Tuesday, March 4, 2008

What I see unraveling

I've been seeing the gold standard pop up a lot lately. People preach about how we have to have sound money. We have to know that the money is there for it to be worth anything. For a few smart people this may be true. Unfortunately most people are dumb. If you give them a piece of paper and tell them "You can buy stuff with this" then they will go out and try to use it to buy stuff with. When they spend their entire lives getting stuff for the worthless paper then they perceive it as valuable. As long as everyone thinks that it's valuable then it's valuable.

There are just a few things that our economy needs to really thrive. It's a consumer based economy so obviously the people have to have money to blow. They also have to be willing to spend their money. Once the consumers start to lose confidence then things go downhill. Cheap energy is also a necessity. As long as things like gas, food and water are cheap then we have plenty of leftover cash to spend on luxuries. Over the years the development of cheap energy has raised our standard of living and raised consumer confidence to the point where the biggest concerns are who Britney's latest baby's daddy is and what kind of coffee we're going to spend $4 at Starbucks on.

The subprime crisis was just a part of the beginning of the end of all that. It set the stage for a major recession. The guys at the top started to realize that it wasn't such a good idea to give shady loans to people with bad credit because of optimistic speculation really fast when they started receiving sets of house keys in the mail and the mortgage checks stopped coming in. The fact that the banks all continued to repackage and sell these loans to the point where they couldn't even keep track of them all, anymore, didn't help things. Now the banks don't even know how much money they're going to end up losing and everyone is afraid to loan each other money. That means that they're afraid to loan normal people money, too.

With so many foreclosures there's a glut in the housing market. With the tightening of credit fewer people are able to buy houses which just makes that glut even worse. This, obviously, results in the value of houses taking a dump. Now people that bought a house just a few years ago are seeing the value of their house drop instead of go up like it was supposed to. At the same time that people were buying houses at the peak of the market other people were "capitalizing" on the easy credit by taking out home equity loans every few years. Lots of people had lots of extra money to spend for a long time. A lot of that was because the value of housing just kept going up. Now that it's dropping people don't have a lot of extra money. The people that do have extra money are seeing what's happening to others and they're less likely to spend their extra money. Consumer confidence is fading. At least we still have cheap energy, though, right?

Just a few weeks ago Bush visited the king of Saudi Arabia to ask him to keep oil prices low. How much have gas prices gone up at the pump in the last few weeks? Wheat prices are skyrocketing because of Bush's subsidies for ethanol. I can see why he'd want to push ethanol despite the repercussions if he knew that our oil supplies were diminishing. Bush's ranch in Texas is completely off the grid. This is a man that is neck deep in big oil. Do you think he knows something that the rest of us don't? Peak oil is here.

If the housing bubble had popped but gas was still $2 a gallon and no one cared about making ethanol because the world's oil supply wasn't in danger then we would probably rebound from it pretty quickly. In fact the stimulus package that Bush has planned would probably be enough to get everything turned back in the right direction just like it did the last time that he tried it. It aint gonna work this time. There are just too many things going wrong on too many different levels.

First of all the ethanol subsidies are hindering our foreign support. It won't be long before it's too expensive to help out other countries. I have no problem with that but, unfortunately, the rest of the world loses confidence in us when they realize that we can't spend our resources to prop up other countries. Not to mention the fact that they're increasing the price of food for American citizens. The price of wheat goes up so things like flour go up as well. The price to feed cattle goes up so obviously the price of meat will go up. Now think about all of the things that grain really affects. Give it a year. When people start to realize how expensive things are they'll be EVEN LESS apt to spend their hard earned money.

The federal reserve just keeps lowering the interest rate. This is great for US banks but it makes it less and less profitable for foreign governments to invest in us (ie loan us money). That leaves us with only one option. We have to print the money that we need ourselves. That will lead to rampant inflation. The Fed is in a really tough spot right now.

People are foreclosing on their homes in pretty large numbers. In some areas whole blocks are empty. Areas like this will be a haven for squatters and other criminals. Crime will start to pop up in places where it didn't exist before. People will start to get more desperate. This will all result in even further drops in home values.

When gas prices start to go up it will be harder and harder for commuters to get to work. They'll have to move closer to work to save on gas. Some of these people will just try to sell their houses but with everyone else doing the same thing they'll either have to sell it at a huge loss (resulting in larger and larger drops in property values) or they'll have to keep paying for their house while they live in a rented apartment. They'll also be able to foreclose as long as they don't change the laws on that, too (like they did on declaring bankruptcy on credit card debt). Either way you end up with the situation that I described in the last paragraph in most suburbs.

If things sink further than this then you'll really start to see TEOTWAKI at it's finest. The question is whether we'll be forced into this overnight or if we'll wake up one morning and go "holy crap that dude on the internet was right". Maybe something will happen that fixes it all and we'll end up just like we were five years ago (where the guys that actually worried about this crap really were paranoid :p). I do see a not so distant future where I put my gun in my pocket, not because it makes me feel better but because I feel that I may really need it. I just hope that I still have the right to carry that gun and that I can still afford to own my house when that time comes.


theotherryan said...

I do not think a gold standard would be a cure all either.