David Stockman: Energy Crunch Will Morph Into a Replay of the Housing Crash

By John Morgan at MoneyNews 
The spiraling energy meltdown is the new housing crash, according to David Stockman, White House budget chief in the Reagan White House.Just as the 2007-09 housing plunge did not put a dime into consumers' pockets — even though average home prices tanked by about 30 percent, from $230,000 to $165,000 — the energy crunch likewise is not going to add to consumer wallets, Stockman asserts.At the peak of the mortgage boom, he notes, the U.S. savings rate had actually vanished, falling to about 2.5 percent of personal income from pre-Greenspan rates of 10 percent to 12.5 percent."Stated differently, the mortgage credit boom exploded uncontrollably in the run-up to the financial crisis because free-market pricing of debt and savings had been totally distorted and falsified by the monetary central planners at the Fed," Stockman writes on his Contra Corner blog.

"Drastic mispricing of savings and mortgage debt in this instance touched off a cascade of distortions in spending and investment that did immense harm to the main street economy because they induced unsustainable economic bubbles to accompany the financial ones."

Now Stockman predicts it will be deja vu all over again for Federal Reserve Chair Janet Yellen and her minions at the Fed.

"Substitute the term 'E&P [exploration and production] expense' in the shale patch for 'housing' investment and employment in the sand states, and you have tomorrow's graphs — that is, the plunging chart points which are latent even now in the crude oil price bust. But the full story of the housing bust also reminds that the long caravans of pick-up trucks which will soon be streaming out of the Bakken in North Dakota will represent only the first round impact."

According to Stockman, the Fed-driven energy distortion crossed national borders, and into the willing hands of other central banks, as the "Fed exported bubble finance to the entire world."

"Between 2000 and 2014, China's credit outstanding soared from $1 trillion to $25 trillion. Consequently, its credit-swollen GDP expanded from $1 trillion to $9 trillion in a comparative heartbeat; and its crude oil consumption soared from 2 million barrels per day to 8 million."

Stockman sees more shoes to drop, as the "lunatic junk bond yields" stemming from billions of dollars in bad loans to the energy industry start to unravel.

"But there is something else even more significant. The global oil price collapse now unfolding is not putting a single dime into the pockets of American households — the CNBC talking heads to the contrary notwithstanding. What is happening is the vast flood of mispriced debt and capital, which flowed into the energy sector owning to the Fed's lunatic ZIRP [zero interest rate policy] and QE [quantitative easing] policies, is now rapidly deflating," he explains.

"That will reduce bubble spending and investment, not add to economic growth. It's the housing bust all over again."

Not everyone agrees that lower gas prices are bad for the U.S. consumer – at least for now.

The Energy Information Administration, a unit of the U.S. Department of Energy, estimates the average American will receive a $554 windfall from lower gas prices in 2015.

Nomura analyst Robert Drbul tells MarketWatch, "Declining gas prices can increase discretionary spending power and are particularly significant to companies that target customers in the lower-income brackets."

Drbul estimates that every 10 cent decline in gas prices could translate into an additional $14 billion of disposable income for U.S. consumers annually.


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