Our economic perturbations become more bizarre every day.
The stock markets fly up just as employment, production, construction, and retail sales decline. General Motors is facing bankruptcy at the end of the month and soon will be thrown off its 83 consecutive year tenure on the Dow Jones Industrial Average. Oil prices touched $60 a barrel this week as demand falls and worldwide stockpiles grow. There are now 130 million barrels of oil and products sitting in tankers waiting for prices to go higher.
Despite a 3 million barrels a day (b/d) cut in OPEC oil production, recent analysis suggests that the supply of oil has been outrunning consumption by 2 or 3 million barrels each day. Speculators have been storing the excess in hopes that prices will be higher down the pike; hence we have 100 or so tankers-full of oil at anchor waiting for prices to go up. This situation cannot go on much longer for at some point the world will run out of unchartered tankers and the demand for oil will drop as there will no longer be any place to store the surplus. Whether this drop in demand is days, weeks, or months away is impossible to say – there are simply too many variables at play.
For the last two months the equity markets have been rising steadily, setting records with the pace of the climb. This surge has come despite remarkably little evidence that the U.S. and global economies are actually improving. Many are warning that perceived economic improvements come from a combination of hype and selective interpretation of economic data. Many believe that equity markets are supposed to rebound from a recession six months before economic growth actually begins. Given this predisposition, it is always easy to imagine that things will be better six months from now so that the barest hints that an economic decline is decelerating is deemed sufficient evidence that the worst is over.
Most of the optimism comes from shallow economic thinking. Any company can beat Wall Street estimates of its likely earnings simply by low-balling its earnings guidance, firing or part-timing a bunch of employees to cut costs, and then letting inventory run down. As retail stores close, the survivors are likely to benefit from less competition – for a while.
Despite all the green shoots, bailouts, and stimuli, the case for prolonged economic troubles remains solid. Real un- and under-employment continues to rise. China’s exports are now down 22 percent over last year. Housing prices dropped by the most on record during the first quarter as banks sold foreclosed properties. A large number of mortgages will reset leading to even more foreclosures over the next two years. Despite the hype and optimism surrounding the bankruptcy and reorganization of Chrysler and likely bankruptcy of GM, it is difficult to see where the US automobile industry is in anything but a death spiral, considering the issue of how many motorists will be unable to afford gasoline a few years from now.
Fictitious bank profits derived largely from creative accounting and massive government support can only briefly offset economic reality. Somewhere in the near future, this fantasy of green shoots and rebounds must come to end. A massive economic paradigm shift stemming from the overextension of credit, the declining availability of most kinds of natural resources, and a population overshoot, must be recognized for what it is leading to — a depression that will last for an indefinite period, likely decades.
How long it will take before the reality of our predicament is generally recognized is hard to tell. There are now 6.8 billion of us milling around here on planet earth. We all come from different places, act on different information, and hold different perceptions and prejudices. Just where and how a critical mass will emerge that will start to deal with the realities of dysfunctional monetary systems, global warming, peak resources and other dangers yet to be perceived is impossible to tell.
The pace of events, however, is increasing. In a manner similar to the great wars of the 20th century, events are spinning out of control. This time it is not great armies, but economic forces that are on the move. Before the month is out we should have a better idea of what sort of automobile industry America will have in the years ahead. In the next quarter or two we should know whether there really were green shoots or just another chimera. Another year or so should settle the issue of brief recession vs. extended depression. Three or four years should be enough to make peak oil and peak many other natural resources clear enough for all. Another 30 years should settle the global warming “tipping point” issue and whether or not we will bequeath future generations a greatly degraded place to live.
We are living in interesting times.