Beware Gustav

The U.S. economy is poised in a very perilous position. There is still very little credit available, high gas prices and inflation are still around, and many, many institutions, especially banks, are barely hanging on. Additionally, there is not much the government can do to prevent more problems or to help the economy.

Meanwhile, a small tropical disturbance named 94L has snuck up on hapless Hispaniola and become a category 1 hurricane named Gustav. As this atmospheric maelstrom nears the caribbean, there is virtually nothing to stop it from becoming a category 4 or 5 . If that happens, and it continues towards U.S. landfall, Gustav could have devastating effects on the U.S. economy. In addition to the devastation that $6 gas could wrought, the building boom that normally would accompany a major disaster will be hindered by high construction costs and lack of credit. Instead, an area hit by the hurricane could simply stay depressed and remove productivity from the economy. Normally in a disaster this is marginalized because the huge U.S. economic engine can absorb blows from a disaster. Imagine, however, that the banking and insurance system is hit by the loss of several thousand homes and businesses. The margin of error between recession and disaster is so small right now that Gustav, and anything that follows it, could push us over a cliff that would be very difficult to climb back up.