OK...today, we give it to you straight. No metaphors. No jokes. No irony. No sarcasm. Today, you're going to get the story unvarnished, unadulterated, unsweetened, unsullied...like a shot of Old Overholt Pennsylvania rye whiskey without the branch water...oh, never mind.
There are four macro-trends, all related, and all affecting the world at the same time:
1.) The world is running out of cheap oil. Yes, there will always be energy, but it will be harder and more expensive to get. American oil production peaked out decades ago. Britain's North Sea production is declining. No one knows how much oil the Saudis have, but probably less than they say they have. The entire world's oil production is expected to peak out in a year or two. Cutbacks in supply couldn't come at a worse time; more people want more oil than ever before. The Chinese bought two million new cars in 2004. They're buying nearly twice as many each year. Currently, the average Chinese consumes less than 1/10th as much energy as the average American. Wait until they consume just half as much! Gasoline prices in the United States jumped last week - the biggest increase in 11 weeks. Three dollars for gasoline now seems certain. In a few years, it will seem cheap.
2.) The world's wealth is shifting to the East. General Motors, recently America's largest company, is worth $12 billion. Put it together with Ford and they are still worth less than half of Honda, and less than a fifth of Toyota, with a market cap of $172 billion.
"In 1970," says Marc Faber, "IBM alone had a bigger market cap than the entire Japanese stock market. Over the next 10-20 years, Asian markets, including Japan, could have 25% to possibly 50% of the world market cap, from 14% currently."
A friend of ours just returned from Shanghai:
"It is unbelievable. They've built a whole new city. The hotels are the nicest I've seen anywhere in the world. The bars are fabulous. It is so exciting. If I could live anywhere I wanted, I'd live in Shanghai, at least for the next 10 years or so. It must be the place where more growth and innovation is taking place than anywhere else on the planet. There's so much money...so much energy...so much life. It must be like New York was in 1910 or 1920."
Globalization has wrought competition. Now, faster, lighter competitors in the East are eating America's lunch and kicking its derriere - just as New Yorkers did to Londoners a century ago.
3.) The U.S. Empire is peaking out. From the get-go, the U.S. Empire has always been a slippery grog of Wilsonian moonshine and Custerian military hooch. Those two intoxications have come together in an explosive and disgusting concoction: The Iraq campaign - a war that is both strategically incompetent and operationally ruinous. The most splendid attack force ever created has been put to service patrolling gas stations! But what is really sapping the empire's strength is money, or more precisely, a lack of it. Americans would rather have granite countertops and free pills than have a costly empire. They can't afford both...not with globalization marking down the American workingman's daily rate.
So, their debts rise. The Washington Post reports:
"U.S. household debt hit a record $11.4 trillion in last year's third quarter, which ended Sept. 30, after shooting up at the fastest rate since 1985, according to Fed data.
"U.S. households spent a record 13.75 percent of their after-tax, or disposable, income on servicing their debts in the third quarter, the Fed reported."
Drenched in easy money, a decadent mildew spreads. "Get it while you can," say the corporate hustlers, lifestyle gurus, and money shufflers. Wall Street, for example, is enjoying another year of record bonuses. Henry Paulson, Jr., CEO of Goldman, will get $38 million.
4.) With the decline of the empire comes the decline of the empire's money
- the dollar. When the dollar was cut loose from gold on August 15, 1971, thinking men posed themselves a question: How long would the dollar last? The answer is still unknown, but the day of its demise gets closer all the time. Yesterday, the euro jumped above $1.23. Gold headed for $560. This experimental drama with paper money as the lead role has a few acts to go, but we all know how it will end. The dollar will go down; it will fall like Macbeth at Dunsinane.
There is also an important cyclical trend to consider. Markets go up and down...even while the great macro-trends work their wills and their ways. A major expansion of credit, and an increase in asset prices, began in the early '80s. In terms of real money (gold),prices for stocks, bonds, and real estate all over the world rose. That inflation of asset prices came to an end in July of 1999. Since then, gold has gone up against almost all asset classes. The trend has just begun. And since most people only look at prices in nominal, local currency terms, few people have noticed. But asset prices are deflating. In terms of real money (gold), stocks, bonds and property are going down.
This, too, couldn't come at a worse time. U.S. credit market debt is more than twice what it was when the expansion began in 1980; it has gone from 130% of GDP to more than 300%. That debt - especially mortgage debt - rests on inflated asset values. When asset prices go down, so will the debt itself. And then, the struggling householder...the poor yeoman consumer...the purchasing prole...what will he do?
Pinched between the Scylla of debt and the Charybdis of declining real, spendable income - with all the costs, illusions of a decaying empire to sustain, with his dollars losing value (and his Fed chief dropping them from helicopters) pumping three-dollar gasoline into his gas-guzzling land barge, and making monthly payments on a mortgage that towers over his house like the Washington Monument over a bum's cardboard box - what will the poor man do?
We almost think we know the answer. He will turn to the left. But that is another story for another day.
*** Over the past few days, we've been examining Greenspan's 18-year stint as Fed Chief - as he's passing the economic torch to Ben Bernanke next Tuesday.
Many are speculating over what kinds of measures Helicopter Ben will assume when he takes the helm at the Federal Reserve. We told our friends at American Conservative Magazine:
"Greenspan's real legacy [is that] he has finally made central banking work. And his successor, Ben Bernanke, pledges not to mess it up. By targeting inflation, he says, he will be able to make the financial world even more stable and predictable. And if the party ever starts to wind down, he has told fellow economists that he will drop money out of helicopters, if necessary, to keep it going.
"...But of all the twisted concepts that came out in 2005, the explanation of the world's international financial system offered by Alan Greenspan's replacement, Ben Bernanke, is perhaps the most elegantly preposterous. Americans are not spending too much, said Bernanke. The problem is that Asians are spending too little. As a result, they have a 'savings glut' that Americans helpfully recycle into granite countertops and home entertainment systems.
"Bernanke managed to condense a whole universe of lies, misapprehensions, and conceits into two short words. Yet as compact as they were, they covered up a grotesque system of global finance so out of whack that even congressmen are appalled: One nation buys things it doesn't need with money it doesn't have. Another sells on credit to people who already cannot pay-and builds more factories to increase output."
Bill Bonner is the President of Agora Publishing. For more on Bill Bonner, visit The Daily Reckoning.