10 August 2007

The Panic of '07



I already made a resolution to stay out of mines. The stories from Utah about the men lost 1,400 feet below the surface in the darkness give me the creeps when I think about all that rock overhead, like being in the crypt of the Great Pyramid. I am trying to stay away from bridges, too, until they do something comprehensive about inspecting them. There is an overpass on the 14th Street exit from the freeway that appears to be bandaged together with a great rusty I-beam and a thicket of corroded bolts.

The patch on the overpass has been there a long time and it must be getting tired. I don't pay much attention if I can cross it at speed, since my vulnerability is limited. Once, though, with traffic snarled, I found myself sitting square in the middle of it, and felt it vibrate alarmingly. I have learned many things in my life, some useful, and one of the most important is not to rely on the government of the District of Columbia to do anything helpful.

So bridges and mines are out. Public transportation is too, since the Metro runs in tunnels underground and then pops up to cross the river. I am trying to stay away from unsecured crowds until the situation is resolved with the terrorists.

That is the tactical view for surviving August. The heat-wave appears to have broken, and it may be safe to venture outdoors today. I am leery of that, though, since there is something going on at the strategic level, something that has us all blowing like leaves in a great wind.

Everything is connected. We have been told that repeatedly, as the reason the jobs are moving offshore, and you cannot tell where a car where might have been assembled. The President of Pakistan may- or may not- declare an emergency, which connects backwards to Partition from the rest of the Indian subcontinent. That in turn is linked to the Northwest Frontier, where al Qaida is hiding, and which was the fifty-yard line of the Great Game between the Brits and Russia.

You could argue that the Soviet adventure in Afghanistan marked the end of the communist empire, and perhaps it will for the Americans, and yet the oil and gas beneath the great steppes is fueling the return of a pugnacious policy from Moscow. Last week it was the ballyhooed planting of flags on the seafloor beneath the North Pole. Yesterday, it was the flight of long-range Tupelov TU-95 Bear H cruise missile carrying bombers to Guam, where American forces are pulling back from Japan.

That sort of dramatic military gesture has not been seen for years. My squadron, and generations of squadrons, used to play aerial games with the Russians. Sometimes the interceptors would display Playboy images to the Russian aircrews. Once, our pilots wore gorilla masks under their flight helmets.

All that symbolic activity required the burning of a significant amount of aviation fuel, and the distribution of more greenhouse gas into the atmosphere, which is causing a record shrinkage in the Polar Ice. Scientists announced that this season's summer retreat of the sea-ice in the north has been the greatest since satellite imagery began to track its annual progress thirty years ago.

It is extraordinary, they say, and the newly open Arctic Ocean will offer access to riches below, and fuel competition for once-frozen oil and gas resources, which the Chinese and Indians are eager to burn in their new cars.

That sort of national rivalry will require investment, in icebreakers and drilling platforms and defense assets to protect them. But the markets are jittery. The sub-prime melt-down in the American markets has spread to the international community. There is something that looks like the beginning of an international panic.

The world markets are responding to the uncertainty by clamping down on liquidity. The once-attractive financial instruments backed by home mortgages have become toxic. The financial follies of the last few years have come home to roost. The housing bubble the burst in America was only part of it; all across the world the money managers appear to have taken leave of their senses in the compulsion to speculate.

It was not just the mortgages issued to those who could not afford them. It was high-yield corporate junk bonds, backed by nothing but ideas. I have watched the progress from the windows of Big Pink, since now I am as unlikely as you to be able to move anywhere else.

First it was the housing bubble, then the sub-prime collapse. Now the bond market is shaky, and the once serene US Treasury bond is starting to assume the aspect of a junk stock.

The Chinese hold $407 billion in U.S. Treasury securities, and the Japanese hold more. Flooding the market with them could spark a recession in the U.S. economy.

The President made an announcement yesterday that was intended to calm the troubled waters. He said everything was fine, and we all ought to just relax. The Federal Reserve dumped $24 billion into the market to calm things down, and the central banks of Europe threw in another $130. The Japanese, seeking to protect themselves, added another eight billion.

The Chinese just glowered across the Pacific. They do not yet have giant bombers to fly threatening profiles.

The issue at hand is liquidity. The Federal Reserve declined to lower interest rates this week, their main tool to spark economic activity.   Word in the press is that the market is counting on them to do so in at the next quarterly meeting. Lowering the cost of money could provide relief for those who cannot meet the mortgages as they are.

Reducing the cost of money doesn't do much for borrowers if nobody is willing to make loans. Why would the bank bail out someone who is already near default?

I could panic, but I won't. I am going to take the President at his word. This won't be a crisis like 1929. The world is too connected for that. This will blow over like the Savings and Loans melt-down in the 1980s, or the collapse of the Long Term Capital Management Fund a decade ago. This is a big economy, after all, the biggest that has ever existed, and it is thoroughly wired into the globe. This is about confidence, and optimism. I am positive this is going to be OK. That is the strategic view.

The only problem I can see is a tactical one. The road ahead is crowded with people, and security does not appear to be that good. The other thing is that all the ways out seem to go through tunnels, or over bridges.

Copyright 2007 Vic Socotra
www.vicsocotra.com

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