chanson

I take issue with each of these statements.

First, on the bubble. Being that selling pressures are the only way prices will go down significantly, you're going to see people more and more often hanging onto houses far longer during the selling process than they otherwise might, in order to at least recoup their initial investment. It is far more likely that prices will simply stagnate for quite some time, which is why I consider that right now, a real estate purchase is still fine if you're buying your own dwelling, but investing in a speculative sense, unless very targeted, is not a great idea at the moment.

What evidence do you have that the dollar's collapse will screw everyone? It hasn't really had any particularly ill effects yet. Inflation remains in check (which I find a little surprising). It's also true that historically, the dollar has gone in cycles relative to other currencies. There may be a catastrophic danger this time, if there were a perfect storm of events--plunging the entire world economy into a recession, again, would not be pretty. But the dollar would overall be in better shape if so many other curriences weren't pegged to it. Were the yuan to float, we'd see the current account deficit get better, but then there would also be inflationary effects...

Personally, I think the weak dollar is mostly annoying to people who want to do a lot of traveling in affected areas. Particularly at present, that seems to be the effect. And I'll be traveling anyway.

Oil is not running out any time soon. Even at current projected consumption rates (dramatically increasing consumption, that is), we're not running out for hundreds of years. Unfortunately, this is why no one has an economic incentive yet to decrease reliance on foreign oil. The incentives are security and envrionment related. Odd couple, that.

Fuel cells don't really solve anything. All they do is move the energy generation problem back up the chain...and what with all our coal-fired plants still around, it's not that great a thing. Though it does increase security a bit.

posted my response on my journal.

Given that oil is dominated in dollars, the price, at least in the US and China will rise independent of supply fluctuations, should the dollar keep falling. This means that for every day that passes, the cost of consuming oil will rise in the two economies driving the world economy. China's continuous growth can't keep going if the price it has to pay for raw materials (not only oil but everything due to the tie between the yuan/renmibi and the dollar) keeps rising. The largest producer, Saudi Arabia, also has a fixed rate of its currency to the dollar, which is why some of the price fluctuations haven't been as severe as they could have been.

I actually expect that as oil's price rises prohibitively, Western nations, more immune to oil shocks and more capacity for infrastructure change, will conserve more and shift to less oil dependent systems. The oil shocks of the 1970s made Europe far less dependent on oil than it was, and has been able to see less of the increases the US has experienced.

The reason we use oil in such quantity instead of coal, nuclear, solar, and other energy sources is simply that it's still cheaper than the alternatives.

If oil stays above $60/barrel for a year or more, then it becomes economically feasible to start steaming it out of the tar sands: Canada has more oil than the Saudis, it's just harder to extract. Likewise, US shale reserves are of a similar scale.

Really, it's not like oil is all there is, and when it runs out we'll all be screwed. We'll switch to other energy sources when it's cost-effective to do so.

As for the housing bubble, Japan went through a period where the ten square miles of downtown Tokyo was worth more (on paper) than all of Canada. That bubble burst, and Japan's economy went through a long recession, but we're not talking soup lines and Hoovervilles.

I don't see a collapse in the offing, just an ordinary dip in the exchange rate. It's happened before, and it will happen again.

-jcr

Hi Chris! It's Randy Thelen from San Jose, CA.

Your comments on oil are spot on. For more information (though you sound as though you understand already), I encourage you (and others) to get down with http://www.endofsuburbia.com/ . My good friend Steve Strange watched it and was completely floored. Our conversations often fall into discussions of the end of oil. At issue, for those who are unaware, the cost of extraction of oil is the leading indicator of the cost of oil. As the easy to extract oil runs low, the cost of extraction increases increasing the cost of oil. As oil increases in cost, the cost of your salad increases. When your salad increases, you ask your boss for a cost of living increase. Your boss will reply that he can't increase two costs simultaneously and remain competitive: the cost of goods and the cost of employees. Therefore, something will give.

Housing prices. My wife and I are looking to buy a rental property (4 or more units) some where in the United States where the cost of the mortgage, insurance, vacancies, property management, water/sewer/gas, property taxes, and property maintenance are profitable or will be in a few years. It's tough. People are buying property for speculation in many of the interesting regions. At the same time, new construction is very affordable. In Las Vegas, for example, when you buy a new house (for almost nothing down) you get a low interest rate (an ARM, so there's the rub) plus a credit card with $2000 applied to it by the seller for you to buy your new furniture (and clothes, and shoes, etc). I can't compete with those kinds of offers.

At any rate, people are buying on speculation (or, they're buying investment property without doing the hard research, take a gander at this article in the San Francisco two-bit Chronicle the other day: http://sfgate.com/cgi-bin/article.cgi?f=/chronicle/archive/2005/03/27/REG32BUC6L1.DTL). In San Jose, a property purchased today won't have a rent that pays the mortgage (and insurance, and property taxes, etc.) for 30 years! This assumes rents that increase at 2.5% annually (which they haven't been doing recently, I might add).

What you didn't mention in your blog entry about the housing market disaster is the role the ARM's have played in all this. I mean, for those holding a 30 year loan there is no housing issue. For those who purchased the most expensive house they could afford with a 4.5% ARM are going to be in for tough times when the mortgage rates go up. But of course, the expectation is that their salaries will increase to account for it. If that doesn't happen and selling the house seems appealing, one will be horrified to recall the home equity line of credit they obtained and the petty things they purchased with it (is that Yukon in the drive way increasing in value at the same rate that the value of the house is falling? Nope, they're both falling).

As for the dollar, we're fucked. Dick and Bush have squandered our federal budget which means that we need to borrow tanker ships full of money from governments that don't even like us (unless there's a wealthy country left that I've missed?). The Chinese government is buying U.S. dollars from their businesses at a break neck pace so that the Chinese businesses can continue to purchase raw materials for more products. This will play a major role in the increasing cost of home mortgages.

Hi, Randy! (Or should I say neighbor?) I was just wondering what you were up to this weekend!

Adjustable-rate mortgages are yet another harbinger of the economic apocalypse, I totally agree. We've basically bet our all, including all sorts of credit the house generously extended us, and then hit at 20. What a total waste.

I've heard that some of the units in the new apartment building next to mine were sold to people who decided to rent them. I can't see how the economics of that can work out.

"The End of Suburbia" looks really interesting. I'm a regular reader of Kunstler's Clusterfuck Nation Chronicles and I love his Eyesore of the Month feature. Particularly this Hummer dealership.

Hi -- This is Steve Strange (since I saw my name mentioned, I feel compelled to reply :) ).

Just a few comments on the peak oil issue, and the alternatives that we have.

I just read an article that said Canada is working on a pipeline to take natural gas from northern Canada down to the tar sands area, since it takes a lot of heat energy to extract oil from tar sands. This got me wondering what the percent gain in energy is between the gas used and the oil extracted. Add on top of that the petroleum used in all the machinery to mine and move the tar sand around, and the gain may be so small that it's not clear it's worth the severe environmental impact of doing that sort of mining. From what I've read, you're lucky to get the equivalent of 3 barrels of oil out of every two burned in the process. Compare this with a 20:1 or 30:1 energy extraction ratio for Saudi oil. No matter how much or how little oil costs in dollars, if it takes a barrel of oil to extract a barrel of oil, it doesn't generally make much sense to do it. Perhaps they'll soon realize they're better off simply sending that natural gas down over the border to the US, and leave the tar sands alone.

The thing that I think is most concerning is how painful the transition to alternative energies will be. There is no question the transition will happen. But will we go to 50% unemployment for ten years in the process of getting there? The US is probably more dependent on oil for everything we do than any other country in the world. This means our economy is argubly the most vulnerable to very high oil prices. The feds often talk about economic "soft landings" at the end of an economic expansion cycle, and they try to create conditions to prevent a severe downward change in economic activity (a "hard landing"). But US energy policy (or the lack thereof) is potentially setting us up for the hardest landing we've yet seen.

For example, we need to be pouring public funds into public transit, revitilization of the railroad system, rather than more freeways. Why is it that railroad funding is called a "subsidy", while freeway building is called an "investment"? Which one looks like the true "investment" when oil is at $150/bbl? I heard last night that the rebuilding of the 880 Cypress Structure replacement in West Oakland cost as much as an entire years' federal railroad subsidy. One lousy five-mile freeway in one city.

We need to be spending a lot more of our oil on building infrastructure for post-oil (wind turbines, solar panels, vastly improved electrical grids, fuel-efficient cars, fuel cells, etc.). If we wait until oil is incredibly expensive, the transition will be so painful that we won't regain our current level of economic activity for decades after peak oil comes.

In addition to the "end of suburbia", I strongly recommend reading "The Party's Over -- Oil, War, and the Fate of Industrial Societies". Richard Heinberg does a great job of bringing all the latest information together in a single book, starting out with a great explanation of how energy of all forms is derived and used by life on this planet, explaining how incredibly dependent our lives and economy are on cheap oil (in many ways I'd never thought of), the history of the industrial buildup, and ending with some thoughts on how we get through the transition. I'm just about finished reading it. His next book, published just a few months ago, is "Powerdown: Options and actions for a Post-Carbon World", is next on my list :).

Heinberg points out that there is nothing particularly special about the industrial age. There is no reason to believe that our current empire will last forever. No human empire ever has in the past. And many ended due to running out of energy, in one form or another (the other form of empire death is getting swallowed by a larger empire :) ). It was a great dose of humility.

Steve

I love you so, even though you may not know. let's makeout. - margie

It is interesting to see how the views of the writers have been borne out. The bubble in housing costs continued for another year and then interest rate escalation finally caught up with the reality for most buyers in most parts of the country and things slowed down. I just returned from Massachusetts in September 2006 and the speculation in housing seems to have disappeared in some volatile markets. Aspirations for escalated price sales are dashed and the closer reality seems to be that homes are selling at the assessed valuation (not two times it). And even the assessed valuation had probably been ratcheted up above realistic value. Lots of homes are on the market and some price reductions are being floated by those who really need to sell. (It is interesting to realize that Alan Greenspan's 9/11- response, low cost of money policy ultimately played havoc with the middle class' ability to purchase a home. Of course Alan never fully understood home ownership.)

The price of oil went up to $78 and is now down about 20% and the price of natural gas has pulled back even more from its peak. Big oil is accommodating the price drop (but it is election time and who knows who will gouge whom after November).