A case in point: The car industry. The Big Three, all functionally bankrupt, are now lined up for bailouts from the treasury’s bottomless checking account. Personally, I believe the age of Happy Motoring is over. Many Americans have already bought their last car — they just don’t know it yet. The current low-ish price of oil is a total fake-out, having to do much more with asset-dumping in the paper markets than the true resource supply-demand equation. Most of the world (the media for sure) has ignored preliminary leaks from the International Energy Agency’s (IEA) forthcoming report which forecasts global oil depletion to be 9.1 percent in 2009. This is a staggering figure, very likely to offset whatever slack we see in global demand from the worldwide economic crisis. In fact, the global oil markets are poised for the most severe dislocations ever seen, meaning it’s a toss-up what happens first in the USA: A major leg back up in oil prices, or shortages, hoarding, and rationing.

For my money (literally) there are only two main reasons that any portion of the car industry should be rescued at the present time: One, because we need somebody to manufacture engines for military vehicles, and two, because we need somebody to manufacture rolling stock for the revival in passenger railroad service that will have to be a centerpiece of the future economy if we want to remain a civilized nation.

Even the progressive factions of the public may be in for much more “change” than they bargained for. The global economy as we knew it is finished (despite British PM Gordon Brown’s fatuous suggestion that we are ready to formalize it). The world is about to lose its “flatness” (sorry Tom Friedman) and get much rounder. For one thing, the racket of American “consumers” gobbling up the output of Asian factories in exchange for paper promises is over. For the moment, the Chinese are struggling with epic factory closures with the sudden prospect of a restive lumpenproletariat. The situation there is bound to get worse. Before long, these broke-and-hungry masses may actually challenge the present government. In the meantime, there’s no telling what the (unelected) Chinese government might do either to keep itself in power, or genuinely defend its country’s perceived economic interests. One thing is self-evident: We are not returning to the old racket of toys-for-treasury-bills. One thing China might do in economic self-defense is shed whatever U.S. dollar-denominated paper is moldering in their vaults before it becomes valueless altogether.

As global trade relations wither, and they will, the U.S. will be thrust back on its own devices, at the same time that oil resources grow punishingly scarce. Mr. Obama will have to contend with the necessary radical reform of all the activities necessary for daily life here. Near the top of the list — invisible to most of the public so far — will be the question of how we produce the food we need. Industrial farming is done, just as suburbia is toast. Mr. Obama will have to apply plenty of ass-time to the first stages of negotiating this bottleneck. I don’t even know what he can do policy-wise, though he can certainly make it plain to the public that we have to grow more of our food close to home and do it with fewer engines and fewer oil-based soil supplements. It is a problem of such surpassing difficulty that it was not even close to being in the election arena. The transition will probably occur by means of “emergence.” Self-evident necessity will prompt different behavior and different ways of doing things. Sooner or later, the new arrangements will self-organize — if we don’t squander resources defending an unsustainable status quo. One thing we can certainly predict is that growing our food will require more human labor and attention — meaning there will be plenty of work for people currently losing their jobs at The Footlocker and Arby’s, but it’s far from certain whether they will be happy in their new vocations.

We’re going to have to resume making things in the USA again, too, probably at a more modest scale, and probably fewer things than we are used to. We have no idea yet how this is going to happen. Like agriculture, manufacturing culture may have to return, if at all, emergently, as individuals and communities see opportunity in advantages like proximity to water-power and water transport. My guess is that corporate enterprise as we have known it — at the continental and global scale — is done for. I would not bet on any of the Fortune 500 carrying on the manufacturing work of the future using the plants-and-equipment that are familiar to them. The manufacturing of the future may be more like cottage industry than Proctor and Gamble. Yet, obviously, there will be tremendous efforts to prop up failing corporate enterprise and prevent natural bankruptcies from occurring.

Similarly, the retail part of the economy. Many observers think that Wal-Mart and its clones are immune to the larger forces swirling around us. Just because many cash-strapped people are hunting for bargains at Wal-Mart these days does not insure the survival of the Big Box model very far into the future. In fact, in every trend we can see — from the oil markets to events in China to the impoverishment of the U.S. working class to the coming crisis in truck transport — you can easily discern fatal weaknesses in this model. Local retail (and its support structures) is coming back. We just don’t know how, yet, and we don’t know how much capital and effort will be squandered trying to rescue Wal-Mart, when the time comes. But the imperative re-scaling of commerce in America also represents huge opportunities for young people to get into their own businesses.

Mr. Obama will preside over the potential restructuring of all our systems, some of them in ways he and his supporters have not imagined. We haven’t begun to see where fate will take higher education, but my guess is that it will no longer be a “consumer” activity, and that the hypertrophied land-grant diploma mills will have to shrink or die as state financial support withers away, and all sorts of unnecessary professions from “public relations” to “marketing” cease to require certified graduates. The luxurious central high schools, utterly addicted to their yellow school bus fleets, will be left as a problem for the states and municipalities. I don’t believe they can be rescued, and they are already failing in many other ways, not least, educating and properly socializing young humans.

In the months just ahead, Mr. Obama will certainly be swamped with straight-ahead cash problems in every area of American life, from the foundering pension funds to the bankrupt state treasuries to the beggaring corporations to the starkly dispossessed and hungry masses of the jobless and re-poed. I wasn’t kidding when I came up with the label, “the long emergency,” to describe the storm that we are heading into, along with Mr. Obama. Of course, the current president — and Mr. Obama has been shrewd to point out there is only one president in office at a time — has more than two months to wreak additional havoc in the financial system. Right now, he’s asking Mr. O, “…do you want fries with that sandwich I made for you?”

Regards,
Jim Kunstler
November 14, 2008

Unanticipated Change in Store was originally featured on Whiskey and Gunpowder

I have thought for some time that things could get dangerously out of hand in America, despite our exceptionalist notion that we are immune to the common plot-lines of history. For starters, inauguration night will seem more like Halloween, as those two little words fly in to haunt the new president. So, a large and looming question is: Who will be appointed the next attorney general of the U.S. (to replace the human sash-weight currently occupying the office), and how soon will the federal marshals be scouring the wainscoted hallways of Goldman Sachs, JP Morgan Chase, not to mention a thousand Greenwich, Connecticut, hedge fund boiler rooms, with man-sized nets?

A storyline is already emerging to the effect that these birds really didn’t quite know what they were doing in grinding out that multi-trillion dollar basket of alphabet securities sausage (a theme on Sunday’s 60 Minutes broadcast). Nobody will buy that line of BS, though — and certainly not in the courtroom where, for instance, Mr. Hank Paulson will have to answer why his own firm of Goldman Sachs set up a special unit to short its own issues. It will be edifying to see how they answer.

In the meantime, however, millions of Joe-the-Plumber types will have gotten their pink slips, slipped helplessly into foreclosure, watched the repo men hot-wire their Ford pickups, and eaten down the kitchen cupboard to a single box of Kellogg’s All-Bran (which had been sitting there for eleven years infested with weevils). They will be watching the official proceedings in the federal courtrooms with jaundiced eyes as they hunch in their tent cities, in the rain, sipping amateur-brand raisin wine bartered for a few snared rock doves. How long before the hardier ones among them venture out to Easthampton with long knives and matches?

It will bring little satisfaction though, and the disappointment could lead to a more inchoate outbreak of civil disorder that would be more like a free-for-all of vengeance and grievance. There will be a great outcry for the new government to “do something!” Perhaps that will finally bring the troops home from Iraq — only for them to find that the Homeland has become Iraq….

If the financial system completes its self-destruction — and that’s looking more and more like a real possibility — there will be several pretty awful consequences. One is that the United States will be forced to declare bankruptcy by repudiating its own debt. All those who took refuge in U.S. Treasury bonds and bills will be like folks who sought shelter from a tornado in their out-house. That would go hand-in-hand with a massive currency inflation that is likely to follow the current phase of compressive liquidating deflation — in which every possible asset is being sold off for less than its face value. That process is self-limiting due to the finite supply of real salable assets. The trillions of dollars injected into the system while this is happening must eventually snap-back as people shed the last fungible article and compete for necessary commodities like food and fuel with dollars that are suddenly plentiful but worthless. At some point, the government may have to summon up a new currency. I don’t think it will be anything like the “Amero” which the paranoid fringe incessantly mutters about as part of their fantasy in which the U.S., Mexico, and Canada all join up to become one country. But any “new dollar” would probably have to be backed by gold.

As we discover ourselves to be a much poorer nation, one of my correspondents put it: “the bogus risk-swapping economy must be replaced by a net value-added economy.” That means actually making things, growing things, and rebuilding things, and that can only begin to happen if we do not stupidly sucker ourselves into a war with other nations who are liable to be extremely ticked off at us for destroying the global economy, but also competing with us for a dwindling supply of resources that are not equitably distributed around the world.

This means especially oil. I hope you’re enjoying the temporarily cheap prices at the gas pumps, because this is purely a function of the compressive deleveraging that is going on right now, as contracts and positions held in energy markets are being dumped by everybody and his uncle to raise cash to meet margin calls. My guess is that oil and its byproducts will become much more difficult to get in the months ahead — not just more expensive, but literally not available. The current falling price of oil has little to do with the real supply and demand fundamentals. It’s simply a function of the markets being in near-total disarray. We’re running on current inventory, and running it down. In the background, all kinds of peculiar and terrible things are happening. The entire apparatus of allocation and distribution is being thrown out of whack. The smaller tanker operations are going bankrupt. The “less-developed” nations are heading back to the 17th-century level of daily life without electricity. The oil exploration and development projects that were planned for hard-to-get oil netting $100-a-barrel minimum — in places like the deepwater Gulf of Mexico, Siberia, and Central Asia — are being shelved, which means the world has less of a chance to offset coming depletions in old fields.

The bottom line of all this is that we in the U.S. could find ourselves in a situation of shortages, hoarding, and rationing. This would pretty much kill off whatever remains of the previous shuck-and-jive economy — hamburger sales, theme park visits, NASCAR weekends — while it makes obvious the failures of our suburban living arrangements (and drives the value of housing there closer to zero). My pet project of restoring the American passenger railroad system might seem pretty minor in the face of all this, but it’s at least a place to start that will accomplish several things: allow people and things to get places without cars and trucks; put many thousands of people to work at many levels doing something of direct, practical value; and be a small step in rebuilding confidence that we are a society capable of accomplishing something.

Regards,

Jim Kunstler
October 30, 2008

Easthampton Burning? was originally featured on Whiskey and Gunpowder

To switch metaphors, let’s say that we are witnessing the two stages of a tsunami. The current disappearance of wealth in the form of debts repudiated, bets welshed on, contracts cancelled, and Lehman Brothers-style sob stories played out is like the withdrawal of the sea. The poor curious little monkey-humans stand on the beach transfixed by the strangeness of the event as the water recedes and the sea floor is exposed and all kinds of exotic creatures are seen thrashing in the mud, while the skeletons of historic wrecks are exposed to view, and a great stench of organic decay wafts toward the strand. Then comes the second stage, the tidal wave itself — which in this case will be horrific monetary inflation — roaring back over the mud flats toward the land mass, crashing over the beach, and ripping apart all the hotels and houses and infrastructure there while it drowns the poor curious monkey-humans who were too enthralled by the weird spectacle to make for higher ground. The killer tidal wave washes away all the things they have labored to build for decades, all their poignant little effects and chattels, and the survivors are left keening amidst the wreckage as the sea once again returns to normal in its eternal cradle.

So, that’s what I think we will get: an interval of deflationary depression followed by a destructive wave of inflation that will wipe out both constructed debt and constructed savings, scraping the financial landscape clean. There’s no question that stage one is underway. But we can be sure the giant wave of money recklessly loaned into existence in just a few weeks time will wash back through the global economy leaving a swath of destruction.

And then what? The societies of the world will be faced with the task of rebuilding systems of fruitful activity, i.e., real economies based on productive behavior rather than the smoke-and-mirrors of Frankenstein-finance con games. In fact, excuse me while I switch metaphors again, because the Frankenstein story — the New Prometheus — is yet another apt narrative to inform us what we have done. We have “played” with financial fire and brought to life a monster now bent on killing us. One question that this metaphor-narrative raises is: when will the angry peasant mob storm the castle with their flaming brands and cries for blood from the makers of this monster? Rather soon, I think. Perhaps, in some countries (maybe the USA, if we’re lucky), this will take the more orderly form of systematic prosecutions, bringing to justice persons who perpetrated swindles involving the alphabet soup of investment “products” that have gone bad in so many accounts (and ruined so many individuals, institutions, and governments). I think it has already begun with the inquisitors summoning the shifty Dick Fuld of Lehman Brothers — but there are hundreds of other characters like him out there, who scored untold millions of dollars in activities that were simply grand swindles. I wouldn’t be surprised if, eventually, Treasury Secretary Hank Paulson found himself in the dock to answer how come, when he ran Goldman Sachs, there was a special unit in the company dedicated to short-selling the very mortgage-backed securities that another unit in the company was so busy pawning off to every pension fund on God’s green earth.

Apart from orderly prosecutions (which can certainly turn harsh and cruel), there is the possibility of sociopolitical upheaval — revolution, violence, civil war, war between nations, the whole menu of monkey-human mischief that afflicts mankind. We are not necessarily immune to it here in the USA, despite our cherished notion of exceptionalism, which would have us inoculated against all the common vicissitudes of history.

Anyway, prosecution through the courts, while perhaps satisfying the hunger for justice (or, more particularly, revenge), is not a productive economic activity. So, the question begs itself again: what will we do? Under the best circumstances we will reorganize our society and economy at a lower level of energy use (and probably a lower scale of governance, too). The catch is, it will have to be a whole lot lower. I think we’ll be very lucky fifty years from now to have a few hours a day of electricity to do things with.

The energy story and its handmaiden, the climate change situation, are both lurking out there beyond the immediate spectacle of the financial fiasco. Both these things imply pretty strongly that the economic relations currently unraveling will not be rebuilt — not the way they were before, or even close to it. The best outcome will be societies that can practice small-scale “process-intensive” organic agriculture and equally small-scale process-intensive modes of manufacture in the context of very local sociopolitical networks. An accompanying hope is that we can remain civilized in the process. Personally, while I recognize the appeal (to others, not me) of the “singularity” narrative, which has the human race making a sudden evolutionary leap into some kind of cyborg-nirvana, I regard it as an utter bullshit fantasy that has zero chance of occurring, given our stark predicament.

But returning to the short term, or “the present,” shall we say, there is the matter of how the U.S. gets through the election and then the first months of a new government, even while the larger fiasco continues. I feel sorry for anyone who is placed nominally “in charge” of things this coming year. The best the President can do is offer some reassurance to a public that is totally unprepared for the convulsion now upon us. He will certainly not have “money” to “spend” on any of the promised social support programs that have been endlessly debated. But he could clearly articulate the reality we’re facing, and ask not necessarily for “sacrifice,” as the common plea goes, but for something more and better: For bravery and resolute spirit, for intelligence and resilience, for kindness and generosity — among a people long unused to consorting with the better angels of their nature. The change that has been in the air all year — that Mr. Obama has talked so much about — is coming in a bigger dose than anyone expected. I hope we’re ready to get with the program.

Regards,
James Howard Kunstler

October 24, 2008

What Now? was originally featured on Whiskey and Gunpowder

Iceland is the poster-child du jour for this. The little island nation of about 320,000 souls (roughly half of Vermont’s population) lately grew a banking sector that thrived on something-for-nothing finance. In little more than a month, its banks have imploded like mini-death stars, leaving Iceland with a pariah currency. Since it has to import just about everything, and it suddenly finds itself unable to pay for imports, the people are stripping the grocery markets of whatever remains there now. You wonder what they will do in two weeks. Ten years from now there may be 32,000 of them left, subsisting on blubber sandwiches.

I exaggerate perhaps a little, but who really knows where all this leads? Here in the USA, the Treasury, enjoying new and seemingly limitless powers of discretionary spending, has begun shoveling dollars into every truck that backs up to the loading dock. The numbers are staggering. In ten days it’s reached into the trillions in loans and handouts. Most of this money is getting sucked directly into the black hole of debt and margin calls of one kind or another. This is previously-presumed wealth that is now un-presumed. It’s leaving the system, never to be seen again. One useful way of thinking about it is to regard it as our society’s previous borrowings against our own future. Thus, we are seeing our future vanish into a black hole — our future comfort, health, and basic nourishment.

This is the kind of fiasco that brings down governments, propels societies into revolutions, and starts wars. In a few months, America will be full of angry economic losers. We’re not the same nation that crowded around the old radio consoles for Franklin Roosevelt’s fireside chats. Back then, we were mostly a highly-disciplined, regimented, industrial society full of citizens who mostly did what they were told to do, and mostly trusted in authority. Today we’re a nation of tattooed barbarian “consumers” with no impulse control, a swollen sense of entitlement, ruled by a set of authorities ranging from one G.W. Bush to the grifter-billionaire pantheon of Wall Street CEOs — now heading into secret bunkers with their stashes of krugerrands, freeze-dried veal Milanese, and private security squads armed with XM-8 carbines.

I go along with Nassim Nicholas Taleb’s idea — read The Black Swan — that nobody really knows anything. We construct our narratives to try and explain circumstances that are unraveling non-linearly before us, and some narratives are more plausible than others, depending on your vantage point. There are infinite narratives. This is nothing more than my narrative. The circumstances we’re entering appear, for the moment, to take the shape of a compressive deflationary depression with the cherry-on-top add-on of a hyper-inflation further down the road — meaning initially that jobs, incomes, and pensions are lost, but that later on even the little money that people manage to get — perhaps mostly from government hand-outs of one kind or another — steadily loses its value. Every way you jigger things, it just ends up meaning the same thing: a much poorer society. It certainly won’t be a society of recreational shoppers plying the Target store aisles for scented candles and home accents. Hyperinflation could make old debts meaningless, but it would also make credit meaningless and spending absurd.

Given the way our society has evolved to operate — as an endless upward spiral of borrowings — you can see an awful lot of things not working anymore, and an awful lot of people not working in them or at them. Maybe the governments of the G-7 will get lending unstuck at the upper levels, but who, exactly, is able to borrow now besides companies on the verge of bankruptcy — and why continue to lend to them? (Except to maintain the pretense that “something is being done”). Besides, there’s much too much previously borrowed money that won’t ever paid back, and the “work-out” of all that debt only implies the continued distress sale of any-and-all assets — so that the USA in effect becomes yard-sale nation.

Personally, I think all the re-jiggering in the world of numbers and indexes will not solve anything, and really only represents a kind obsessive-compulsive neurosis related to numerology that will do nothing to readjust our daily activities toward the production of things that have real and enduring value. In my narrative, the fate of industrial nations really depends on energy resources. The price of oil may be going down for the moment — perhaps due to the de-leveraging of hedge funds, banks, and invested individuals, perhaps combined with a perception of “demand destruction” — but the geology and geopolitics of oil have not changed since June of this year when oil was at $147. Let’s say US oil consumption is down one million barrels of oil a day. Within the next two years, we’re liable to lose more than that in import declines from Mexico and Venezuela alone. The International Energy Agency’s latest estimate is for only slightly less of an increase in worldwide oil demand than was previously posted. It’s still a net demand increase. World oil consumption still exceeds world production now, perhaps permanently so. Finally, the current plunge of oil prices has suddenly halted the very capital ventures in exploration and development that were hoped to increase the worldwide supply of oil. All this portends an aggravation of oil supply and allocation problems in the five years ahead, and ultimately much more expensive, harder-to-get oil.

What we can’t face is the prospect that we might become something other than an industrial “consumer” society. My narrative includes the conviction that we will have trouble producing food for ourselves as petro-agriculture fails, and since society can’t go on without food production, I see this activity coming back much closer to the center of our daily lives. We’re not ready to think about that. The downside of our unreadiness may be that a lot of Americans will go hungry in the decade ahead.

None of this is an argument for despair, by the way, but it certainly invokes the need for steeply revised expectations and serious attention to a national “to-do” list. We’re on our way to becoming another nation, whether we like it or not. No amount of numerological augury or even hand-wringing will change that. The big question for, say the 24 months ahead is: how disorderly will we allow this transition to be?

Regards,
Jim Kunstler
October 16, 2008

Dwindling Resources Meet Vanishing Wealth was originally featured on Whiskey and Gunpowder