Friday, March 14, 2008

Rough Ride a'coming....

This is a little bit speculative, but hear me out....

The dollar is based on a shared fantasy.

Alright, to explain what I mean is that since 1933 the dollar has been a currency floating on treaty and market value, not tied to any fixed commodity. It's worth what folks believe it to be worth, in other words - one of the worlds biggest ongoing con jobs. Further complicating things, an eternal temptation exists with any currency that floats - for a panicky government to fire up its' respective printing presses and start rolling out ever greater quantities of a given currency...and the more of a given currency there is out on the market, the less it is worth (this is also why most governments frown rather enthusiastically on counterfeiting).

For our purposes here, if you can pick it up in your hand and wave it in the air and other folks see something more than the Emperor's new clothes - it's a commodity. Gold, wheat, manure, you name it - if you can see it and sell it, it's a commodity.

In short, if there isn't a requirement that you be able to cash in a currency for a stated quantity of a given commodity, there is no "real" or assured value to said currency - merely a shared fantasy. When that shared fantasy begins to crumble around the edges, you see folks selling the currency in question (dollars, euros, etc) in favor of either another currency (either commodity backed or at least less scary, value-wise) or of other investments (commodities, stocks, bonds, etc) that are in the eyes of the seller more stable or have better growth prospects.

Now, in light of this long-winded explanation, let me point to the perils of the falling dollar (and lately it's been a leap off the high dive). As the dollar falls, it buys less (even locally - the effect is magnified once you cross a national border) - the donut you bought yesterday when the dollar could buy 1/400 of an ounce of gold COSTS MORE IN DOLLARS today when that same dollar only buys 1/1000 of an ounce of gold on the open market. So that donut costs 2.00 or so when it used to cost one.

Moving right along, we see oil prices going up - both in respect to other commodities (the real value) and then combining that with the market devaluation of the dollar, to jack prices well over $100/barrel. Oil is fundamental to our economy, both as an energy source and as a manufacturing base (see: plastics), and when the price of oil goes does the price of most everything else.

For those not following along, we'll walk it through. We want a donut. To get a donut, we need wheat flour, cooking oil, eggs, yeast, sugar and a few other little details. We'll assume the cooking gear is already present (though that would be an additional cost, otherwise). Sticking with *just the wheat* for the sake of simplicity, our metaphorical farmer takes his/her farm eqp't with great big oil-based rubber tires that wear out over time, burns oil in planting/harvesting/hauling to the grain mill. Our grain mill burns energy *at least* in then transporting the flour to a wholesaler, and then to us. We heat with an oil-based furnace, and we deliver our donut with a petroleum-powered vehicle. Count it up - how many points in this process (and feel free to work the production chain on the other ingredients) does a price increase on oil get to impact?

Lots. Ouch.

And at the same time we have these other merry factors in play, we have the banks. The banks that loaned lots and lots of money to deeply questionable borrowers in both home and consumer debt....and an awful lot of that debt is going south for the winter, and not coming back. Fannie Mae and Freddie Mac, the two big federally supported mortgage guarantee agencies are sufficiently in trouble that it looks likely the Fed is going to be buying an awful lot of their debt to keep them afloat...and that's something that can only be done a limited number of times.

My point? If I read it correctly, if any of us have investments laying about, shifting a nest egg or two out of dollar investments into commodities or other items that seem like a good bet to weather the current storm.

Prices are only going to go up for the forseeable future - it's a dandy time to stock up on food, clothers, personal items, ammunition, firearms, etc. If you're in a position to pull it off, I'd even go as far as suggesting that it's a really good time to look seriously at making provisions to go off-grid at short notice (Solar is off-grid; a gas/LP/diesel generator isn't; a wood/garbage/wast-burning steam driven generator with a forgiving pressure vessel is off-grid) as energy prices seem a good bet to go up in even the hydro states - with the help of the "let's breach the nasty dams" enviro-crowd.

We live, I suspect, in interesting times.

Update: The Federal Reserve, using an obscure provision of law last utilized in the 1960's, has voted to rescue Bear Stearns from collapse.

1 comment:

Anonymous said...

And you didn't touch on the impact that mandated and increased use of corn ethanol has had on food production and prices.

Farmers that used to plant soybeans, potatoes, tomatoes, lettuce, cotton, etc etc etc are now growing the newest cash crop, corn, instead.

Wheat has increased by fourfold over the past couple of years.

We normally have a surplus of lifestock, with rising feed prices, ranchers can no longer afford to feed their stock they sell it to meat packing companies, they don't replace it. Very soon, those surpluses will be gone and prices for beef, chicken, pork, turkey and lamb products are going to skyrocket. This is going to happen, within the year.

The increased fuel prices exacerbate this problem. Very soon, the vast majority of Americans are going to be lucky if they can afford the basic necessities of life.

Unless the government un-does some of the bone-headed harm it's done over the past few years and very very quickly, we are in deep trouble.