Jan Collmer has an interesting article in the Intellectual Conservative on why the economy tanked in 2008 and why prospects are dismal for recovery anytime soon.
In the early summer of 2008 the world’s oil markets careened out of control, and an incredible price bubble developed fueled by Wall Street savants, the media and the many who claimed a massive supply shortfall in the face of worldwide acceleration of consumption. It is true that consumption has accelerated in the last few years, especially in Asia, but the world is awash in petroleum and shortages are due to either delivery, refining capacity or problems associated with geo-politics. . .
That is not to say that there was no problem; but the problem was rooted in unregulated speculation in the petroleum markets, a fact overlooked by the MSM. During the eight-year reign of Bill Clinton, Enron Corp convinced Clinton to pressure the regulators to open up the futures markets in petroleum to a large variety of investors, not necessarily those in the business who had traditionally operated a futures market to ensure stabilized pricing. Up to that time an investor in futures had to be a producer or a consumer of crude oil or natural gas. Once the entry barrier was lowered it wasn’t long before 95% of the futures trades were not by users or producers but by speculators. Speculation was the primary driving force to create the bubble. Leverage was extremely high with just a 10% margin required on a trade, much like the stock market of the late 20s. Once prices broke, the market plunged from a high of $147 per barrel at the peak to less than $40 in December 2008. High leverage cuts both ways; win big or lose big. . .
There is still extreme leverage throughout the financial arena worldwide and the game is far from over. Derivatives in the form of credit default swaps and thousands of other clever financial gambles are ravaging the world. While many of these instruments have sound uses as hedges for crops, oil, industrial commodities and materials, most are just pure speculation. In any derivative transaction, there is a winner and a loser but if the loser can’t pay, there are two losers. When the loser is a major Wall Street firm or an insurer like AIG and the numbers are in eleven or twelve figures, the situation becomes dire indeed. . .
It is reported that the total face value of derivatives worldwide is around $700 trillion. The entire Gross World Product is only about $50 trillion, $15 trillion of which is the US output. Most of the massive derivative action has been created in the US, making America the world’s biggest casino. It will take a few years for all of these chickens to come home to roost, to paraphrase the Reverend Jeremiah Wright. . .
The seeds of our destruction were planted in the 60s and have grown and metastasized ever since. . .
The road ahead looks very, very rough. Recovery is not in sight. Bailouts seem to be the order of the day but where does the several trillion dollars (rumored to exceed $8 trillion already) needed for bailouts and liquidity come from?
There are just three sources of new government money: new taxes, increased borrowing and the printing press. . .
Expect to see double-digit inflation within a year or two. First, there will likely be a period of deflation or what was called stagflation in the 70s. Stagflation is a combination of inflation and recession. But, the inflation engine is running and it is in high gear and it will prevail. The dollar will sink in the sunset as Reagan’s “Shining city on a hill” goes up in financial flames. . .
Still the American financial hole is deep too and some folks, notably your Democratic Congress, are still digging. The Bear Market is in absolute total control of Wall Street for the foreseeable future and rallies will be brief and each one will be followed by deeper slides. The DJIA will likely lose 60-70% from its peak value of about 14,000 points, down to 4000-6000 points by the end of 2009. . .
Our children and grandchildren will grow up in an America that is very different than the one we enjoyed.
Full article here.
Hat tip: Sam C.
A bleak assessment of our dire predicament. Yet there’s reason to hope. We endured similarly bleak times in the late 1970’s under Jimmy Carter — whose record still stands as the only President to have once been attacked by a rabbit. As Ronald Reagan famously quipped: “A recession is when your neighbor loses his job. A depression is when you lose yours. And recovery is when Jimmy Carter loses his.”
Indeed. Carter’s policies bequeathed gas lines and double-digit inflation at home, and a humiliating year-long Iranian hostage crisis and a belligerent Soviet adversary abroad. How Reagan handled these crises and launched the biggest economic expansion in U.S. history is a story that deserves to be remembered and retold. My own poor effort in this regard is documented here.
In a related story, the Sunday Times UK reported yesterday that “a model housing estate funded by Hollywood celebrities and hand-built by Jimmy Carter” and his Habitat for Humanity volunteers is “falling apart”.
[Insert joke here]