ePAROL - Economic News and Views

STORMS LURKING ON THE HORIZON

by James Howard Kunstler

For those of you too young to remember, the Y2K scare was about an
esoteric little programming glitch that existed almost universally in
older "legacy" computer systems around the world. The glitch in
essence
would have prevented older systems from recognizing the date beyond
12/31/99, and this, it was widely believed, would have pranged the
interdependent complex institutions and public services that ran on these
computers.

There was fear that everything from municipal sewage treatment plants, to
international banks, to big electric grids, to government agencies would
stumble, that equipment for running these things would be badly damaged in
the process, and that financial records would be lost on a broad basis.

As it turned out, very little happened on New Years Day, 2000. Scoffers
exulted in their righteous rightness. The truth, though, was that immense
sums of money had been spent - hundreds of billions worldwide - and
countless work hours put in by programmers to avert the problem. It was a
problem with a very definite deadline, and they made the deadline.

The Y2K event would have been a harsh lesson in the diminishing returns of
technology and especially over-investments in complexity. Ironically, the
work done, and the new equipment purchased by companies, institutions, and
agencies may have played a major role in the tech boom of the late 1990s -
which, of course, eventuated in the tech bust that immediately followed.

My own involvement in Y2K in the early days of blogging derived from my
observation that a lot of knowledgeable tech people were taking the Y2K
problem seriously, and yakking about it on the Net, and so I concluded the
issue deserved attention. In retrospect, I also suppose that the one thing
nobody really knew was how the programmers working on their own individual
projects around the world were coming along, because a lot of that work
and expenditure was going on in secret - big government agencies, big
companies, and big utilities did not want to scare the public, queer their
stock values, or let on about the difficulties involved in fixing the
problem. And of course, the inter-connectivity of many of these complex
systems - banks especially - was precisely the scariest part of the
problem, meaning that it would not be okay for some of them to fix their
problems and some of them to fail. As it happened, enough of them fixed
their problems - at great cost - and there were no cascading failures.
Score one for advanced civilization.

Now that I have written a book titled The Long Emergency, there is a new
wave of disappointment gathering - that life, as we know it has not come
to an immediate end, and I am being reproached for suggesting that we have
some problems. Of course, that was never the point, as a reflection on the
book's title ought to suggest. One funny element of this is that the
reproach reached a crescendo the very week that crude oil prices reached
record levels above $75 a barrel.

So this might just be a good point to step back and ask where we are now
at mid-year, 2006. In January, I predicted that the U.S. economy would get
into a lot of trouble, specifically that the Dow would melt down to around
4000 and that we would see carnage on the real estate scene. When you
figure in inflation, the Dow has just gone sideways for six months. What
is propping it up?

Last week I referred to Doug Noland's theory that investments in
alternative fuels and technology are starting a new boom. I doubt this can
work as a prop to support the huge losses in previous misinvestments. For
instance, sooner or later General Motors will go up in a vapor for its
failure to sell cars, pure and simple.

In any case, we are faced with the essential problem of ever-increasing
prices for far less net energy. That is a recipe, perhaps, for an American
perestroika, but not for continuing to benefit from the old arrangements.
And so far, America at all levels, in leadership and the public, resists
the sort restructuring we require. For example, we are still
systematically starving and dismantling the railroad system instead of
rebuilding it. There is still plenty of time left in 2006 for the stock
market to start reflecting the true character of our phony-baloney economy
- namely that it is based on consuming goods and resources without
producing things of value.

It is my observation that the housing market is tanking broadly and
steeply around the nation. In my own town, a mini "hot market," there
have
never been so many "for sale" signs planted in so many yards (and
remaining there month after month). Some even have "price reduced"
shingles added to them. But there remains mutual reinforcement between the
sellers and their realtor agents to keep a happy face on the situation (to
avoid panic selling).

Since house prices here, in a tourist town, are falling when the tourist
season has hardly gotten underway, I have to surmise that the local market
is in deep trouble. A few months from now when the tourists depart, and
the last golden leaves flutter down from the maples, I expect we'll see
psychological capitulation among the sellers and their realtor
cheerleaders.

The energy picture, as alluded to above, is certainly cause for concern.
Oil prices are creeping up relentlessly into territory that will, at
least, stall the consumption orgy among the Wal-Mart shoppers. We are one
hurricane or one geopolitical incident away from an energy trauma. The
natural gas supply situation is another storm lurking on the far horizon.

So, here at high noon of 2006, I'll stand pat with what I have said more
than once: we have already entered the zone of The Long Emergency.

Regards,

James Howard Kunstler
for The Daily Reckoning

posted by G @ 10:45 AM