Partying like it's 1929
- From: hal@xxxxxxxxxx
- Date: Mon, 31 Mar 2008 12:28:43 GMT
Don't say I didn't warn you. Better get your gardens started.
Hal
http://www.energybulletin.net/41978.html
by Dave Cohen
RELATED NEWS:
Peak Oil Review - March 24th, 2008...
Things fall apart; the centre cannot hold;
Mere anarchy is loosed upon the world
from The Second Coming by William Butler Yeats
Signs of an economic meltdown are springing up all around us. The U.S.
is almost certainly in a recession now, but the worst is yet to come.
The full consumer price index has risen at a 6.8% annual rate in the
last 3 months just as GDP growth has likely entered negative
territory, raising the Specter of Stagflation. Americans have not
faced such dire straits in 25 years.
When the New York Times feels compelled to reassure us that the
chances of a full-blown 1930's-style depression are low, you know
something is up. See Depression You Say? Check Those Safety Nets,
March 23, 2008. The Bear Stearns debacle, a classic run on the bank,
took most observers by surprise. This point was brought home to me
personally when Standard & Poors downgraded National City's outlook
from 'stable' to 'negative' last week, "citing risk from the shaky
housing and mortgage markets." National City is my bank. Deposits are
insured, of course, but that didn't make me feel any better somehow.
Paul Krugman joined the chorus, warning that we're Partying Like It's
1929. Alan "Bubbles" Greenspan, who oversaw an economy that is now
unraveling, writes that "the current economic turmoil is likely to
become the 'most wrenching' since World War II." Even as the no-
longer-infallible former Fed Chairman tries to squirm out of this one,
Ben Bernanke is left to sort out the mess. Helicopter Ben is cutting
interest rates and opening credit windows for banks to "replenish
[their] depleted capital," a strategy that is further driving down the
dollar's value and boosting pre-existing inflationary pressures
deriving mainly from high oil prices and biofuels.
Over the next year we're going to learn a lot about global oil demand
and prices. We're also going to learn whether American consumption is
still the sine qua non of global economic health it once was.
Regardless of the outcome, Americans are in for a tough time. Let's go
through some recession scenarios.
Oil Demand and Price in a Recession
Boom and BustIn Another Wild Ride in 2008, we noted that American oil
demand growth has been slow and steady since 1990, despite two mild,
short recessions in 1990-1991 and 2001 (ASPO-USA, December 19, 2008).
The American economy had its longest expansion in the 1990's and
continued to grow after the post-9/11 recession (graph left from the
Times, cited above). This recession promises to be different.
According to the EIA's data for oil products supplied, U.S. demand
actually peaked in 2005 at 20,802 million barrels per day (b/d). The
data set is incomplete, but demand fell 0.6% in 2006 and was flat at
the 2006 level during the last 6 months of 2007 (=E2=89=85 20,685
million b/=
d). This is a modest decrease, considering that the oil price has
doubled over the last year.
Last week, the EIA reported that demand for petroleum products fell a
whopping 3.2% in the 4-week period ending March 14th, coming in at
20,259 million b/d. Much of the decrease was in distillate fuel oils
(-5.4%), which is mostly diesel fuel. Diesel prices stood at an all-
time record $4.037/gallon on March 22nd according to AAA's Daily Fuel
Gauge Report.
Diesel consumption fell in part because of the end of the winter
heating season, in part because of the slowing economy=E2=80=94trucks
moving=
fewer goods from place to place=E2=80=94and in part because of the
price. By=
contrast, inelastic gasoline demand showed only an insignificant drop-
off of 0.1%. Gasoline prices are also close their recent record-high.
The consumption signals are mixed. No recession U.S. oil demand trend
is in place yet as we approach the "summer driving" season, which may
be a bust this year as disposable income for travel becomes scarce.
The main effect of the shaky economy so far has been on the oil price,
which has fluctuated wildly in the past few weeks. Traders moved their
money into commodities=E2=80=94gold topped $1000/ounce=E2=80=94as a
safe hav=
en from an
unregulated "shadow banking" system populated by a bestiary of exotic
financial instruments in which no one knows the true value of the
paper they're holding. Oil prices surpassed $111/barrel but then
tumbled to values closer to $100. These actions followed another
interest rate cut by the Fed.
Paul Horsnell, a commodities analyst at Barclays in London, asked the
pertinent rhetorical question about the "dramatic" fall of the oil
price.
=E2=80=9CWe see headlines: =E2=80=98Oil collapses to
$102.=E2=80=99 Is t=
hat really a
collapse?=E2=80=9D
If the U.S. economy tanks and oil demand does take a swan dive, what
will happen to global oil demand and the price? The answer depends on
whether the American consumption still drives the global economy and
its thirst for oil.
The Dangers of Decoupling
The term "decoupling" refers to the degree of economic independence of
the developing economies from the American market. In Prospects For
China, it was argued that 1) Chinese GDP growth, and hence their
import levels for oil and other commodities, must eventually slow down
to prevent overheating and tame inflation; and 2) China must function
within the globalized economy, which implies that they can not push
commodity prices up to levels that cripple the economies of their
export markets (ASPO-USA, January 16, 2008). China has effectively
underwritten debt-financed American ventures like the occupation of
Iraq with their massive $1 trillion treasury bond holdings. So it
would appear that the U.S. and China are locked in a mutual dependency
=E2=80=94 if the U.S. economy falters, China's will too.
This "coupling" of the two economies is rapidly losing steam. The
decoupling debate, an analysis in the March 6th issue of The
Economist, contains data to back up that assertion=E2=80=94
Sales to America will obviously weaken. The point is that
[emerging economy] GDP-growth rates will slow by much less than in
previous American downturns. Most enjoyed strong growth during the
fourth quarter of last year, and some speeded up, even as America's
economy ground to a virtual halt [0.6% growth] and its non-oil imports
fell...
Emerging Economies Exports The four biggest emerging economies,
which accounted for two-fifths of global GDP growth last year, are the
least dependent on the United States: exports to America account for
just 8% of China's GDP, 4% of India's, 3% of Brazil's and 1% of
Russia's. Over 95% of China's growth of 11.2% in the year to the
fourth quarter came from domestic demand. China's growth is widely
expected to slow this year=E2=80=94it needs to, since even Wen Jiabao,
the
prime minister, warned this week of overheating=E2=80=94but to a still
boisterous 9-10%.
Two possible outcomes follow from a substantial decoupling of the
American and developing economies and neither is good news for
American consumers. First, lower U.S. oil demand would have little
effect on oil consumption in the emerging economies. China, Russia and
others will likely gobble up the decrease, leaving global demand
unchanged. The oil price would thus remain above $90-$100/barrel or
continue to rise in a stagnant American economy, giving consumers
little reprieve from higher fuel and food costs. See Would a U.S.
recession lower oil prices? Not necessarily by the unfailing Jad
Mouawad (International Herald Tribune, January 23, 2008).
The second, more speculative, outcome is that the Chinese may lose
interest in propping up American spending when they realize that their
growth can be sustained without relying heavily on the U.S. export
market. Here's a quote from Prospects For China=E2=80=94
As [Atlantic Magazine's] James Fallows points out [in The 1.4
Trillion Dollar Question], whenever a Chinese official raises a trial
balloon even hinting at the possibility that the Chinese might start
unloading dollars and investing them to subsidize rapid growth in
their own economy, "phrases like 'run on the dollar' and 'collapse of
confidence' [show] up more and more frequently in financial
newsletters." China has deliberately chosen to inhibit their own
growth to keep their export customers, especially the United States,
happy.
Although the Chinese are heavily invested in the U.S, they may decide
to cut their losses, especially if highly leveraged American consumers
are no longer buying much of their stuff in a prolonged, deep
recession. Imagine the consequences for the shaky American economy
should China start unloading dollars. This would give new meaning to
the phrase "Cut & Run."
A Meltdown for American Consumers
GDP Wage Divergence As if the possibility of China abandoning its
investment in the United States weren't bad enough, there is mounting
evidence to suggest that American consumers are about to get seriously
squeezed. It's not just the investment banks that have a liquidity
crisis.
In Not Fixing To Walk, we explored the standard view of economists
that rising oil prices have not affected U.S. demand because energy
spending is still fairly low as a percentage of all household
expenditures, and discovered that this percentage started to rise
toward levels last seen in the 1970's and early 80's in 2003 after a
brief spike during the post-9/11 recession (ASPO-USA, November 14,
2008). This trend is poised to get worse.
Bear in mind that wages have not nearly kept up with GDP and
productivity growth throughout the Bush years, while oil prices have
tripled since the beginning of 2002 (graph above left, cited by Jerome
=C3=A1 Paris at The Oil Drum:Europe). The media was looking at this
topic
back in 2006. The Wall Street Journal's Wages Fail to Keep Pace With
Productivity Increases, Aggravating Income Inequality was typical
(March 27, 2006).
Since the end of 2000, gross domestic product per person in the
U.S. has expanded 8.4%, adjusted for inflation, but the average weekly
wage has edged down 0.3%...
Some factors aren't in dispute. Since the end of the recession of
2001, a lot of the growth in GDP per person -- that is, productivity
-- has gone to profits, not wages... Since 2000, labor's share of
GDP, or the total value of goods and services produced in the nation,
has fallen to 57% from 58% while profits' share has risen to almost 9%
from 6%. (The remainder goes to interest, rent and other items.)
It's easy to overlook rising household expenditures for food or fuel
when easy credit is available in the form of Visa cards or home equity
loans. It was also possible to refinance and take money out of equity.
Credit is now drying up for indebted consumers as housing prices
plunge, which puts the bill paying burden on stagnant household income
alone. Nine million households have negative equity, i.e. their
mortgages exceed the market value of their homes. Mortgage defaults
are way up. Here are three among the many recent examples indicating
distress=E2=80=94
1. By the end of 2007, 36 percent of consumers' disposable income
went to food, energy and medical care, a bigger chunk of income than
at any time since records were first kept in 1960, according to
Merrill Lynch. (Associated Press)
2. Americans' percentage of equity in their homes fell below 50
percent for the first time on record since 1945, the Federal Reserve
said Thursday... That marks the first time homeowners' debt on their
houses exceeds their equity since the Fed started tracking the data in
1945... Economists expect this figure to drop even further as
declining home prices eat into the value of most Americans' single
largest asset. (Yahoo Finance)
3. The Great Unwind has begun, Citigroup warns =E2=80=94 Avoid
leveraged
companies, countries and consumers, bank's strategists say... "Easy
money encouraged many to buy a bigger house, a bigger car or a bigger
speculative position... But now, any behavior that relied upon
continued access to easy money is being dramatically
reassessed," [Citigroup] added. "Leveraged banks must lend less,
leveraged consumers must consume less, leveraged companies must
acquire or invest less, and leveraged speculators must speculate
less." (MarketWatch)
There you have it: continuing high energy and food costs, contracting
credit, stagnant wages and increasing property debt. Highly leveraged
or poor American consumers=E2=80=94this is just about everybody who
isn't
among the richer rich=E2=80=94are about to get nailed. The day of debt
reckoning has arrived as the U.S. receives a long overdue margin call
(Wall Street Journal, March 15, 2008).
Consumer spending makes up about 70% of GDP. The money squeeze is a
recipe for disaster. Household finance will be getting more
unmanageable for Americans, who have been living the high life made
possible by easy credit following from rising house prices. The only
silver linings are that American exports are up and we're getting more
foreign tourists because of the shrinking value of the dollar.
On the oil front, it appears that reduced demand in a cash-strapped
American economy is unlikely to lower oil prices much as the recession
unfolds, but all bets are off=E2=80=94no one knows how much demand
will be
affected yet. If China and the other emerging economies truly are
"decoupled' from American consumption trends, it won't matter much if
U.S. demand falls off significantly in any case.
The Chinese will be partying at the Beijing Olympics while Americans
be scrambling around trying pay their mortgages and make ends meet at
the fuel pump. Kind of symbolic, don't you think? Here's an idea why
don't we build some light rail systems?
.
- Follow-Ups:
- Re: Partying like it's 1929
- From: Herbert Cannon
- Re: Partying like it's 1929
- Prev by Date: Re: My WOTT - Solo Training
- Next by Date: Re: Strikeforce winner is....
- Previous by thread: Womens Martial Arts - Your Perfect Strategy Against Big Attackers
- Next by thread: Re: Partying like it's 1929
- Index(es):
Relevant Pages
|
Loading
