It's the economy, stupid. Blood and riches flow to the Middle East in so many ways these days.
Some things to take notice of:
1) Oil just hit $108 a barrel today. The prices will continue to go up. I buy a tank about every 2 weeks and the price per gallon here in lovely California has jumped over 40 cents a gallon. Analysts are predicting prices as high as $4 a gallon this spring. And I am going to say that it could go higher if a refinery "breaks" down, which seems to happen fairly often, or if there is even more instability in the oil producing parts of the world.
2) The US lost 63,000 Jobs in Feb. This combined with #3, rising foreclosure rates, below has further weakened the dollar. This rate is probably low. News is that many people have just given up and aren't even counted. But then, they say that every time the jobs number goes soft. Hard to say what is really going on there.
3) Home foreclosures rose to a record high in the fourth quarter of 2007 and that is expect to go even higher in the Q1 08. With a housing market that is tanking and consumers more wary than they have been in a long time. Rising fuel prices don't help.
4) The exchange rate is now $1 will buy me .65 Euro cents and .49 pence (British pound). When I go to Europe next week, I will be doubling the price of everything to get some idea of what I am paying for things. The dollar fell to an 8 year low against the yen.
Folks, we are in deep trouble and headed in deeper.
Monday, March 10, 2008
$108
Posted by USWest at 8:55 PM
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17 comments:
Don't forget that the credit markets worldwide have also gummed up, making any debt more expensive.
The speculation that I heard was that money from the dot com bust went into real estate, though I'm not sure what the mechanism for that is. Now we are seeing that market shrink.
So are we -- and I say "we" because this is a worldwide issue that seems to be hitting the US first and hardest -- finally seeing a economic contraction that has been a long time in the making?
Spotted Handfish
I think the intuition behind connecting the dot-com bust and the real estate bubble is this: The dot-com bubble was fueled, in large part, by the twin desire for easy money and the fact that no other investment was garnering significant returns. Interest rates were relatively low - and sinking - during the late 1990s, so those with money to invest were not interested in putting it in banks. After the dot-com bubble burst, suddenly the stock market was a no-go place for investment. So what to do? Real estate became the next thing to invest in. Low interest rates are beneficial to real estate investment, since it's all debt financing (note that 100% financing for real estate is more leverage even than buying stock "on margin."). So, SH, I think that's the mechanism. The 401k boom almost guarantees another such investment run somewhere, because there is a large amount of capital sitting there in tax-free accounts looking for somewhere to go. Excess capital has to go somewhere.
The only real disaster occurs when excess capital goes out of the market and into the mattress or (as is now happening) into precious metals.
If I may digress, the investment in precious metals is a peculiar form of idiocy that Ron Paul supporters, survivalists, and assorted nuts get off on. Gold has no productive capacity, and (until recently) few industrial uses. It's too soft for most uses and too expensive for others. Its sole virtues are that it is rare, pretty, easy to measure, and does not corrode. In that regard, gold is more valuable than sand or feces only because it is rarer and prettier.
Bush refuses to eliminate special tax incentives for oil companies on the stated theory that eliminating these will only raise the cost of fuel. Of course, the tax incentives (for investment in new resources) are nothing but giveaways, and Bush knows it. If $100/oil won't prod people to invest in developing new oil resources, forget about tax incentives.
By the way, McCain is going to get crucified at $4/gasoline. This happened while his party was at the wheel, and just last week Bush said at a press conference, "$4 gasoline? That's news to me." Uh, yeah, so is most of reality. But it's not news to voters.
McCain, btw, can't reply, as Bush does, "that's because you won't open up ANWR for drilling." McCain also opposes this (one of the very few ways he differs from Bush on anything).
All of this is tied to the war.
The value of the dollar is low in large part because of the high deficits we are running to pay for Bush's war.
The deficits in turn also, suck up a lot of capital from world capital markets (thanks for pointing that out Spotted Handfish) which make capital scarce. Interest rates are basically the price of capital so when it gets scarce, they go up.
The oil supply is disrupted (and futures markets nervous) because of the war in Iraq (normally one of the largest producers but running way below capacity for years).
Increasing oil prices are pushing up production costs which leads to inflation which leads contributes further to the higher interest rates.
The higher interest rates lead to more forclosures.
War - unh! - what is it good for?!
absolutely nothing.
Bush's war in Iraq is a disaster, of course. But... surely the notion that war is good for "absolutely nothing" is not standard political science theory?
An LA Times headline this morning was that some prominent group of UCLA economists says we are not--repeat, not--heading for an actual recession. They think there will be a slowdown this quarter and next, but a return to 2.5% GDP growth by the end of the year (2008). I wonder what they are looking at that we are not--or vice versa?
No, it's a song, of course...
Well, I'll go along with Dr. S...the song should go like this: "War! Hunh! WHO is it good for? Oil Companies and military contractors! Good God Y'all!"
Obviously, if war weren't good for anything from anyone's perspective we'd never see any wars. There are a lot of political science researchers out there debating whether or not war pays. Of course the really interesting question is "pays for whom?"
Well the Fed adds $200B in loans to free up lending and stock markets around the world are jumping. Let's see if this works without increasing inflationary pressures, not that they need a lot of help with oil at $108. If inflation starts increasing then the Fed will have to start increasing interest rates, which will hit debt. It's not a pretty picture and I don't see where US growth will come from with housing slowing, oil getting more expensive, jobs disappearing and one would have thought people slowing their spending/debt. (And Pombat commented to me last night that the US still has it easy on fuel prices: Australia is over $5/gallon and the UK is much higher.)
For comparison, Australia has been raising interest rates to try and cool inflation (we are making buckets of cash on the back of resources). Banks have been increasing their rates faster than the Reserve Bank to cover the increased costs. Our housing market is yet to crimp though...
*continues doing mystical make-the-housing-market-crimp-so-we-can-buy dance*
:-)
I think Ben Bernanke has decided four things. First, that stagflation is unacceptable. Second, that recession is worse than inflation at this point in time. Third, that the risk of serious inflation is, at any rate, less than the risk of a prolonged recession. Fourth, inflation may be a concomitant of oil shocks that we just can't stop, and we have to wait until a new administration can make policy changes that begin to affect oil prices positiviely.
By the way, most Americans are now debtors, often by a lot. To the extent it is fixed-rate debt (and not all of it is), inflation is a boon. The financial genius that many boomers credit themselves with having was actually just the luck of owing mortgages at less than 5% interest when inflation went up to 10-15% with the last oil shock. Run inflation at 20% for 5 years and our debts go away real fast.
A possible source of economic growth for the US is our export industries. With the value of the dollar low relative to other currencies, demand for our exports should increase.
Pombat: very funny. And it just goes to remind us that economic changes always have winners and losers. That RbR, LTG, and I are all recent homeowners surely has something to do with our concern. And now I find myself cheering for a wee bit of inflation. Apparently, I need to learn the mystical make-the-interest-rates-crash-so-we-can-refinance dance.
Three cheers for inflation!
The refinance dance is also known as the Basis Point Cha-Cha or the Suburban Samba. The trick is to shake your tight credit market while doing the recession shuffle.
LTG: Never has refinancing seemed quite so... lewd. Now if one could do the dance while upside-down, that would be a trick...
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