From Bob Herbert @ the New York Times:
A Different Creature Nancy Pelosi, at lunch, was making the point that this latest recession was not a typical cyclical downturn.
The evidence is stark. More than 44 percent of unemployed Americans have been out of work for six months or longer, the highest rate since World War II. Perhaps more chilling is a new analysis by the Pew Economic Policy Group that found that nearly a quarter of the nation’s 15 million unemployed workers have been jobless for a year or more.
Nancy Pelosi is right about the crisis and wrong about what to do about it.
We are having an energy crisis, not a finance crisis. The relative shortfall of fuel supply relative to consumption is mediated on an ongoing basis by credit and demand. Access to credit allows demand to auction the price of available energy toward the highest bidder and away from high cost USA labor, which, when added to fuel costs becomes unprofitable. Because of credit intermediation in the fuel markets, the nature of the crisis remains difficult to identify. The distortions in the economy are felt first in lending and foreign exchange rather than seen in the form of physical shortages and gas lines.
As credit expands fuel is treated as a speculative rather than a productive asset with a ‘vicious’ investment cycle amplifying the nominal price. This is what happened during the great oil price spike of 2007- 8. When the nominal price bubble is inflated enough the productive economy which depends upon low energy prices collapses, destroying demand for fuel.
When credit shrinks as it is doing presently, credit itself is deprecated relative to cash- dollar currency which consequently becomes a proxy for crude oil rather than the so- called ‘productivity’ that can be leveraged from it. This dollar/fuel proxy at the center of the world’s industrial economies is shockingly deflationary. Like hard, gold- backed currencies of the early 1930’s, the crude oil dollar is more valuable than any work that can be bought with it. Because this is so, both the crude and its proxy are hoarded. The consequence is the world’s economy becomes the buying and selling of money with the end of obtaining dollars … rather than productive commerce. This is what is starting to take place in places such as the Eurozone, in US credit markets and in China.
The consequence is a permanent state of deflation with countries locked within their ‘oil fetters’.
The Pelosi/Establishment ‘solution’ to accelerate ‘growth’ with more credit is exactly the wrong prescription. Efforts to restart growth amplify demand and ramp up the auction process driving up crude prices – both nominally and in real terms. This makes even cheapest labor unprofitably costly, along with other forms of business activity.
The only solution to our circumstance is stringent energy conservation. Americans need to start showing a positive return on energy use rather than the current regime of monetizing/gatekeeping waste. We have no choice but to change otherwise change will be forced upon us by circumstance.
Unfortunately, if we wait until it is clear that there is no choice but accept conservation imposed by events, it will be too late. The time it act is now, every day matters.
steve