Wednesday, December 24, 2008

The Last (Consumerist) Christmas in America
December 24, 2008

Christmas Eve is an appropriate time to consider the possibility that 2008 will be the last consumerist-frenzy Christmas in America. Commentator Richard Metzger reports on what lies ahead.

As noted last week, I will be covering a number of critical topics entitled In conversation with Richard Metzger, as my discussions with Richard have ranged far and wide over the future of the U.S. economy and society.

Richard writes:
"When we first met up, there were so many topics we could have started with, but the most pressing one seemed to be, to both of us: 'What is "it" (Depression II) going to actually look like?' Or what will it look like in a year, then two, then five? What will be the visible and social manifestations of the crisis? Let's start with that here, shall we?

What strikes me at the moment, is just how poor the retail environment is. Well poor for the merchants, great for the consumers. Would they have slashed prices this deep, this early, unless sales were off on an absolutely monumental scale? My wife and I were walking around the mall the other day and the prices now are lower than they'd normally be at the end of February, when they REALLY want to get rid of stuff. As in 75% to 80% off.

There was a story on the radio about people haggling at Barneys in New York. Here in Los Angeles many of the chi-chi modern furniture stores and small clothing boutiques are closing or have closed already. Not to type out such a Grinchy prognosis, but here it comes anyway: I think it's obvious that as bad as this retail season has been --if 75% off isn't flat out DEFLATION, I don't know what is-- this will still be seen as the "last" great, old school American spend spend spend Christmas shopping orgy for some time to come.

Christmas 2008 will be the historical bookend of the consumer era. (Emphasis added: CHS) The last gasp. I don't see any possible chance of its return. This culture of spending, the conditions won't be there for it, nor the desire to consume like that again. I think it's simply been beaten out of us.

But, further to this point, with the tremendous implosion in the FIRE economy and the huge aggregate losses in the GDP from Wall Street, the banking sector and the real estate bubble (all essentially non-productive enterprises seen from hindsight. none likely to rebound for decades), when these losses get combined with a massive, massive slowdown in US consumer spending --which serves as a sort of gigantic furnace for much of world manufacturing and trade, of course-- we'll have an America where the GDP returns to the level of... what year?

You often read economists writing about real estate saying that housing prices might eventually return to pre-bubble levels by 2011, but what about the GDP? A lot of the Ponzi scheme profits of Wall Street and the hedge funds can now be seen to never have existed in the first place. There's been unprecedented wealth destruction in real estate. In practical terms for a reasonable guesstimate of the true United States Gross Domestic Product, might this mean a return to the GDP of, of say, pre-dotcom bubble America, taking the years 1994 to 1996 as an arbitrary yardstick?

Subtract the FIRE industries, throw in the consumer/debt shut down and how much THAT will subtract (I can't guess at that number) we are looking at one hell of a haircut for the GDP. It won't be anything like a 4% contraction-- already an epic nightmare-- it'll be an abrupt implosion of some high percentage of the GDP.

And when America's rapidly growing national debt is measured against a GDP that looks closer to 1996's tally than to 2006's, this is when the word DEFAULT will be on everybody's lips. It will begin to seem advantageous to repudiate the debt before there is no possibility of any sort of governmental spending beyond servicing it. What will that do to the currency, what will this do to world trade, etc.? So many more onion layers keep presenting themselves and it all looks doomed."

Excellent summary, Richard, thank you. The numbers being bandied about to quantify the wealth that's been lost/destroyed in the U.S. in the past year are truly staggering: $10 trillion seems to be a common number but I wonder if that is as underestimated as unemployment, etc.

The Fed is desperately attempting to re-inflate the debt bubble by lowering interest and mortgage rates and buying up all sorts of semi-toxic/impaired consumer debt. Well, mortgage applications have shot up, but it's basically existing homeowners rushing to refinance existing mortgages. Lower payments will free up some household spending, but what the Fed cannot do is make people borrow more money.

What the Fed dreads is the reality we all feel and see: fear of the future due to diminished wealth and shaky incomes. If your assets have been slashed, you feel poorer because you are poorer. Borrowing more at any interest rate will not make anyone feel wealthier.

People who fear their income may plummet due to layoffs or their hours being cut are not in the euphoric mood to borrow more.

People whose 401K and IRA retirement accounts have been decimated are not in the mood to borrow more; they're in the mood to save, not borrow. People whose homes are worth less than their mortgages--at least 20% of all mortgage holders, heading to 40%-50%-- are not in the mood to borrow more.

Thanks to the "head-fake" crash in oil prices, people have received a windfall "tax cut" which won't last. All the investment which should have been made in the global petroleum industry but was cancelled due to the drop in demand will have consequences. A few years from now, when demand exceeds the fast-dropping supply of oil, then the lines snaking around empty gas stations will remind aging Baby Boomers of the gas lines and shortages of 1973. But there will be one important difference: these gas lines will never go away.

Let's say we go ahead and drill the ANWR tract in Alaska. Whoopie, in about a decade we'll get at most 1.5 million barrels a day out of that field, or less than 10% of our daily consumption. In the ensuing ten years, global depletion will have hacked off 10+ MBD from global supply.

Simply put: no matter what technology is applied, depletion of the few supergiant fields which supply half the world's oil will decline faster than modest new supplies can come on line. Since our consumer economy and thus Christmas is fundamentally based on cheap, easily available fossil fuels, then the demise of cheap oil will mean the end of the free-wheeling consumerist frenzy.

This is the last Christmas in America because this is the last Christmas in America with cheap, abundant oil.

And let's not forget that much of what is purchased in this frenzy is needless, superfluous crap. My wife saves the most egregiously gift-buying-frenzy advertising circulars, and one from Bed, Bath & Beyond caught my eye.

There is no difference between this "1001 Best Gifts" from BB&B and a parody of consumerist excess. Hmm, how about an "executive standing valet" rack of wood and plastic for $99.99.
To make this poor-quality contraption, a forest somewhere in a Third-World kleptocracy was cut down and precious, irreplaceable oil was burned shipping the lumber to China and from that factory to the U.S. across 6,000 miles of Pacific Ocean.

We know this spindly piece of garbage will break in a matter of days, weeks or maybe if the owner is especially careful, months; then the legs will break loose of the base, the towel bar will pull out, etc. and the "we cut down a priceless rain forest to make this" piece of human handiwork will be put on the curb where a diesel-buring garbage truck will haul it to the landfill.

The 16-bottle wine cellar/cooler from Cuisinart for $199.99 might come in handy storing something once it's unplugged--but a cardboard box will probably do just as well.
I for one will not mourn the last Christmas in America. Good riddance to the flaunting of borrowed money and the heedless, desperate purchase of valueless "goods" as gifts for an insolvent nation awash in too much of everything but common sense, accountability and healthy living.

Here is Part 4 of Chris Sullins' strategic action thriller, Operation SERF: Operation SERF, Part 4

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