Editor’s Note: Americans are now paying the price for the US government’s misguided military and energy policies over the last decade, says Bill Bonner in The Daily Reckoning.

And with US gas prices prices off the dial, America’s suburban lifestyle is starting to become an expensive business. Inner-cities, says Bill, are about to become fashionable again…

Crude oil prices have been knocked off their perch in the last couple of days, however. US crude oil inventories have risen substantially, according to a report by the Energy Information Administration.

And it seems that Americans are driving less as a result of high gas prices. US demand for gas has dipped 2.1% over the past four weeks compared with year-ago levels.

The Most Boneheaded Miscalculation Of All Time

By Bill Bonner

“Terrorism will be reduced… weapons of mass murder will be limited, people will be safer around the world, human rights and democracy will be unleashed in the Middle East, and the fragile outlook for world prosperity will be improved… The uncertainty tax on world growth will be lowered too, as will the energy tax from temporarily spiking oil prices.”

This was Larry Kudlow writing in March, 2003.

The spike in oil prices he described took place on March 12th, 2003, pushing the price of a barrel of crude all the way up to $37.83 and the price of a gallon of gasoline to $1.72. Yesterday, oil closed at $137 and gas sells for $4.06.

But Kudlow was hardly alone in his hallucinations. Laurence Lindsey, then George Bush’s senior economic advisor, looked into his own crystal ball and saw nothing he didn’t like.

“Under every plausible scenario, the negative effect will be quite small relative to the economic benefits… The key issue is oil, and a regime change in Iraq would facilitate an increase in world oil,” thereby driving down oil prices.

Paul Wolfowitz, then Deputy Secretary of Defense, went on to reassure the nation that Iraqi oil revenues would pay all the costs of reconstructing the country.

Today, we are talking about one of the most boneheaded miscalculations of all time. Almost with a single maladroit stroke, a relatively small group of world-improvers undermined the progress of 9 generations. Five years later, Americans are on the losing end of the “biggest transfer of wealth in history,” as T. Boone Pickens described the oil market of 2008. George W. Bush has the highest disapproval ratings of any US president in history. America’s most profitable industry — finance — has collapsed… its currency has lost a third of its value…and European, Chinese and Indian economists are wagging their fingers saying “I told you so.”

But here at the Daily Reckoning we always look on the bright side. And the sunny side of this story is that the US needed to be humbled. After the Soviet Union fell to its knees in 1990, America had a monopoly on worldwide military force. Nature abhors a monopoly; she needed to take the US down a peg. Who better to do the job than this group of neo-cons? They knew no history; nor did they understand economics. They were the perfect people to lead the nation to disgrace and bankruptcy.

Mr. Kudlow continued his miscalculation by referring to a survey, in which 69% of respondents said they would gladly pay $300 for the war.

So far this year alone, the price of crude has risen 40%. It’s now $100 higher than when the neo-cons took America into the Iraq War. Each American uses 25 barrels of oil per year. This is equivalent to a tax of $2,500 in additional energy expense per person…or $10,000 for a family of four, annually. In addition, the war itself is estimated to cost between $1 trillion and $2 trillion. Divide that by the number of US families and you get a figure of $10,000 or more.

Ooops.

But the numbers are just the beginning. High energy prices are undermining the American way of life itself, such as it is. As colleague Byron King explains, below, we’ve spent the last 100 years building the wrong kind of world. Now, many Americans are doomed to live in the ruins of a civilization that no longer works.

“Rethinking the country life,” begins an article in the New York Times. “Suddenly the economics of American suburban life are under assault,” it continues. Then, it gets down to business.

When Larry Kudlow, Laurence Lindsey and Paul Wolfowitz were explaining how nice it would be to rough up the towelheads, the average suburban American household spent $1,422 on gasoline. Now, according to the Bureau of Labor Statistics, the sum has risen to $3,196. Another estimate puts the increase in energy costs to the typical family at $50 per month. Any way you look at it, it’s a lot of money for people who don’t have much money. And the figure goes up the further you get out in the boonies.

“Life on the edges of suburbia is beginning to feel untenable,” says the Times. Like it or not, Americans are being forced to park their cars. This spring, they cut back on their driving at a sharper pace than anytime since 1942. But it’s hard to stop driving when you live far from work and far from shops.

Meanwhile, we got the latest figures on the US housing market. According to the Case/Shiller survey, prices fell at their fastest rate ever in April, down 15.3% over the year before. This no doubt contributed to an enveloping funk in consumer confidence, which hit a 16-year low.

The confidence level of suburbanites falls with their house prices. We have no proof, but our guess is that no houses are falling more than those built most recently, most far out. That’s where homeowner equity is likely to be lowest…and where the increased price of commuting hits hardest. That is where house prices ought to be most vulnerable. Potential buyers will simply add up the costs of commuting – in time and money – and subtract it from what they are willing to pay for the house. The longer the commute, the lower the price.

“Prices in outer suburbs will get clobbered,” concludes economist Mark Zandi.

The country will be turned inside out by higher energy prices. The suburbs are becoming less and less desirable…compared to concentrated, close-in developments near city centers. For the first time since the 1920s, the inner cities are “in.” The suburbs, meanwhile, are ‘out.’ And the further out you go…the further ‘out’ they are. Over time, many of these out-lying suburbs are likely to become slums…or may simply be abandoned, left to become ghost towns, with tumbleweeds blowing through the empty split-levels and burned-out neo-colonials.

In the fashionable inner cities, meanwhile, the middle classes will adapt and probably be better off for it. They’ll walk to restaurants, to school, and to shops. In the far out suburbs, consumers will regret every trip to the shopping mall…and rue the day they listened to Larry Kudlow.

Source: The Most Boneheaded Miscalculation Of All Time