Yesterday the stock market fell over a percent and a half - briefly falling below 12,000 on the Dow - while oil briefly passed the $100 bbl. mark before settling at $99 and change, while gold jumped about $20 an ounce to $860 and the dollar fell about a percent against the Euro to $1.47. Indeed, if you add up these factors, you discover that the U.S. market was worth 1.5% less, the dollar 1% less and oil became 3% more expensive. While it's not possible exactly to total all this up, still that's a pretty big hit in the pocketbook on one day alone - something on the order of 5% decline of U.S. wealth (as experienced by much of the mainstream) in one day.
What was particularly striking about this one day's trade is that it pointed, in a microcosm, to the deep systemic problems that will remain with us for a long time to come. While the initial drop was precipitated by a report that showed a drop in manufacturing - thus signaling a likely recession in the U.S. - another report showed declining oil inventories and thus a spike of over $3 in the price of crude. "Normally" signs of an economic slowdown would result in lower energy prices, as reduced economic activity would translate into greater overall energy supplies. However, the combination of declining energy reserves worldwide and greater use in the "developing world" (especially China and India) means that the U.S. is quite likely to experience an economic slowdown, or stagnation, in combination with rising resource prices, or inflation. This was a condition that we experienced in the 1970s now known as "stagflation," although it was artificially created by OPEC's oil embargo and was relieved when that embargo was lifted. Our current experience with stagflation will not be the result of artificial manipulation of the market, but actual declines in energy production and reduced economic growth. If our first encounter with stagflation was any indication, we can expect some unpleasant times in the offing, albeit without the easy possibility of another "morning in America."
Meanwhile we continue blithely to live in excess and tread ever closer to a precipice largely of our own making. Two essays in yesterday's papers made this point (eerily on a day when markets fell as a consequence of our very excesses, either due to our foolish use of debt or wasteful consumption of fossil energy). Robert Samuelson wrote yesterday about our wasteful and ill-advised housing choices, particularly the building of excessively large homes that are nothing more than drywall and pasteboard temples to our egos. "'We're not selling shelter,' says the president of Toll Brothers, a builder of upscale homes. 'We're selling extreme-ego, look-at-me types of homes.' In 2000, Toll Brothers' most popular home was 3,200 square feet; by 2005, it had grown 50 percent, to 4,800 square feet." All this, along with the rolling out of ever more subdivisions on arable land, subsidized to the tune of 89 billion by our federal government. On the same day in the New York Times, Jared Diamond discussed the radical disparity between consumption rates in the developed West and the developing or undeveloped rest of the world. U.S. consumption, he points out, outstrips that of (for example) Kenya by a factor of 32 times. It is now the aim of the leaders of these nations as well as good liberals in the West to encourage development of these less developed nations to a comparable level to that of the West. The idea that the planet could sustain such levels of consumption is idiotic, as Diamond points out: "If India as well as China were to catch up [to U.S. rates of consumption], world consumption rates would triple. If the whole developing world were suddenly to catch up, world rates would increase elevenfold. It would be as if the world population ballooned to 72 billion people (retaining present consumption rates)." The logical conclusion in the face of this lunacy is for the developing world, led the by the U.S., to cut back its rate of consumption. Yet, such a suggestion is regarded by most Americans as tantamount to treason or heresy or both. Nevertheless, we will be cutting back, whether we want to or not. How painful that experience will be is really the only choice we now retain - evidence that a pro-choice position remains available...
Tonight Iowans gather to select a nominee, and the caucauses of this small and unrepresentative state may eliminate a significant number of the current crop of candidates. When the voting is done, it's likely that only three or even two candidates from each party will be seen as viable, and one or more of the current frontrunners may effectively be eliminated. I remain interested in Huckabee, McCain and Obama and repulsed by Clinton, Romney and Giuliani, although none of these candidates is much better than any of the others on the fundamental questions we face as a nation. Indeed, I have a prediction that goes beyond the horse race guesses to which we are typically subjected quadrennially at this time: the next President will be forced to preside over the rapid decline of the United States as an economic power, and thus as well over the decline of the influence of the U.S. over world affairs. This prospect presents the world with a jarring alteration of its current order, and doubtlessly will lead to potentially wrenching forms of worldwide unrest and anxiety. Yet, even this prospect is less worrying to me than the likely reaction of the citizenry of this nation to the reality of economic hardship. Given our current levels of national and household indebtedness, that 2/3rds of our economic "engine" takes the form of "consumer spending," that we have shipped our manufacturing base overseas and have opted to become a "service economy" that largely sells stuff made in China for McMansions, and given the unsustainability of our current rate of consumption particularly in an era of increasingly constricted resources, I harbor distinct fears about how ugly our collective reaction to a contraction of our economic future and enforced austerity might become. How will we deal with further declines in the worth of our drywall and wood stud houses? How will we cope with rising fuel and food prices along with rising unemployment rates? And what of the prospect of spot gasoline (or diesel) shortages, a distinct possibility as we see simultaneously a rapid decline of oil production in Mexico, our second largest supplier, and the simultaneous rise of energy nationalism in other nations who increasingly will seek to assuage their own discontented populations by supplying them with remaining energy production? If the example of the 1970s was any indication, things could get ugly. Do we have a candidate among this bunch that will rally Americans to face potentially very difficult times, or even - heaven forfend - call on us to make some sacrifices now to avoid this prospect or its worst case? I'm dubious.
I am, on the one hand, grateful that things have not yet gotten so bad that this election is not likely to elicit in the selection of a demagogue; however, I am concerned that none of the current candidates yet strikes me as having the depth to understand our current situation or the fortitude, prudence and statesmanship necessary to lead the nation in what could be some of its most deeply troubled times. While we argue over whether Huckabee is a scab for appearing on the Tonight Show or whether Hillary! is laughing too much at nothing, clouds continue to gather on a horizon that is becoming all too visible yet remains largely ignored.