October 16, 2006,
I got an email from a reader in the banking sector who said that he generally likes this blog but I that I was "way off" in last week's observations about the US economy. I called him on the phone to entertain his complaints in more detail. His main complaint was that I failed to appreciate the fantastic resilience of American can-do enterprise, and what it means in the larger economic scheme of things. He said that massive amounts of capital were moving into investments for alternative energy and into new technology associated with the pursuit of alt.energy. These capital flows, he said, would keep the US economy humming as far ahead as anyone can see.
He was a thoughtful and articulate fellow, but I still disagree. I still view the US economy as chronically diseased. It must be in the nature of a stock market melt-up, of the type we've seen the past month, to exert a hypnotic effect on herd expectations -- generating any number of rationalizations to make the melt-up seem a healthy and natural occurance when it is actually something like an aggressive cancer feeding on the organs of our society and sucking the life out of them.
There may be money flowing into alt.energy ventures, but that is no guarantee that these ventures will produce significantly more petroleum or viable substitutes for petroleum -- or anything that will permit us to keep running WalMart, Disney World, and the interstate highway system. We could sink a trillion dollars into research and development for perpetual motion machines, too, but the venture would probably end in tears.
It seems to me that as long as our overall goal is to keep a lot of cars running by other means, at all costs, then we are going to be horribly disappointed, and our investments will amount to a Chinese fire drill performed like a game of musical chairs with overtones of Ponzi. Whatever else the future may be about, it is unlikely to be a continuation of mass democratic happy motoring in the service of mass consumption. So an investment campaign to save that mode of human existence is a waste of investment. It is just the financial facet of what may turn out to be an even more comprehensive, and utterly futile, effort to save the entitlements and previous investments connected with American suburbia.
A recognition of this would at least allow us to get on with other things and make better investments in a reality-based future.
Personally, I doubt that the putative investments in alt.energy and related tech amount to more than a tiny fraction of the total capital surging into the markets these days. The big oil companies are spending more of their considerable profits buying back their own stock and crafting farewell compensation packages for retiring executives than on exploration and discovery. In one place they have put up some E & P money, far eastern Russia, they just got their asses kicked by the host government, so they won't even be sticking around there. Excuse me for saying that Chevron's "Jack" experiment in the deep water Gulf of of Mexico will prove to be a public relations stunt. The money going into biodiesel, ethanol, and shale oil combined is probably less than the capital being directed into the next generation of MP3 players.
To me, the Fall 2006 Euphoria only underscores how divorced the financial sector is from real life. Day by day, thousands of grifters are making huge digital dollar profits on abstract financial plays in a global virtual casino. None of these plays has much to do with anything of real and enduring value. They're just scoring points on consolidations of ailing industries, on turns of the interest and currency differentials wheel-of-fortune, abstruse shorting strategies, and similar non-productive shenanigans. While these thousands of playas party hearty, millions of non-playa middle-American shlubs are underwater with their mortgage payments or real estate taxes, going bankrupt from their child's emergency apendectomy, or desperately seeking parking places where the re-po man won't find their Ford Expedition on which they failed to make payments numbers thirty-eight through forty-four after being laid off by the Uniwanker Corporation.
The sentiment now in the financial press is -- like that expressed by my banker correspondent -- that the US economy is indestructable. It's like Jason, the protean stalker-slasher of countless Halloween movie reels: an implacable monster on a mysterious mission. Nothing can stop it or kill it. Not the tanking real estate sector, not military misadventures in the Middle East, not a ball-and-chain of unimaginable debt. Like Jason, the US economy is fueled now by sheer entropy -- the force that drives everything toward death.