National Commentary

Nicholas F. Benton: The Dreaded

Remarkably, there are simply no indicators suggesting a rosy coming period for the U.S. economy. None, not one. On the other hand, there are plenty of arrows, and thumbs, pointing downward. No one has said how the gaping hole caused by the sub-prime mortgage crisis and related predatory lending policies will go away. If anything, the home foreclosure rate is expected to worsen next year, not ease off, as more balloon payments are triggered on adjustable rate mortgages.

What makes the mortgage crisis particularly interesting is its conjuncture with the unfolding energy crisis. It’s taken until now for some chickens to begin coming home to roost respecting the soaring cost of crude oil, as we’re being told that due to high energy prices on the farm, the cost of a box of Fruit Loops and other cereals will double by mid-year.

Yesterday, following the signing of the comprehensive energy bill, Energy Secretary Sam Bodman conceded in a TV interview, “There is real concern out there about the availability of oil in the world.”

All the parameters of the “peak oil” crisis, as documented every week by columnist Tom Whipple, whose reports have appeared exclusively in the Falls Church News-Press the past two years, appear to be looming. It means that a lack of ability to provide a sufficient supply of crude oil is not linked to any structural issues or foreign demand so much as to what becomes, or may already be, a permanent problem of having to spend more and more to extract increasingly scarce oil.

That’s because the “peak” of oil production has either passed, once and for all, or is imminent. A finite supply is the culprit driving up prices.

Meanwhile, the combination of jitters associated with such things and the inability to tap home equity lines and other borrowing mechanisms, due to the drop in housing asset values and the tightening of credit, are leading Joe Q. Public to batten down the hatches.

The great fear is that Mr. Public will begin spending significantly less, making a bad situation worse and threatening a nasty recession.

The numbers reported yesterday for Hovnanian Homes are that 40 percent of its new home contracts are dropping out. Union Pacific is ailing from the high cost of diesel and General Mills and Darden Restaurants are suffering from high energy costs and weakening consumer demand.

Morgan Stanley reported a $9.6 billion write down due to the mortgage crisis, and turned overseas for a loan that effectively gives China a 10% stake in its company.

The problem of talking about the chances of a recession is that recessions don’t behave the same. They’re kind of like hurricanes. How much damage they inflict can seldom be predicted in advance, notwithstanding that economists consider themselves masters of the art of prediction (like sportswriters).

Short of recession, or God forbid, a full blown depression, there are stalls like the so-called “stagflation” of the 1970s, when there was no growth coupled by inflation. Former Fed Chief Allen Greenspan says the economy is already stalled, and insists that avoiding inflation must remain the Number One goal.

One can’t help but think that most of the measures the Fed and others are now taking to mitigate the effects of an ugly economic downturn are way too little, too late. What’s the solution? Frankly, a global Marshall Plan could turn the U.S. economy around at its core structural level, creating demand for materials, technology and skilled workers. Global infrastructure development focused on roads, rails, canals and irrigation is desperately needed to lift billions out of grinding poverty, cool down the planet and turn it into a garden with a chance for peace. It would take energy, and a lot of it would have to be nuclear.

But slamming the borders shut, saying to hell with the rest of the world and turning inward is the worst approach possible. The U.S. will wind up being owned by the Chinese and implode even faster.

In the meantime, on a personal level as the recession approaches, one of the best pieces of advice I ever heard from a pulpit was simply, “Travel light.” Live within your means. Don’t get greedy. Never forget that investing is gambling.

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