Wednesday, April 23, 2008

Where have all the good times gone?

Payday comes and you are thrilled the floater checks are covered and you hit the grocery store and gas pumps on the way home from work. You sit down and look at your checkbook and hardly anything is left. It’s going to be a hard two weeks until the next payday and a year ago it wasn’t like this.

It’s costing you $9 or maybe $18 per day to pay for gas to and from work, so you think this is to blame, but then you think about the few sacks of groceries you bought and those cost you $75 when a year or two ago they would have only cost you $45, so you think the food is to blame. Then it hits you.

Food is higher because gas is higher, and food is also higher because there is more demand for corn and rice and wheat and soybeans and now there is a shortage. Corn is more in demand for ethanol production, which was supposed to offset rising oil costs and make the fuel cleaner to burn but now it’s driven up the cost of food, food is in short supply and gas went through the roof anyway.

Fuel is higher because the dollar is far weaker than it was even 6 months ago and the people who have true wealth are moving their money into commodity speculation, so they are driving the cost of a barrel of oil higher and higher. Demand is still high for oil and refinery capacity has been decimated since the late 90’s when the big oil companies were given the green light to merge unabated.

Your monthly bill to pay for gas in the car has skyrocketed, the bill for natural gas in your home has skyrocketed, and the electric companies are chomping at the bit to sack your earnings too. Water bills are rising, food is getting expensive and in short supply, insurance keeps going up year after year.

How have your earnings looked over the past 8 years? If you charted it out in a graph you would most likely see two big dips and a flat or slowly rising line between the two dips. Earnings have not only failed to keep pace with inflation, the average and median incomes of US workers have actually fallen. Your spending power is not what it was in 2000.

No one in the government dares even say the truth; we are in a deep recession. Economist eggheads flutter around the subject without saying it but some brave souls in the ether world of economics have been saying we are in an immense recession. Slowly but surely, some are leaning their language toward the big “D” word, the word that no one dares write or say in such circles.

On April 1st of this year the stock market rallied like crazy. The cause was an email from a respected economist who’s opinion is regarded like God’s truth. His outlook was Rosy Jack and upbeat and the market responded. Then the truth got out, his email, all comments in the writing, were an April Fools joke. He was being a sarcastic fucker like your humble blogger and the moneybags on Wall Street took off on a wild spending spree.

So, I have to ask you this question. Who and what really controls our economy? It’s not wise and learned men and women, for if they did the April Fools rally would have never happened. The cyclic dependencies that have brought us to this precipice would not have been allowed to operate had wise people been at the helm. What really controls our economy? Is it optimism? Greed? Blind luck?

I can’t answer those questions; I don’t have the foggiest clue.

Economics is a strange creature. Off and on for more than 20 years I have followed economics as an occasional, novice spectator. I’ve read various reports, books, journals and it’s all led me to a point where I see economics as a multi-headed Hydra. No precious gemstone could be cut with enough facets to equal the number found in economics.

Every now and then a small door will open and then shut just as abruptly that will lead me to a new realization of what is going on behind the scenes. The drive mechanisms of the economic bus are mysterious. These can be large or small revelations, some occur just by looking into the past.

If you sat down and read as many volumes as you can find regarding the touchstone moments of economics over the past 100 years you would have a heavy reading list and dear God, is it ever boring. It would take years to read the main books and journals, assessments and deconstructions, editorials and academic research. In the end you would be no closer to understanding the real foundation of economics. You would, however, keep seeing the same façade to the subject. Credit, payment of interest and control of resources. Those are the three subjects that maintain the façade.

Take the 1971 events where Nixon told the world to pack sand as an example. Credit in this case would be Federal Reserve notes and the valuation of currency. Interest on credits would have been the US gold reserves. Control of resources is the gold stockpile and the valuation of currency. It never changes. Credit. Payment of interest on credit. Control of resources. Thirty-seven years later and it’s still about those three subjects, only the players and the medium of credit and resources have changed.

Maybe the unrest in the economy is natural; perhaps it is not. I don’t know. I do know a few things. Level heads will prevail if and when things get messy. Level heads do not lie down on the floor and throw a tantrum. Level heads do not go out and try to assert some sort of flawed alpha type personality trait. Level heads do not wonder where the good times have gone and ask what they should do now.

Do you own a bicycle? If not, get one on the cheap through Craigslist or at a yard sale. Do it pronto. Get spare parts for it too. Do you own a small backpack or a large duffel or Navy sea bag? If not, get those items pronto. Do you know how to make a crystal radio? Download instructions on the web and try it out and commit it to memory. Do you own real work clothes, a real pair of work boots and the ability to snuff out your ego? If you say no to any of those things, get busy on them. You will need all three.

Did you ever talk to your older relatives about the Great Depression when they were alive? If you did, you better start plucking the wisdom from what they told you. If you have no idea what they did to survive that event, here is the short answer. Be prepared and ready to do whatever it takes to survive from day to day. I’m not talking about rioting and causing mayhem. I’m talking about being prepared to work for pennies and be so afraid of letting that money out of your hands that you are willing to go to bed hungry at night, for many nights, over many years.

Could you go to bed on an empty stomach after a hard day of manual labor and know you will do it again tomorrow if it means your child or elderly family member can have one small bowl full of mush? Would you be prepared to do that? Do you even know what mush is? Find out what it is and learn how to make it.

Are we heading down that path or am I just a crazy old paranoid fool? Maybe, maybe not. I do know this. We have not seen the bottom of the economic woes in this country; we are not even close to being able to see the bottom. We have only begun to start our fall into the hole.

In one regard money follows a rule in physics. Money, like water and electricity and high pressures, will follow the path of least resistance. In the case of money, the path of least resistance is the path that will yield the highest return on investment. i.e. the payment of interest on an investment. Water will not flow uphill, electricity will flow through copper wire instead of steel cables and a failed seal on a vacuum chamber will always allow a higher pressure to enter the chamber.

Real money, not like what you and I have, will always move along to the next area to speculate, causing a bubble. This bubble ratchets up demand for that ‘thing’ and drives the prices to un-naturally high levels for that ‘thing’. Credit and real estate were speculated upon and a bubble formed. Prices inflated well above the intrinsic value of those things and rose many times higher than historical prices and what inflation could provide. The bubble is leaking; the higher pressure is entering that chamber. The path of least resistance is taking the money to food stocks and other commodities like oil and precious metals. When those have once again been pillaged beyond the last drop of interest, the money will flow out to another speculative bubble like water from a broken dam.

30 years ago the purchase of a house was a safe bet. You could expect a nominal increase in value over time along with the rise of inflation to provide you with a decent profit when you sold ‘if’ you made a wise purchase and kept your home maintained. Take a look at your county tax commissioner’s website and look at the graded and assessed build quality for homes. Check out the number of new homes that are only graded as Good when compared to the number of homes 40 years ago that were built to a higher quality standard and get an Average rating. There is your value in a McMansion. Only a Good rating for quality of materials and construction on your McMansion with a mudroom and Jack and Jill bathroom while a ranch house in the same neighborhood, built in the 1960’s is better constructed with better materials. Yes, infill was a bright idea. Actually, it was a bright idea for the speculators who made a killing on the gullible and the folks who misinterpreted the “American Dream”.

If you think a 20% or 30% drop in home values is the bottom, think again. This market has another 30% in it at the least. Look at the historical values of homes before the speculation began and you will see a modest increase yearly to compensate for inflation and demand and that is all. The ‘value’ of homes over the last 30 years has been driven by speculation and when there was no driving force to raise speculation the financiers created a credit bubble to facilitate a house speculation bubble.

We are still waiting for the Alt-A bubble to begin crumbling, we are waiting for the Put Option ARMs to begin resetting, we are still waiting for the credit markets to shrug off the excess credit load with write offs. We are still waiting for the fall out from lack of cash flow that will affect commercial real estate and retail far more than the credit collapse. Remember, right now we are seeing only the early effects of a so-called credit crunch. The credit was based on ether. It was money that never existed in the first place and a massive block of the economy was being driven by this credit. When credit is gone only cash is left.

When the cash is devalued like we are seeing now, inflation really sticks it to those who have cash. When credit is gone only those with cash can maintain the economy and when uncertainty and fear permeate the economy you won’t let a penny out of your hands unless you really have to. This is the direction we are heading toward. Cash did not keep the failed and failing companies alive, credit kept them afloat. Cash did not put people in million dollar McMansions, credit put them there. The credit is going away and the speculators are looking for cash only resources such as oil and gold and corn and wheat and soybeans.

I’m not saying the end is nigh, I am saying that we all need to be prepared and we all need a plan. I’ve got a bike, work clothes, some food socked away, some cash and no qualms about letting my ego take a kicking just to make enough money to eat a bowl of rice and beans or some sort of pancake concoction. Are you willing to do the same thing?