A Cascading Collapse of International Finance is Underway

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God knows what manner of deals went down this past weekend in the Hamptons’ wine cellars and below-decks among the Chesapeake Bay sailboat fleet. All these hidey-holes must have been dank and fetid with the sweat of mortal fear. Will the U.S. government declare itself a subsidiary of General Electric? Will Vlad Putin be roped in to save Goldman Sachs? Meanwhile, the whole noisome rat maze of international counter-party deals was taking on sewer water and rodents of every nationality were seen leaping for daylight all over the fusty old motherlands of Europe. A cascading collapse of international finance is underway. While many fixers may jump heroically into the tumbling wreckage hoping to rescue this-and-that, the outcome by Friday is liable to be an unrecognizable smoldering landscape of the G-7’s hopes and dreams.

Some big questions for the week: will the Euro survive as a currency? Will the rush into the U.S. dollar continue even as the U.S. financial system dematerializes in a Fibonacci fever of accelerating de-leveraged infinitude? Will the remaining Big Boyz, Goldman Sachs and JP Morgan succumb to the counter-party hemorrhagic fever? Will great rows of lesser banking dominoes now start clacking onto their faces? Will all fifty states follow the leads of California and Massachusetts and line up at the U.S. Treasury’s hand-out window. Will the entity that calls itself the civilized world be left at week’s end with anything resembling money?

Your guess is as good as mine. We’ve entered the realm of phase change, where everything is slipping and nothing has settled. The final result, when the dust settles – and that may not be for weeks to come – will certainly be a poorer western world. Will it be so poor that it can no longer afford to import anything? Including oil from the land of the date palm? If so, we are really in for a rough ride, poised as we are at the edge of the heating season here in the temperate regions. Notice, by the way, that the $700 billion just approved by congress to bail out Wall Street is exactly the same sum of money that we send to the oil exporting nations this year.

Will millions stop receiving paychecks due to the turmoil in banking? It’s certainly possible, starting with the poor drones in Mr. Schwarzenegger’s motor vehicle bureau and eventually ranging to every payroll office in the land. Will Sarah Palin’s fellow Six-packers line up around the parking lagoons of the suburban banks trying desperately to withdraw the last seventy bucks in their checking accounts? (And will their thoughts in the event be: this economy is fundamentally sound….) Will the supermarket shelves of chipotle-flavored crunchy snacks and power drinks go empty as truckers refuse to deliver their loads without up-front payment? And how long does it take a hungry public to turn mean?

We could see a parallel problem in the motor fuel supply sector. So far, gasoline shortages have only appeared in parts of the Southeast USA, due to interruptions caused by two hurricanes. If the oil tankers quit offloading now for lack of credible payment, then the whole nation will get an interesting lesson in the shortcomings of the suburban development pattern.

The candidates’ debate Tuesday night should be interesting. I don’t expect too much give-and-take on the subject of East Ossetia this time around.

Even at this point, the current crack-up in world finance makes the 1929 crash and the events of the 1930s look in comparison like an orderly small town auction of somebody’s grandmother’s effects. Back in that sepia day, America had plenty of everything except ready cash. We had, especially, plenty of our own oil, and – you’re not going to believe this but it’s true – the stuff was selling for as little as ten cents a barrel, it was so abundant. And yet still, America in the 1930s plunged into a dark depression of inactivity, loss of confidence, and impoverishment.

This time around, things could get more disorderly. Personally, I think we may be beyond the reach even of fascist authoritarianism, because unlike the programmed industrial masses of the 1930s, we are unused to regimentation, to lining up at the factory gates and the movie theaters. Back then, society was so regimented that everybody wore uniforms in-and-out of the military. Look at movies from the 1930s. Every man-jack wore either a necktie and hat or overalls. The industrial masses behaved like termites. Once unemployment hit, they were waiting to be told what to do, to line up for something. It worked fabulously for Hitler, who took every advantage of this mentality. Luckily, the US went for Roosevelt (both FDR and Hitler entered office the same winter of 1933, by the way). FDR was more like everybody’s kindly Uncle Frank, and his reassuring persona enabled Americans to suck up their bad luck and altered circumstances. Many of them retreated to the family farm (which still existed then) and waited things out – and, anyway, the melodrama of the Great Depression soon resolved in the Second World War when Hitler’s love of regimentation led him into military misadventure. He shouldn’t have picked a fight with someone who had so much petroleum – end-of-story.

Okay, what happens here and now? To this point (9 AM Monday October 6, 2008) events have been proceeding under a veneer of still-just-barely- credible authority. We (as represented by Congress) have allowed Mr. Paulson to advance and activate his remedies. As things unspool further, he will be out of credibility, perhaps in a few days, and it’s unlikely that his successor will have any either. Mr. Bernanke has simply gone AWOL. Notice, he has vanished from the media landscape. We may soon be hearing the declaration of various “emergency” measures involving the allocation of food and the rationing of oil products. The Big Bailout of last week may be partially rescinded as it becomes obvious that it has had no effect – I believe about half the $700 billion has already been allocated, which is to say: lost.

I realize these things sound pretty extreme. But forces have been set in motion and momentum rules. One thing for sure: the American public is about to undergo a severe mood adjustment. There will be fewer American Idol fans and worshippers of Donald Trump by the close of business on Friday.

James Howard Kunstler
for The Daily Reckoning Australia

James Howard Kunstler
(born 1948) is an American author, social critic, and blogger who is perhaps best known for his book The Geography of Nowhere, a history of suburbia and urban development in the United States. He is prominently featured in the peak oil documentary, The End of Suburbia, widely circulated on the internet. In his most recent book, The Long Emergency (2005), he argues that declining oil production is likely to result in the end of industrialized society and force Americans to live in localized, agrarian communities.
James Howard Kunstler

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Comments

  1. Tell me that you think the idea of George W Bush deciding the only thing left to do is to declare himself the USA’s first Dictator is implausible. Are Paulson and Bush Sith? Maybe Obi Ben Bernanke is hiding out on Tatooine, waiting for the New Hope?

    Nick Samios
    October 8, 2008
    Reply
  2. I thought the same thing a while back – Bush will not leave EVER. Worst nightmare.

    But what will McCain or Obama do (which ever wins) if they have to wait until January to get anything done properly, assuming they know what to do?

    Reply
  3. ..wealth is the feeling of ease you acquire when you are comfortable with your place in the pecking order, you can provide for yourself all the comforts you desire and your desires do not exceed your ability to be useful to others…some people “jump ahead in the pecking order” by securing credit and under the discipline of debt repayment….get motivated to improve their abilities…they do this because they are confident…..banks depend on confident people to turn a profit and go about inducing confidence by adjusting the interest rates to accommodate bank profit..which they become very competitive about….inducing the public to the point of mass delusion or irrational exuberance is the dilemma for modern bankers in that once they start the confidence ball rolling, it snowballs nominally to levels which even able confident alpha types grow suspicious of…..you see, a growing nominal value of assets due to banks’ generous credit standards induces a false confidence in that without increasing the abilities of the debtor the percieved increase in nominal valuations induces delusions ….at this point, banks have to tighten credit….to weed out the slightly delusional types as an example to the more able types …which is done at periodic intervals or “waves” if you like…..if banks delay too long and allow these waves to become too large i.e. the ratio of queue jumpers to stand in line types draws too much suspicion…or worse, the queue jumpers rule the roost….then the adjustment process can be very disruptive……. as Dr. Oro Myicin says..” wurst case i’ve evah zeen!”….

    Reply

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