[T]he decline of Rome was the natural and inevitable effect of immoderate greatness. Prosperity ripened the principle of decay; the causes of destruction multiplied with the extent of conquest; and, as soon as time or accident had removed the artificial supports, the stupendous fabric yielded to the pressure of its own weight. The story of its ruin is simple and obvious; and, instead of inquiring why the Roman empire was destroyed, we should rather be surprised that it had subsisted so long.
—Edward Gibbon, from the Decline and Fall
Perhaps you have noticed a common theme in my recent columns. Each policy proposed to solve our economic, oil or climate problems I have examined has a fatal flaw, and often more than one. New initiatives always seem dead on arrival.
Cap & Trade is not likely to be enacted but if it is, the law would raise energy costs while making only token CO2 emission reductions as in Europe. President Obama put forward a proposal to think about, not build, an expanded passenger or freight rail system in the United States. A “harmonized double standard” for increased CAFE fuel efficiency mandates that cars average 39 miles-per-gallon by 2016, which probably translates to 29 miles-per-gallon in EPA bureaucratese.
On the economic front things are the same. Change we can believe in quickly morphed into a doomed attempt to return our flawed banking system to business as usual. As the Fed and the Treasury continue to bail out the banks, Arianna Huffington tells Tech Ticker’s Aaron Task that—
… the [Obama] administration is avoiding the big problems [in finance]…Tim Geithner and Larry Summers were creatures of Wall Street… [and they] are like people who still believe the world is flat. They see everything revolving around the Earth and in their case that’s Wall Street. That’s not good if you’re producing maps to navigate.
Even if we require a functioning financial system to speed any “recovery” we might get, few are thinking about what those banks will invest in after our economy bottoms out. More McMansions in the exurbs? More shopping malls? Who will buy these houses miles from nowhere? And then fill up the GMC Yukon to shop at Saks and eat at the Cheesecake Factory? Some over-leveraged consumers will gas up & go, but most will not, at least not as frequently as they used to. People need to pay down their debt as they try to hang on to their low-paying jobs. Our FIRE economy (Finance, Insurance, Real Estate) will try to blow another bubble, but we’re quickly running out of quality assets whose value we can inflate.
The theme that unites our flawed responses to economic and energy problems is futility, defined as—
- The quality of having no useful result; uselessness.
- Lack of importance or purpose; frivolousness (unworthy of serious attention)
We can not seem to escape futility’s vicious circle.
Figure 1 — As problems become more intractable over time, our resistance to making real changes to confront those problems, our social inertia, becomes more entrenched. Thus the solution to debt-based economic problems is more debt. The solution to liquid fuels problems is marginally more fuel efficient cars, not alternatives to driving. We study an expansion of the rail system instead of building it to provide an actual alternative to flying or driving between cities. We dream of hypothetical biofuels in the far-off future to solve an oil supply problem in the here & now.
Bingeing on debt is reckless, and financialization has a long record of being a dangerous late stage in the trajectory of previous leading world economic powers. Moving money around instead of making things is always dicey, and the U.S. transformation has been the most grandiose to date…
Money is “bad,” in the historical sense, when a leading world economic power passing its zenith — before the United States, think Hapsburg Spain, the maritime Dutch Republic (when New York was New Amsterdam), and imperial Britain just before World War I — lets itself luxuriate in finance at the expense of harvesting, manufacturing, or transporting things. Doing so has marked each nation’s global decline. To institutionalize the dominance of minimally regulated finance at this stage of U.S. history is a bad idea.[My note: Phillips wrote this before the meltdown in 2008:Q3. finance at the expense of … manufacturing— look at Figure 2.]
Phillips is talking about the Decline of the American Financial Empire. When our society “luxuriates in finance at the expense of harvesting, manufacturing or transporting things,” we cling to the status quo instead of acting to solve the problems confronting it. We dig our heels in, our inertia grows stronger. The problems (too much debt, too little oil) do not go away. Unattended to, they get worse, as do the eventual consequences of inaction.
All my recent articles on the economy or energy describe futility.
Futility manifests itself in several ways, including—
- paralysis or indecisiveness
- frivolousness, money-seeking at the expense of others (”greed is good”)
- the triumph of wishful thinking (unfounded hope or fantasy) over substance
- political in-fighting and corruption
- passivity or apathy
I’ll tell a few stories to illustrate three of these ubiquitous signs of decay.
Upon assuming his duties as the Secretary of the Department of Interior (DOI), Ken Salazar extended the review period of President Bush’s midnight plan to expand offshore drilling from 60 to 180 days. The Washington Post’s Plan, Baby, Plan described the policy change—
Mr. Salazar’s 180-day extension of the comment period is the first of four actions that he says will give him “sound information” on which to base a new offshore plan for the five years starting in 2012. He has directed the Minerals Management Service and the U.S. Geological Survey to round up all the information they have about offshore resources within 45 days. This will help the department determine where seismic tests should be conducted. Some of the data on the Atlantic are more than 30 years old.
The secretary will then conduct four regional meetings within 30 days of receiving that report to hear testimony on how best to proceed. Mr. Salazar has committed to issuing a final rule on offshore renewable energy resources “in the next few months”…
[My note: There’s no final rule yet.]
Mr. Salazar’s announcement was also notable for what it didn’t do. Much to the chagrin of some environmental advocates, it didn’t take offshore drilling off the table. Nor did it cut oil and gas interests out of the discussion. That’s as it should be.
The new DOI Secretary’s wish-washy attitude toward offshore drilling appears to have been among his most important qualifications for the job. He’s not for offshore drilling, but he’s not against it either. Salazar’s announcement was notable for what it didn’t do and nothing would happen before 2012 in any case. That’s how it should be opined the Washington Post. Salazar then trotted off to meet the public in Atlantic City, New Orleans, Anchorage, and San Francisco to get some expert opinions.
Surfers splashed with organic chocolate “oil spills” and environmentalists dressed as jellyfish and furry polar bears gathered in San Francisco on Thursday and gave a theatrical message to Interior Secretary Ken Salazar: Don’t start new drilling off California’s coast.
Undoubtedly a bunch of people drove to the meeting, did their jellyfish/furry polar bear thing for Salazar’s benefit, and then drove home. You can’t have it both ways—either stop driving or start drilling. Make up your mind, do something, Mr Secretary. Tienes huevos!
As we further deplete our oil reserves, our lethargy on new drilling turns into paralysis. Efficiency gains lowering our fuel demand will be offset by future production losses. Our dependency on imported oil, which now stands at 64% of our consumption, will not go away. The problem will become more acute as we compete with China and other emerging markets for barrels. Yet we do nothing as we make a desperate, last ditch attempt to preserve Happy Motoring.
Investors hoping for immediate hefty returns are now speculating in stocks and commodities in the midst of the biggest economic downturn since the Great Depression (Figure 3).
Figure 3 — Four Bad Bears posted by Calculated Risk from dshort.com. There has never been a stock market rally like this one in a slumping economy (bear market) that is still months away from hitting bottom.
General Motors filed chapter 11 bankruptcy on Monday this week. The move portends the further loss of tens, probably hundreds, of thousands of jobs for autoworkers, dealers and parts suppliers. What happened that day? The Dow Jones went up 221 points. The oil price jumped $1.77 per-barrel as it surged past the $68 mark. Bloomberg reported Crude Oil Rises to Highest Since November on Manufacturing Gain. Manufacturing gain?
Crude oil rose to the highest level since November as China’s manufacturing expanded and U.S. industrial output shrank less than forecast, signaling that fuel demand may increase…
[My note: Oh, I see. The manufacturing gain was in China!]
“We’re certainly on our way to $70, if not $75,” said Stephen Schork, president of Schork Group Inc. of Villanova, Pennsylvania. “That seems to be the number everyone is talking about. Given the technical momentum in this market, you cannot bet against it and step in front of this train.”
Technical traders watch for patterns on charts for clues to price direction, and may sell or buy based on those signals…
“Investors are hopeful that the economy will be buoyant during the second half of the year, which will lead to increased crude-oil demand,” said Michael Lynch, president of Strategic Energy & Economic Research, in Winchester, Massachusetts. “There are also hopes for a strong driving season.”
The peak U.S. gasoline consumption period lasts from late May’s Memorial Day holiday until Labor Day in early September, as Americans take to the highways for vacations… Gasoline for July delivery rose 2.9 cents, or 1.5 percent, to end the session at $1.9243 a gallon in New York, the highest settlement since Oct. 9.
“As we get into the $70 to $75 range, we’re going to be talking plus-$3 gasoline by the end of the summer,” Schork said. “If you’re going to tell me plus-$3 gasoline is sustainable in this economy, then kudos to you. I just don’t believe it.”
[My note: I described the current speculation in oil in Mr. Market Gets It Wrong Again. I described how traders who are all doing the same technical analysis act in concert to drive the price up or down in The Price Is Not Right.]
Bullish stock and oil moves on the day General Motors filed for bankruptcy were frivolous—these are not signs of an economic comeback.
What should be taken seriously is the orgy of escalating fuel costs that will accompany the recent spike in oil prices. Only a few traders will make money from these price movements, but everyone else will suffer. Investors are hopeful of a strong summer driving season? As they drive up gasoline prices for cash-strapped Americans amidst the worst economic downturn in 75 years? The price increase was based on a flimsiest of indicators, a slight decrease in China’s Purchasing Managing Index.
Figures from the state-sanctioned China Federation of Logistics and Purchasing yesterday said that its Purchasing Managers’ Index (PMI) fell slightly to 53.1 from 53.5 in April, but given that any number above 50 represents growth, it still marks an increase in output and orders.
At best speculators in oil are rationalizing sociopathic behavior by citing mediocre Chinese manufacturing numbers while U.S. industrial output shrinks less than expected. At worst they all think they’re Gordon Gekko. Excessive speculation (gambling) by investment banks, regular banks, hedge funds, pension funds, and the rest got us into this economic mess. What is the answer to the problem of excessive speculation? More speculation of course!
Gambling neither reflects nor signals green shoots in our economy. The only possible outcome of running up oil prices would be to squash an incipient recovery should one appear. This behavior reveals a society that can’t regulate its markets properly, a society where oil prices are not related to supply & demand and stock prices are not related to a company’s earnings. If we no longer pay heed to poor fundamentals, speculation reflects futility.
Consider the recent rise in the Conference Board’s Consumer Confidence Index (and Figure 4).
The Conference Board Consumer Confidence Index™, which had improved considerably in April, posted another large gain in May. The Index now stands at 54.9 (1985=100), up from 40.8 in April. The Present Situation Index increased to 28.9 from 25.5 last month. The Expectations Index rose to 72.3 from 51.0 in April.
Figure 4 — Consumer Confidence since 1978. From Jim Puplava’s Financial Sense. The “Present Situation” Index (blue) remains at a low level not seen since 1992 and 1982.
The Consumer Confidence Survey™ is based on a representative sample of 5,000 U.S. households. The monthly survey is conducted for The Conference Board by TNS. TNS is the world’s largest custom research company.
Consumer expectations are getting better. That’s good for spending, right? MarketWatch took note in Consumer confidence, or consumer hope?
They call it “consumer confidence,” but the numbers released Tuesday by the Conference Board might better be pegged as “consumer hope.” There’s a big difference, namely that confidence translates into spending, while hope is just a good feeling.
The Conference Board’s measure of consumer confidence was up 35% from April, the fourth-largest jump in the 32-year history of the index. The move left consumer confidence in positive territory at 54.9, the highest it has been in eight months. The gain was far bigger than economists expected.
Consumers clearly believe the worst is behind this economy and the market, when it’s not clear at all to the experts that the U.S. can avoid another leg down — or worse — en route to a broad-based recovery.
Consider that there was a big increase in the percentage of consumers expecting the economy to generate new jobs, despite no evidence that the current economy can actually achieve that.
Consumers expect inflation at a rate north of 5%, even though government numbers have been showing price deflation; that disconnect should undermine confidence. And while rising gas prices were cited as dampening confidence in 2008, consumers appear to be ignoring the action in gas prices now.
More consumers are now expecting the economy to start generating jobs, whereas most economists believe it will be late 2010 before the jobs numbers become positive. More consumers expect hyperinflation north of 5%, whereas the current numbers put future inflation at 1-2%. Where do these unfounded hopes or expectations come from?
Eric Janszen at Tulip took a close look at consumer confidence (aka. sentiment) after the Conference Board’s latest survey. You would think confidence would correlate with job prospects, right? It does not. Consumer confidence follows the stock market! Specifically, sentiment corresponds to the Dow Jones Industrial Average (DJIA).
Figure 5 — Consumer Confidence versus the Dow Jones Industrial Average (DJIA) since 1998. Janszen’s comment: “Except for a brief period in 2005 and 2006, consumer sentiment and the DJIA strongly correlate. Rising unemployment starting in early 2007 overwhelmed the DJIA as the key consumer sentiment driver; consumer sentiment peaked in early 2007 before the DJIA peaked late in the year. The DJIA and consumer sentiment declined together during the recession so far, since late 2007, until recently when the DJIA and consumer sentiment re-connected.”
Janszen believes “the DJIA index is used by the FIRE Economy financial media [e.g. CNBC] to sell the current state of the economy [to consumers or investors]… The DJIA has virtually no economic significance compared to the broad stock indexes such as the S&P index and the NASDAQ that have many times the capitalization of the DOW.” In a related development, bankrupt General Motors and insolvent Citigroup were dropped from the Dow index on June 1st. They were replaced by Cisco Systems and Travelers, respectively. That should improve consumer expectations considerably!
Bullish speculation in stocks bolsters consumer confidence based on … nothing at all. Confident consumers are seen as prone to spend more money, which begets bullish speculation. Many Americans think the worst is behind us. They expect a wave a new jobs to appear any day now. This is wishful thinking.
The fundamentals of our vaporous economy are terrible. This speculative frenzy doesn’t change the sorry state of Main Street. It’s just a lot of hot air on Wall Street, which is trying to re-inflate stock prices. This new equities bubble (Figure 3) is like some bizarre Wheel of Fortune—round and round it goes, where it stops nobody knows.
All this behavior is utterly futile if our goal is a sound economy & recovery.
I could tell stories like this all day long, touching on political infighting, corruption or undue influence up and down the Wall Street-Washington corridor, or the docility of our passive citizenry brought about by 30 years of consumer training. I would run out of time long before I ran out of material.
Everything—I mean every single thing—is broken, including health care costs & coverage, the energy markets, the economy as a whole, public education, physical infrastructure, insurmountable deficits at the local, state and Federal levels, etc.
Can We Put Humpty Together Again?
Humpty Dumpty sat on a wall,
Humpty Dumpty had a great fall.
All the king’s horses,
And all the king’s men,
Couldn’t put Humpty together again
—A Nursery rhyme
Is there any hope? I’m talking about real hope, not the daily barrage of pernicious nonsense that passes for serious discourse in the United States. No radical transformation of our society will occur unless we can overcome our social inertia. We would need to get serious, escape futility, do real things again.
The first step would be to acknowledge what a sorry state we’re in. Speaking with Bill Moyers back in September, Kevin Phillips didn’t think soon-to-be President Barack Obama would level with the American people about how bad things are. If the President indeed understands the depths to which we’ve sunk, he has not come clean with us—you don’t rock that boat.
History suggests that we will not be able to put Humpty Dumpty together again. Imperial greatness reaches an apogee and then follows a downhill trajectory. We had it good once, but now we cling to old dreams—like Rome, we prop them up with Edward Gibbon’s artificial supports—instead of confronting unpleasant realities. The old vitality is gone. In the United States we carry out studies explaining why the cost of nuclear power is prohibitive. The Chinese build nuclear power plants.
America is like an Obsessive-Compulsive who has lost his keys and keeps looking for them in the same drawer over and over again. We never tire of making the same mistakes, believing that “More Is Better” without acknowledging that it was this kind of flawed thinking that got us into this predicament in the first place.
California, it has long been claimed, is where the future happens first. But is that still true? If it is, God help America…
What’s really alarming about California, however, is the political system’s inability to rise to the occasion…
… and you have to wonder if California’s political paralysis foreshadows the future of the nation as a whole.
Don’t worry about it, Paul. The future looks like California just as it always has. As Gibbon said of the Romans, prosperity ripened the principle of decay, the causes of destruction multiplied and eventually the stupendous fabric yielded to the pressure of its own weight.
In the near future I’ll get back to writing about our futile efforts to put 1 million plug-in hybrids on the road by 2015 and similar fantasies. And if I’m alive in 20 years, I’ll write another article called The Decline & Fall of the American Empire.
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