America Update

America is on vacation from its financial, fiscal, and economic problems, having left the centers of power in Wall Street and Washington for a Nantucket-of-the-mind, where, in a haze of artisanal vodka and bong smoke, it's out in the cool dune grass watching imaginary whalefishes blow, leaving only the TV Bubbleheads behind back home. Larry Kudlow of CNBC was practically drooling into his cufflinks on screen last week when the dollar popped against the Euro, and crude oil slumped, and the equity markets climbed up a flagpole.

This sort of euphoria is actually an alarming pre-crash symptom, in this case of a patient (the US) entering the terminal phase of sclerosis. Our society and all its playerz -- especially the appointed communicators -- just can't fathom the reality of the threats we face, which are 1.) the loss of primary energy resources, 2.) the loss of technological potency, and 3.) the loss of a comfortable standard of living.

As the boys over at the Financial Sense News Hour podcast have been saying for months, we're caught in a paradigm shift and we're trying desperately to prove (to ourselves) that we can get back to the way things used to be. This is a broad cultural phenomenon and helps to explain why even the greenest captains of environmentalism strive to find groovy new ways to run all our cars, while their counterparts on Wall Street strive desperately to salvage a set of "innovative" financial rackets based on getting something for nothing. It also explains the foolishness of the "drill drill drill" crowd, which believes we could be back to 99-cent gasoline if only Exxon-Mobil were allowed to prospect offshore where the codfish used to swim. (By the way, I'm in in full favor of granting them permission to do so, if only to put an end to this foolish debate.)

Reality, meanwhile, strives to take us in another direction. Our destination is a far less complex society in a larger, rounder, and less economically-integrated world. We will be leaving a lot of our technological comforts behind, staying closer to home, living in smaller cities and reactivated small towns, working the land more intensively to produce the food we need, and possibly organizing our governance at something less than the continental scale our dwindling riches used to afford. That is, if we're lucky enough to avoid the real possibility of social disorder and violence that would attend a fullblown economic collapse scenario.

August is historically a quiet time for oil, the so-called "shoulder season" when vacationing climaxes, but before deliveries of heating oil get underway in earnest. We have no real prospects of overcoming any of the structural problems now built-in to our oil supply, starting with the grim central fact that we import at least 70 percent of the oil we use. Add to this the fact that world production of conventional crude has not exceeded the 2005 rates; that export rates from our Number 3 and 4 sources of oil, Mexico and Venezuela, are down a combined 30 percent this year; that discoveries of new oil are meager to the degree that they fail by a long shot to offset current world-wide depletion; that the oil available on global markets is proportionately more sour and heavy crude than the light and sweet our refineries are designed for. And so on....

These geological matters form the base on which the geopolitical issues work their hoodoo. For instance, the war currently underway in former Soviet Georgia (I say this in case the folks in Atlanta wonder why Stone Mountain is not being bombed) will at least end up with Russia in control of the major oil pipeline that runs from the Caspian region across Georgia, through Turkey, to Europe -- even while parts of that pipeline get blown up. The net effect will be of Russia taking control of even more of the oil now flowing to Europe. The whole point of building that pipeline was to bypass Russia, which was crippled by its own paradigm shift in the years when the pipeline was built.

The US might talk tough about this threat to the status quo, but what is it going to do? Pull troops out of Iraq and Afghanistan to mount a land war against Russia in a landlocked region of its own neighborhood? Fuggeddabowdit.

Notice, the Europeans are not making so much as a peep -- because when the time comes that Russia does control that pipeline, the Europeans will do anything to keep the contents flowing toward them. Europe may be organized as a trade-and-currency confederation, but not as a military power. NATO is strictly a US auxiliary, not a power unto itself. The result of all this will be that Russia, already the world's leading oil producer, even as it has entered depletion, will now possess a potent geopolitical-and-financial weapon with control of that pipeline. A collateral effect will be Europe's inclination to bid more desperately for Middle East oil -- the oil that comes via the Suez Canal -- which can't help but boost the price-per-barrel that the US is forced to pay.

One part of the oil equation we haven't seen yet this year -- the prelude to the heating season which could be just as spectacular as the opening of the Beijing Olympics -- is the hurricane season. This will be an interesting week for that, as two tropical depressions have now formed off West Africa and begun their grinding progress into our part of the world. Stay tuned to that (National Hurricane Center).

With Wall Street on vacation at its various beaches, the idea has taken hold that the so-called credit crisis is mostly over. In fact, we're still in the first quarter of that classic. The big move before the investment bankers packed their snorkels and baggies was Merrill Lynch selling off a batch of its fraudulent securitized debt bundles for roughly five cents on the dollar. That pretty much marked-to-market the similar garbage that every other big bank or pension fund or hedge fund has hidden in its closet. My guess is that some of them will just declare "game over" without even bothering to haul their garbage out and hang a "for sale" sign on it. Fannie Mae and Freddie Mac are essentially there now.

The Federal Reserve will be in the awkward position of having to make more loans (that will never be paid back) to many of these companies and entities, and in the process will fork over their remaining treasuries in exchange for garbage collateral that they will never get rid of. I don't see how the Federal Reserve survives this process. It will not have any reserves left. The collapse of the Federal Reserve would take America into an outer space version of uncharted territory, really into a whole other dimension of distress.

While Europe faces its problems on Russia and energy and its own economic performance, it has more probability of staying afloat than the US in this upcoming period. I would look for the dollar to make a new big "leg" down against the Euro.

It was fascinating to watch a CNBC report Sunday night about the progress of General Motors and McDonalds Hamburgers in China. It sure makes one wonder about the current mood of Sino-triumphalism -- the favorite car of the Chinese elite is... the Buick, a product that even demented old ladies in Columbus, Ohio, will not touch with a stick. It appears that China has succeeded in turning Peking and Shanghai into simulacrums of Atlanta and Dallas, complete with glass office towers and all the on-and-off-ramps they'll ever need -- a pretty stupid project when you consider how little oil of its own China actually has. One can only say, with a shudder, that they got into the Happy Motoring game a bit late, and wish them "good luck."

The Mickey-D phenomenon appears to be a mere fad, a toy that Chinese trade officials tossed to its people in the euphoria of ramping up the world's last manufacturing economy. For starters, China doesn't have enough groundwater or grain to feed the necessary steers (and hogs) that McDonald's uses for it's "meat products" there.

The most amusing part of the CNBC segment was the deportment of the smarmy American executives representing those companies: Rick Waggoner of GM, who was depicted in the full flower of a campaign to hose his Chinese "partners," blowing smoke up their asses as if he were some kind of a human walking-talking bong, and the two necktied creeps from McDonalds' Asian office scheming on camera about opening tens of thousands of so-called "restaurants" across the ancient kingdom. These were all perfect representatives of people stuck in a paradigm already bygone. When the Olympic mania ends, China will find itself in a new reality, too. Its single advantage, as far as I can see, is that it holds a lot of US dollars in various formats, and I don't know that this is much of an advantage given the imminent tanking of American finance.

Yes, China has become the world's factory. But if the world's leading shopper is shopped-out and busted, this might not be much of an advantage. Beyond that, as suggested above, they face huge problems with oil, water, and food, not to mention over-population and environmental degradation at a scale we can barely imagine here.

The slide toward Labor Day will remain interesting, even with all the Boyz off at the beach. Notice we haven't even touched on the upcoming political theater of presidential politics, a show that I'm inclined to call "The Party That Wrecked America."

Source - James Howard Kunstler