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Today, some experts are predicting that gas prices in the United States will hit $4 per gallon by the end of the year. Needless to say, other experts dispute this possibility. As much as I would love to say that this is an obvious panic marking a top in prices, it is worth considering what would happen if they are right.

Gas prices at $4 per gallon would represent a doubling of price over the course of two years. It would be over 30% inflation from right now. This is inflation all by itself, even before you consider that just about every object you could possibly have in your home needed fuel to get there, either in the manufacturing process or the delivery process. Expect general inflation to come on the heels of such an increase in fuel costs.

Increased inflation means Agent Greenspan must swing into action, raising interest rates. This means interest rates will go up for loans, credit cards, and mortgages. For goodness sakes, if you have ignored my warnings to lock in your adjustable rate mortgage, this may be your last chance! One benefit to Joe and Jane Average is that the interest paid on bonds will also go up, and there is a slim chance that interest paid on their savings may go up ever so slightly. Of course, this also means that the national debt will grow even faster.

Consumer and employee confidence are already down. And no wonder! Planned layoffs are continuing to outpace planned new hires. Expect a continued decline in confidence if gas hits $4 per gallon. Wal-Mart was concerned about gas prices a year ago, estimating it was costing their customers an additional $7 per week; one can only imagine what the internally circulated numbers look like now. Gas prices are now bad enough that Wendy’s is willing to blame poor sales on high gas prices.

As CNN reported yesterday (see previous post for link), people are already changing their habits due to high gas prices. That will continue. Unnecessary trips will not happen. That means less shopping, less eating out, fewer after-school activities. The malls will be trying to come up with interesting ways to get people into the building. The guys who downgraded the company which owns Olive Garden and Red Lobster will look like geniuses. People will be bringing brown bags to work with them, partly to save money and partly to save gas. If $4 per gallon gas persists, private school enrollment might also suffer, as such institutions often draw students from several miles away.

However, internet and mail order businesses will see increased orders. Whether they will profit from this depends on whether they can keep shipping costs reasonable. eBay will continue to see decent traffic as the intersection of people trying to turn unneeded objects into cash and people looking for online bargains.

Truck and SUV sales are already plunging. Expect a continued shift away from low fuel efficiency vehicles. Light truck prices, particularly in the used vehicle market, will plunge. Detroit will not be able to prop up truck sales with incentives in the long run. Many people will reevaluate whether or not they really need a large vehicle; some will sell, while others will get a small high efficiency “around town” vehicle for everyday use. Some insurance fraud is possible as truck owners decide it is easier to have the truck stolen than to sell it.

Mass transit will be all the rage. Well managed systems will benefit; poorly managed systems will collapse under their own ridership. Being near train and bus stops will be a plus rather than a minus for homes. People will — perhaps for a limited time — be willing to support taxes and mass transit initiatives.

There used to be a bit of buzz about people moving to “exurbia,” that place a little farther out than the suburbs, where there is still a slightly country feel, yards are big, and houses cost less. People who went for that bigger cheaper house further out are feeling the pinch of gas prices, and it will only get worse. Double that if they over-extended themselves to buy it. Property on the edges of metropolitan areas will decline in value as these exurban areas will no longer be seen as commutable. Some families will even reevaluate whether it is cost effective for both parents to drive to work every day.

Finally, people will walk away from debts. Between rising day-to-day expenses and tougher bankruptcy laws going into effect this month, there will be people who just decide to stop sending a check to Chase Manhattan or GMAC every month. “Go ahead, cancel my credit card,” and “Please, take back the truck I can’t afford to gas up anyway.”

I hope I am overreacting. Better yet, I hope the experts are wrong.

Or, “Japanese Economics Class”

Agent Greenspan has spent most of the week talking out of both sides of his mouth. For example: homeowners are in fine shape except for the risky mortgage products, speculative activity, and cashing out of equity. If you want to take a shot at deciphering Greenspeak for yourself, here’s what he actually said today. Currently, Greenspan appears to be telegraphing that there will be a continued rise in interest rates, because there is a continuing risk of inflation. This is of course assuming that the trend of foreign owners of American bonds depressing interest rates does not continue.

Some analysts think this is just awful news. Doesn’t Greenspan know about the lousy consumer confidence numbers? Isn’t he worried about the people who are overextended on mortgages and credit cards? Doesn’t he want to keep interest rates low to stimulate the economy? Has he not noticed the flat stock market? Doesn’t he know that the Administration expects the hurricane damage in the Gulf Coast to sharply impact the economy? Has the old man lost his freaking mind?

Oh yeah, and what does Japan have to do with this?

WARNING! Severe Oversimplification Follows! Modern economic theory says that lowering interest rates stimulates the economy: it makes it cheaper to borrow money, and therefore easier for companies to buy manufacturing equipment — to say nothing of making it easier for Joe and Jane Average to buy things like houses and appliances and cars on credit. Raising interest rates, however, stifles inflation — and with energy prices being what they are, who can blame Greenspan for thinking inflation is a bigger potential problem than slow economic growth.

For some years, Japan has had economic problems. A huge stock bubble in the 80s was followed by a colossal bust in the 90s, and the economy suffered. More accurately, the economy suffered despite slashing interest rates to very low levels, even to zero! If you believe that low interest rates stimulate the economy, you must now be saying something along the lines of “HUH?”

The Japanese economy, while not where it was in the 80s, is now recovering. However, mucking about with the interest rates did not bring this about. It took dealing with underlying problems, in Japan’s case banking/credit reform and consolidation.

It is my theory that beneath certain levels, low interest rates do not stimulate the economy. There are several factors which combine to this result: First, when rates are very low, there is no incentive for lenders to extend credit to individuals and companies. Since the available rate of return is so low, they would rather take the sure thing on government bonds. Housing lending has continued partly because there is a real asset involved, and partly because such loans can be sold to aggregators such as Fannie Mae.

Second, when interest rates are very low, corporate borrowers — who are supposed to be goaded into action by super low rates — are mindful that the Powers That Be feel the economy is lousy. It is a bad idea to incur debts and invest in infrastructure when the economy is lousy. What will the stockholders say? What cash they do have they will sit on until the moment is right. After all, if the economy is lousy, they may well need the cash cushion. As for loans, they will wait for some kind of signal that things are improving — an increase in interest rates, maybe — before calling for cash.

Finally, the third leg of the economic table, Joe and Jane Average do not experience added liquidity. While the banks are more than happy to lend them money for concrete things like houses and cars, the banks won’t lend them cash for things that have a lasting impact on the economy. They can’t get cash to start a business (or to help along their existing business) because it’s too risky — for the bank, that is.

So, Alan? You just keep raising that interest rate, mmkay?

This week there was some economic news: Consumer Sentiment numbers as reported by the University of Michigan dropped sharply, to levels far below what “the experts” anticipated (coincidentally, the Bloomberg version of the story points out a similar drop in President Bush’s approval rating); and retail sales are weak, dragged down by lousy car sales numbers. About the only bright spot on the car sales front is that hybrids are hot, hot, hot. Consumers are caught between light trucks whose values have collapsed and new cars that only sell because of silly incentives. It is no secret why both these things are true, but let me give you the expert take: “Toyota Motor Corp.’s president said he’s ‘worried’ that fuel prices, which surged to records after Hurricane Katrina disrupted supplies in the U.S., may curb worldwide demand for new autos.” It is no coincidence that Toyota offers hybrid cars and trucks.

If the American auto industry really wants to keep selling cars, they are going to have to stop offering the crazy CRAZY crazy deal of the week, and start offering vehicles that people are willing to buy at full price. And unless gas prices fall below $2/gallon (ha, yeah right) that means they need to be both safe and fuel efficient.

They tell you that the popularity of the SUV is evidence that people want these land yachts. If that is so, then drop the incentives! They tell you that bigger vehicles are safer vehicles. The truth is that safe vehicles exist at all size levels; it is a function of good design, not pure mass. Size = safety is one of those over-generalizations, like “All old people like prunes.”

The technology exists to make fuel efficient cars. Thirty years ago, there were efficient cars. They might not have been pretty, and they might not have been peppy, but they were affordable; now we have 30 years of technological advances that can and should be used to make them better. Here’s one fellow whose gadget makes cars both more efficient and less polluting. Somebody, find me a downside to this!

In closing, Senator seeks Wealthy Corpse. Object, poster child for estate tax cuts. Also, CNN takes time to say “if you need a non-standard mortgage to afford that house, maybe you should reconsider.” And finally, two former Governors — one Democrat, one Republican — say our health care system is broken.