The Five Big E's

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1.) Energy is no longer cheap. We were appalled when we got the latest heating bills from our house in France. And we’re not even really heating the place; we’re just trying to keep the pipes from bursting.

2.) The Exodus of wealth and power continues…from West to East. Reuters tells us today that “China Roars into the New Year.” Experts expect the sino-economy to produce another year of near-double digit growth.

We interrupt with a note about the homeland economy. Employment is still disappointing. It’s up only 2.7% in the 49 months of this expansion. That compares to 8% during a similar period in the ’90s…and 13% in the ’80s.

Where are all those missing jobs? Look East. The United States’ trade balance is running at a negative $60 billion per month. That is money that goes to foreign-based suppliers and foreign-based workers — notably in Asia. Yes, a substantial part of the U.S. payroll is packing up and leaving for the East, too. Recent reports even tell of Westerners who have gone to the Far East in search of better paying jobs.

In America, meanwhile, the jobs that are left show little or no wage growth. Except for the very top earners, real wages are lower today than they were two years ago.

3.) Hot on the heels of this exodus of wealth, power and income marches Pharaoh’s army. Yes, the U.S. Empire is peaking out. And its crack troops are drowning in a Red Ink Sea …or wasting away in far-flung, godforsaken outposts of the empire. A new report commissioned by the Pentagon warns that the imperial army is getting worn out by frequent deployment to the Middle East. In 2005, recruiting agents missed their targets for the first time since 1999. The empire may soon have to turn to barbarian troops; the homeland boys would rather go to work as mortgage brokers and enjoy new granite countertops at home.

4.) The Grand Experiment with paper money is running its inevitable course, too…like a fever or a hangover. Yesterday’s trading pushed an ounce of gold up over $560. The problem with central banking is the problem with running an empire: You can control some things, but not everything. And when you try to control one thing, you throw the other things out of whack. You get your yin right, but the yang goes haywire. Or just at the moment you have the flim down pat, the flam starts acting up.

In the Fed’s case, it can control the quantity of money or the quality of it, but not both at the same time. Having vastly increased the quantity during the Greenspan years, Ben Bernanke is going to be plagued by quality issues. The dollar only lost half its purchasing power during Greenspan’s reign. It is only a matter of time until it loses the rest.

5.) And then, there is the old Economic cycle. For nearly a quarter of a century credit expanded, asset prices rose, and bond yields fell. The rich got richer; the poor went further into debt, and everyone was happy. Things just couldn’t be better, said Bill Clinton near the peak. He was right. Now they will be worse. In real terms — matched against gold, that is — almost all asset classes are going down. They have been since July of 1999. Then, you would have had to put 43 ounces of gold on the table in order to buy the Dow stocks. As of this week, you need only 19 ounces. And by the time this cycle runs to its ineluctable conclusion, a single ounce of gold will buy every stock on the Dow…with change left over.

Remember the 5 E’s, dear reader. Remember the 5 E’s.

• A reader explains what may happen to the oil price as Iran gets targeted in the War on Terror:

“The Iranians are in no mood for another regime change and will exact a tremendous toll on the U.S. Empire, which will ultimately lead to its demise. Quite frankly, the high price of oil and our addiction to it is a blessing because it is the only deterrent that the dogs of war will pay attention to.

“As someone who has worked in the oil industry, I fully expect to see oil at $100 a barrel after sanctions are imposed. Once hostilities occur, I could see prices between $300 and 500, especially if tanker traffic is slowed or targeted. The worst scenario would be if a sunken tanker blocks the narrow Strait of Hormuz. This will bring about a global economic meltdown. I cannot fathom how developing countries are able to cope with the present price of oil let alone when it skyrockets.”

“So what?” we wonder. An Iranian debacle would do no one any good, but things can always get more out of whack than you expect. The neo-cons wanted “creative destruction” in the Middle East…they may get more of it than they wanted.

• “After reading Empire of Debt, I was inspired into wanting a Hollywood satire/thriller (based on the book) about a German-style hyperinflation scenario hitting the United States economy,” one reader writes.

“I would love to see the macabre enactment of Federal helicopters dumping currency on cities, mob scenes at gas stations charging $50 per gallon, frenzied depositors mobbing banks and jumping over teller counters to make forced ‘withdrawals’… The movie could showcase the ‘worse case scenario’ of runaway hyperinflation, crashing markets and the Chinese on a spending spree in the U.S. buying up real estate and driving the average home into the tens of millions.”

• Things always last longer than we expect, and get further out of whack than we can imagine.

Today’s news tells us that “Vegas Condos Grow Cold.” Three high-profile projects have been canceled in the last seven months, the article tells us. Maybe the madness is correcting…maybe not yet.

The Fed funds rate could soon reach 5%. This will give Ben Bernanke some room. There is not much margin for error, it is true. With credit market debt about twice the level it was when Alan Greenspan nestled into the cushiest chair at the Fed, Bernanke will find his own seat a little harder and less comfortable. But as the economy starts to sober up and come to its senses, Bernanke will also have a little more gin to add to the punch. He’ll be able to cut the prime rate back down to 1%. Who know what madness will follow?

House prices could continue to go up. Stocks could rise. People might spend even more recklessly, and add to their debts even more imprudently. About the only thing you can count on is that the price of gold will go up. We say that, fully aware that we can’t read tomorrow’s newspapers any sooner than anyone else. It’s just that we have a deep and abiding faith in central banking; we know it is a swindle. The more brazen it becomes, the more brightly good old honest gold shines in comparison. (More on this below…)

• How mad has the real estate bubble become? A service called “101 dumbest moments in business: Real estate” tells us that there is a booming business in converting insane asylums into up-market housing. Of the “seven priceless moments of real estate insanity,” this one tops the list, say the authors. They go on to say, “the nuthouse-to-yuppie-house trend currently sweeping North America, with such conversions also planned in Detroit, New York, Vancouver, and Columbia, S. C., where the centerpiece of the development is an original brick building with the word ‘asylum’ chiseled into the facade.”

Also on the list: “Vail’s Board of Realtors announces that it’s moving back in with its mom.

“Unable to buy office space in a community where the average home price recently headed north of $4 million, the Aspen Board of Realtors heads north too — to Basalt, Colo., a town of 3,000 residents 20 miles away.”

In San Francisco during the month of March: “The median price of a single-family detached home in the San Francisco Bay Area rises more than $1,000 per day. By month’s end, it swells to $106,000 above the previous year’s median — 43 percent more than the area’s estimated average household income of about $74,000.”

And here in England: “A house in the Shepherds Bush area of London measuring less than 10 feet across at its widest goes on the market for $933,000. Listing agent Winkworths describes the anorexic structure as ‘utterly amazing and almost certainly unique.'”

Bill Bonner [send him mail] is the author, with Addison Wiggin, of Financial Reckoning Day: Surviving the Soft Depression of The 21st Century and Empire of Debt: The Rise Of An Epic Financial Crisis.

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