling faster than Britney Spears’ career.

While shortages of key industrial and energy commodities are frightening, no other sector will threaten global stability more than agriculture.

Food Fight

It seems ironic that as global population is reaching an all-time high, we are turning at least half of our crops into ethanol or biofuel. This is a questionable, if not idiotic, alternative that clearly does as much damage as good. While the short-term impact is obvious, the longer-term ramifications for agriculture on a global scale could be devastating.

In 2007, we saw stark glimpses of just how bad this situation will get. The “Tortilla Crisis” in Mexico, the “Pasta Protest” in Milan (I happened to be there for that one), the riots and crushing of one supermarket shopper in China over cooking oil…we have seen dairy, meat and bread prices skyrocket.

The idea of food inflation is new to many Americans, who are used to prices for food being only about 13-16% of income. Back when my grandmother got off the boat in 1912, they were more like 45%.

Bad Choices Beget Bad Choices

In recent years in the U.S., the number of immigrants has swollen. The porous borders continue to attract newcomers as if it were still 1912. Here in the U.S., a lot of people think that America can still absorb a massive influx of immigrants from all over the planet who are poor, tired and hungry. And while that is nice, romantic thinking, the fact of the matter is we cannot.

Now, I would hate for us to change the plaque on Lady Liberty to “Bring us your well-fed and rested, employable and intelligent,” but the truth is maybe we have to.

Get Smart or Get Gone

As investors, we must look at this situation as an opportunity for our portfolio. First of all, I suggest if you have some extra land (condo developers and house flippers, listen closely), grow a vegetable garden, and if you are ambitious, raise some sheep and cows, because they will come in handy. A little more practical and with less bunker mentality is to add stocks of some of the key agricultural companies that help support the industry, like those dealing with equipment making, fertilizer, irrigation and transport.

My grandmother may have missed the Titanic, and figuratively, I hope we all do too. But keep in mind that our ship (the USS America) is sailing in uncharted waters and we had all better get smart fast. Really, the food supply is stretched and getting stretched thinner and thinner. There are only so many lifeboats, and unfortunately, that’s the new reality. Increasing population and rising demand for scarce resources mean that there is a big iceberg ahead. So man your stations.

Yours for resource profits,
Kevin Kerr
April 28, 2008

Agricultural Shortages was originally featured on Whiskey and Gunpowder. Visit Laissez Faire Books for the best selection of libertarian book titles.