Yes...but!

January 7 2008

Home > Columns >Yes...But! Year 8-9

The coming years will be a tough for many, especially south of our border, where house prices are going south, way-way down, resulting in many homeowners owing more than their dwellings are worth. In addition one Hundred Dollar Oil will herald hardship and inflation because everything has carbon content which means increased traveling cost, extra home-heating expense, greater outlay for groceries: higher everything, including unemployment.

The New Year brings something new: a sagging in Gross Domestic Products and a rise in inflation, an economic condition for which I have coined a brand-new word: sag-flation, worse than the stag-flation some 25 years ago when the economy stagnated while the Consumer Price Index went way up. Watch the word “sag-flation” become common currency in the years to come.

There are literally millions of home owners, especially in California, Florida, Michigan and Ohio, many of them first-time buyers, who now have trouble meeting mortgage payments. Their very last resource, credit cards, have now been maxed out, and, with a recession in the USA on the horizon, lay-offs are looming, causing a nasty domino effect: fewer jobs mean less income, leading to more positions disappearing, sucking the economy into a whirlpool of misery.

I feel sorry for these folk. Losing a home must be a heart-breaker. Being a first-time home-owner is a unique experience: the thrill of buying it, then getting more furniture because the kids will have space of their own, showing the newly acquired place off to friends and in-laws. Then failure, thanks to the re-setting of payments, or not reading the fine-print or being too trusting.

Losing a home has many other implications as well: marital tensions, fights, sicknesses, substance abuses: believe me, the hardship is real. And it is happening to millions of homeowners in the USA.

All this comes at a crucial point in history. Bush and Co tried to replace America’s dwindling manufacturing economy with a new-home-ownership-industry, benefiting both the construction segment and the automotive establishment. A successful Iraq conquest would result in an infinite and cheap stream of oil, making the exurban building boom on cheap land far away from everywhere feasible.

This utopian dream has now blatantly back-fired. Peak Oil has replaced the tiger in the tank with a monkey-wrench, vastly reducing the value of sub- and exurban housing.

It was good while it lasted: forty (40) percent of all new jobs after the year 2000 were created in the latest burst of residential expansion, providing good wages for excavators and framers, for sheet-rockers and the manufacturers of kitchens and bathrooms and Jacuzzis, for the sellers of appliances and furnishings and those who made cars to service the far-out new settlements. It also gave million dollar bonuses to bankers, while the real estate industry raked in billions. The initial owners of strip malls, power centers and office towers did equally well.

There is a lot at play here. The moneys to build these outlying settlements were advanced by financial institutions, who, in turn, sold these securities – better billed as insecurities – to Wall Street, where traders added a percentage point as commission and peddled them in Chile and China and Singapore and Seoul. All these securities are now only fit for the shredder.

The next wave will come when credit cards are defaulting, also made into (in)-securities and also distributed throughout the world as Triple A Bonds. How all this money magic will affect the secretive hedge funds, and their staggering leveraged positions, is anybody’s guess.

What is plain is that the American public has enjoyed an artificially high standard of living thanks to inflated home prices and easy cheap money. Now Pay-back time has arrived, accompanied by Peak Oil which will take its toll much more on the American consumer than on Europeans who have enjoyed the same high living standard as the US citizens but have done so using half the amount of energy. Add in America’s debt situation, and its ever shrinking dollar and matters can only get worse. Oil producing nations know that they have the world in a stranglehold. They know that oil in the ground will only grow in value, so they will export just enough to allow them a good income, while preserving their reserves.

Matt Simmons, the leading investment banker to the oil industry, predicted in October that the United States is much closer to encountering shortages of oil (and gasoline, of course) than the public realizes. Once this happens life will be disrupted in every imaginable way – economically, politically, and socially. People will adjust to higher prices, said Simmons, but they will freak out over spot shortages.