Federal Reserve and Monetary Policy: Energy, Substitution and Who's Going to Pay for this?

Greenspan comments of a flexible economic system is, in my opinion, an ideal case. I'm amazed at Greenspan's admiration of Adam Smith's “Wealth of Nations”. (Here's the link ) The biggest problem with Smith's works is that he makes no reference to “Third World or Developing Countries”. This is his view of Colonies:
“The colony of a civilised nation which takes possession either of a waste country, or of one so thinly inhabited that the natives easily give place to the new settlers, advances more rapidly to wealth and greatness than any other human society.
The colonists carry out with them a knowledge of agriculture and of other useful arts superior to what can grow up of its own accord in the course of many centuries among savage and barbarous nations....”

The world is different now. Greenspan's ideal economic system is just as utopic of Owen, Marx and the Fabian socialists. This is a shame because a free market has no business being involved with China's Communist government and its command economy. Greenspan's view on China is in direct conflict with his views on a flexible economic system.

Greenspan has stated that the US economy is on a firm foundation, however, his concern with the housing market is a sign that there is a problem. Katrina has shown, in my opinion, the weakness of the incomes of US consumers. The sharp rise in energy prices is just the tip of the economic iceberg the US economic ship is heading toward. The global financial system is under stress, due mainly to China's command economy. The global market needs clear price signals to re-allocate its resources to meet the needs of the US. A very large dollar amount of investments must flow into the US to rebuild the Gulf coast. China is a investment “Black Hole”. The global financial community have no real ideal of what is happening to “their” investments.

Greenspan, White House economist and others have stated that there is no national housing bubble. It is possible to have a “sink hole” or economic shocks that “liquefies the ground” on which the US's economic foundation is on. This “sink hole” is the result of problems with the global financial plumbing. Its nature is the fact that portfolios are stress tested for interest rates, but not for connections that are part of the plumbing.

Example: Fannie Mae and Freddie Mac's accounting problems can lead to a reduction of home values in the secondary mortgage market. This in turn can shut off some of the financial instruments used to finance a mortgage. This in turn will lead to a reduction of housing activity, in areas that depended on them. Which in turn will be reflected in the housing data. Which in turn will result in a hesitation of capital spending. Which will result in a reduction of GDP. Which will go on and on....

The banking and hedge fund world needs to understand that part of the US “Banking” industry was wiped out by Katrina and Rita. The part of the US “Banking” industry I'm referring to are home values. A region's value has been destroyed and it is up to the US government to bail that region out. Sort of a FDIC for the landowners. Let's face it, the insurance industry is NOT going to pay for the water damage. This is a good time for the coastal regions to set up a catastrophic insurance funds because the rest of us will not bail them out the next time a hurricane comes. Technically, the cost of insurance should drive some home owners out of the region.

The spike in energy cost will force the true nature of some of the economic statics out in the open. Wages and incomes are not what they seem. The US economy is being forced down a path of serfdom and feudal lords. If you do not own a home, you are disfranchised by the White House and others. Rowing back wages only reinforces my concept of the link between US government deficit and the trade deficit (see my blog: Neoclassic Theory of Production). The source of the US's protection against inflation is also the source of the rapid unraveling of our income. As the current account deficit goes up, income must come down. One only needs to look at the auto, airline and now the survivors of New Orleans and other coastal regions to prove it. Bush repealed the prevailing wage law.

Greenspan is right that a flexible economic system will allow the global economy to expand, however, this expansion is at the cost of the US economy which is currently being flushed down the toilet.

I agree that energy prices will spike this coming winter, however, I'm not in agreement to the percent. Consumers will begin the substitute phase during the winter. My mom and sister bought electric space heaters (on my advise) not because I believe that their will be shortages of natural gas, but because the cost per BTU between electricity and nature gas will narrow and it will become cheaper to heat by electricity rather than natural gas. A period of sun, space heater and lower than average furnace usage will, I think, average out to a lower cost than sun and furnace use and still maintain a comfort level. My what a year can do to prices. (if any body agrees with this, I suggest that they part with their money now before a shortage of space heaters become evident)

The only way out of the “rebuilding of New Orleans and who's going to pay for it” peril (sinking of the US economic ship type peril) is to go into deficit spending. This is the “good” type of spending. It will be a direct shot into the local economies and in fact will prevent the US “Banking” (home values) industry from collapsing, aka 1929 ish.

As a side note to those who believe that the refining capacity problem is due to environmentalist, I have a few words: I went to Roosevelt High School in East Chicago, Indiana (look at the Indiana map). Down pass a one and a half block wide city park and across a barge canal (that had a history of catching on fire (the canal)) was a refinery. It is a wounder that I know how to use this blog, because of the smell one gets on a light, breezy day. Environmentalist are right on this issue.