Second Economic Catastrophe Looming?

Last year it was the "toxic assets", the investment in "tranches", the financial equivalent to buying a thousand tons of second-grade ground beef deeply contaminated by the addition of one ton of rotten meat. It doesn't matter how much you churn it or how fine you grind it. In every last bite is a nice case of food poisoning, even though 99 percent of the beef is perfectly good.

This year, we've got other problems.

First, the looming crisis in Commercial Real Estate, which is nationally running at a roughly 16-17 percent vacancy rate, with a lot more commercial space coming onto the market as it is completed.

Secondly, there is the ongoing malaise in consumer spending, and the high level of unemployment that isn't rising as fast as it was, but it's still rising. National average unemployment is expected to hit 10-percent very soon, and in some places such as Michigan, unemployment is very near to 20-percent.

Third, there's a really strange phenomenon of interaction between the price of oil and the value of the dollar.

The price of oil continues to hover in the general vicinity of 60-70 dollars per barrel. Yet, believe it or not, the price of oil is actually declining fairly rapidly. The only reason that it remains priced approximately near $70/bbl is because even as falls the value of oil in the ongoing global Recession, so falls the dollar.

If you wanted to compare a graph of oil prices, and of dollar exchanges, you'll see that they follow almost exactly the same curves. Even as consumer-driven manufacturing and sales drop or hold steady -- keeping the demand for oil relatively low -- so the dollar falls in terms of exchange rates and especially in terms of the amount of hard commodities such as gold, silver, or platinum. If you consider the price of oil in terms of how much hard-commodity exchange it takes to buy it, the price of oil continues to drop.

There is a positive side to this: with the drop in the real costs of oil, there is a drop in prices -- after a predictable one-year lag -- of things that take a lot of oil to produce. Costs of fertilizers are down, as are the costs of many foods which are fuel-intensive. The fuel costs of both harvest and over-the-road transportation of food products is less than half of what it was when gasoline was selling above $4.00/gallon.

Yet despite significantly decreased production costs in both transport and feed, livestock products including milk remain high. Some of this may be attributed to producers recouping their sharp losses due to high costs in recent years before letting their prices fall to something closer to the market-demand estimated reasonable prices. Then again, food sales near the consumer market may be being priced according to a faulty pegging to the dollar, rather than in consideration of costs.

One thing is for sure: right now, oil is linked to the dollar in a manner as unrealistically reflecting market forces as housing was pegged unrealistically in Fall 2007. The same whiplashing adjustment that propagated throughout world markets when the housing bubble began to implode and took global credit to the mat along with it, we are possibly going to see that as the dollar unlinks from oil in the face of declining demand, and finds its own level, probably pegging against and indexed from moving averages of hard commodity exchange rates in industrial metals such as silver, gold, platinum, and "coltan".

And now, into this volatile mix propped up on very shaky legs, comes the possible bankruptcy of CIT Group.

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More later, we won't know which way that goes until perhaps close-of-business today, or perhaps late Friday afternoon.

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