Tuesday, April 15, 2008

gasping for air

in a scene near the end Total Recall, a group of rebellious martians are nearly suffocated by a greedy capitalist. they lie panting for breath, staring at the motionless fan that normally brings them fresh air before they're finally saved.

it seems an apt metaphor for what's happening in suburban, consumer-oriented USA... after years of enjoying an easy draft of credit and liquidity, an entire consumer-based economy is starving for money. take for example the current top story in today's NYT:

The consumer spending slump and tightening credit markets are unleashing a widening wave of bankruptcies in American retailing, prompting thousands of store closings that are expected to remake suburban malls and downtown shopping districts across the country.

for years, our economy relied on an artificial and unsustainable flow of money and credit. this multi-decade process is now unwinding, threatening to undo much of the material culture -- the hard archaeology that makes up our society. this year, nearly 6,000 retail establishments will close, the most since 2004, according to the NYT, which cites the International Council of Shopping Centers.

I would like to stress that our suburban-based consumer economy itself is a strange and idiosyncratic model. it's a true product of the 20th century -- a period when the big challenge was finding a use for all the cheap commodities available everywhere. coming out of the Great Depression, blessed by the Keynesian notion of keeping strong effective demand, the US economy grew by aggressively consuming large amounts of oil, steel, plastics, food and fabric. we promoted highways, gave tax breaks to make suburbia cheaper than urban living and subsidized sunbelt economies with everything from big dams (TVA, Hoover Dam, etc) to defense spending.

it's important to understand the bigger picture historically, and few things tell the story better than the above chart. part of this 60-year process of consumerism and sprawl was an easy growth of credit and increasing household debt. in 1952, debt was 7% of household net worth.. by last year, it was over 23%... and, as home prices decline, it could increase further because their wealth will fall while debt will remain constant.

I studied this subject in college and recently found one of my old papers on the subject, which can be accessed here

one more thing I would like to throw out to the people who think commodities are in a bubble... one sure sign of a bubble is that inventories are rising and demand is falling. that was true with houses in 2006, true with credit last summer, true stocks in 1929 and again in 2000.

commodities are simply no where near that level yet. oil supplies are high, but still in strong demand. grains are in very tight supply. so, I say commodities still have more to go. oil seems to be establishing new ground above the key level of 110 ... as this blog predicted... the next leg up may be even sooner than I thought.

No comments: