House of Cards: Forecast for 2008 - 1/15/08

Hobert Pruitt
Beyond Fossil Fuel Columnist

After a temporary dip in the economy, many forecast that everything will be back on track, with the economy growing again the second half of 2007.

I would not agree with these forecasts, the U.S. and the rest of the world may be changing in a major way.  Oil is in short supply and will get worst in the years to come.  People and businesses will find it difficult to pay back loans and credit cards, because everything from food to fuel will be rising in cost. 

The Financial system itself is a house of cards ready to fall.  The world wide financial system is so interconnected; if one part of the system fails it can affect the other parts of the economy.

Part of the stress on the financial system is the rise in oil prices which increases the cost of food. For more information go to this link http://www.beyondfossilfuel.com/ethanol/food_oil_122807.html

Adding to the cost of food is grains that are being diverted from food production to ethanol production, further raising the cost of food. Learn about Peak Food
     
Some think price increases for energy and food are only temporary and we will soon be walking down the yellow brick road again.  These folks live in a fantasy land.  We are currently in a commodity super cycle that may last seven to ten more years.  In a commodity super cycle, demand for commodities like food and energy exceeds supply, causing increased prices and can cause supply shortages.  These super cycles last an average of 15 years.  The current super cycle started around 2000.  Once demand exceeds supply producers of commodities will see that it is profitable again to get back into the commodity business.  It takes a number of years for producers of these commodities to increase production.  You just can’t put an oil rig in the Gulf of Mexico overnight, or plant coffee trees and expect them to produce coffee beans next year.   

More will realize how peak oil is here and how it can affect the financial markets.  The financial decision makers need to start thinking about how higher oil prices when loaning money.

As the financial markets become aware of peak oil, lenders will be more wary of long term loans and interest rates are likely to rise with the risk.  Money could be scarce to loan as defaults grow. 

With our consumer driven economy, the rise in food and fuel will leave less to spend on non essential goods and services driving the economy.  With less money, defaults on loans will increase, adding to a recession for 2008. 

Banks already struggling will fail.  The FDIC will need to step in and make good on the insurance coverage of $100,000 on most accounts, but will they have enough money if numerous banks fail.  I am sure the government will find a way to work around the problem.  Got Gold?

Banks are already tightening up on the money they lend and will tighten further as these defaults on loans and credit cards increase.  This will put the brakes on the housing market helping to drive the economy. 

Oil producing countries taking a falling dollar for their precious oil will soon see the light and un-peg their currency from the dollar.  They may decide they don’t want dollars for oil anymore.  This will cause the value of the dollar to fall further causing oil to rise. 

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