This is the “other shoe” that a lot of people are waiting to drop. Right now we are caught up in a compressive debt deflation as mortgages stop “performing” and loans of all kinds are welshed on. Since money is loaned into existence, and a great many loans are not being repaid, then a lot of money is going out of existence. That’s what I mean when I say that capital is leaving the system. At the same time, the Federal Reserve has made good on its promise to drop money from helicopters if necessary to prevent an implosion of the banking system (as all that older money goes out of existence), and so it’s now a question as to when the amount of new money will exceed the disappeared old money. (Of course when I say money, I mean “money,” because we are dealing here in a shadow realm of assumed value.) In any case, there is bound to be a lag period between the time that the Fed’s money is dropped from the choppers and the time it actually filters through the banks and other recipients to the so-called “real economy” of people who buy and sell real things. The credible estimates I hear run between six and 18 months.

I’ll only venture to guess that we could see the start of serious inflation sometime in 2009. To some extent, all currencies are now free-falling together, some at slightly faster rates than others, but the situation of the US dollar is so grotesquely dire, and our structural imbalances so monumental, that it is hard to imagine that our currency will not win the international race to the bottom. Gold resumed its movement upward against the dollar a week before Christmas, and that may be an early sign. The government — and anyone badly in debt — benefits much more from inflation than deflation, so every effort will be made to avert the latter. The trouble lies in the government’s dumb incapacity to control dangerous things that it sets in motion, so that an inflationary campaign to avoid compressive deflation can so easily lead to a fiasco of super or hyper inflation — the kind that kills governments and turns societies into murderous monsters. I’ll forecast that the US dollar is worth 40 percent of its current value by next Christmas.

Geopolitics

Well, now, who the hell knows what’s in store. Aside from a few bombs here and there, and pirates skulking around the horn of Africa, the world scene was miraculously free of major incidents in 2008 — perhaps the worst being a toss up between the September Mumbai bombings and the fiasco in Georgia, where the US prompted Georgia President Mikheil Saakashvili to send troops into the South Ossetia region and the move was answered by overwhelming force from neighboring Russia, leaving the US looking feckless and retarded for our troubles. But otherwise, there wasn’t a whole lot of action out there.

Until the last few days of the year, that is. I’m sure the ever-growing cohort of American anti-Semites who send me emails will be tickled when I assert that the Hamas rocket attacks against Israel of recent days guaranteed a sharp response from Israel — and now, of course, Hamas is playing the crybaby card: “… what’d we do to deserve this…?” Well, you ******* fired a bunch rockets into Israel. Did you ever hear of cause-and-effect? This matter requires no further elucidation, except that it seems to suggest a ramping back up of hostilities. I wonder if it is the beginning of a new coordinated offensive by Islamic extremism aimed at taking advantage of the West’s current economic plight (and the West’s probable aversion to anything that will complicate its desired recovery). We’ll know in a month or so, I think, since any coordinated campaign (if such a thing were possible) might well be aimed at confounding the new American president.

The other hot corner of the world right now is the India-Pakistan border where the 60-year-old rivalry, which has already produced three wars, looks to be gearing up for yet another round. I’m not the first one to say that Pakistan is an extremely dangerous regional player, being an economic basket case, possessing a score or so of nuclear bombs, harboring more Islamic fundamentalist maniacs than any other place in the world, and having a government held together with duct tape and twine. The caper in Mumbai last September could well have been construed as an act of war, but somehow India kept its head. Who knows where this is going…

So far I have only described what is already obviously going on. Add to this the likelihood that Iran is closer to achieving membership in the atomic weapon club. They’ve been spinning their centrifuges all year and nobody has done anything about it. My guess is that neither the US nor Israel will attempt to take out their facilities in the year ahead. If Iran used a nuclear device against Israel, or anybody else, they would be asking to become, in turn, the world’s largest ashtray. End of story. A different story, though, is how Iran might behave if and when the US Military presence in Iraq is reduced. I can imagine Iran doing anything possible surreptitiously to gain control over Iraq’s southern oil regions around Basra, but even the Iraqi Shia don’t like the Iranian Shia that much. Anyway, Iran’s economy has suffered hugely from the fall in oil prices. That nation may be in for more internal trouble than they have seen in thirty years since the Shah was tossed out by the minions of Ayatollah Khomeini.

There’s been a lot of sentiment the past year that as the US and the Europe fall into economic disarray, China would emerge as the great new hegemonic superpower. While it’s come a long way in a quarter-century, China’s internal problems are still enormous and worsening. They’re in trouble with water, food imports, mass unemployment, and energy. They have locked in some oil contracts around the world, but they are still susceptible to vagaries in the oil markets and Black Swan events. As the US consumer economy falls into a coma, and the shipping containers from China to WalMart get sparser, the Chinese government will face the wrath of millions of unemployed workers. I believe they will struggle through 2009, perhaps growing more surly as the US dollar inflates and their holdings of treasury bills begins to look more like a swindle.

Russia may be suffering economically for the moment due to the crash of oil prices, but they are energy resource-rich — at least for the next couple of decades — and if they don’t like the current price, they can keep more of their oil in the ground until the price looks more attractive. I think Mr. Putin has the confidence of the Russian people and will survive the current malaise.

Japan remains a riddle wrapped in toasted nori. They’re beggaring their own factory workers to stay solvent. Their banking sector has been zombified for a generation. They import 95 percent of the energy they use. Do they have a plan? One can imagine them sliding in resignation back to something like the sixteenth century, giving up the whole industrial circus as more trouble than it’s worth, just as they once gave up on firearms.

The over-arching geopolitical theme of 2009 will be the end of robust globalism as we’ve known it for some time. Reduced trade, competition for energy resources, sore feelings over debts and currencies will drive the nations inward or, at least, direct their energies toward their own regions. Note to Tom Friedman: the world turned out to be round after all.

Conclusion

The big theme for 2009 economically will be contraction. The end of the cheap energy era will announce itself as the end of conventional “growth” and the shrinking back of activity, wealth, and populations. Contraction will come as a great shock to a world of conventionally programmed economists. They will toil and sweat to account for it, and they will probably be wrong. Unfortunately, this contraction will do its work in unpleasant ways, driving down standards of living, shearing away hopes and expectations for a particular life of comfort, and introducing disorder to so many of the systems we have depended on for so long. People will starve, lose their homes, lose incomes and status, and lose the security of living in peaceful societies. It will become clear that the Long Emergency is underway.

My hope for the year, at least for my own society, is that we will transition away from being a nation of complacent, distracted, over-fed clowns, to become a purposeful and responsible people willing to put their shoulders to the wheel to get some things done. My motto for the new year: “no more crybabies!”

Regards,
James Howard Kunstler

January 5, 2009

James Howard Kunstler

James Howard Kunstler is perhaps best known for The Long Emergency, which predicted the financial meltdown and the implications of the peak oil problem. The Geography of Nowhere , about the fiasco of suburbia, is a campus cult classic among the architecture and urban planning students. It was followed by a sequel, Home From Nowhere and The City in Mind: Notes on the Urban Condition . Mr. Kunstler has also authored 10 novels including World Made By Hand, a story set in America’s post-oil future. His articles have appeared in The New York Times, The Washington Post, Rolling Stone and The Atlantic Monthly.

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