The Influence: How The Economy Went Kaput on the $100 Barrel

On The Dow Low

By Marquis Hunt ( October 29th, 2008 )

If you noticed, the Dow Jones Industrial Average is very crazy these days. Even crazier, this frenzy is simultaneous with the news that consumer confidence in the United States has reached new lows.

Some are betting that the worst is over, some believe hard times will continue beyond the next president. But is there anyone out there really able to analyze and bring solutions to this market crisis? Even Alan Greenspan (Wiki) has discovered a flaw in his ideology. If one of the great economist of our time is baffled by this financial turmoil, then where would we find credibility for answers to our current problems?

How did this happen? Was it that the housing market’s lack of regulatory measures gave freedom to rampant loaning and mortgage swapping? Was it that housing values reached a peak, and the price dive took the entire country down with it? Was it due to inflation, and the faltering US currency?

The Redistribution of Debt

Many of the analyst overlooked the root the cause: The $100 barrel of oil was the slow poisoning of the world economy. When it hit the $100 mark, there was great relief that the markets were stable. What was neglected was that a market continuing to function under business models designed for cheaper resources was doomed to hit recession. The longer we stayed at expensive oil prices, the faster the turmoil was going to hit.

The $100 barrel is like a punch in the face. If you get punched, it hurts like heck, but you will survive. But the barrel punches you every day it exists. After a while, you have trouble surviving getting hit, and sooner or later, you will lapse. Analogous to the financial markets, there were punches hitting people’s wallets, mortgage payments, stock portfolios, retirement funds, grocery bills, property taxes, electricity, luxury goods etc.

Slowly Sinking into The Sea

The skyrocketing prices couldn’t hurt the economy’s condition in one day, or even one month. But the prolonged period of high cost for manufacturing goods created a wave of calamity that permeated through many industries, governments, and financial systems that were tied together. Freddie & Fannie, Lehman, Washington Mutual, giants TKO’d out of the system.

Although people slam the fact that oil can’t be the culprit now because of its falling prices, the analysts who spoke of dire consequences for the financial system under expensive oil were right in predicting turmoil in the world markets.

The world financial systems are all inter-related, and much of the energy used to power manufacturing systems and transportation derives around oil.

I am an owner of 200 Crazy Guy burger stores and 20 factories. I use oil to work the factory machines, oil for the energy of lighting and computer systems, oil to transport to the stores, and oil for my smaller products and plastics. Every year, oil increases in price. I lose money, and have to get rid of workers to make the bottom line.

I work as a manager for a Crazy Guy burger store. Prices went up 20%, and we have lost a lot of customers. We had two managers, but one was fired when we downsized the burger chain. The other manager just lost his house, and is living with his mother. His wife still works with a law firm, but she has felt the pinch as well.

I am a banker in charge of our banks real estate portfolio. We own a lot of mortgage contracts, as well as give loans to real estate companies building more houses. But people aren’t buying any new homes. There is just not enough money around. Some of our mortgage contracts have been heavily delinquent, with a few foreclosures. If this climate of business keeps going, we are in big trouble.

love going to Crazy Guy burger, but I just don’t have a lot of money to go around like I use to. Milk is $5, gas is $3, my bank overdrafted me eight times, and my heating bill was a lot more than usual. I have to cut back, but I hope to stop by Crazy Guy’s once in a while. My kid loves it.

These anecdotes were by no means the best descriptions of the interplay of rising costs, but it is the essential idea of how the financial pillars just couldn’t be held up by the working and middle-classes any longer. As people began to lose money from spiked prices, many took back money that would’ve been part of the revenue stream of many other companies ( such as consumer products and housing ), and the pillars crumbled as no support ( ie: revenue ) was there to support anybody.

The Domino Effect

The banks started dropping as clients or the clients’ clients couldn’t pay their mortgages and/or rent, earnings from manufacturers dropped as people had no money for 150-inch Hi-defs for their living rooms, and banks were reluctant to give away money to businesses and start-ups who models were failing or weren’t viable in the recession climate. The spiraling effect made it hard for any individual aspect of the system to be successful, and the system, based on credit, debt payments, manufacturing, and future revenue, began to lose control.

Currently, prices of all commodities are deflating, but this is only a reflection of the massive slowdown of the world economy, not an instance of a rebounding or cheaper goods ( such as gas ).

How Does This Affect Me?

Do you have stocks that are being slammed? I would say you are in the know about how it is affecting you.

College students, post-grads, Gen Yers: You are seeing the beginning of capitalism itself consolidate for an unknown period of time. This means that there will be less jobs, freelancing will be a bitch depending on your occupation, leisure activity will be lower or less expensive, and you may have to kiss your mom on the cheek every morning while going back to your high school room.

If you are in the working class or poor, you will also see job losses around you. In areas already stricken with poverty, you may see an increase in tension as people lose there jobs, and some may become desperate. I am not writing a script to supplement Escape from L.A., but you will see times get tough.

The good news is, this situation doesn’t seem as bad as one might think. Gas & food prices have dropped somewhat, unemployment is still very low, and the government seems to be picking up steam in fixing the situation. But look for times to be a little tougher over the next couple of years. With a dwindling supply of world resources and a higher allocation of resources to the wealthy and elite, we will see greater policy measures to mitigate the stress and confusion of the working-class.

These policy measures can be good ( such as tax credits, subsidized systems ) or bad ( departure of government programs, surveillance/security measures ), but it will depend on the interplay between the government, the people, activists, and corporate/wealthy interests.

What should I do?

Try to become more involved in your community. Especially in diverse, urban, or church/progressive active communities, you will find many people with many problems, as well as others with answers. Dialogue must come about between people you know.

Who needs help with their problems? Who has recently lost their job? Anyone in danger of losing their home? Should we share food between locals to conserve food and energy? Do people have advice and tips on saving energy?

Plan your future around the knowledge that energy will increase again if the financial system rebounds. OPEC has announced cutting 1.5 million barrels from the world markets ( Oil consumption, see: Oil Consumption By Country). This is foolish, since the reason we are in this mess is because it is harder to find cheap oil and hard to “do” stuff when oil costs so much money. It may not be foolish, thinking that they probably weren’t going to keep up production in the first place.

But I digress. Try to stick to occupations that have long-term means of helping people. Industries such as media are viable, but the competition is so large and intense that many of the current companies are even having trouble surviving.

Occupations such as acupuncturists or dog-sitters, hard-work as it may be, just won’t survive the shrinking purses of the masses. I can’t say what industries will be better to jump into; that will be for a future issue.

Buy less meat, and stick to cheap wholesale and/or local goods high in calories and somewhat healthy. Peanuts, bananas, cereal, pasta, rice, and local vegetables; supplement these goods to your weekly shopping list; you will save a lot. Chicken is still very cheap; if you use meat or chicken, you can make a decent stew that could last you for a week. Local farm markets are cheaper in most cases then supermarkets; depending on your area, you could have a great or small assortment of products you can buy from these establishments.

Be close to your friends. Make sure people aren’t stressing about the bad times. These times aren’t really bad, but the financial freedom people strive for will be harder to get. That doesn’t mean you can’t visit a friend, watch a movie, have a beer or two, knit a winter hat, or watch a sports game. Just relax, and make sure you are prepared if times get a little tougher. If they do, then you will be prepared, and will have nothing to worry about.

October 29th 2008 — Juuble Wire — Leave A Comment — Subscribe

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