James Howard Kunstler

Mid Year Digest

by James Howard Kunstler

kunstler.com,

24 June, 2013

Wondering why the money world got its knickers in a twist last week? The answer is simple: the global economy is breaking apart and its constituent major players are doing face-plants on the downhill slope of a no-longer-cheap-oil way of life. Let’s look at them case by case.

The USA slogs deeper into paralysis and decay in a collective mental fog of disbelief that its own exceptionalism can’t overcome the laws of thermodynamics. This general malaise precipitates into a range of specific quandaries. The so-called economy depends on financialization, since it is no longer based on manufacturing things of value. The financialization depends on housing, that is, a particular kind of housing: suburban sprawl housing (and its commercial accessories, the strip malls, the box stores, the burger shacks, etc.). Gasoline is now too expensive to run the suburban living arrangement. It will remain marginally unaffordable. Even if the price of oil goes down, it will be because citizens of the USA will not have enough money to buy it. Lesson: the suburban project is over, along with the economy it drove in on.

But so is the mega-city project, the giant metroplex of skyscrapers. So, don’t suppose that we can transform the production house-building industry into an apartment-building industry. The end of cheap oil also means we can’t run cities at the 20th century scale. That includes the scale of the buildings as well as the aggregate scale of the whole urban organism. Nobody gets this. For one thing, there will be far fewer jobs in anything connected to financialization because that “industry” is imploding. The recent action around the Federal Reserve illustrates this. When chairman Bernanke’s lips quivered last week, the financial markets had a grand mal seizure. He floated the notion that his organization might “taper” their purchases of US government issued debt and mortgage-backed securities — the latter being mostly bundled debt originated by government-sponsored entities and agencies. That’s the “money” that supports the suburban sprawl industry.

If the Fed were to reduce its purchases of this debt paper, nobody else would buy it. The reason the Fed buys the quantity it does in the first place ($85 billion-a-month) is that nobody else would touch it at the offered zero interest rates. The US Treasury and the mortgage bundlers could only sell the stuff if they paid higher interest rates. But the US government would choke to death on higher interest rates because its aggregate debt is so huge and the scheduled interest payments so gigantic that a one percent increase would destroy even the fantasy of economic equilibrium.

Apart from that unhappy equation, entropy never sleeps. Everything in America except the Apple stores and a handful of big banks is falling apart — especially the human habitat and households. Suburbia will only lose value and utility. Big cities will have to get smaller (ouch!). Tar sands, shale oil and shale gas will not ride to the rescue (they cost too much to get out of the ground). The entire declension of government from federal to state to local will be too broke to fix the roads and make “transfer payments” to idle, indigent citizens. This populace will lose faith in their institutions… and disorder will eventually resolve in a new and very different disposition of things on-the-ground. If we’re lucky, this will not include cruel despotic leadership and war.

If the “taper” talk is empty rhetoric, and the Fed continues sopping up issued debt, it will eventually destroy the credibility of its issued money. That is just another way of going broke, though it might beat a shorter path to the general loss of legitimacy of governments and other institutions.

Young people, harken: prepare for careers in agriculture and activities that support it. Consider moving to small towns in parts of the country where farming is possible and get ready to rebuild a very different economy. Also, consider repudiating your college debt en masse, since the fantasy of repayment is but another mental shackle holding you back from your future.

As for the other parts of the global economy, a digest:

Europe doesn’t have enough oil and gas to run itself. Its suppliers (Russia, various Islamic states) are all basically hostile to it. As the late, great Tony Soprano might say, “end of story.” Europe has been playing financial pocket pool with itself for five years with credibility ebbing. Soon Europe will descend into painful economic re-set. Its era as the go-to theme park of advanced civilization is ending. Go there while it’s still possible and take some snapshots of what comfort and artistry used to look like.

China is imploding under the weight of its half-assed crony command economy and banking system. Nice try. Cookie fortune says, “Industrial era entered too late in game.” All else there is desperation: e.g. the idea of moving hundreds of millions of peasants into new cities. As Tony would say, “Fuggeddabowdit.” They’re better off growing bok choy en situ. Anyway, no one should assume that China can remain politically stable. Let’s hope that its economic and political crack-up doesn’t transmute into war.

Russia’s oil production is in permanent decline. It has a lot, but it gets most of its income from selling it to other people. Hence, Vlad Putin’s notion of finding something else to base Russia’s economy on. Like…what? I don’t think they’re going to replace China in making salad shooters. Farming would be the way to go, and Vlad’s government is hoping that global warming improves Russia’s prospects for doing more of that. In any case, Russia might benefit in the long term by not selling off all of its oil and gas — though Western Europe would surely suffer from that decision. On the plus side, Russia’s government is not crippled by idiot squabbles over abortion, gay marriage, and the Bible in schools.

Japan. Sorry to repeat myself. Going medieval. They have no oil and gas. (Cue Tony Soprano again.) In the event, Japan’s financial hara-kiri will drag down the rest of the world’s banking system — or at least hasten the damage already self-inflicted elsewhere around the globe. I’m also informed that much of the essential computer chip fabrication in the world still happens in Japan, and that will go away, too, as the Japanese engine seizes, smokes, and expels its final belch of CO2.

What else is there? South America? Think: spreading jungle (or desert, take your pick). Canada? There’s an idea. Maybe Labrador becomes the new Hamptons? Second biggest national land mass… 30 million people (2 percent of China’s population). Only one drawback: the view to the south.