The Feast of the Assumption of the Blessed Virgin

It’s “an empire ending problem,” says Robert Zubrin.

He’s referring to the outflow of capital from the United States of America to the oil exporting countries. OPEC now takes in more cash than the U.S. government.

Oil fell a dollar yesterday – bringing the price per barrel down to $114. It’s sold as low as $112 this week. We expected it to sink below $100. So far, it hasn’t happened. But this correction could last much longer and take the price down a bit more.

Americans are responding. The latest numbers show them driving nearly 5% fewer miles this year. And the Arizona Republic opines that the price of gasoline is not likely to fall much further.

OPEC’s revenues add up to more than a $1.1 trillion per year – more than the U.S. government gets in tax receipts. If OPEC were to save its money, in just three years it could buy nearly the entire Dow – taking control of America’s most important industries.

Of course, if the foreigners got together and pooled all those dollars they’ve been collecting over the years they could already buy control of every public company listed on the NYSE.

But don’t worry about it, dear reader; they’re not going to do it. Yesterday, we got word that Russians were getting a foothold in the U.S. steel industry, buying the John Maneely Company, a steel pipe maker in Ohio, for $3.5 billion. Sure, there will be a lot more foreigners picking through the rubble of once-great U.S. manufacturing businesses. With the dollar down...and U.S. wages falling (more below...)...the foreigners are finding that the United States can be a good place to outsource work. But the takeover of key U.S. industries will be piecemeal and disorganized. Besides, the empire is giving way anyway. You can’t run an empire on credit – not for long. And not when you have to borrow from your rivals. A real empire needs to be able to control its money. And a borrower is never in control. As it says in the Bible, he is “slave to the lender.”

Americans forged their chains over the last three decades. Now, the homeowner is slave to the mortgage lender (the typical house is majority owned by the mortgage holder)...the mortgage lender is slave to the Wall Street banks that lent it money...and Wall Street is now slave to the U.S. government. When the big financial institutions need money today – they turn to the feds, not to short-term money markets. Yes, the Fed has become the bank of first, middle and last resort. It advertises to Wall Street: Need cash? Bad credit? No problem!

But where do the feds get any money? The U.S. government now spends about half a trillion more than it takes in. Where does that money come from? From U.S. citizens? Nope, they don’t save a dime. Directly and indirectly, it comes from those nice people who speak Chinese, or Russian, or Arabic – you know, the same people who are jockeying to replace the United States as the world’s leading imperial power.

*** U.S. homeowners are getting paddled; yesterday’s news brought forth new evidence. The National Association of REALTORS reported a 7.6% drop in house prices nationwide during the second quarter. One third of all sales are now of foreclosed houses – on which the lenders lose money. Repossessions are running three times what they were a year ago, with the largest inventory of unsold houses on record.

Sacramento, California, seems to be the epicenter of the housing quake. Places there are down 36%, according to the NAR. On the other side of the country, the housing-price tornadoes touched down in Cape Coral and Ft. Myers, both in Florida, where prices are down 33%.

House sales are at a 10-year low. And houses take three times as long to sell as they did two years ago. While they are waiting to sell their houses, people default on their mortgage payments. Default notices are running 53% ahead of a year ago. And analysts from Credit Suisse estimate that 8.4% of ALL homeowners will lose their houses to default and foreclosure before this downturn is over.

The poor homeowner is having trouble keeping up with his payments because he doesn’t earn enough money. Wages have only kept up with inflation – barely – for the last 40 years, as spending has increased. And now, jobs and overtime are becoming harder to get. The unemployment rate rose to 5.7% last month. In Michigan, where they used to make cars at a profit, 8.5% of the workforce is unemployed.

Someone did somebody wrong. But will a few whacks on the derriere – for homeowners and Wall Street – be enough to put the whole episode behind us? Meanwhile, the feds are trying to rescue the homeowners – very publicly. And they’re trying to rescue Wall Street too – furtively.

U.S. workers are competing with the whole rest of the world. They are not necessarily better educated. Nor do they have newer and better factories to work with. Unfortunately for them, the playing field has been leveled. And so, their wages must fall into line with wages in the rest of the world.

Jacques Rueff described how to cut the worker’s wages – “without tears,” no less. Inflate the money supply! Inflation decreases the relative value of wage earnings.

We read in the news that the official inflation rate in the United States has jumped to 5.6% – a 17-year high. Consumer price inflation rose 0.8% in July, more than economists expected. Which just goes to show what a herd of me-too thinkers economists are. Bloomberg had polled 78 of them. Their estimates for July ran from 0.1% to 0.7%. Not a one of them dared to guess the right number.

Multiply 0.8% times twelve and you get an annualized rate of inflation close to 10%. But the same economists who didn’t expect 0.8% also don’t expect inflation to increase. They think the feds have inflation under control; that they’ve managed to pull a fast one on U.S. labor. In today’s globalized economy – especially now that it is slowing down – workers have no bargaining power. And since they can’t expect higher wages, there will be no “wage-price spiral” such as there was in the ’70s. No wage-price spiral, no serious inflation. No serious inflation, no need to raise rates. And with no need to raise rates to fight inflation, the Fed can continue to bailout Wall Street...pump up the money supply...and allow modest rates of inflation to undermine workers’ wages.

It sounds almost too good to be true. Nobody gets punished too severely. The world economy falls – but softly. And those who take the most whacks – the wage slaves – don’t know what’s happening to them anyway.

Will it happen that way? We doubt it.

Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.