Bea points to Michael Klare’s piece on How oil burst the American bubble.
His argument:
- The late 1990 stock bubble riches led to an increase in suburban/exurban housing and SUV usage. Both depended on cheap oil. They increased energy usage while the domestic oil production share declined.
- This and the devaluation of the U.S. dollar dramatically increased the price of oil and deteriorated the U.S. balance sheet. (In 1998, the United States paid some $45 billion to import oil; in 2007 it payed $400+ billion.)
- The commodity inflation obliged the Fed to increase interest rates.
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The rate increase popped the mortgage bubble while higher oil prices dimished domestic car production.
As the U.S. now slips into recession foreign sovereign-wealth funds are taking over US banks and industries. - In all, the process transfered wealth and global influence away from the U.S. and towards second tier and resource countries.
Klare is right in that economic processes don’t "just happen". They are consequences of certain lifestyle decisions and the underlying philosophies.
From 1995 onward I watched the sprawl taking place in the counties west of Washington DC. People had well paying jobs there. But they drove too far – in too big cars – from too big houses – to work at overvalued companies. Worse – the cars were low quality, the houses simple plywood construction, the infrastructure congested and the companies led by mediocre managers. It was all shortterm quantity and not longterm quality.
That view is of course exaggerated. The DC area and Silicon Valley are extremes and other places were less infected.
Still Klare’s argument makes sense. A certain lifestyle demand led to higher energy consumption which led to the developing breakdown. But he cuts a bit short on other factors. The role of the Greenspan Fed in creating the double bubble needs to be included in the analysis. The effects of the war on Iraq on oil production and the general U.S. balance sheet is another understated cause.
Like the lifestyle both were willful policy decisions supported by the U.S. public. They are expressions of a certain philosophy.
There is also one serious error in Klare’s essay when he writes:
Only a dramatic last-minute decision by the Federal Reserve to reduce overnight lending rates by three-quarters of a point before the markets opened on January 22 averted a further, potentially catastrophic slide in stock prices.
As Roubini points out:
[T]hat day the market told the Fed (with a 3.5% stock market drop following the rate cut): your 75bps cut means practically nothing to us and unless the credit problems of the economy are resolved. And the 5% rally was indeed triggered by news that maybe the monoline [bond insurers’] downgrade could be avoided.
The problems have moved far beyond oil imports. Fed interest rate cuts are no longer a way to handle them. The big issues now are credit and insolvency. Said differently – trustfulness in the U.S. model – and a financial crisis developing from the lack of it.
The long ignored bills for the overconsumption of the past decade demand to be payed. That need will require a different predominant lifestyle. But the changes will have to go beyond lifestyle and energy consumption pattern.
The underlying prevailent philosophy of "bigger equals better no matter what" is fundamentally wrong.
We don’t know if the developing economic shock will yet be hard enough to change it.
