In The 1920s Credit Bubble, I explained how a credit binge gave rise to serial bubbles in housing, durable consumer goods, and the infamous stock bubble of the 1920s.  Last week in The Panic of 2008: a Turning Point I gave a big picture overview of how our current credit crunch is unfolding.  At that time I pointed out that there were some important differences between our credit crunch, and the collapse of the 1920s credit bubble into the Great Depression.

   So a chronological examination of how the apparently mild if abrupt downturn that began in late 1929 transformed into a much more serious downturn that ultimately snowballed into the Great Depression will tell us what events to watch for.  That is the goal of this diary:  to peer into our near future by examining how events unfolded during the year following the stock market crash, 1930.

Last November I wrote a diary called The Panic of 2008? in which I predicted:

This is NOT the Great Depression II.  Nor is this the stagflationary 1970s.  It is going to unfold as some other Beast.  Only the broad outlines of this Beast appear discernable now:  it will likely feature (1) increasing import prices; (2) wage stagnation (that does not keep up with price inflation); (3) real asset deflation; and (4) possibly a Japan-style "liquidity trap."

 
    That prediction has been borne out so far.  In view of the events of this last week, particularly the run on Fannie and Freddie, and the failure of IndyMac, revisiting the Big economic Picture seems timely.  The Panic of 2008 is unfolding like a neutron bomb over the financial and construction sectors of the economy, leaving the infrastructure of the rest of the economy basically intact.  Asset prices - stocks and real estate - are declining, wages are stagnant, import inflation is setting records.  But The Panic of 2008 nevertheless signifies an important turning point.

    There is a fierce debate going on across a number of economic and financial blogs about the most recent price spike in oil.  After years of seemingly orderly increase, the price of oil took off dramatically in February 2007 and even moreso in early 2008, rising from $55 a barrel only 16 months ago to $140 a barrel now.
    Clearly, something happened in the last year and a half to cause the price of oil to go "parabolic" -- the straight to the heavens chart that we have seen before in the 1920s stock market and the Nasdaq tech bubble.
    For some, it's a simple matter of supply and demand.  Others have blamed the dollar's collapse, or "speculation."  In response to the "speculation" argument, Prof. Paul Krugman asserts that in order temporarily to cause a product to spike in price and try to hold it there, somebody(-ies) must remove physical product from the market.  There must be hoarding.  No hoarding = simple supply and demand.
     Krugman's  argument got me thinking:  if there were hoarding of oil, where would it be?  The answer, surprisingly or unsurprisingly enough, is right in front of our noses, and seems to lead directly back to one George W. Bush.

    As it turns out, that old saw about how a frog slowly boiled in water never jumps, isn't true.  The frog jumps.    Recent surveys show that over 80% of Americans believe the country is on the wrong track.  Increasing percentages of Americans identify themselves as democrats.  They too are "ready to jump."
    In order to convince them to jump, we need to provide them with the coherent, persuasive, intellectual underpinnings of why the Right Wing has failed, and why they should embrace a new New Deal.
   There is an absolutely compelling case to be made, but too often among the blogosphere, that case seems to be marginalized, and drowned out by the shouts of "The Sky is Falling!"   More than one economic blogger I respect has gone overboard calling for the Apocalypse, only to have to explain why it keeps getting delayed.  
    The case to be made isn't Armageddon.  It is Inequality of Economic Opportunity, that has already, slowly but inexoribly, eaten into the standard of living of average Americans.

    Yesterday's report on import prices, and today's report on consumer prices, continue to show that average Americans have to spend more and more on necessities, leaving less and less for discretionary consumption or savings.
    Originally I was going to call our new form of rotten economic performance with heightened inflation, "Stagflation nouveau" but I don't think that quite catches the meaning I want to convey.  I think "Scroogeflation" works better.  What we have here is an inflation which is gradually, month after month, slowly eating away at middle and working class Americans' standard of living.  It is the kind of inflation that Ebenezer Scrooge would welcome.  Hence, "Scroogeflation".  If you think of something better, let me know.
    I parse through the numbers, talking about seasonality, inflation in food prices, and "core" inflation, below.

    The bailout for billionaires on Wall Street, and the rampant increase in food and oil prices has been well and often discussed on Daily Kos.  What has not perhaps been so well fleshed out, is exactly how the Fed's return to Alan Greenspan-style easy money policies has reverberated around the world and come back to bite American consumers where it hurts.
    Recently University of Oregon economist Tim Duy wrote an excellent article explaining just how badly the Fed misjudged the global ramifications, and the resulting blowback, to its batch of recent rate cuts.  For the Fed ignited a global wage-price spiral not seen since the 1970s elsewhere.  But with US wages lagging, that inflation has come roaring back ashore in food and gasoline price inflation which is eroding American standards of living.
    You may have a good feel for the US part of this story.  You probably don't have much information on just how badly this inflationary spiral is rocking the rest of the globe.  That is what I will spell out below, and then come back to the US to summarize the continued ramifications here.

    In a diary over the weekend entitled, Countdown to $100 Oil ?!? Subsidies, hoarding, and bailing out billionaires, I took the contrarian position that oil is more likely to re-cross to the downside the $100 a barrel price, before it hits $200 a barrel.  I cited evidence of hoarding on tankers, the Fed's realization that destroying the dollar might be a bad thing, and most of all, intense pressure being applied to Asian governments' subsidies of consumer oil prices in support of that position.
    Today, with the price of a barrel of oil at the moment at $123.75, comes fresh evidence that those oil subsidies are collapsing. It turns out the laws of supply and demand work on the other side of the globe too.

    Hey, wait a minute.  Isn't this supposed to be "Countdown to $200 oil"???  
    No.  That would be another diarist.  On the other hand, I was in the midst of writing a diary about how there aren't "2 Americas", a la John Edwards, but 3, when it became clear that so much information has become available this week concerning the forces affecting Americans' demand for oil, that it demanded its own diary.

    And yes, even if the world has reached the plateau of "Peak Oil" and supplies will gradually be rationed at higher and higher prices, there are going to be booms and busts along the way.  I'm here to tell you that the evidence suggests that there has been a speculative boom in the last 6-9 months and we may shortly see a bust, echoing the sudden decline of oil from $80 to $55 a barrel just before the 2006 elections.  The boom and the bust, if it happens, have everything to do with (1) Subsidies to gas consumption by Asian governments, (2) hoarding (in tanker ships), and (3) unintended consequences of the Fed's bailing out billionaires, that have added about $1 to every single gallon of gas you buy.

   There are two simple graphs which together brutally show the steady, slow erosion of the Standard of Living of middle class America.  That occurred to me yesterday when I realized that even if  there is ZERO percent inflation in the price of unleaded gasoline in the next year, what does that mean?  It means that gasoline will sell for $4 a gallon for the entire next year!  Those who have little choice but to drive to and from work, and to and from the grocery store (which is unfortunately the case in most any suburb that has been built in the last 25 years) will find that the Standard of Living they thought they had, went flying away.  That's why it's worthwhile to post those two simple graphs again ....

   A while ago, in a diary entitled Are Hard Times near? The Great Decline in interest rates is ending I pointed out that the great decline in interest rates that began in 1981 looked like it was coming to an end, and with it American consumers' ability to refinance debt at lower rates.   I noted that if consumers could no longer refinance at better terms, and if their wages weren't growing, the engine of the American economy would stall, not just for a short time, but for a very long period -- What I have called "The Slow Motion Bust."

    With oil prices at $126 a barrel, and $4 a gallon gasoline, the boa constrictor of higher prices has tightened around the average American's budgetary breathing space some more.  A look at how much and how consumers are coping, below.

    Over at TPM Cafe, this week Fareed Zakaria's new book, "The Post American World" is being discussed.  In it, Zakaria repeats the theory of globalization's most toxic and unproven claim:  that countries which participate in trade together do not make war upon one another.  So if you want to prevent war, just participate in deep and interwoven trade with the other country and everything will be hunky-dory.

It's a lie.  Moreover, it is a dangerous lie that in real life as opposed to theoretical economics inhabited by that mythical creature, the "Rational Economic Man", was spectacularly refuted in the 20th century.

    Events of the past two years have made food an increasingly worrisome item in household budgets and in the budgets of nations. In early 2008, food prices to the American consumer were 25 percent greater than two years earlier. This reflected dramatic increases in farm beef prices, while farm corn prices were double and wheat prices triple those of early 2006. Clearly something new has happened to a food market which has historically fed Americans well and for a uniquely small proportion of their income.

A series of events was associated with these price adjustments. In 2005 the U.S. dollar began to depreciate and a major realignment of international currencies set underway. (1) [A series of crop failures and poor harvests around the world magnified the food problem].  Finally, Congress adopted legislation that drastically altered the framework of American agriculture....
         - Foreign Affairs  (2)
    Add to this a "guns 'n' butter" fiscal policy of protracted war without either budget cutbacks or raising taxes to pay for it, and the recipe for World Food Crisis was created.

    America and China appear to be locked in a financial embrace turned toxic.  If America is running perennial trade deficits and if American consumers are running dire savings deficits, then China appears to be wrestling with the opposite peril:  a worsening inflationary spiral  caused by a tsunami of incoming ever-cheaper dollars.
    I won't pretend to be an expert on China's stock or bond market, but then again finding such discussion of financial conditions in China seems to be just about impossible.  What I do know a little about is financial history, and what conditions in stock and even moreso bond markets can tell us about where an economy is going.

    With that in mind, it is worthwhile to look at China's markets and ask ourselves, "If this was the US, where would the economy be heading?" The answer (while enviable compared to America's condition) ain't so pretty.

    If you want your daily Kos to read like an echo chamber, this diary isn't for you.  If, on the other hand, you are open minded enough to consider evidence that runs contrary to received wisdom and challenges your assumptions, then read on, I hope you will find this diary thought-provoking.

    Because there is some excellent evidence that, if "It's the Economy, Stupid", then there are some very powerful people who have operated some very powerful economic levers to the benefit of one certain Senator John McCain.  And the cocaine they are injecting into the economy is going to hit full force by about election day.

This morning's New Home sales, as reported by AP, make it official:

Sales of new homes plunged in March to the lowest level in 16 1/2 years as housing slumped further at the start of the spring sales season.

The median price of a new home in March compared to a year ago fell by the largest amount in nearly four decades.

The Commerce Department reported Thursday that sales of new homes dropped by 8.5 percent last month to a seasonally adjusted annual rate of 526,000 units, the slowest sales pace since October 1991.

The median price of a home sold in March dropped by 13.3 percent compared to March 2007, the biggest year-over-year price decline since a 14.6 percent plunge in July 1970.

Are we...

    In my last couple of blog entries I have suggested that data from past commodity driven recessions, as well as strongly supported evidence from the yield curve indicate that we may be near an inflation peak, and that as a result there might be a respite from this recession by the end of the year.
    In a number of places on the econoblogosphere this position has been criticized, and in general the criticism comes down to two words:  "Peak Oil!".   I put that in caps and with an exclamation point because the argument is that "Peak Oil!" explains everything.
     For purposes of this diary, let's assume that peak oil is a correct concept (and I happen to think it is) and furthermore that we are close in time to the point of peak oil (or at least on a long plateau of maximum oil production).  Nevertheless, unless you are a believer in cosmic coincidence, it seems very unlikely that "Peak Oil!" explains most of what is happening with the world economy.

    The economy is always a yin and yang, with one thing tending to counterbalance another.  In the past I have frequently differentiated one such tension between the "Kudlow economy" for the top 20% (actually more like top 5%) which prospered mightily during the Bush/GOP malAdministration, and the "Bonddad economy" of the bottom 80%, which saw little or nothing of the alleged prosperity.
    Until late last year, consumption in the Kudlow economy more than balanced the distress in the Bonddad economy.  Then, the balance changed.
    I am here to deliver a message which I fear will be as welcome as a skunk at a wedding reception:  I believe the balance is about to change again, at least briefly, back in favor of the Kudlow economy.  Even if you disagree strongly, I hope you take the time to consider the evidence I amass below.

You probably heard that the "headline" (i.e., including food and energy) CPI number today was +0.3%. You may have scratched your head, wondering what planet these guys are on.
Well, they were on the "seasonally adjusted" planet. Generally speaking, inflation runs hotter in the first part of the year, and cools down dramatically towards the end of the year.

So, for the best year over year comparisons, turn to the non-seasonally adjusted CPI number. And that number today was +0.9%. Much closer to our actual experience, no?  On a non-seasonally adjusted basis, energy went up 5.1% last month, while food only went up 0.1%.

For a closer look at how today's CPI report fits in to the inflation picture, see below.