I don't need to tell you folks... Wall Street price mechanisms have disconnected from Main Street's employment and income projections... All asset classes, even those that in the past had inverse correlations (move in opposite directions) are now fully correlated... Commodity prices have rocked while Real Estate and Wages have not.
What the heck is goin' on?
Well, that's more complicated than any Think-Tank could answer, let alone a lone blogger... still...
It would seem that the U.S. and the West had a great deal more slack in many of their systems than any of us realized. As bad as things are economically, I thought they would have been somewhat worse, and I think this has to do with "slack" in various systems and the impact that slack has on the rate of change. To my mind, the rate of change is EVERYTHING... we can adjust to just about any environment change if the rate is slow enough... In no particular order here are slack items to consider:
Money printing has caused price inflation in the commodity sector, but there is little to no inflation elsewhere in the economy. Awful lot of slack in the money supply... of course, this might just be a lull in the action.
Housing. As I have said a Gizzilion times... we don't have a housing crisis... we have a housing finance crisis. In a long ago comment "Coal Guy" paraphrased someone and said "When this is all over the houses will still be there, and the people will live in them". The Fed and other central banks were able to buy, and then "write off", the various banks' bad loans and recapitalize the system because of the slack mentioned about above on money printing. So the banking system has survived, something I was not particularly sanguine about just 12 months ago. There will be fits and starts, and markets could get very tough... what I was worried about was contra party risk... the risk that the guy on the other side of the trade is not there to effect delivery. We seem to have gotten over that hurdle. (With plenty of risks to be sure. The CDS market is the silliest and most dangerous thing man could have conceived of if he wanted a deadly virus to be perpetually floating around the body of the financial system, to say nothing of sovereign debt risks...)
Oil imports are down, 20% or so in 5 years. 20%! Yea, things are tough... I thought it would have been a great deal worse. This does not mean that imports won't continue to decline and approach essentially zero in 10 or 15 years (with the exception of Canada)... but efficiencies will develop and domestic production of Nat Gas and Oil has increased nicely, North Dakota alone will be 700k bpd by 2020, up from zero over the past 5 years. With our new found Nat Gas production capabilities the rate of change should be manageable PHYSICALLY. Politically and then the politics of economics? Well, I am not so hopeful there... The point is that we will likely have the time necessary to work on Mass Transportation and more efficient living arrangements without having tens of thousands of people freeze to death one winter soon, something else I thought could very well have happened and that risk has been eliminated for the next decade given our new-found Nat Gas resources (and no, at some point they won't be cheap... but better to be expensive than not have it). We have been given a reprieve, not a pardon. We will need to a great many things from shrinking to insulating to mass transiting, if you will... but these things CAN be managed if the rate of change is not overwhelming. This is not to say that our car centric life will continue unchanged... we will be driving a great many fewer miles. The point is we will adjust and life can and will go on.
Food. The Federal Government has approved a plan to go to 15% ethanol in our gasoline... not sure where the ethanol is going to come from, as we already consume nearly half of the U.S. corn crop to supply 10% of our "gasoline". The mirror image of this is that we have plenty of grain for food! All we have to do is consume less gasoline. How this all balances out, your guess is as good as mine... I would bet even money that some kind of disaster would happen first to bring about a dose of sanity, and THAT is disconcerting... but on the other side of that the issue will be what it always was - WEATHER.
There are real risks in the food supply, but they are not the simple sh#! you hear tell from the doomers. Like plane crashes, it would likely be a series of unfortunate problems that compound themselves into trouble... with the the final compounding effect being WEATHER. Let me give you a scenario:
TPTB see a supply crunch coming in liquid petroleum, and trying to survive the next election they endeavor to bring ethanol up to 15% of gasoline consumption by volume. In doing so, they deplete the West's grain reserves to a point not seen in our history. They survive the election. They are sworn in in January. YAY! Kum Bi Ya! The northern hemisphere planting season starts out normal enough. Corn prices are $11 a bushel because inventories are so low, farmers are slaughtering livestock because they can't afford to feed them, meat prices plunge as a result, and crop farmers plant corn at the expense of wheat and soybeans because of the price and because they were bribed by the government to do so. It is now April/May and 80% of the corn crop has been sown. By June, it is apparent that the U.S is in the grips of a 1936 style drought and heat wave. Unfortunately, so is Ukraine. By harvest, the U.S. crop is down 60% from projections and the Ukraine crop is down 40%. Corn is $40 per bushel, and the Western economies have been destroyed by high Oil prices along with high food prices...
Farmers across the continent saw their worst harvest on record, causing corn and wheat prices to rise quickly. Droughts and heat waves were common in the 1930s. The 1930s are remembered as the driest and warmest decade for the US (the Dust Bowl years) and the summer of 1936 was the most widespread and destructive heat wave to occur in the Americas for centuries.
Or something like that. The point is, if an issue in that space were to materialize it won't be something as simple as a single event, i.e Peak Oil. It will be a compounded event, and the fact is that grain inventories have never been lower than they are today in the post WWII period in terms of days of usage, and the world is one really bad weather event away from catastrophe... and that has ALWAYS been the case. Any body who is not a "prepper" has rocks in their head. Its just probability theory. Given enough rolls of the dice, every possible outcome will be realized eventually.
So? So things are not as bad as they could be. Life goes on, the wine will flow, and there will be much rejoicing. Odds are we get through all this alive and well, but with a great deal of economic pain... which is really calibrated against our outrageous expectations. But there will be a year's worth of food in my pantry. 1936 will absolutely, positively happen again - just hopefully not during my lifetime.