Almost Daily Rant

Open Source Ecology

The open source philosophy has evolved from its roots in software into an enabler of resilient communities. Open Source Ecology (OSE) fuses capital and labor by using minimalist open source designs and scrap metal to implement a framework for relatively self-sustaining communities based on the construction set shown below.

 

OSE is emerging as a powerful trend as more people opt out of the corporatist economy by choice or through necessity tending to a way of life tending towards:

1.)    Individual liberty

2.)    Resource-based monetary system

3.)    Decentralized autonomy

4.)    Direct capitalism as opposed to state-managed Keynesian/Marxist/Neoliberal economies

5.)    Local- and regional-level resilience

Watch this video for a 40-minute overview of the OSE Economy in the box and the concept of miniaturizing civilization.

In a practical application example of OSE, you'd build a tractor from scratch by downloading the modular, open source design, rather than use a credit line from a multi-national finance company to purchase a tracker with thousands of individually sourced and specialized components. Or how about a hole puncher?

Open Source Metal Hole Puncher - Prototype I from Marcin Jakubowski on Vimeo.

 

There’s of course a tension between the open source philosophy and capitalism, though I argue that most “capitalists” that are threatened by open source aren’t capitalists, but rather statists disguised as capitalists. Sharing for the common good seems to have some collectivist underpinnings, so let’s take a closer look. Is it really the small scale direct capitalist working in a true free market or the state-sponsored, multi-national monopolist who is threatened?

The International Intellectual Property Alliance, a lobby group broadly representing the RIAA, MPAA and others, has requested that the U.S. government put countries including Indonesia, Brazil and India on the “Special 301 watchlist.” Special 301 is a report that concerns the “adequacy and effectiveness of intellectual property rights” around the globe. Being put on the associated watchlist effectively puts those countries on a shortlist of governments considered “enemies of capitalism” who aren’t doing enough to protect intellectual property abroad. The reason the IIPA is so concerned about the aforementioned countries? They apparently have the audacity to either use or advocate the use of open-source software either in government departments or in state-owned businesses.

So what would John Galt think of the free distribution of ideas? The notion that open source jives with direct capitalism requires that you not mistake money, defined as a store of wealth, as the only form wealth for exchange in a voluntary trade agreement. In open source, the consideration is that any derived works that are publicly distributed must also be made available under the same terms. Money may not be exchanged, but the creator may see that submitting a design is still within his own selfish interest to take advantage of future enhancements and so voluntarily enter an agreement that does not threaten his personal property or wealth. Under those terms, even Ayn Rand would be OK with it.

In any event, I’ll keep watching these OSE pioneers closely. They have a bold vision and are clearly rolling up their sleeves and getting to work building something new rather than wasting time poking jabs at a failed system.

Quick Hits for 8June10

Kunstler on America spiraling into a scary place.

Got Goggle? You might instead go with startpage.com which doesn't log searches.

Peakaholics make the NYT, but true to form, it was a silly depiction about a woman growing plants in her kitchen and I'm sure most readers will simply go back to their lattes. Nothing to see here folks. Seriously.

Yes, Obama has known how bad things are in the Gulf for a long time. Now Senator Bill Nelson is confirming that the casing is pierced underneath the surface, would mean that oil is making its way up through the subsurface strata gushing from one or more additional places on the sea bed away from the BOP.

Iran Red Crescent to Gaza. An Iran-Israeli skirmish could be the tipping point for WWIII.

Long Emergency Act II

The catastrophe in the Gulf, Europe's unraveling and the quickening pace of systems failure all around us all but guarantees the Long Emergency is entering the second act. Kunstler describes in his latest roast, though I could do without his constant bashing of people from the south. The “folks down Dixie” he mentions may not be as eloquent in expressing their outrage or agree with him on the cause, but I'm sure do understand something is deeply wrong.

Everybody in the world is broke, except for maybe Lloyd Blankfein, and he may not end up broke so much as broken -- by a political meat-grinder that is revving up to turn the world's woes and swindles into a new kind of Long Emergency sausage, to be distributed among the roiling, angry masses as a synthetic substitute for nutriment. Call it a synthetic non-collateralized political obligation.

     Something snapped in the world last week and a lot of people around the world sensed it -- especially in the organs of news and opinion -- but this ominous twang was not very clearly identified.  It was, in fact, the sound of the financial becoming political. The macro-swindle of a worldwide Ponzi orgy now stands revealed and the vacuum left in its place is about to suck everything familiar into it -- standards-of-living, hopes, dreams, not to mention lives. The political action will be a desperate scramble to determine who and what is able to escape getting sucked into this black hole of annihilation. It's very suddenly shaping up to become an epic in human history.

     Meanwhile, a giant oil blob lies quivering in deep waters off the Gulf coast, like some awful amorphous Moby Dick full of malice waiting to sink Pequod America -- or at least the economies of five states. A few months from now, the BP corporation will wonder why it didn't go into something safe and predictable like the pants business instead of oil exploration. They will surely question the viability of conducting future business anywhere near the USA, and the USA will enter a wilderness of soul-searching about the drill-baby-drill strategy that only a few scant weeks ago seemed to be a settled matter. Tough to have your future hoped-for energy supplies evaporate at the same time that your hopes for future prosperity get sucked into a black hole.

     I've maintained for a long time that the folks down Dixie way are the the most dangerously crazy people in America and the Deepwater Horizon oil blob is not going to improve their outlook when it slops over their beaches and bayous. They'll blame Obama for it by syllogism. Anyway, they are only marginally more crazy than the rest of the folks in the USA. Those folks are warming up for an election season that is going to send a horde of exterminating angels into the halls of congress and the governor's mansions, and before too long those merchants of retribution are going to appoint their inquisitors. It's going to be a heckuva spectacle. In retrospect, Mary Shapiro's SEC will look like the Council of Trent. You can be sure that if ten gallons of gasoline remain to be found in America a few years from now, they will power the last GMC Sierra to drag the captains of Wall Street through the sawgrass prairies of Collier County, Florida.

     What has gone on in Europe the past few weeks is nothing more complicated than a waking-up to how broke they are. We're not quite there yet on this side of the Atlantic. They fired one last bazooka of wishfulness at the enveloping monster of debt and the monster laughed at them, and now they are standing in the windows of palatial edifice of the Euro Union waiting to see who will jump first. Here in the USA, we're still dazed and confused. What for a long time had looked like a game of musical chairs is morphing into something more like a national Chinese fire drill, a pointless running around in circles in the hope that sheer motion will be an adequate substitute for conscious action. In any case, both Europe and the USA are out of bazooka ammo now. Nobody can bail out so much as another lemonade stand. From here on governments really start to crumble.

     As in any time of severe turmoil, all political bets are off. There are insinuations in the press, for instance, that the communists will rise up in Greece and overthrow the elected government. That's rich, since communism was flushed down the human race's credibility toilet twenty years ago. The Greek opposition may even call themselves communists, but what on earth could they mean by that?  There are no "means of production" left in a country whose economy consists solely of cab-drivers, bellboys, and waiters. There's no "wealth" to redistribute, only the pain of collective economic loss when the tourists stop landing.

     Elsewhere in Europe, each national house is being outfitted with a procrustean bed of austerity. The various publics are not going to like lying in them. They ain't no Tempurpedics. History being the shape-shifting demon that it is, I imagine that this time around the Brits will be the ones who elect Nazis --or something like them -- while the still-chastened Germans find themselves in the odd position of becoming Europe's moral guardian -- its sole-surviving "good parent" figure, striving to maintain some residue of collective goodwill in Europe's once-ritzy gated community. Great historical figures always arise from unexpected places -- Corsica, Kentucky. Maybe some great unifying leader even now warms a seat in a Norwegian law school.

     God knows what the Europeans will make of the helter-skelter scene playing out here in the States. Perhaps some species of schadenfreude tinged with regret for the missing stream of tourists. My own guess is that there may not even be a president of the US after Mr. Obama. Rather, events will get so gnarly and disordered so fast that somebody like General Patraeus will have to step in for a while and keep the reincarnation of the Ku Klux Klan from trying to murder every non-Cracker from sea to shining sea. Of course, once that happens, we probably don't go back. It's not Imperial Rome (release 2.0) after that, either, because even the mighty US military will be too strapped for a means of support to continue operating.  Instead, it's the devolution of the US into functionally autonomous regions and states -- and even that scale of governance may be too great for the stringent economic realities of the years ahead.

     There remains, of course, the very great question of what the rest of people of the world -- the non-Western world -- do as the West spins into insolvency and tribulation. The Islamists will do everything possible to make things worse, and there's a lot they can do, from restricting their oil exports (maybe cutting them off altogether) to provoking the immigrant populations of Europe into political violence to possibly setting a few nukes off in their enemy's front yard.

     The Chinese will affect to referee the collapse of the West, but soon they'll be sucked into their own implosion of population overshoot and resource scarcity. India you can forget about out -- zero oil. Russia gets to kick back in glorious isolation and enjoy the methane fumes of the melting tundra. South America will heed the wise words of a forgotten 18th Century Viceroy of Mexico who explained his method of administration thusly: "Do little, and do it slowly!"

     The Long Emergency has now up-shifted to second gear. Wouldn't you know it, I have to go to Europe at the end of the month. And I'm supposed to get paid in Euros -- oh, snap! This week I'll be cavorting with my homeys, the Congress for the New Urbanism, at their annual jamboree in Atlanta (ugh!) and will be reporting on the doings there in this space next Monday.

 

Robb on the Decline of the West

I follow John Robb's website because of his big picture perspective on self-organizing groups and resilient communities. His recent post, The Decline of the West, summarizes what I've been calling the Latin Americanization of the industrial West, including the US, and the factors that will lead to the US joining the ranks of other hollow states. Which of the 3 basic individual choices that he presents at the end of the article do you choose?

Most analysts (at least the ones that are worth reading) contend that the sovereign default crisis (Greece, Portugal, Spain, etc.) in the EU is about the collapse of a system that created monetary union without a political union.  It isn't.  That's actually a narrow, parochial view.  Instead, the current sovereign debt crisis is about something much more interesting:  it's another battle in a war for dominance between "our" integrated, impersonal global economic system and traditional nation-states.  At issue is whether a nation-state serves the interests of the governed or it serves the interests of a global economic system.

Who's winning?  The global economic system, of course.  The 2008 financial crisis, the first real battle of this war (as opposed to the early losses in skirmishes in Russia, Argentina, the Balkans, etc.), generated a very decisive outcome.  It was a resounding defeat for nation-states.*   The current crisis in the EU will almost certainly end with the same results.

When this war ends, and it won't be long, the global economic and financial system will be the victor.  Once that occurs, the nation-states of the West will join those of the global south as hollow states: mere shells of states that serve only to enforce the interests of the global economic system.  These new states, more market-states than nation-states, will offer citizens a mere vestige of the public goods they offered historically.  Incomes will fall to developing world levels (made easy to due highly portable productivity), and wealth will stratify.  Regulatory protections will be weak.  Civil service pensions will be erased and corruption will reign.  The once dominant militaries of the West will be reduced to a small fraction of their current size, and their focus will be on the maintenance of internal control rather than on external threats.  The clear and unambiguous message to every citizen of the West will be:  

You are on your own.  You are in direct competition with everyone else in the world, and your success or failure is something you alone control.  

For those that think that this will bring about a surge of peaceful economic vigor, you will be wrong.  It will fragment society and lead to perpetual stagnation/depression, endemic violence/corruption, and squalor.  For absent any moral basis (a social compact), stability, or (widely shared) prosperity: new sources of order will emerge to fill the gap left by the hollowing out of the nation-state.  These new sources of order will be first seen in the rise of the criminal entrepreneur, whether they be the besuited corporate gangster or the gang tattooed thug.  For in the world of hollow states (without a morality that limits behavior) and limitless connectivity to the global economic system, these criminal entrepreneurs quickly become dominant, violently coercing or corrupting everyone in the path to their enrichment. 

As this occurs, you have a choice.  

1. You can stand alone and do nothing.  Thereby suffering the predations of this new criminal class.  
2. You can join them and prey on your former compatriots, enriching yourself in the process.  
3. Or finally, you can build something new.  Resilient communities and independent economic networks based on freedom, prosperity, and a new moral compact.

*  An ambush that yielded:  excessive debt, endless deficits, state guarantees (against financial system failure), and moral ambiguity/corruption.

  

Bageant on Blogging toward the Kingdom

Joe Bageant posted a good read on the national ethos of money and the discounting of all that is non-material. With all the outward rage occurring in every corner of the world, ironically deep introspection is the biggest threat to the Status Quo.

The brutal way Americans were forced to internalize the values of a gangster capitalist class continues to elude nearly all Americans. Most foreigners too. This is to say nothing of how our system replaced our humanity with ideology, our liberty with money, and fostered fascist nationalism through profound degeneration of the people's mind and spirit. It's not as if one can ever escape that sort of thing, either by going to a place like Mexico, getting drunk or whatever. We are made in Americas' image, whether we admit it or not, and America's image is the face on a ten dollar bill

Liberal or conservative, money is what we care about -- period. From birth, the empire has made one thing very clear to us: If you do not produce or acquire enough of the green stuff, meet the quota, you will be ground beneath the heel of the machine we call a society. No universal health insurance or higher education, no guaranteed minimum income, no worker rights, nothing for you suckers but the tab. So keep humping.

With such a national ethos, who can blame Americans for caring most profoundly about money? Everything is secondary to money. The future of the world's children, the planet, everything. I've been watching the horrific BP oil spill on CNN (doncha love the way they call it a "spill," as if it was a cup of coffee?)  The first and biggest ongoing question has been, "Who is going to pay for it?" Right off hand I'd say the fish, birds and wetlands will pay for it, along with future generations. One quart of motor oil will pollute 250,000 gallons of water, and already there have been millions of gallons of oil blasted into the earth's waters from this single spill. Yet the big question has been "Whose money and how much is going to change hands here?"

EVERYTHING is a money transaction up there. Which is why I am here.

And so here I sit waiting for the book tours to begin in the fall. I find that I have changed over the time it took to write the new book (Rainbow Pie, due out in September). Every time I do a book, even an essay really, I work out some stuff in the process, in my case, mainly rage.

It is now clear to me that the people's rage is a tool in the hands of the new electronic and digital corporate state. Its various channels, eddies and pools, regardless of type, can be directed toward all sorts of mischief and profit. Left or right, the angry throngs on both sides can be managed and directed. They can be sent chasing various injustices, denouncing evil characters on Wall Street, Times Square bombers, BP executives, or whatever, worked up into slobbering outrage over Sarah Palin, and thus kept divided and working against each other for the benefit of last gasp capitalism.

Once outside the furious drek of American political and economic life, and having finished the last book I will ever write, I found myself asking: "Why did the good in the American people not triumph? How can it be that so many progressive, justice-loving citizens failed? Their positions were well reasoned. The facts were indisputably on their side. Obviously, there was, and is, more going on than merely losing battles to demagoguery and meanness. Why do we lose the important fights so consistently? What has kept us from establishing a more just kingdom? Something is missing.

I think it is, in a word, the spiritual. The stuff that sustained Gandhi and Martin Luther King, and gave them the kind of calm deliberate guts we are not seeing today. I am not talking about religion, but the spirit in each of us, that solitary non-material essence, none the less shared by all humans because we are human. When we let our capitalist overlords cast everything in a purely material light -- as material gain or loss for one group or another -- we played the oppressor's game.

It was always a game with no vision. Just good guys, bad guys, pissed off people, or apathetic disenfranchised ones, amid one helluva lot of money changing hands. Mostly the wrong hands. That game drives us to the petty the larcenies we perform against one another in the name employment, and the atrocities abroad to which none of us lay our rightful claim as beneficiaries of the empire's pillage. Our purposeful blindness to such things necessarily eliminates any universal vision. All the best ones are universal.

Yet down inside human beings is a love of justice. Honestly. The psyche seeks balance, and therefore seeks justice. Regardless of the perversion of its definition, and therefore the laws, by those who own nearly all of our country and damned well intend to own the rest, we know.

While those elite forces can own everything around us, and have proven they can make life quite miserable if they care to, they cannot own that thing inside us. The one that gives out the last sigh before sleep, and travels the realms of the great human collective consciousness alone. This is the consciousness that ebbs and flows between all external events. There is nothing mystical about it. Go sit in any quiet place with your eyes closed for a half hour or so, and that self will invariably say hello.

This is also the self that our oppressors can never allow a moment's rest. Because when it finds rest, it finds insight, and can fuse the spiritual, psychological and material worlds into some transcendent vision that can at last seen and sought after. It makes Buddhist monks rebel in Sri Lanka and creates indigenous liberation theologians in Latin America.

Fortunately for Wall Street, the world's bankers, the military industrial complex, there is science, which they love so dearly they purchased it outright. Scientism has successfully sold the notion that spiritual awareness is superstition. By that accounting, the mind is no more than the brain, and love is a body sack of chemicals interacting. (A stunningly successful new public relations campaign by BASF chemical corporation campaign actually declares that love is chemical. Its success both here and in China would give Orwell the heebie jeebies.)

This will in all likelihood be the last philosophical and political battle with capitalist totalitarianism, assuming it can even be called a battle. I am not seeing much thinking and no genuine struggle on the American people's part. Consumer capitalism's material gratification has been so grotesquely satisfying, that it has shredded most of thinking in the country and all of willingness to take risks.

The blinking reptilian elites now own our entire material needs hierarchy chain, top to bottom. You eat, shit, work, fuck and die at the pleasure of their Great Machine. The presence of six billion others, most of whom are in the same situation, all but guarantees this as our material destiny on a finite and increasingly poisoned planet, before the big hasta la vista.

Meanwhile, win or lose, we are left with our inner selves to sustain each day (if only because Oprah has not yet gained copyright). In doing so we can discover the only kingdom that was ever ours. The same one gurus, messiahs, martyrs and hairy-assed sages the world over have ever agreed upon. The kingdom within.

I'm sure many readers bailed out back there when I first mentioned the spirit. "That crazy old peckerwood Bageant has finally blown a head gasket!" And as many more said "fuck this" at the mention of a kingdom within us. That goes to show the level of our indoctrination against anything that cannot be measured, counted, computed (and thereby controlled by the corporate state). I find it fascinating that we can so easily bandy terms such as fascism, or American free market capitalism -- two of the filthiest concepts ever devised -- yet piss all over terms indicating some higher value or quality in human beings.

What has all this to do with blogging? Everything and nothing of course. When I do get around to blogging, I serve up whatever the ole puddin' between my ears has been festering on. Mostly what happened around me that day, and what it may suggest about the world.

Sometimes it is a topic as big as the empire, other times as small as reflections on my latest batch of tortillas. In any case, I am the same as my reader friends, ordinary and fearful. Enough so, that they can identify with my ramblings. I don't write to them. I don't write for them. And I don't write at them. We merely live on the same planet watching the unnerving events around us, things the majority does not seem to see. So I write about that. And maybe for just a moment, a few friends I've never met do not feel so alone. Nor do I.

Which is why god made blogs, I guess.

However, beyond that, we are each on our own, most of our waking hours, for the rest of our days. There are more chapters to come in our lives, and this time next year, I do not plan to be blogging. Having glimpsed that kingdom within, I am very much interested in its pursuit, which is individual and does not much involve rage or politics. In other words, shut my pie hole and grow stronger, and with luck, a little wiser.

I hate writing this sort of me-me-me stuff. But I felt your letter addressed a question I've been asked often lately, and deserved my best effort at an honest reply.

In art and labor,

Joe (Read full article)

 

Isaiah's Job

I get a lift when I think about the lesson of Isaiah's Job written back in the 30's by Albert Jay Nock, which describes the concept of the Remnant. In a seperate essay, Charles Hugh Smith relates the Remnant to the Pareto principle (e.g. the 80% rule) and frames the concept in the current context of the larger economic, social and political issues.

Are you wasting time thinking 80% of the people will do anything but dance on the balcony while you point at the iceberg ahead? 

Undoubtedly yes.
 
But remember you're not alone in your thinking, and more importantly your actions, even though mass media is designed to make you feel isolated in a machine you can't do much about. 

These two paragraphs sum it up, though the entire article is worth reading:

In the year of Uzziah's death, the Lord commissioned the prophet to go out and warn the people of the wrath to come. "Tell them what a worthless lot they are." He said, "Tell them what is wrong, and why and what is going to happen unless they have a change of heart and straighten up. Don't mince matters. Make it clear that they are positively down to their last chance. Give it to them good and strong and keep on giving it to them. I suppose perhaps I ought to tell you," He added, "that it won't do any good. The official class and their intelligentsia will turn up their noses at you and the masses will not even listen. They will all keep on in their own ways until they carry everything down to destruction, and you will probably be lucky if you get out with your life."

Isaiah had been very willing to take on the job – in fact, he had asked for it – but the prospect put a new face on the situation. It raised the obvious question: Why, if all that were so – if the enterprise were to be a failure from the start – was there any sense in starting it? "Ah," the Lord said, "you do not get the point. There is a Remnant there that you know nothing about. They are obscure, unorganized, inarticulate, each one rubbing along as best he can. They need to be encouraged and braced up because when everything has gone completely to the dogs, they are the ones who will come back and build up a new society; and meanwhile, your preaching will reassure them and keep them hanging on. Your job is to take care of the Remnant, so be off now and set about it."

The Story of Your Enslavement

Greer: Business as Usual is Quietly Coming to an End

John Michael Greer, author of “The Long Descent”, describes the beginning of the endgame of attempting to paper over an economic collapse. (Read Full Article)

Forget the survivalist fantasy of violent hordes pouring out of the inner cities to ravage everything in their path; today’s slum residents are instead becoming the Okies of the Great Recession. In the process, part of business as usual in the United States is coming to an end...

If I read the signs correctly, America has finally reached the point where its economy is so deep into overshoot that catabolic collapse is beginning in earnest. If so, a great many of the things most of us in this country have treated as permanent fixtures are likely to go away over the years immediately before us, as the United States transforms itself into a Third World country. The changes involved won’t be sudden, and it seems unlikely that most of them will get much play in the domestic mass media; a decade from now, let’s say, when half the American workforce has no steady work, decaying suburbs have mutated into squalid shantytowns, and domestic insurgencies flare across the south and the mountain West, those who still have access to cable television will no doubt be able to watch talking heads explain how we’re all better off than we were in 2000...

Those of my readers who haven’t already been beggared by the unraveling of what’s left of the economy, and have some hope of keeping a roof over their heads for the foreseeable future, might be well advised to stock their pantries, clear their debts, and get to know their neighbors, if they haven’t taken these sensible steps already. Those of my readers who haven’t taken the time already to learn a practical skill or two, well enough that others might be willing to pay or barter for the results, had better get a move on. Those of my readers who want to see some part of the heritage of the present saved for the future, finally, may want to do something practical about that, and soon. I may be wrong – and to be frank, I hope that I’m wrong – but it looks increasingly to me as though we’re in for a very rough time in the very near future.  (Read Full Article)

 

More Trends for 2010

In his Trends Research Institute report, Gerald Celente lays out the top 10 trends for 2010. Look for the next wave of the financial collapse once unprecedented government measures to prop up and obfuscate economic realities give way. No surprise there. You'd expect the government to continue to wage holy War on Economy to attempt to keep the strings from unraveling off the yarn ball through the November elections, but that is hugely wishful thinking.

Case in point: The government disguises real job loss through the birth-death model, which mistakenly assumes newly created companies creates an equal number of jobs as companies going under during a given period. As Bloomberg illustrates, a record 824K more jobs were lost last year than stated in the unemployment reports due to the birth death model and this figure does not account for phantom jobs created after April 2009. The next figures won't be reconciled until February, 2011. In the meantime, for more realistic figures, see John Williams at Shawdowstats.

Celente covers protectionism (notice China is now playing the role of the created enemy), neo-survivalism, the coolness of thrift, microbrands, the continued erosion of Big Media and Cable networks (good riddance) and downsizing of Americans and the American way of life that goes with it. Nothing too far reaching, but he should have added 2010 will be the year of sovereign defaults, with Greece, Spain and Portugal the most likely next cases, as well as desperate downsizing of people and services at the local and state governmental levels, choking from a lack of tax revenue.

How the bankruptcy of the US plays out will have to be seen. As long as other countries need a pretend trade surplus, they will take dollars and the US will continue to erode the currency as any debtor nation with the abusive privilege of printing a reserve currency. Ironically, other countries will attempt to devalue their currencies with respect to the USD as the race to the intrinsic value of zero continues. Eventually, you can't fake insolvency or print real wealth, so this game may come to an end much quicker than anyone thinks.

In November of 2007, we predicted the "Panic of ’08." There was a panic. In November of 2008, we forecast the "Collapse of ’09." In March ‘09, the global equity markets collapsed. But before they could crash all the way to the ground, a scaffold of emergency props was erected. An unparalleled array of government cash infusions, rescue packages, bailouts and incentives papered over the crisis.

Today, even as government spokesmen and the major media proclaim that the world is emerging from its near-cataclysmic recession, we predict the "Crash of 2010." The rising equity markets, on which claims of recovery are based, are worlds away from the hard reality of the streets....(Read full article)

Boyd Loops

The central theme as we enter 2010 is our collective failure to form a cohesive and integrated understanding of what is really happening at a broader social, political and economic level. 2009 was the year that a general loss faith in the status quo accelerated beyond the traditional corridors into the mainstream: A wide swath across all segments of society beyond the greens proclaiming Gaia’s redemption on her abusing masters, or the Biblical focus on the culmination to ultimate clash between good and evil or the Marxists declaring the coming fall of the capitalistic Babel.

 

 

It was also a year marked a year of massive confusion in linking cause and effect, if the bantering of left-right bickering were any indicator. More importantly, with increased awareness that the status quo is broken and perhaps terminally ill, there is massive individual stress on how to best position ourselves in the coming years, aside from arrogant mystical claims by hucksters that they have all the answers...for a fee of course.

 

 

Confronted with infinite direct and indirect impacts of the broader trends, our response to each conforms to the theory of one of the most influential U.S. military strategists, John Boyd. Any confrontation can be deconstructed into a series of Boyd Loops: Observation, Orientation, Decision and Action. The Boyd loop applies in war, business, politics and everyday life:

 

 

· Someone confronts you on the street with a knife – what do you do?

· Your business is floundering in a world that has less to spend – what do you do?

· You’re Napoleon, you’ve just captured Moscow, but at great cost – what do you do?

· You lose your job and find your soft skills have been outsourced and undervalued– what do you do?

· You manage your company’s finances and see interest rates rising, the EU disintegrating, the coming China real estate collapse and a massive loss of faith in the financial system – what do you do?

 

 

As in war, the situation is fluid. Big Media presents you with disinformation at every angle, so cutting through the fog of war is difficult as the alternative viewpoints fragment into thousands of points of light. How do you reconstruct the narrative and take the best action for your individual circumstance?

 

 

In chaotic social and economic situations, most get crushed, but a small minority capitalizes beyond what would be possible in static conditions. The Soviet collapse two decades ago led to once-in-a lifetime arbitrage opportunities preyed upon by the oligarchs, organized crime rings and people in exploitable situations. While many suffered, somewhere a humble purchasing agent became rich buying materials and products at state-suppressed prices and resold them on the black markets of Eastern Europe.

 

2010 will continue to separate people and organizations that are able to quickly form an integrated understanding of what is really happening around them even as the “common sense” rules of the status quo fail them, apply the Boyd loop in infinitum and respond better and quicker than their opponents in war, politics, business and life.

Kunstler Forecast for 2010

If you've read Kunster's forecasts in years past, then you know he's been a bit premature at times on calling certain aspects of the Long Emergency and even jokes about his repeated DOW 4000 predictions, but that aside, he usually paints a pretty accurate forecast of things to come.  

There are always disagreements in a society, differences of opinion, and contested ideas, but I don't remember any period in my own longish life, even the Vietnam uproar, when the collective sense of purpose, intent, and self-confidence was so muddled in this country, so detached from reality. Obviously, in saying this I'm assuming that I have some reliable notion of what's real.  I admit the possibility that I'm as mistaken as anyone else.  But for the purpose of this exercise I'll ask you to regard me as a reliable narrator. Forecasting is a nasty job, usually thankless, often disappointing - but somebody's got to do it. There are so many variables in motion, and so much of that motion is driven by randomness, and the best one can do in forecasting amounts to offering up some guesses for whatever they are worth.

I begin by restating my central theme of recent months: that we're doing a poor job of constructing a coherent consensus about what is happening to us and what we are going to do about it. 

There is a great clamor for "solutions" out there. I've noticed that what's being clamored for is a set of rescue remedies - miracles even - that will allow us to keep living exactly the way we're accustomed to in the USA, with all the trappings of comfort and convenience now taken as entitlements.  I don't believe that this will be remotely possible, so I avoid the term "solutions" entirely and suggest that we speak instead of "intelligent responses" to our changing circumstances. This implies that our well-being depends on our own behavior and the choices that we make, not on the lucky arrival of just-in-time miracles.  It is an active stance, not a passive one. What will we do? (Read Full Article)

Dmitry Orlov on the Next Decade

Dmitry Orlov, author of Reinventing Collapse: The Soviet Example and American Prospects, has a take on what live will be like in the U.S. the next decade.

The decade will be marked by many instances of autophagy, in business, government, and in the higher echelons of society, as players at all levels find that they are unable to control their appetites or alter their behavior in any meaningful way, even in the face of radically altered circumstances, and are thus compelled to consume themselves into oblivion, as so many disemboweled yet still ravenous sharks endlessly gorging themselves on their own billowing entrails.

Governments will find that they are unable to restrain themselves from printing ever more money in an endless wave of uncontrolled emission. At the same time, rising taxes, commodity prices, and costs of all kinds, coupled with a rising overall level of uncertainty and disruption, will curtail economic activity to a point where little of that money will still circulate. Inflationists and deflationists will endlessly debate whether this should be called inflation or deflation, unconsciously emulating the big-endians and little-endians of Jonathan Swifts Gulliver's Travels, who endlessly debated the proper end from which to eat a soft-boiled egg. The citizenry, their nest egg boiled down to the size of a dried pea, will not be particularly vexed by the question of exactly how they should try to eat it, and will regard the question as academic, if not idiotic.

Distressed municipalities throughout the country will resort to charging exorbitant fees for such things as dog licenses. Many will experiment with imprisoning those unable to pay these fees in state and county jails, only to release them again as the jails continuously overflow and resources run low. The citizenry will come to regard jails as conveniently combining the features of a soup kitchen and a homeless shelter. Some towns will abandon the idea of having a fire department and decide that it is more cost-effective to just let house fires run their course, to save on demolitions. In an effort to plug up ever larger holes in their budgets, states will raise taxes, driving ever more economic activity underground. In particular, state liquor tax revenues will drop for the first time in many decades as more and more Americans find that they can no longer afford beer and switch to cheap and plentiful Afghan heroin and other illegal but very affordable drugs. Marijuana smoke will edge out car exhaust as America's most prevalent smell.

Several countries around the world will be forced to declare sovereign default and join the swelling ranks of defunct nations. There will be a mad shuffle to find safe havens for hot money, but none will be found. Investors around the world will finally be forced to realize that the best way to avoid losses is to not have any money to start with. Despite their best efforts to diversify their holdings, investors will find that they are all long paper, be it stocks, bonds, deeds, promissory notes, or incomprehensible derivative contracts. They will also find that, in the new business climate, none of these instruments make particularly formidable weapons: as the friendly game of rock-paper-scissors turns hostile, they will discover that rocks stave in skulls, that scissors puncture vital organs, but that the paper, even when wielded expertly, just causes paper cuts. Those formerly well-heeled persons who tend to believe that "possession is nine-tenths of the law" will find many extralegal exorcists eager to liberate their demons. In particular, organized crime rings will start using data mining software to identify lightly guarded cabins and compounds in Montana and other remote locations that are well-stocked with canned food, weapons and gold and silver bullion, and start harvesting them by softening the target with mortars, rockets and aerial bombardment, then sending in commando teams with grenades and machine guns. Once the harvest is in, they will expatriate the proceeds using the diplomatic pouches of defunct nations held in their sway.

While the bullion is expatriated, the Pentagon will attempt to repatriate troops from Iraq, Afghanistan and the numerous US military bases around the world, soon finding that they lack the wherewithal to do so, stranding the troops wherever they are, and forcing them to resupply themselves. Military families will be invited to donate food, uniforms, clean underwear and toiletries for their loved ones overseas. American weaponry will flood the black market, driving down prices. Some servicemen will decide that returning to the US is a bad idea in any case, and go native, marrying local women and adopting local religions, customs and garb. Although national leaders will continue to prattle on about national security whenever there is a microphone pointed at them, their own personal security will become their overarching concern. Officials at all levels will attempt to assemble ever larger retinues of bodyguards and security consultants. Members of Congress will become ever more reticent and will avoid encountering their constituents as much as possible, preferring to hide in Washington's hermetically sealed high-rises, walled compounds and gated communities. Meanwhile, outside the official security perimeter, a new neighborliness will take root, as squatting becomes known as "settling in," trespassing as "beating a new path," and fences, walls and locks are everywhere replaced by watchful eyes, attentive ears and helping hands.

Leading Indicators of New Normals

The stock market indices while center stage as economic barometers are clearly less reflective of what the man on the street sees in the real economy and more a function of an unlimited 0% line of credit for large financial institutions by the Fed, the moral hazard which has the public holding the bag for huge loses and forced speculation due to the USD replacing the Yen as the new carry trade currency. In a carry trade, the big money centers effectively borrow the carry currency (the USD) 0% then earn a profit by putting that money in anything else.

Remember, even in Zimbabwe, the ultimate economic basket case, the stock market had run up over 50,000% in one of the last months of trade as hyperinflation set in and people desperately threw their money into anything other than bank accounts to keep their money from going up into smoke.

So I've put together a short list of some leading indicators we can keep lookout for in the real economy as we cross into each "new normal".

1. Executive Orders are put in place to restrict capital outflows and artificially maintain the value of the USD by force, cheered on by a public as a patriotic act against “evil speculators” who bet against the Dollar and “evil Chinese” who won’t devalue the Yuan.
2. The Cash-for-Gold trend reverses and the public realizes they need to stop exchanging Grandma’s trinkets for paper.
3. Former middle-class feuding with migrants for day labor work.
4. Public schools move to a 4- then 3-day week to cut costs.
5. Increase of 3rd world like ‘shock doctrine’ asset sell-off and privatization by bankrupted state and local governments.
6. Appearance of articles about 3 generations of former middle class families living together becoming the norm.
7. Commodity arbitrage of actual shipped and freighted cargo by big money centers disrupts supply lines.
8. Communities that once cried not in my backyard, begin to court private security companies and building contracts for internment centers for jobs.
9. Increase of small-scale feudal living arrangements between a landowner and several ex-middle class families.
10. Increased military presence at the nation’s strategic assets (Natural gas hubs, shipping ports, cattle yards etc.) and the nation’s biggest liability…the 12 Fed Reserve Banking centers.

The 4% that Matters

Kunstler true to form, laid it out in this week's commentary. He raises one of the most important points that social influence works as a power law, or what most think of as the 80/20 rule or Pareto distribution.

You don't need a majority of people to "wake up" in order to drive significant social change as 80% of the people are simply going to go along as long as they can get along. It is the 1/5th of the 1/5th or 4% tipping point that we seem to be nearing. What that really means in the near to mid future, only the wind knows.

By now, everyone in that fraction of the world that pays attention to something other than American Idol and their platter of TGI Friday's loaded potato skins knows that Goldman Sachs has been caught at another racket in the stock market: front-running trades. What a clever gambit, done with the help of the markets themselves - the Nasdaq in particular - in which information on trades is held back a fraction of a second from public view, while the data is shoveled to the computers of privileged subscribers who can execute zillions of programmed micro-trades before the rest of  the herd makes a move. This allows them to vacuum up hundreds of millions of dollars by doing absolutely nothing of value.  The old-fashioned method used by brokers was called "churning," in which stocks were bought and sold incessantly (by phone) from the portfolios of inattentive clients merely to generate commissions.  In any sensible society - i.e. a society with an instinct for self-preservation - it would be against the law and the people doing it would be sent to prison.
    I'm not a lawyer, but I've got to think that the actions at the Nasdaq end - shoveling the data to the privileged subscribers a fraction of a second early - is patently illegal in the first place, since the whole purpose of an exchange is to create a fair trading space. Where both parties are concerned, it should amount to a plain vanilla criminal conspiracy to commit stock trading fraud. Maybe the larger question is: since when did we become a society lacking the instinct for self-preservation - that is, a society bent on suicide?  Or maybe the question is better put to Goldman Sachs's CEO Lloyd Blankfein.
    Since this racket was made public, there has been chatter all over the Web about how angry the American public is about Wall Street in general, and increasingly about Goldman Sachs in particular.  Nobody has summed it up better than Rolling Stone's Matt Taibbi, calling the company "...a great vampire squid wrapped around the face of humanity, relentlessly jamming its blood funnel into anything that smells like money." And Taibbi's fierce article about Goldman Sachs came out weeks before this latest outrage. As we turn the corner toward autumn, President Obama looks increasingly like a dupe, a tool, or a co-conspirator of Goldman Sachs.  If he doesn't instruct the Justice Department to commence investigations of the company, and if he doesn't dissociate himself from their alumni hanging around the White House, the Treasury Department, and elsewhere in the government, he's going to become the object of an awful public wrath.  Obama has no other choice at this point except to clean house - to fire Larry Summers, Robert Rubin, Tim Geithner, and all other former Goldman Sachs employees in positions of power and influence around him.
     Actually, it's not necessary for the whole general public to be fed up with this situation.  According to the Pareto 80-20 rule, it only takes one-fifth of the public to set social actions in motion, and only one-fifth of that one-fifth to do the heavy lifting.  I think we've reached that point.  The sentiment is now overwhelmingly tipped against Goldman Sachs (and Wall Street generally) and the only questions are whether the President of the US ends up lumped in with them, and whether we'll see orderly prosecutions or disorderly persecutions.  At this point, it even begins to look as though Mr. Obama is taking cover behind the health care reform debate to avoid answering for his government's association with Goldman Sachs.
    The trouble is, if the thoughtful and trustworthy members of the "Pareto 20 percent" don't stir themselves into action over Goldman's behavior, then sooner or later the thoughtless and reckless will take over.  Bill Moyers hosted a fascinating report on his most recent podcast about the savagery of right-wing broadcasting and how it had led, in one instance, to the murder of a doctor who performed abortions. What bothers me is that, sooner or later, the conduct of Goldman Sachs will lead the growing ranks of the unemployed, foreclosed, disentitled, and hopeless into the hands of a savage right wing seeking mindless vengeance, for instance, against "the Jews," (as represented by Goldman Sachs), or brown-skinned people (as embodied by a vilified president).
    Readers of this blog know I'm allergic to conspiracy theories. But surveying the scene out there, it is hard to not conclude that Goldman Sachs has become the "front-runner" of a criminal syndicate defrauding US taxpayers.  This isn't the first time in American history that business veered into extremely antisocial behavior on the grand scale.  The last quarter of the 19th century was just as bad, with frauds, swindles, sociopathic trusts, and predatory corporations preying on people trying desperately to make an honest living.  Then, one summer day in 1901, a factory drone named Leon Czolgosz stepped up to President William McKinley in a reception line at the Buffalo World's Fair and plugged him twice in the abdomen. (Czolgosz liked to think of himself as an "anarchist," a then-fashionable ideology among the simmering powerless.) Eight days later, McKinley expired and Teddy Roosevelt became president - to the extreme chagrin of the Republican business establishment - "... now that damned cowboy is in the White House!" cried Republican national leader Mark Hanna of Ohio.
    He was correct to be nervous.  TR turned the corporate world upside down with reform, from dismantling monopolies to establishing the cabinet departments of Commerce and Labor, to bringing the new food industry under regulation.  This naturally leads me to wonder if or when Barack Obama will have his TR Moment, when he stands up to the large malign forces operating arrantly in the daily life of this nation.  I get volumes of email complaining about Mr. Obama.  The writers behind them seem, on the whole, crankish, cynical to an extreme, and not very trustworthy observers of the scene. But I begin to sympathize with them.
    In the meantime, the US economy gives the illusion of recovery - but to what?  Back to a "consumer" credit card shopping orgy?  Another house-buying fiesta? I don't think so.  Households are drowning in debt.  They're using their credit cards, if they still can, to buy staple foods.  Those are the lucky ones who still have lines of credit left.  Soon, many of these families won't even amount to households because they won't have a house.  There is absolutely no way we are going back to that particular bubble economy.  The only bubble left is the government debt bubble, now leading to such extravagant excess that it can only end up wrecking the government, and perhaps American society with it.  In the meantime, how much remaining wealth is Goldman Sachs and its cohorts vacuuming off the floor?
    Also meanwhile, oil is heading back to the $70 range (with the dollar shedding basis points).  That's the oil price range where the economy begins to get wrecked all over again - that is, whatever remains of the economy.  That's the price range where airlines go back to the intensive care unit and citizens have to max out their credit cards to buy gasoline.  We're moving toward a very hard landing and very soon.

Why I Bother and Very High Praise for CHS Survival+ EBook

A good friend of mine asked me what really motivated me to start this website in 2006, so I thought I’d take a broad swag and position the ‘why I bother’ in a form of a list of some guiding questions. It’s surely not the one thing, as the expression goes:

-How do we each best emotionally and philosophically approach the next 2-3 decades, assuming a broad transformation due to economic, social, demographic and environmental factors, as well as political reaction to those factors?

-How do you find the right balance between fatalism (we’re doomed so why bother) and complacency (things will work themselves out through politics and technology)?

-How do you avoid the spectacle of "left"-"right" cartoon politics, but guard against the loss of individual rights, death by 1000 cuts road to fascism, fighting unjust wars, theft by financial cartels, agricultural monopolies (tyranny by seed) and so on?

-How do you reconcile your vigilance over the aristocratic class (I'm not talking classic rich vs. poor claptrap, but rather the highest echelons of global power brokers) that usurps democratic process and governments with the inconvenient fact that in many cases your way of life is deeply intertwined and dependent on the structures and systems they impose? How do you take personal responsibility for your part in the deal instead of simple and pure blame?

-How do you guard against quasi government outside the supposed representative government, which brokers sweetheart deals in backrooms and ensures state-subsidized monopolies maintain an illusion of "free markets", that is more responsible to a small group of elite stakeholders than 99.9% of the population?

-How do you avoid buying into the constant stream of propaganda and Orwellian double-speak in the corporate-owned media, which is nothing more than another means of maintaining structural control by a small group of stakeholders? And again, how do you reconcile your role as someone who is probably in some way shape or form beholden to the same useful myths and outright lies?

-Even if you’ve planned for the worst and stockpiled your beans, bullets and Band-aids in preparation for the sudden plunge into a new dark age completely dominated by warlords with AR’s and AK's, how will you approach day-to-day life if the decisive all-hands-on-deck trigger event never quite comes? What if there is no EMP pulse or sudden hyperinflationary chaos due to an overnight bond market collapse, but a steady descent towards something like a 3^rd world neo feudal arrangement over years, in fits and spurts?

There are of course many others, but that’s a very broad pass which explains the diversity in points of view in authors, writers, columnists and bloggers I link.

No link ever implies, “Hey this guy has all the answers and I agree 100%”, but I respect each of their personal truths and the conviction behind their narratives. I value the free thinkers out there, most of whom have have more wisdom and personal experience than I, who dare speak their form of truth to power and have opinions that aren’t bought and paid for.

That brings me to Charles Hugh Smith’s EBook Survival+ which hits on many of the broader themes of this humble site of mine. Of course I don’t agree with absolutely everything he says in the book, but I can’t be more emphatic to take the time to read this – an excellent summary of the reasons we are where we are, and the factors that most likely shape where we’re heading.

In the end, as my friend points out, it is not what we write or say, but what we do in life.

 

Survival+:

Structuring Prosperity for Yourself and the Nation

by Charles Hugh Smith


Introduction

Since launching my blog www.oftwominds.com in May 2005, nothing seemed more important than warning readers that the unsustainably leveraged credit-mad global financial system was poised to break down. Once the system finally crashed in late 2008, my goal switched to writing a practical guide for not just surviving the coming Great Transformation but prospering: a concept I called Survival+ (Plus). This requires liberating ourselves from failed models of credit expansion, resource depletion, financial looting and a counterfeit prosperity built entirely on debt.

I immediately ran into several great difficulties. Many others had foreseen the same calamity, and their focus narrowed on individual survival: relocating to a remote/sustainable spot and preparing for societal collapse by stockpiling self-defense and food.

While prudent and practical on a short-term timeline, this response struck me as incomplete on several levels. Most importantly, stockpiling six months' supplies would not sustain anyone through a 20-year Crisis and Transformation; their own Crisis was simply being delayed a relatively short time. In other words: "what happens in month seven"?

Secondly, many "survivalist" proponents focus on individual preparation, as if a single person or household can prosper without a stable, caring community for reciprocal support. This notion ran counter not just to my own experience but to all of human history. While I understood the desire to "opt out" and become an Isolationist--a solution to general turmoil which has roots going back to the dissolution of the Roman Empire and the Warring States era in ancient China--I felt a more practical, longer-term option to Isolationism should also be presented.

The second great difficulty is that individuals, households and communities exist in larger units: city-states, counties, nations and continents. Even if nation-states were to break apart, the world would remain tightly interconnected. Events, weather, shortages and surpluses in distant places would continue to impact us all. States (by which I mean all forms of government) will continue to extend control over resources and wealth.

Trade has been a key component of security and prosperity since the dawn of civilization. Long before fossil fuels dominated the global economy, land and sea trade in both goods and innovations bound Asia, the Mideast and Europe. Thus a retreat to isolated islands of self-sufficiency, while understandable and practical on one level, does not align with what history teaches us about prosperity. Prosperity ultimately depends on stable communities, surplus production and trade. These essentials have been largely ignored in analyses of the coming Great Transformation.

Thus our individual survival and prosperity are inextricably bound up in larger contexts: we cannot just ignore community, State and trade forces as if they will cease to exist. Even as they no longer function as they did in the past, it seems wise to influence the larger Transformation rather than view ourselves in an isolation which is ultimately misleading.

That is why I subtitled this book "Structuring Prosperity for Yourself and the Nation." To believe that we can prosper individually without regard for the actions of our fellow citizens and the State (government) is simply not practical. Yes, a handful of very rugged people have the experience required to live in the deepest remains of wilderness; but the wilderness cannot support more than a handful of people, and most of us do not have the requisite skills or ruggedness to survive that splendid isolation.

This, then, is a practical book for the rest of us.

As I organized the book, another great difficulty quickly arose. I realized that the way a problem is phrased implicitly stakes out the eventual solution. As a result, the greatest challenge in understanding our plight, both as individuals and communities, is essentially conceptual. The forces which benefit most from the status quo are pouring all their prodigious resources into framing the "problems" in such a way that the "obvious solutions" leave their own power, influence and wealth intact.

Lest you wonder how this works, recall that all through the initial phase of the financial crisis in 2008, the mainstream media and standard-issue financial punditry (SIFP) blamed the entire crisis on foolish low-income homebuyers who had chosen to finance their purchases with subprime mortgages.

Framed in this way, the "problem" appeared to be caused by credulous citizens in the lower socio-economic levels. The "solution" was thus to eliminate these people from the pool of potential homebuyers, and auction off their foreclosed homes to worthier buyers.

But subsequent events revealed this framing of the problem to be highly selective: the "problem" extended far beyond feckless subprime borrowers into the top rungs of American Capitalism: the money-center and investment banks, and a politically driven absence of oversight by the very governmental agencies tasked with protecting the public.

The status quo's convenient "framing of the problem" insured that any "solutions" would leave their power, wealth and influence entirely intact; only the impoverished subprimers would suffer, not those who profited so immensely from the housing/credit bubble.

It was thus clear that a practical analysis of the crisis and coming Transformation requires a deep understanding of how "solutions" are set in the framing of the "problem." Indeed, what is "obvious" must be questioned on the deepest levels, for what is "obvious" has two powerful characteristics: it can be managed/manipulated via the mass media, and it directs "solutions" which leave the rentier-financial Power Elite (what I call the Plutocracy) intact.

The nature of propaganda in a so-called free State must then be explored in depth as well.

The last great difficulty is also conceptual. It is relatively straight-forward to present the causes of the coming global crisis: Peak Oil, disintegration of the credit bubble, demographics, etc. Many books do a fine job of outlining the nature of these interlocking crises.

The books attempting to present solutions typically focus on either individuals (along the lines of "get rich as the world falls apart") or idealized policy "fixes" based on academic understandings of large-scale structures (articles on G-20 trade policies, etc). The flaw in both approaches is that neither flows from what I call an integrated understanding of the actual problems. (Key concepts are italicized when introduced.)

Practical solutions must follow from this integrated understanding. Without such a comprehensive conceptual framework, then all proposed solutions will be ungrounded and thus dangerously misleading.

Any "solution" which ignores key elements of the problem is doomed to solve nothing. As in our example of the so-called "subprime crisis," the "solution" of limiting uncreditworthy borrowers did nothing to address the actual problems: highly profitable and highly fraudulent practices riddling every level of the mortgage/rating/securities industries, perverse incentives that created unprecedented opportunities for windfall exploitation, over-reach and looting, etc.

I cannot claim that reaching such an integrated understanding will be easy. Many of the concepts presented here may be unfamiliar and thus difficult to grasp at first. Many are so alien to status quo "explanations" that they may well strike you as the opposite of "obvious." But since I have thought about these concepts and forces for years, they seem "obvious" to me. In the language of our Declaration of Independence: I hold these truths to be self-evident.

So let us begin.

We stand on the threshold of a Great Transformation that will unfold over the next 20 years--a generation. The exact turn and sequence of events is unknown, but a clear-eyed appraisal of the forces, trends and cycles already at work will help us, collectively and as individuals, weather the challenges and turn what could be a catastrophe into a positive transformation.

To the status quo understanding of how our world works, this appraisal will be anything but "obvious." (Sorting out what is "obvious" is a big part of the analysis which follows.)

A number of other writers have addressed preparing for the Depression which has just begun. These books are, within their limited scope, practical and useful. This book aims at a different goal: once we understand the complex forces at work, then we can structure a response on all three levels: household/family, community and nation. For if there is anything we can confidently predict, it's that the nation's crumbling finances will drastically affect every family and every community (continued link)...

 

Rogue Waves

The latest Global European Anticipation Bulletin (GEAB) describes how high unemployment, corporate bankruptcies and the dollar crisis are converging this summer like a three sisters rogue wave. 

One specific kind of rogue wave is called the “three sisters”, i.e. a group of three rogue waves all the more dangerous in that, even if a ship had time to react properly to the first two waves, there is no way she could be in the right position to brave the third one. According to LEAP/E2020, it is a similar phenomenon that the world is about to encounter this summer; and no country (ship) is in a favourable position to face them, even if some countries are more at risk than others, as explained in this GEAB (N°36).

One of the bigger questions is how quickly the dollar reserve unwinding will unfold. Brazil, Russia, India and China want so badly to wean themselves from the dollar seeking non-dollar currency swaps and reserve holdings in IMF SDRs, but know they must do so in such a way not to create a run on the bank that quickly destroys the value of their dollar holdings. At this point, large dollar holders are held hostage by their reserves and they must escape without drawing too much attention from the guards, in fear of starting a panic rush to dump the dollar by other countries.  

As anticipated by LEAP/E2020 as early as October 2008, on the eve of summer 2009, the question of the US and UK capacity to finance their unbridled public deficits has become the central question of international debates, thus paving the way for these two countries to default on their debt by the end of this summer.

At this stage of the global systemic crisis’ process of development, contrary to the dominant political and media stance today, the LEAP/E2020 team does not foresee any economic upsurge after summer 2009 (nor in the following 12 months) (1). On the contrary, because the origins of the crisis remain unaddressed, we estimate that the summer 2009 will be marked by the converging of three very destructive « rogue waves » (2), illustrating the aggravation of the crisis and entailing major upheaval by September/October 2009. As always since this crisis started, each region of the world will be affected neither at the same moment, nor in the same way (3). However, according to our researchers, all of them will be concerned by a significant deterioration in their situation by the end of summer 2009 (4).

This evolution is likely to catch large numbers of economic and financial players on the wrong foot who decided to believe in today’s mainstream media operation of “euphorisation”.

In this special « Summer 2009 » edition, our team describes in detail these three converging « rogue waves » and their impact, and gives a number of strategic recommendations (currencies, gold, real estate, bonds, stocks, currencies) to avoid being swept away in this deadly summer.

LEAP/E2020 believes that, instead of « green shoots » (those which international media, experts and the politicians who listen to them (5) kept perceiving in every statistical chart (6) in the past two months), what will appear on the horizon is a group of three destructive waves of the social and economic fabric expected to converge in the course of summer 2009, illustrating the aggravation of the crisis and entailing major changes by the end of summer 2009… more specifically, debt default events in the US and UK, both countries at the centre of the global system in crisis. These waves appear as follows:

1. Wave of massive unemployment: Three different dates of impact according to the countries in America, Europe, Asia, the Middle East and Africa
2. Wave of serial corporate bankruptcies: companies, banks, housing, states, counties, towns
3. Wave of terminal crisis for the US Dollar, US T-Bond and GBP, and the return of inflation

 

In fact, these three waves do not appear in quick succession like the « sisters rogue waves ». They are even more dangerous because they are simultaneous, asynchronous and non-parallel. Hence their impact on the global system accentuates the risks because they hit at various angles, at different speeds and with varying strength. The only certain thing at this stage is that the international system has never been so weak and powerless to face such a situation. The IMF and global governance institutions’ reforms announced by the London G20 are at a standstill (7). The G8 becomes more like a moribund club whose utility is increasingly questioned (8). US leadership is the shadow of what it used to be, mostly concerned by desperately trying to find purchasers for its T-Bonds (9). The global monetary system is in a process of disintegration, with the Russians and Chinese in particular accelerating their positioning in the post-Dollar era. Companies foresee no improvement in the business climate and speed up the pace of layoffs. A growing number of states falter under the weight of their accumulated debt created to “rescue banks” and are about to be faced with a welter of failings by the end of this summer (10). And, last but not least, the banks, once they have squeezed money out of naive savers thanks to the market upsurge orchestrated in the past few weeks, will be have to admit that they are still insolvent by the end of summer 2009.

In the United States and United Kingdom in particular, the colossal public financial effort made in 2008 and at the beginning of 2009 for the sole benefit of large banks became so unpopular that it was impossible to consider injecting more public money into banks in spring 2009, despite the fact that they were still insolvent (11). It then became necessary to invent a “fairy tale” to convince the average saver to inject his/her own money into the financial system. By means of the « green shoots » story, overpriced stock indices based on no real economic grounds and promises of « anticipated public funding repayment », the conditioning was achieved. Hence, while big investors from oil-producing and Asian countries (12) withdrew capital from these banks, large numbers of small individual investors returned, full of hope. Once these small investors discover that public funding repayment is only a drop in the ocean of public aid granted to these banks (to help them dispose of their toxic assets) and that, after three or four months at best (as analyzed in this GEAB N°36), these banks are again on the verge of collapse, they will realize, powerless, that their share is worth nothing once again.

Not your Grandfather’s Depression

Charles Hugh Smith explains point-by-point why the economic situation before us will be longer, deeper and more destructive than the Great Depression.

 

I realize the causes, similarities and differences aren't news to most of you, but I still found this to be a good hit list in the face of all the recent “green shoots” propaganda.

But the present is far more fragile and vulnerable than the U.S. economy of 1929, for the following reasons. In 1955 Galbraith could not possibly have foreseen or anticipated these current conditions:

1. A Federal government which since the "Reagan Revolution" of 1981 (e.g. don't tax and spend, just borrow and spend) has borrowed during so-called good times on a scale once reserved for rare Keynesian stimulus to combat serious recession. Thus we find ourselves at unprecedented levels of debt (comparable in terms of GDP to the entire cost of World War II) and our current Depression has barely begun.

2. A corrupt-to-the-core corporate structure riddled with bogus accounting, reliance on financial trickery for profits and misdirected/worthless regulatory oversight.

3. A banking sector of such debauchery and fraud that the excesses of the 1920s are reduced to the pranks of slighty-naughty choirboys and girls.

4. A Federal system of entitlements (Medicare, Medicaid and Social Security) which has grown far faster than the underlying economy for decades and now threatens the very solvency of the government itself, so stupendous are the future obligations.

5. A global military hegemony which costs more than all the other militaries and intelligence operations of the entire world put together. The U.S. military consumes more oil than the nation of Sweden (9 million residents).

6. An industrial, transportation and energy infrastructure that, rather than being rebuilt during the past 26 years of debt-based "prosperity," has crumbled in a long decline. Rather than invest in electrical power grids and energy-efficient transport systems, the U.S. squandered the trillions of borrowed dollars on toys, gewgaws, electronics made elsewhere, malls and commercial towers with only transient value and millions of bloated, inefficient poorly constructed homes no one needed or could afford: "assets" which were not productive at all, "assets" which are now capital traps on a scale heretofore unimaginable

7. A paucity of U.S. savings (and thus of domestic capital) with only one historical parallel: the depths of the Great Depression when unemployment was 25%.

8. A huge reliance on financial leverage, debt, borrowing and trickery for corporate profits; the U.S. exports soybeans, increasingly worthless dollars and "financial innovations" which are now exploding in economies from Ireland to India with the destructive force of superweapons. In exchange for this dubious paper, we have accepted actual tangible goods from the rest of the world.

They are now slowly waking up to the fact they've been conned on a scale few can grasp.

9. Globalization has reworked the global supply chain in an astonishingly brief period of time. As a result, the arbitrage of currencies (foreign exchange a.k.a. forex), wages, governance (less is more profitable) and environmental regulations (zero is the most profitable) have all placed advanced post-industrial economies like the U.S. at great structural disadvantages.

10. The U.S. claims to be competitive but much of this competitiveness is highly selective and thus illusory. Everything in the U.S.--labor, goods, buildings and taxes--is high-cost, overregulated (except for finance, banking and governance) and vulnerable to unpredictable lawsuits and officially sanctioned looting. Other than recent immigrants, non-U.S. employers find the workforce is often surly, unappreciative, narcissistic, entitlement-obsessed, unhealthy, poorly educated, unmotivated and more inclined to get-rich-quick schemes than actual enterprise or productivity.

The middle management labors under impossible demands to enrich stockholders next quarter and heavy turnover insures few stay in any job long enough to learn it effectively. Team cooperation is a doublespeak fraud imposed by "facilitators," creating a phony work environment where employees and managers alike pretend to care. This bogus environment breeds a looting, game-the-system mentality in which everyone is grabbing for all they can before retirement, restructuring, reassignment, resignation or getting fired.

A "quarterly profits are God" mentality reduces the workforce (even the good workers) to units of input which are pared back or hired without regard to morale or loyalty. This managerial and cultural pathology makes a mockery of worker loyalty and breeds the very qualities of distrust and "I got mine" attitude which undermines both productivity and workplace happiness.

11. Last but certainly not least, the U.S. economy is highly dependent on cheap, abundant fossil fuels--the very fuels which are in the global depletion phase, happy stories about unlimited natural gas and tar sands to the contrary.

For all these reasons, we can anticipate the Depression currently unfolding will be deeper, longer and more destructive than the Great Depression.

Let's recount the chain of events which partly parallel the Great Depression and partly diverge in meaningfully more destructive ways from that previous era:

1. The postwar income convergence (i.e the rise of the great middle class, the reduction of poverty and the relative reduction of the Plutocracy's share of national income) reverses in the early 1970s as the "true prosperity" of the postwar era ends and is replaced by income flowing increasingly to the top as stagflation, globalization and the decline of dollar gut the purchasing power of the middle class.

2. The rising productivity of the 50s and 60s slips to the flatline through the 70s and early 80s, only picking up again as computer software and hardware revolutionize the back office, sales, manufacturing, just-in-time shipping/production, etc.

3. Concurrent with this gradual return to productivity is the rise of finance as the key profit-center of corporate America. As income skews ever more heavily to the top 1%/5%, then capital (productive assets) become ever more heavily concentrated in the hands of the financial Plutocracy. The top 1% now owns some 2/3 of the nation's entire productive wealth.

4. As profits rise (from rising productivity) then the profits flow not to wages (which remain flat to down 1975-2009 for all but the top 10% professional class) but to those who own the capital.

5. As the middle class experiences a decline in their income and purchasing power (for reasons cited above: declining dollar, rising income disparity, and wages falling due to global wage arbitrage) then they turn more and more to borrowing and ever greater debt to fund what they have been brainwashed by the media to believe is "the American dream" of imported luxury goods, bloated homes, vacuous cruises, etc.

The only other mechanism available to the middle class to increase household income is for Mom/Aunt/Grandmom to enter the workforce, which she does in the tens of millions, with sociological consequences which are still unfolding.

6. This advert/media-driven desire to borrow to fund the "good life" is hugely profitable to the money-center banks, which expand rapidly into mortgage securization, derivatives and consumer credit to the point that they come to dominate corporate profits.

7. The financial Plutocracy, observing that actually producing goods is not very profitable unless you can fix prices as per ADM (Archer Daniels Midlands) or gain government subsidies and tax giveaways (oil lease depreciation, etc.) sinks its capital into the FIRE economy (finance, insurance and real estate), eschewing real-world investments as comparatively unprofitable.

Though rarely noted, this is a longstanding trait of capitalism stretching back to 1400-era Venice. When trade became less profitable than mainland farmimg, the Venetian Elite stopped funding trading and bought farms on the mainland. As a side effect, Venice ceased to be a military and trading power. But the Elite remained immensely wealthy.

8. As the tech bubble expands, middle-class investors see the Plutocracy (those with enough capital to qualify as angel investors and vulture, oops, I mean venture capital) reaping huge gains, and they enter the dot-com stock bubble buildup with a vengeance.

9. In a happy accident, the Soviet Empire collapses just as productivity begins its computer-fueled rise in the U.S. In a so-called Unipolar World in which U.S. military, political and financial influence is unrivaled, non-U.S. investors seek the relative safety and high returns (based on appreciation of the dollar) of U.S. financial instruments.

10. The dot-com bubble implodes in a speculative meltdown (dot-bomb), and retail investors (a.k.a. the middle class 401K investors) are devastated. The ephemeral wealth they once possessed, however briefly, fuels their speculative desire to get into the next get-rich-quick game, which just so happens to be "something everyone understands:" real estate and housing.

11. Having exhausted the dot-com play, Elite capital is seeking a new high-profit home. The miracles of derivatives (CDOs, credit default swaps, etc.) and securitized debt (mortgage tranches, etc.) open up vast new opportunities for leverage, off-balance sheet shenanigans and outright fraud/debauchery of credit. As chip wafer plants disappear from Silicon Valley (too dirty, too costly, etc.) then they're replaced with paper: mortgage-backed securities.

12. Sniffing gold in them thar exurban hills, the under-capitalized and over-indebted U.S. working class and middle class reach for the chalice of easy-money gold: leveraged real estate.

13. With the Federal financial regulatory agencies in a Republican/Democrat-enforced somnambulance, the coast is clear for brigands, shysters, fraudsters, con artists, liars, cheats, and assorted riff-raff in the realtor, mortgage and appraisal businesses, who all feed the ravenous maw of the money-center banks' apparently limitless appetite for real estate assets to securitize and leverage in exotic and highly profitable ways.

14. For a wonderful five years circa 2001-2006, the game is afoot and no-down-payment Jill and $100 million bonus Jack are immensely enriched. Meanwhile, the underlying real economy is becoming ever more imbalanced and ever more fragile as real production and real productivity plummet as everyone rushes to the speculative riches of exurban McMansions and malls.

15. This last best speculative leveraged bubble pops, gutting a Wall Street which had grown utterly dependent on leverage, debt, gamed/fraudulent accounting and bubbles for its rising profits.

16. Doubly devastated by the implosion of housing and their stock investments (mostly in retirement funds), the middle class faces the terrible consequences of its 26-year stupor of ever-rising debt and leverage. Alas, the Emperor's clothes are revealed as remarkably transparent.

17. Just as in the Great Depression, to its great surprise, the Elite has also suffered catastrophic losses and declines in capital and income.

18. Having borrowed and squandered trillions of dollars since 1981 on unaffordable entitlements, military misadventures and assorted worthless bridges-to-nowhere pork spending, the Federal government (The Fed and the Treasury) finds that its ability to borrow its way out of its current debt hole somewhat annoyingly limited. The rest of the world has finally caught on to the con, and Chinese university students are openly mocking Treasury Secretary Geithner's Orwellian claim of "we support a strong dollar." The miracle is that he was not pelted with tomatoes and tarred and feathered for making such absurd statements.

19. With the global media concentrated in a scant few corporate hands (less than 10), this pulling away of the curtain is deleted/excised from media coverage in a ruthless campaign of pure "green shoots" propaganda.

20. As the wheels fall off the U.S. economy and the bubbles cannot be re-inflated, fruitless attempts at holding back the tide with incantations (stop, tide, I am Obama/Geithner/Bernanke!) and loopy sand castles (the bottom is in, buy now! Green shoots are sprouting everywhere except in the real economy!) abound. Unresponsive to propaganda, the real world grinds down into a global Depression without visible end.

Reality vs. Recovery

With a growing number of jesters in the king’s court claiming the worst is behind us and the economy is recovering, let’s take a look at some of the figures.

 

•   Real unemployment in the US is about 20%. Everyone knows that the Official U3 numbers put out by the government are hugely understated. U6 is over 16% and the SGS Alternate Unemployment rate published by ShadowStats.com is over 20%.

•   Where will the good jobs come from when the US manufacturing base has been gutted by globalization, wage arbitrage and tax laws which have all but required US firms to take their business offshore?

 

  

 

Figure Courtesy of ShadowStats.com

• Remember the old subprime resets charts from 2 years ago? They’ve been updated to show that Option Adjustable mortgage resets won’t peak until 2011 so this alone makes any housing recovery in the near future wishful thinking.

•   Government balance sheets are bending and it is only a matter of time before they break.

•   The 2009 Federal Government deficit is $1.9T. The U.S. will have to borrow 50 cents for every dollar it spends.

•   The US, Europe and Britain will have to sell $8.3T in debt in 2009-10.

•   US income tax revenue is down 44% this year at a time when government spending is soaring.

•   China’s exports are down 41% and global exports are down 30%. Where will the money come from to fund the budget deficits?

 

•   Savings surplus to buy Treasuries doesn’t exist and the Fed and other central banks will have no other choice than to continue to monetize the debt by printing the money from thin air.

•   Meanwhile, long-term interest rates are climbing  – specifically on the 10-year Treasury bond. The Fed can manipulate short-term rates, but the long term bond market has hard-hitting impacts making the debt much more expensive to service.

•   Rose-colored glasses types say this is because there is less demand for “safe” Treasury bonds because market conditions are improving. Ah – yeah.

•   Or it could be the world is expecting massive inflation because of all the funny money demanding more return for funding all the foolishness. Why do you think Chinese students were laughing at Geithner when he told them with a straight face the US was going to be financially responsible and the dollar was safe?

   Increased debt monetization by the Fed continues to erode confidence in the Dollar's reserve status. True there are no healthy currencies in the world, but that won't stop countries from weaning from their dollar dependency. Remember, the dollar system is the primary source of US strength along with its military which can only be funded by the former. No other country can run up huge trade deficits with other countries and pay the debts by printing currency.

•   China is leading the slow dollar dumping charge. They have already signed agreements with Brazil, their largest trading partner, to trade in other currencies. China and the US are in a financial shotgun wedding and to suddenly call it quits would be bad for both, but that won’t stop China from continuing the backdoor dollar dump over time.

•   The Keynesians who run the show and have for decades huckstered the general population into believing deficit spending cures all will continue push more debt into an insolvent system until it breaks.

 

 

Tower of Babel

So how does the financial Tower of Babel we’ve amassed managed to soldier on without toppling over? Catherine Fitts, investment advisor, former Assistant Secretary for Housing-Federal Housing Commissioner, and Solari Report publisher describes the role of derivatives at a broader level and why we’re experiencing what she calls a slow burn, instead of a sudden breakdown.

The title of my presentation is:

Derivatives 101: Useful knowledge in plain English about credit default swaps, interest rate swaps, futures and other complex financial instruments that help centralize the financial system, steal money in the trillions and make the financial news incomprehensible.

I will address why these financial tools are so important to maintaining the dollar as reserve currency and continuing the “Slow Burn.”

I coined the “Slow Burn” scenario years ago to describe a politically managed economy in which financial and economic failures would not translate into system collapse. Instead, they would translate into continued transfers of resources from political outsiders to political insiders to subsidize and manage the asset values and power of various corporate and bank interests.  Countries would be drained to feed the system, or various populations, species or places. Replenished by draining others, the system would continue to move forward.

For many years, a variety of highly capable, intelligent people have tried to persuade me that the dollar is imminently going to lose its status as the global reserve currency and collapse and that the price of gold is going to shortly increase to $2,000/oz. or more.  When these events do not come to pass and time goes by—something strange happens. We never sit down and do a “lessons learned” to determine why it did not happen. No one wants to discuss it. There is no venue to ask and answer the questions:

-Why does the dollar's performance defy economic fundamentals?

-Why is it that the U.S. trade and budget deficits don't matter?

-How can $20 trillion in global bailouts not yet trigger global hyperinflation?

It turns out that understanding the Slow Burn and the amazing strength of the U.S. dollar requires several “building blocks” of knowledge that most of us have not acquired through our formal education or media:

Shadow Governance: Our world is governed on a highly centralized basis that networks into every industry (or so-called “cartels”) and every place—whether country, region or local area. This system is not new—it has evolved organically for centuries within “the central banking-warfare model.” Much of its evolution has organized around intergenerational pools of capital, the growth of which reflect the fundamentals of economic and military warfare as they determine command of intelligence, technology, populations, natural resources and trade routes.

The U.S. Federal Credit: The U.S. economy is a highly controlled political economy, with most of the economy managed through the U.S. government budget—both the Congressionally approved budget as well as secretive black budgets run with no transparency and oversight but with the benefit of governmental powers and authority. Building literacy of how this governmental financial mechanism operates both globally, throughout financial and commodities markets, and at the federal, state, and local levels requires an understanding of the financial ecosystems of places and industries.

Suppressed Technology and Knowledge: Political control depends on suppression of knowledge. We do not have ready access to the knowledge that we need to understand our history and economy. Significant health, energy, information, military, and space technology has been suppressed, from the citizens who funded its development and management.

Advanced Surveillance Technology and Weaponry: Historically, financial leadership requires some form of military dominance and enforcement – which comes down to supremacy on land, on sea, and/or in the air. What this means is that invisible weaponry, particularly that created with new advanced technology, can have a profound influence on our world while many people can not fathom that such powers exist. The U.S. has sea and air supremacy which is critical in supporting the dollar.

Control Files and Tools: Many of us have enjoyed the movie, The Matrix, yet we fail to understand how our own incentives and behavior are manipulated. While it has become easier to see the control on a broad, national scale, we are resistant to seeing and understanding how it operates at a more intimate level—in the media and entertainment we choose, within our own family, our school, our workplace, and our community. We see the torture in Guantánamo Bay. We do not see it in our community.  Indeed, to see the control mechanisms and how to navigate them often requires that we understand the areas of knowledge described above.

One of my goals for The Solari Report is to break down these different areas, help you understand them and see the threads weave through the current news of the day. The more you are armed with this knowledge, the more powerful you become. I want us to address what is holding up the dollar and why. Understanding this is critical to understanding how to best manage our time and assets.

In this week’s Solari Report, in Money & Markets, I will discuss the extraordinary success of the Obama Administration’s first 100 days in further centralizing political and financial controls and how this is shifting popular opinion, answer your latest questions in Ask Catherine and then present Derivatives 101.

What are derivatives? Who uses them and why? Why are derivatives at the heart of the current bailouts? We will cover these questions as well as how critical derivatives are to the political management of the financial system and maintenance of the Slow Burn. Understanding derivatives is part of understanding the federal credit system—and how the Anglo-American interests maintain a strong dollar and trigger and exploit the selective collapses that subsidize it. Derivatives are at the financial heart of building Empire.

Global Political Instability

The Economist Intelligence Unit (EIU) published a special report on the economic crisis titled, “Manning the Barricades – Who’s at Risk as Deepening Economic Distress Foments Social Unrest.” You'll notice on Page 16 of the report that the US is tied with France and Iceland - not the best of company considering the riots in France and the collapse of Iceland's government. The report focuses on two scenarios – one deflationary and one hyperinflationary – and how those scenarios destabilize social and geopolitical order.

Underlying vulnerability indicators are: inequality; state history; corruption;ethnic fragmentation; trust in institutions; status of minorities; history of political instability; proclivity to labour unrest; level of social provision; a country’s neighbourhood; regime type (full democracy, .flawed. democracy, hybrid or authoritarian); and the interaction of regime type with political factionalism.

 

 

The Main Risk Scenario:

Stimulus fails, leading to continued asset price deflation and sustained contraction in the leading economies and depression persisting for some years. The stubborn decline in global economic activity is punctuated by occasional rallies that are taken as signs of recovery, but these quickly fade as the underlying downward trend reasserts itself. The prominent role of governments

in propping up banks and reviving domestic demand leads to strong political pressure for protectionism, effectively putting the process of globalisation into reverse.

The Alternative Risk Scenario:

Failing confidence in the dollar leads to its collapse, and the search for alternative safe-havens proves fruitless. Economic upheaval sharply raises the risk of social unrest and violent protest. A Political Instability Index covering 165 countries, developed for this report, highlights the countries particularly vulnerable to political instability as a result of economic distress. The results of the index are displayed in map form and in a ranking table in the centre pages, along with a brief methodology.

Job Opportunities in the New Economy

There are a lot of comparisons in the mainstream media between current events and the Great Depression that miss the mark. Unemployment comparisons are not apples to apples.

In the Great Depression, we were an under populated nation of farmers and factory workers with an abundance of natural resources. The US was the Saudi Arabia of the world in energy supply terms and there was plenty of countryside to light up, so many New Deal job programs were based on nationalized electrification projects.

In those days, it was about generating as much demand pull as quickly as possible and Sam Insull's powertools and appliances were there to do just that. At the time, because of favorable demographics and other factors, we could afford vast, national, inefficient projects for job creation. For a good read of the history of the New Deal, check out Amity Shlaes, Forgotten Man.

Today we face unemployment of a completely different kind. Decades of a global economy based on debt-based consumerism have produced a hyper-specialized workforce.

In FDR’s New Deal, workers were fairly fungible. Today, resumes in one industry are foreign languages in the next. Not only are today’s lifestyles artificially propped up, but the means for those ends are as well.

So what do you do when you lose your job in retail, or software development, or financial consulting, or as a personal trainer?

There are few areas of the economy that don’t depend on everyone else living beyond their means and conventional wisdom about “recession proof” jobs often miss the point. One lady I know in geriatric private home care told me there would always a need for her job because of aging Baby Boomers. Wrong. Many people will do what they’ve had to do in the past when they or their families can’t afford private care. Many will move in with their children. The question of will you be ready for retirement, as Dmitry Orlov once put it, will not be the question. The question will become, will you be able to survive when you can no longer work?

Health care in general is another biggie in the making. While I encourage anyone to learn as much as they can about medical care, conventional prospects in the medical field still rely on vastly inefficient health care systems with huge, unsustainable cost structures. As businesses downsize and fold, tax revenues decrease, medical programs will inevitably shrink. The health care industry bubble has not run its course.

As more and more people, who once felt secure, now turn to a more informal job opportunities, certain areas seem likely to draw more attention. I’ve listed a few below off the top of my head, but encourage you to write in and comment with your experiences and ideas.

-Local/Coop Farming - Localizing food production is growing nearer and dearer to all of our hearts.

-Security Services - Hard times bring more crime. Personal security for the well-to-do, ranch livestock security from rustlers and poachers, neighborhood cooperatives to deal with less police services from shrinking budgets are opportunities especially for the ex-military.

-Asset Stripers - Salvaging materials from abandoned Big Box stores and suburban homes for reuse.

-Medical Practitioners - We need fewer plastic surgeons and more personalized health care as we transition to more house calls and less insurance paperwork. Many will double as veternarians.

-Small-scale Engineering Projects for Localized Utilities - You many not be needed to design iPod circuit boards, but there is power, civil and mechanical engineering work to be done to decentralize power and other utilities.

-Horse Trainers - Depending on how quickly we begin to experience the new normal of fuel shortages, more will become dependent on horses and other draft animals.

-Military/Mercentaries - Unfortunately, this is a geopolitical reality with opportunities worldwide.

-Repo Men - As the bills don't get paid, people are needed to collect.

-Gunsmiths - Have you noticed gun sales lately?

-New Deal II - I hope we spent more time rebuilding the train lines and shipping ports and don't squander time, money or energy on building 6-lane roads to nowhere.

 

Return of European Fascism

One of the worst outcomes of an economic collapse is that it leads to civil unrest and eventually extraordinary politics.

History shows us time and time again the types of governments installed by or imposed on a desperate and angry group of people searching for someone to blame and a return to former glory. The most cited example of the 20^th century is a humiliated Germany reeling from war time reparations in WWI due to the Treaty of Versailles and a miserable bout with hyperinflation. Mussolini’s rise to power came on the coattails an economic crisis coupled with strong feelings of resentment towards the Allies having been slighted at the Paris Peace Conference in 1919.

In 2009, the early warning signs of fascist regimes are already flashing in the UK.

"Ed Balls, the Children's and Schools Secretary, said the downturn was likely to be the most serious for 100 years, and his comments appeared to raise the prospect of a return to the Far Right politics of the 1930s and the rise of Facism.

His warning, in a speech to activists at the weekend, came after a trade union baron warned that far right parties were trying to hijack the campaign for "British jobs for British workers".

The row over foreign workers has gathered momentum in recent weeks and Mr Balls seemed to suggest the recession could trigger a return to the Far Right politics that prospered in the Great Depression of the 1930s.

He told Labour's Yorkshire conference: "The economy is going to define our politics in this region and in Britain in the next year, the next five years, the next 10 and even the next 15 years.

"I think that this is a financial crisis more extreme and more serious than that of the 1930s and we all remember how the politics of that era were shaped by the economy."

The remarks are significant because Mr Balls was a key adviser to Mr Brown during his decade at the Treasury as Chancellor of the Exchequer.

Mr Balls said that he believed this to be "the most serious global recession for over 100 years".

He said: "We now are seeing the realities of globalisation, though at a speed, pace and ferocity which none of us have seen before. The reality is that this is becoming the most serious global recession for, I'm sure, over 100 years as it will turn out."

Last week Derek Simpson, the general secretary of Unite, gave warning that far right elements were hijacking a campaign against foreign firms bringing in non-British workers.

He said: "We are deeply concerned that other organisations like the BNP are latching onto the movement for their own racist agenda."

Last night, George Osborne, the shadow Chancellor, said Mr Balls' comments were at odds with Treasury forecasts suggesting a recovery in the third quarter this year.

He said: "This is a staggering and very worrying admission from a Cabinet Minister and Gordon Brown's closest ally in the Treasury over the past ten years.

"We are being told that not only we are facing the worst recession in 100 years, but that it will last for over a decade – far longer than Treasury forecasts predict.

"In this time of recession, a Cabinet rift over the economy could be deeply damaging.

"We need immediate clarification of whether Ed Balls is speaking for his colleagues in the Government."

The Liberal Democrats compared the comments with those made by Treasury minister Baroness Vadera, when she claimed she was seeing "green shoots" of economic recovery, echoing remarks by former Tory Chancellor Norman Lamont in 1991.

She was criticised for saying last month: "I am seeing a few green shoots, but it's a little bit too early to say exactly how they'd grow."

Vincent Cable, the LibDems' Treasury spokesman, said: "Instead of giving clear and consistent leadership, government ministers are oscillating between complacent optimism and this doom laden picture of Armageddon.

"Surely the truth lies between the two? This is a serious crisis but not hopeless."

The news came as the Financial Services Authority, the City watchdog, warned that the UK was at risk of a deeper-than-expected recession.

The authority said that the worst financial meltdown "in more than 70 years" has far from run its course and the British economy was predicted to shrink by 2.2 per cent this year.

It also said that Britain's 'vulnerable' banks need to make huge culture changes to survive the recession.

A spokesman for Ed Balls denied he had been trying to draw parallels with the Far Right.

He said: “The speech was about the difference between Labour and the Tories on the economy. It was not about trying to draw parallels with the Far Right.

“The Tories are completely isolated in their opposition to a fiscal stimulus that is essential to combating what most economists agree is an unprecedented financial sector recession. “He said that this difference between the parties will define this country’s politics for many years to come.”

The Love Song of J. Alfred Marketeer

There is no shortage of books on dystopia these days, but I’ve found very few that summarize how the major trends actually impact existing business models and more importantly the viewpoints of the people at the helm. Instead, most take an after-the-impact look where the present is discounted to something less than meaningful because the changes were so drastic and sudden. On the other hand, you have plenty of unrealistic, though fashionable, battle cries of “we should do x,y and z to keep doing what we're doing only in different ways” a la Thomas Friedman, and other poster children of intellectual idiocy.

A lot of folks can see two points – one a hyper-specialized consumer economy – the other some endgame of chicken farming and serfdom – but the connecting road is a lot less clear. Meanwhile, if you have a job or business or some going concern that seems less than certain in the long term, you still wake up in the morning and make a go at it while you can. And you probably do your best to reconcile your understanding of the inevitability of certain things with a surrounding culture of positivity which presumes things will eventually return to better business days of yesteryear.

This is one reason I’ve long enjoyed Charles Hugh Smith’s viewpoints and his ability to summarize the major trends that shape our lives. I also admire his ability to be matter-of-fact but not as draining and bitter-sounding as some of the other truth-tellers. A few months ago, I read his book, “Marketing in Crisis – The Era of Global Crisis: Intersection of Four Long-Term Cycles”.

Smith’s book is a very tight summary of the reasons why business leaders should reach way down, be honest with their stakeholders and put theses macro trends into direct focus with their business. Even today, when I listen to business forecasts I think, “The stories we tell ourselves…”

Smith describes the intersection of four mutually reinforcing long-term cycles:

· Peak extraction - the depletion cycle end-game of the global economy’s complete dependence on fossil fuels. (Smith indirectly expands this to planetary collapse in general – lack of fresh water, good soil, deforesting, peak extraction for metal ore etc.)

· The 60-70-year cycle of credit expansion and contraction which is transitioning from unsustainable credit expansion (bubble) to renunciation of debt (credit collapse) and global depression.

· The generational cycle – 4 generations or approximately 80 years of American history that leads to nation-changing social, political and economic upheaval. (The American Revolution: 1781+80 years = Civil War, 1861+80 years = 1941)

· The 100+year cycle of price inflation and stagnation of wages’ purchasing power which began around 1901 is not reaching the final state of widespread turmoil, shortages, famine, war, conflict and crisis.

Yes, I know if you’re reading this article, then you probably understand the problems at this point, but Smith then puts these factors into the context of, for lack of a better expression, business as usual: Creative destruction and capitalism. He then describes what we intuitively know – that boom-dependent businesses with a standard marketing model are dead.

Smith’s presentation allows you to bring up all the elephants in the living room to your cohorts, desperately clinging to familiar ways, without the usual arms-crossed response of, “So, you’re another one who thinks the world is ending.”

Mostly.

"The optimist view that history is an entelechy following a vector toward higher energy density, higher consumption, longer lives, stable peace and increasing liberty is facing unprecedented challenge on fundamental physical, demographic and financial fronts.

This Hegelian view of history fired both the idealistic Marxist ideologies of the 19^th and 20^th centuries, and the progressive/liberal Western Civilization view that humankind was inevitably growing wealthier and wiser.

The alternative view that history is essentially cyclical is supported by geography and financial data stretching back hundreds of years. Rather than choose between the two views, we should consider the possibility that just as light is both wave and particle, perhaps history is both entelechial and cyclical. The challenges the world faces within the next few years/decades certainly seems to mix teleological and cyclical forces and trends:

1.    Skyrocketing energy costs will act as an enormous global tax on consumption. (Note - With the recent collapse in energy prices when the bottom fell out of the financial markets, let’s not forget that badly-needed projects were scraped which will leave us in an even worse predicament in the years to come.)

2.    Just as FEW (food, energy, water) imbalances tax global consumption, demographics guarantee that huge Baby Boom populations in Europe, North America, China, Japan, India and elsewhere will be retiring and exiting the workforce just as their governments and employers find their revenues declining.

3.    The Kondratieff Cycle suggests that the global asset bubbles which are starting to deflate have a long way to go before the next cycle of financially healthy and stable growth can begin.

4.    Globally, public heath will be under increasing stress from persistent current trends (obesity, air pollution, resistant bacteria, diseases of overconsumption and diseases of malnourishment etc.) and disruptions, scarcities or outright shortages of food and water.

5.    “The End of History” which was welcomed just a decade ago has been replaced by a sober realization that deeply rooted post-colonial and ethnic/regional tensions were only suppressed, not resolved, by the Cold War.

6.    The constant geographical shifting of manufacturing for increasingly slight competitive advantages and the deployment of industrial robots both augur an era of overabundance of manufactured goods and a sustained global surplus of labor.

7.    Fragile delivery systems dependant on long supply chains and bottlenecks will be vulnerable to unpredictable fractal breakdowns and disruptions.

8.    Just as overabundance of manufactured goods reduces prices and profits to zero, the overabundance of marketing and advertising effectively reduces the value of all standard marketing to zero.

9.    What constitutes status and prestige will undergo substantial transformations as scarcity of essential commodities collides with overabundance of manufactured goods and marketing.

10.   As supply/demand imbalances in food, energy and water and the iron hand of demographics strangles government’s revenues and entitlement expenses, a global loss of faith in institutions will foster backlash/blowback and social disorder."

 

 

 

Death Spiral of the Dry Baltic Index

In spite of early 21^st century cheerleading by CEO’s and MSM columnists, globalism has been with us for centuries from origins in the Silk Road, Merchants of Venice, Dutch trading companies and so on. But the latest model, which multinational corporations, governments and billions of livelihoods are attached, can be reduced to several basic movements of raw materials, energy, goods and capital:

 

1.    Move production away from places with high labor costs – the US and Western Europe - towards places with cheaper labor – Asia, the global factory (Wage Arbitrage).

2.    Move raw materials from the Global South - Africa, South America and Australia to Asia.

3.    Move oil from the Petro states to Asia to fuel production and the US to fuel consumption.

4.    Move finished knick-knacks from Asia to the US for consumption.

5.    Move capital (Petrodollars) from the US and Asia to the Petro States in exchange for oil.

6.    Move capital surpluses from Asia to the US to purchase debt instruments (e.g. Treasuries) which fuels more debt-based consumption in the US.

7.    Move material from discarded and recycled finished goods to Asia for reproduction, repackaging and disposal.

8.    Move capital, borrowed at zero percent interest rates from Japan, to fuel speculation (Carry Trade) which resulted in debt-based inflation of the underlying collateral and consumption.

 

The first innings of a global depression and the effects on movements of raw materials, energy and finished knick-knacks that support this global model, is best illustrated by the Baltic Dry Index, an indicator of shipping rates for raw materials. The Baltic Dry Index is a good leading indicator for the overall global economy because it is not based on a survey like consumer confidence polls and instead is based on a sampling of actual booked shipping rates around the world.

 

 

This is a very nasty head and shoulders pattern followed by a freefall that best sums up graphically the seizure in world markets.  The graph is also forbearing of the future business impacts due to the whipsaw effect and extreme volatility over the last couple of years.

 

Imagine being a shipping company, leveraged up on debt to outfit a fleet of extremely expensive ships. You made assumptions about the going rates and then the bottom completely fell out of the shipping market. You’re getting 7 cents for every dollar you used to earn. Or you’re a mining company with operations which are no longer economic, or you’re an international oil company that just shelved deep offshore projects that required a seemingly conservative $80 per barrel oil at $147 barrel oil. Maybe you’re the leader of a Petro welfare state with an economy that grew addicted to $90 oil and an angry population at the gates. Then there’s the Chinese government concerned with an increasingly restless population of unemployed as factories get shuttered.

 

The point is that an overwhelming majority of the players in these global movements, from source to sink, were hopelessly addicted to speculative financing of unproductive activities. Judging from the long list of retail closings, the days of an endless market for cheaply-built consumer, feel-good junk from the laundry list of Big Box specialty retailers are ending. So less ships with metal ore float to China, less Happy Meal toys get exchanged for Treasuries and less shipping containers wind up at ports in Los Angeles.

 

Like any addict, rather than quit cold turkey, world leaders are scrambling to substitute one drug for another. Maybe with zero percent interest rates to mimic those in Japan which unwound in the summer of 2007, the Feds can create a US Dollar carry trade to try and fuel more unproductive use of capital and risk taking.

 

In any event, even at zero percent interest rates and the possibility of higher returns somewhere else, when fear and loathing rules the day, return of investment trumps return on investment, which also has the effect of crimping productive activities – like small business investments and energy projects we’ll need to heat homes and keep the grid up and running.

 

Globalism, or more aptly put, trading between countries, didn’t begin in the 2^nd half of the 20^th century and in all likelihood won’t end in the 1^st part of the 21^st. but the model is shifting by painful necessity to something less insane.

Awake and Alone

Alice in Wonderland, how do you get to Wonderland?
Over the hill or underland, or just behind the tree?
When clouds go rolling by, they roll away and leave the sky.
Where is the land beyond the eye, the people cannot see, where can it be?
Where do stars go, where is the grass that's blue?
They must be somewhere in the sunny afternoon.
Alice in Wonderland, where is the path to Wonderland?
Over the hill or here or there, I wonder where.

-Lewis Carroll, "Alice's Adventures in Wonderland"

One of the biggest struggles for people with an acute awareness of the types of change we face in coming years is playing their part in a business-as-usual world.

People “in the know” often describe the sensation as Alice tumbling down the rabbit hole or Neo in the Matrix having taken the red pill, forsaking the comfort of ignorance for painful knowledge of reality.

It is a feeling of suddenly questioning every aspect of your reality.

Meanwhile, talk around the water cooler still revolves around selling more widgets to ABC or the Bears game with the occasional jab the mainstream political situation.

They are rambling on about this or that like the adults in Peanuts and the whole time you are thinking food shortages, riots, government debt defaults…

You realize there are many people like you out there in the wilderness of the Internet and so you seek refuge among the like-minded far from the vacant stares of “the Sheeple” at Wal-Mart. The Sheeple are of course helpless dregs living in a sort of consumer fantasy land, hopelessly addicted to corn syrup products, cheap gasoline, mindless reality shows, empty mainstream news groupthink and iPods. You only wish you could share with them the Theory of Everything, a narrative that ends with TEOTWAWKI, but unlike Paul spreading the word of Christ, you hesitate.

Not only is being a Doomer bad for business, but spreading the gospel lessens its novelty…after all how many Sheeple should be converted? How many lambs does Noah allow on the ship? When will they catch on? Will I be completely ready when “the masses wake up”?

So if you’re reading this and relating because your world is turning upside down, then one place to start is Dr. Kathy McMahon’s site. How you feel specifically about the Peak Oil issue is less important here as the common element of the emotional reactions that go hand-in-hand with internalizing the types of big disruptive changes we face in an era of economic, political and social turmoil.

Another challenge is pulling a real signal out of the noise of the day-to-day, frantic headlines. Interpretations of history are barely clear in hindsight and completely foggy in the making. For instance, Nassim Taleb in his book, Black Swan references William Shirer’s Berlin Diary: The Journal of a Foreign Correspondant, 1934-1941, Shirer describes the events of WWII as they were taking place, not after. In studying the wartime journal, Taleb realized that many people living through the beginning of WWII had no inkling that something momentous was taking place and the insight at the time went completely against what later would become conventional wisdom. For instance, many thought Hitler was just a temporary phenomenon.

What struck me about Taleb’s observation was that sometimes our ability to subconsciously adapt compensates for our sense of normalcy more than we may realize and numbs our awareness of huge changes in real time. Said a different way, it is not easy to pull the signal out of the noise when 99% of what you see and read is noise.

So in a survivalist mindset where there is some retreat, separate from business as usual, short of a complete breakdown in society, when is the correct time to “bug out” or declare, “yes, this is TEOTWAWKI”?

And Doomerville is not without its factions. Just like religion, it is splintered and so you must sift through the different voices until you distill them down to your personal narrative. There are many voices and few without political or pure fear mongering capitalistic agendas.

Increased self-sufficiency and community cooperation seem like no-brainers, but taken to an extreme individualist, survivalist mindset for instance, how much stuff will really save you in the absence of personal connectedness and know-how? Will anyone care if you die alone and in your bunker stocked with bullets, beans and Band-Aids?

And if you place life for life’s sake above all else like a hypochondriac at the expense of everything else, is life worth living? Taken a step further, is humanity in anyway redeemable in this form? And if your preparation for the big event is purely accumulating stuff that might save you, then what if the motorcycle zombie gangs you fear steal from you leaving you with nothing?

There is a reason why the lowest common denominator in survival is some form of community. And what might that community look like? There are many forms of lifeboat communities – self-sufficient projects detached from the rest of society – but what are the real prospects for success? Again, the struggle to maintain such an arrangement must be worth the fight and history shows that worth can only be measured in terms larger than oneself. This was the reason why the silly counter-culture experiments in the 60’s failed.  John Michael Greer takes on this subject here.

What all this suggests is that the central problem that proposed lifeboat communities must tackle is one of motivation. This same suggestion might have been drawn from the historical parallel that undergirds the entire project. The Christian monasteries that preserved classical culture through the last set of dark ages, after all, were not staffed by people trying to preserve some semblance of a middle-class Roman lifestyle while the world fell apart around them. Quite the opposite—the monks and nuns who copied old texts, taught at abbey schools, and kept the lamps of Western civilization burning when they were at their lowest ebb since Mycenae’s fall voluntarily embraced a lifestyle even more impoverished and restricted than that of the peasants among whom they lived. The same point is equally true of the Buddhist and Taoist monastics who accomplished the same vital task in other places and times. Arguably, it was precisely this willingness to embrace extreme poverty that freed up the time and effort needed for the economically unproductive activities needed to keep the heritage of a civilization alive.

The motivating factors that guided the followers of Benedict of Nursia, Kobo Daishi, and Chang Daoling, then, may be among the crucial missing pieces in current debates about lifeboat communities, and indeed the entire contemporary crisis of industrial civilization. To explore this possibility, we’re going to have to take a hard look at one of the least understood and, admittedly, most dysfunctional aspects of modern culture, and talk about the place of religion in a response to peak oil.

Another faction, the neoprimatives hold that humanity is hopelessly condemned since the adoption of agriculture. Once you cross the hunter-gatherer chasm, there is no turning back, so collapse of a system of unnatural and unsustainable dependencies is the natural progression of original sin. Taken to the extreme, this mindset would hold that nothing really matters – from Michelangelo’s wonders to the Space Shuttle - because we are doomed in any event. Jared Diamond’s "Worst Mistake..." essay makes a point, that many cling to after they realize sustainability of what we wish to sustain is largely a myth.

Not too far remove from the pure neoprimative case is the Olduvai Theory espoused by Richard Duncan, which distills the human condition down to a per capita energy measurement. From this standpoint, human progress over time is graphically shown as simply a flat line with a single impulse thanks to the benefit of fossil fuel extraction and depletion. We are simply on a ride back to the darkness of caves from this point on, having bypassed our peak extraction point of fuel and metal ore that support civilization.

John Micheal Greer’s, Long Descent is one of the better reads I’ve come across that takes the long, historical viewpoint in coming to terms with the different factions in this regard.

In a nutshell, Greer states the case for what he calls catabolic collapse, one that more resembles stair steps then a sudden cliff. It is the case for a series of disruptive changes, where each disruptive step down self-limits to some new normal before the next disruptive change. Taking a look backward, you can see this playing out and intensifying from the 1970’s forward to present day.

Granted Greer is a Druid, so frankly his stair step to the average Joe living in Suburbia would probably feel like TEOTWAWKI, but the key point is that history points to a de-evolution in stages rather than a sudden, new world dive down into a completely unfamiliar rabbit hole.

But this is not to say, each stair step, is not very painful and turbulent.

One of the keys to dealing with immense change is coming to terms and being aware of two major myths that are deeply ingrained in our belief systems: The Myth of Progress and Myth of Apocalypse.

Our culture’s mythology of progress envisions the goal of civilization as a utopian state in which poverty, illness, death and every other aspect of the human predicament has been converted into problems and solved by technology…The irony of the current crisis is that a civilization that tried to turn all of its predicaments into problems has ended up confronted with problems that, after being ignored too long, turned into predicaments…A predicament by contrast to problem, as no solutions. Faced with a predicament, people come up with responses.

With his distinction between predicament and problem, Greer cuts to the core of the issue with attempting to preserve industrial society in its present, happy motoring, consumer-cult form. Contrasted with the Myth of Progress is the Myth of Apocalypse, which has clear ties to Biblical and other religious terms that dominate our worldviews.

According to this story, all human history is a blind alley. At one time, people lived in harmony with their world, each other, and themselves, but that golden age ended with a disastrous wrong turn and things have gone downhill ever since…

…The history of the last century – think the Great Depression and Second World War, and the brutal excesses of Communism and Nazism, just for starters – shows that industrial societies can endure tremendous disruption without dissolving into a Hobbesian war of all against all…

Both the myth of progress and myth of apocalypse, on the other hand, have a great deal of emotional power; that’s why they’re popular. Faith in perpetual progress comforts those people who have made their peace with society as it is and want to believe that the frustrations and compromises of their lives are part of a process that will eventually lead to better things. Faith in imminent apocalypse comforts those people who cannot accept society as it is; they long for a catastrophe massive enough to topple the proud towers of a civilization they loathe.

The religion of progress has maintained its hold for the last three centuries because it has delivered on its promises, filling lives with technological marvels wondrous enough to distract us from the cost to our world, our communities and ourselves. When the parade of wonders grinds to a halt, then the impact on deindustrializing cultures may be immense…

The failures of its priests to produce miracles on cue could plunge many people into crises of faith with no easy way out. The recent vogue for conspiracy theories and apocalyptic visions of the future strike me as two clear signs that the people are beginning to turn their back on the religion of progress and seek their salvation from other gods.

So getting a handle on the drivers behind our need to cling to the stories we tell ourselves, with deep religious and cultural roots, helps in navigating the emotional river of collapse awareness. Also at the risk of being swept away in an isolated world, trying to find common ground with others who don’t quit share the same viewpoints is a worthy challenge to take.

For instance, you might have different takes on the cause of the world’s ills, but you might share the same take on the things you can learn together to deal with them. Maybe you’re a peaknik and maybe your friend believes Peak Oil is bunk and just another Illuminati myth. Does it matter if you’re building real personal bonds – the only real currency in a world with no guarantees?

Can you help one another redefine how you define yourself even if it means less in terms of the career you went to college for?

Can you teach one another deindustrialized skills that will prove useful as you adapt to each new crises?

Can you dare strike up a conversation with someone you don't think is in the know, find a common bond and take the risk of bringing up some of the larger problems?

Maybe beneath the wool, she is waiting for you to ask the questions because they are burning her beneath her calm surface.

The Diminishing Returns of Feudalism

If you went on vacation last week, all you missed was the end of capitalism as we knew it and a new chapter in feudalism.

You’d pick up any given newspaper to see questions of who’s to blame and how to fix it.

Tales of Wall Street greed are everywhere and sure, Greenspan, the frowning pawn of the financial elite, lit the kindling no doubt. But really, how far back do we need to go to tell this story though about robbing Peter to pay Paul?...Wilson and WWI and the original Federal Reserve Act, the New Deal, Johnson's deadly experiments, Nixon killing Bretton Woods and letting the dollar float to get back at Japan, Reagan’s have-it-all-now policies, overconfidence in the "service" and "information" economies...King Bubbleliscous Greenspan...Glass-Stengle going bye-bye...Helicopter Ben Bernanke...Comrade "Henchman" Paulson...
 
Why pay today when someone else can pay tomorrow?
 
It’s a tough political racket to break and even tougher for a population that isn't used to paying, conditioned by years of government entitlements and the magic of compounding interest.

 

We learned to inflate and indebt our way out of financial crises after the Great Depression. The trouble is, not only was it the government putting the nation back to work. It also took a world war, employment of millions of young men in the army, destruction and debt servitude of Europe to the US.

But OK, so why don’t we just roll over and accept the plan to bailout the financial plans?

Why shouldn’t the gamblers chip in and save the casino - Moral hazard be damned?

First let’s look at the numbers, vague as Comrade Paulson deems them to be <source>:

$700 billion bailout package for Wall Street
$438 billion projected deficit in the federal budget for FY 2008
$200 billion for Fannie Mae and Freddie Mac
$150 billion in rebate checks under the guise of “stimulus”
$85 billion for AIG
$29 billion for Bear Stearns

That’s $1.6 trillion with a T. And the loose wording the plan extends beyond mortgage and other collateralized debt instruments into student loans and consumer debt. In the legislative proposal for treasury authority to purchase mortgage-related assets, Section 10 proposes the statutory limit on the public debt to over $11.315 trillion - again with a T.

In a time where public awareness has never been more focused on the meltdown of complex financial instruments, it is worth revisiting first principles and the question where this bailout money comes from and how it is created.

Remember, every “dollar” or Federal Reserve Note that is created represents debt. When the Fed “fires up the printing press” what actually happens is that the Treasury Department requests the funds from the Federal Reserve, which is – again more first principles – a privately held banking corporation, not a government agency. Essentially, the Federal Reserve issues a check to the Department of Treasury and in turn a Treasury instrument (bond or note) is issued where the US government commits to pay principle plus interest to the private banking corporation.

Sometimes I think this very basic principle is lost in the noise of the day-to-day turmoil.

So what is the problem with the bailout scheme at an economic level and aside from the fact that is completely unconstitutional?

Simply put, try as we might, we cannot create real wealth from nothing. You can feign wealth creation for a while, as the US has experienced over the past decade by keeping interest rates low, keeping the printing presses on full bore, creating massive asset bubbles and keeping shadow banking shenanigans under the rug.

But eventually, nature reverts to the mean, houses work their way back to three times real income, a woman sees through the Hummer, expensive suit and flashy watch to the substance of the man, and nature does not permit our favorite game of getting something from nothing to go on forever.

The graphic above expresses this hard reality very well.

Our debt generation is reaching diminishing returns and the bailout will not create real wealth nor will it do anything more than postpone an even greater reckoning day at a later time.

Banking Holiday

Generalizations are not always fair, but they’re sometimes a necessary evil in wrapping our minds around the world’s complexities.

Take general attitudes towards money for instance.

The Great Generation learned not to trust banks and opted for the Bank of Serta Mattress after many watched their life savings go up in smoke as banks failed during the Great Depression, while Baby Boomers learned to spend money faster than they made it in order to outrun inflation in the 70’s.

Different attitudes towards money also formed on different sides of the Atlantic. The Depression and post WWII growth policies taught the US central bank to fear deflation more than inflation while Europeans, having been ravaged by war and hyperinflation in the first half of the 20^th century – no case more blatant than Weimar Germany - learned to fear inflation more than deflation.

In the unfolding financial crises which is proving to be nothing less than a slow motion collapse and restructuring of a global financial system in fits and spurts, both fears are magnified:  Deflation from the implosion after the peak of a 60-year credit supercycle and an end-run of deregulation and new heights in Ponzi finance, and the inflation of all things of real substance that can’t magically create more of with a printing press and creation of new debt to pay off debt.

Paulson, Bernanke and Co. are giving Oscar performances with their ability to feign surprise as each canary drops in the mine, while reassuring the public and providing yet another large institutional bailout line, none more substantial than Fannie Mae and Freddie Mac.

Fannie Mae and Freddie Mac guarantee about half of US mortgages, coming in at a cool $6T or so.  Remember, Fannie and Freddie are privately-owned government-sponsored enterprises, not government-backed, but now Joe and Jan Taxpayer are on the hook to back these goliath dysfunctional institutions as well to the nervous debt holders, of which about $1.5T are foreign owned. This could prove the most expensive brick in the wall of nationalization of the financial system with estimates of the cost of that bailout range from $100B to more apocalyptic numbers. I use the term nationalization loosley here, as this form of nationalization does not benefit the population at large. This form of nationalization is a life raft to the financial elite at the expense of taxpayers under the false pretense of helping Bob and Betty Homeowner, leaving us with the larger question of who saves us from the bailouts?

As the siphons of credit dry up, non-borrowed bank deposits have gone negative in 2008 for the first time since the Great Depression. So how is it that bank reserves can go negative when money supply growth is peaking? The short answer is that when the bonds and derivatives that loosely represent this money supply, are leveraged against real loans that don't get repaid, their value tends to approach the paper they aren't actually even written on. So the bailout scheme is a Band-aid on a Band-aid on a gaping wound.

 

With the recent implosion of IndyMac, the FDIC is bracing for more troubled bank failures and dealing with 1930’s style bank runs. Though IndyMac's troubles started and were well-documented long before the final FDIC act, strangely, the bank did not make the list of FDIC's troubled institutions until June. Naturally, the FDIC guards the names on the list closely to prevent panic by account holders. Mish Shedlock summarizes the general state of US banking insolvency:

There is roughly $6.84 Trillion in bank deposits. $2.60 Trillion of that is uninsured. There is only $53 billion in FDIC insurance to cover $6.84 Trillion in bank deposits. Indymac will eat up roughly $8 billion of that.

Of the $6.84 Trillion in bank deposits, the total cash on hand at banks is a mere $273.7 Billion. Where is the rest of the loot? The answer is in off balance sheet SIVs, imploding commercial real estate deals, Alt-A liar loans, Fannie Mae and Freddie Mac bonds, toggle bonds where debt is amazingly paid back with more debt, and all sorts of other silly (and arguably fraudulent) financial wizardry schemes that have bank and brokerage firms leveraged at 30-1 or more. Those loans cannot be paid back.

It seems we’re on the cusp of some more unplanned banking holidays.

A Father Son Conversation

(Speculative fiction based sometime in the not-too-distant future)

Son: "Pop, you talk sometimes about the Old Days. The pictures you’ve shown me. The things you describe. Why aren't things that way now? What happened?"

The boy’s father looks off into the distance, exhales and thinks how that question has become the difficult question that every child asks at some point. Probably more so than the birds and bees talk that most parents cringe over, but he shoulders on as best he can, to explain the world that came to be after the oil age.

Father: "Well, really to understand you have to go way back thousands of years. People learned how to grow their food and then they started storing it – instead of just foraging for what they ate at the time. People all over the earth gradually started learning more about agriculture and it came about for different reasons in different times in different ways."

"As food surpluses formed, the groups realized that not everyone needed to work in the fields. So people started doing other things. Some people worked on pottery to store the food. Other people worked as food traders. As more people had more time on their hands more specialized roles came about. They then realized they needed more complicated politics to manage all these complications that came about because of all these new roles.  Some people had enough time on their hand to focus purely on art and lots of really wonderful things came about because of it besides the not so good things like tax collectors."

Son: "I still have no idea what you’re talking about. What does that have to do with the Old Days?"

Father: "It has to do with how the idea of large civilizations, empires and nations started because they basically had extra food, which lead to extra wealth, which lead to people learning that they liked to own things, which lead to more people in each group, which lead to arguments between groups for what they owned when one group had more than the other."

Son: "Like wars?"

Father: "Yes."

The son shifts his weight between feet and awkwardly forces a smile, waiting for his father to get to the punch line.

Father: "So you see son, over the course of history, we got better and better at using technology to control nature for our benefit. And we became really good at using nature to build things that allowed us to live lives with very specific purposes without giving much thought to how we came about our basic needs. We became really good at using nature’s resources for energy and based our lives more and more on that energy."

"It took nature millions of years to build this energy up. But we used about half of this energy in about 100 years. We had so much energy that it was like having hundreds of servants that supported each of us for a very low cost."

"These servants were like invisible machines you didn’t even think about that much. These machines were the ones that produced, packaged and shipped our food thousands of miles. These machines were the ones that powered all the machines inside our homes and at our places of work and allowed us to travel thousands of miles in a few hours without much thought. These machines support every aspect of how we lived and gave us more abundance than had ever been experienced in human history, so we had lots of time on our hands for leisure and other things."

"Within just a couple of generations, we became spoiled and expected that these invisible machines powered by a surplus of nature’s energy would be there forever. Because we figured out a way to use up these resources so quickly and use them to power enormous farms without much manual labor, the number of people in the world shot up from 1 billion to 7 billion people over 200 years."

"Think about that son, it took tens of thousands of years to get to 1 billion but only 200 years to add 6 billion more."

Son: "So oil and other resources powered the machines that allowed the population to grow so quickly."

Father: "Yes."

Son: "OK, but you said we used half of the energy. I still don’t get it. Why don’t we live like that now?"

Father: "Well there's plenty of energy. That's not really the problem. You see, things really heated up near the end of the 20^th century. For most of the 20^th century, much of the world’s resources were eaten up by a few rich countries. And there was a large gap in wealth between rich and poor countries."

"As the rich countries used up most of their own resources, they started moving their factories over to the poor countries where there were still resources to be had. The rich countries learned to base their way of life not so much on building things, but on instead on buying, selling and financing things that were made in the poor countries."

"The rich countries were able to do this for a while because it was easy to build something in on one side of the world and ship it to the other. And the rich countries controlled the money, the banks and the politics in the poor countries, so they made it easier for people in the rich countries to live as though they produced much more value than they really did and buy more of things on credit – which was just money they hadn’t earned yet or might never really earn, backed by things that weren’t really worth as much as they claimed to be, like the houses they lived in."

"The world seemed pretty small then."

"Some said it was flat."

Son: "I can’t even imagine that. But what about the half though?"

Father: "The world needed oil and other key resources just like your body needs water. Your body is something like 60% water. You’re about 100 pounds so 60 pounds is water. Now if you work outside and overdo it, you’ll dehydrate long before you lose all 60 pounds of course. You only need to lose a couple of pounds of water and your body systems start to shut down and soon your body collapses. That’s something like what happened years ago. With other things, when price went up, demand when down, but oil was so critical to everything that all bets where off when supply just couldn't keep up with demand."

"You see, the poorer countries were getting richer and suddenly they had more money to spend on things and they used more of their own energy and so they had less to sell to the rich countries. And in many countries with resources, after a half a century of being pushed around by the rich countries, the people there demanded that the resources be used in their own countries by their own people instead of being burned up in other countries."

"This was a huge power shift, so the rich countries were spending more, becoming poorer and competing against other countries for a shrinking supply. At the same time it was much harder and cost a lot more to get to the last half of the oil. Not just high in what it cost in paper money, but in much higher costs of other resources like fresh water and metals used to pull it out of the ground."

Son: "But didn’t smart people understand this. Didn’t some people try and warn the rest? Even I can see if you have more people needing more of something which there is less and less of you have a problem."

Father: "You’ve just nailed down the problem better than most people could back then. But sure, there were many people who talked about this sort of thing. It had been understood for decades, but the forces in effect were very powerful."

Son: "What does that mean? Why didn’t you find another way? Why did you mess things up so badly for us?"

Father: "Lots of really smart people were working hard on another way in a lot of different ways. But in the end, nature does as nature does. Things level out. Looking back, we did seem to put too much faith in technology, were fixed to a certain way of life and didn't admit some very important things to ourselves."

"At the same time, our needs for these resources overran our ability to pull them out of the ground fast enough and different groups of people became more and more desperate to get what they needed at any cost, even if it meant fighting over them and going to war. But even if we could pull them out of the ground fast enough, there were all these other problems like changing weather patterns that caused floods and lowered crop yields to deal with."

"Back in the old days, people who talked about these types of things were called alarmists up until the point when it became clearer that they were sounding the alarms for good reason. The famous expression was 'The stone age didn't end because we ran out of stones, so the oil age won't end because we ran out of oil.' Plus, truth be told there have been people talking about gloom and doom since the dawn of man. And since oil was discovered, there was always a group running around claiming it was about to run out. So people have just learned to silence them out for the most part - and normally they're wise to silence them out. Until they aren't."

"See back then, it was more popular to be falsely optimistic than realistic. Writers sold books on the secret to success and it was tough for people to have frank conversations about these sorts of things around in the feel good kind of culture that we had."

"There was a sort of trance that fed off one another. Deep down though, many people knew about the problems even though they all saw it in different ways, but normally took to one or a combination of three roads as an outlet – big money politics, blind faith in the markets or blame."

"The trouble with politics was that it put people in power who promised more of the public funds to voters and special favors to the big companies, which want short term profits and business as usual to keep going as long as possible. Companies needed to get back the money they spent on many things that depended on oil. And no one wanted to admit it, but just about everyone was part of the corporate system and benefiting because of the sytem in place at some level. And what politician would get elected if he said put your wallets down, do your best to accumulate less and learn to raise chickens after all? Where's the progress in that?"

"At the time when things really began to fall apart, the politician’s best solutions were mostly boondoggles - which is a fancy way of getting some money for not much good - based on short-term thinking like burning our last layer of topsoil in our gas tanks or big tax breaks to run your car on kitchen grease. It’s one thing to come up with other ways of making energy, but decades to try and change over everything about a world designed to run on fossil fuels and we started decades too late."

"The trouble with too much faith in free markets – where smart people get other people’s money and build things that help make a better world - is that the things, called signals, that tell the markets to do something didn’t come in time for a change this drastic. And also, markets weren’t really free and the market didn’t do a good job of making a number of small-scale, local solutions to help deal with inevitable collapse to some degree – the market was looking for large-scale solutions to keep a world based mostly on having cars on the road at any cost. And those big efforts will always fail in times of crisis because the things that the big efforts need to be successful will fall out of place. Make sense?"

His son shook his head affirmingly.

"Sure a lot of windmills went up all over places like West Texas and solar panels started appearing on everyone's homes. Normally those technologies that could use the things in place for the last techology were chosen - the power lines and ways to get that energy from where it was created to where it would be used. This is why everyone talked about things like hydrogen, but it never really got off the ground - how on earth would you store and transport it without decades of conversion? Plus it depended on too much of everything else that was already in short supply."

"Sure what people called alternative energy was a good thing, but the impact was too small and it took too much of the old oil and gas technologies to maintain and power the distribution systems which were already pushed passed their limits - plus everyone just expected to keep living like they did only with some substitution. And think about what happens when you needed to replace a solar panel on your roof, but you couldn't get replacement parts with industry coming to a halt and no trucks on the road?"

"But the worst outlet was blame. People started blaming the oil companies, the government, other countries, immigrants, the speculators and so on and so on. A lot of people who took responsibility and knew they were as much a part of the problem and took some blame, still felt paralyzed in taking any real action."

"Those people had jobs they spent their whole life preparing for and many lived in houses they spent most their money they earned on. So they wondered what they could they do but do what they did as long as they could do it. Sure some close-knit communities saw the writing on the wall and worked together on ways to keep the lights on, water flowing and food on their tables, but not many."

Son: "It sounded like a very confusing place."

Father: "Things would happen at a faster pace and then get normal for a while – at least what we then thought of normal – before things started happening fast again. People in different places experienced different things at different times. It wasn't like something just happened and the world stopped. We were just experiencing what the rest of the world had been experiencing for years. It was all about where you were standing. And you still had the experts on TV talking about how housing was going to turn around next year or some money guy saying inflation wasn't that bad. People were still debating about whether or not the country was in a recession when signs of collapse where everywhere."

"Some banks would close their doors. More people would lose their houses. People who worked for the cities stopped getting their pension checks because the cities were going broke too. The government would step in with some attempt at a bailout plan and there was some talk about starting some type of new New Deal program in certain areas to rebuild things and put the country back to work."

"Over time, the potholes in roads wouldn’t get repaired like they once did. Schools started going to 3-day weeks before some had to close their doors. Garbage pickups moved to once every other week. The airlines went under until the industry collapsed into a single airline backed by the government, but travel was just something most people couldn't do anymore."

"Meanwhile, the price of oil didn't go up in a straight line. Stock and commodity prices were all over the map as the market tried to price in scarcity, which would drive prices up, and a collapsing world economy, which would drive prices down. So the energy companies couldn't really make good business decisions even if they wanted to continue with their drilling programs in the Arctic Circle. Not that it would have done much, but you heard a lot of talk about the need to drill everywhere. It just got to the point where price didn't matter. It was availability."

"Then stores would be open one day and a closed sign would appear over the door the next. Truckers would strike and stop delivering medical, food and other supplies - but it was never well organized and it became less about their anger over the high costs and more about having to park their trucks because there was no fuel due to what amounted to hoarding by some of the big lines. And people learned quickly that the real emergency was less about fuel in their tanks, but the lack of food on the shelves due to fertilizer shortages on the farms, power shortages in the plants and fuel shortages for the trucks and trains. Some people panicked. Some people just waited for a government, which was becoming just as immobile as its people, to do something."

"The National Energy Security Act put fuel rationing and forced conservation into place, which seemed silly because the word conservation made it sound like you had a choice. The government was slow to hand out the emergency funds checks and ration tickets. People would barter with one another to get more tickets but it was a mess since all the machines were on computer and the stations that were open didn't have the extra people to monitor the tickets. People were angry, confused and on the move. People moved from north to south because they could no longer heat their homes, while people moved from south to north because their unventilated, boxed-in homes without air conditioning were unliveable."

"The news stopped reporting so much because that only made people panic more."

"Just as you’d adapt to the new situation as best you could, something else would happen. The Internet was the best way to keep in contact with the rest of the world, until we lost our connection when I'm guessing the backup battery power at the network access point just ran out. It came back for a while before going out again. The utilities held pretty well in our area, but eventually the blackouts would happen regularly until the maintenance trucks completely stopped and the gas had to be turned off for safety reasons because of low pressure."

Son: "Pop…"

Just as the father started to recap recent history, his son stopped him.

Father: "Yes son."

Son: "I know what happened next."

Father: "I guess you do huh sport..."

A moment of silence passed with the new quiet understanding when the father ended the talk.

Father: "You know son, the good old days weren’t always so good. And tomorrow really isn't as bad as it might seem. We do what we have to do and remember that each day is a gift so we make the most of it and find reward in what we do, even if it isn't what we once thought we'd be doing."

Son: "I know Pop. I know." 

The Cargo Cult of Suburbia

A man stares out to the sea from the shore of a South Pacific island.

He waits patiently for the promise of a man who will bring wealth and prosperity.

He built a landing strip for cargo planes to return as they once did long ago, but there are no planes on the horizon.

And no such man appears.

But still he waits.

Back in the states, the roads were noticeably less traveled this Memorial Day weekend.

Whirling by the outer reaches of the Texas Tollway, we passed one planned community after another along with the usual assortment of Target’s, Wachovia Banks and various outlet shops virtually in the middle of fields in the middle of nowhere, most of which broke ground within the last couple of years.

Oddly the pristine, newly-constructed landscape seemed at once obsolete and stillborn -  like the nonsensical words of a dying man - the last gasps of a 20-year blow off of the great credit expansion in the twilight of the cheap energy era.

As I gazed into row after row of vinyl-sided houses, I imagined the real estate agent showing the house to an eager, young couple. I could almost hear the close.

“Better than throwing your money away in rent.  And easy access to the new Tollway.”

I thought about the Tollway and what it represented – a sort of offering to the man who would bring wealth and prosperity – its own version of the empty landing strip on the South Pacific Island.

At this point, the economic unraveling so many have predicted is happening at a quickening pace. 

There is no stock market crash, but there is a Silent Spring of just about every industry, which cannot escape the long shadows cast by elephant in the living room few dared mention until recently – Peak Oil.

Events are happening at breakneck pace and difficult to keep up with, but the basic problem is fairly simple to understand. Things start to unravel quickly when production of real things you can drop or spill on your foot can no longer support those things (businesses, industries, ways of life etc.) which are based on existing capital.

Cities are going broke.

Airlines are going under.

The list of retail casualties grows longer.

People are selling their things at garage sales to raise cash.

As the grim awareness spreads that Suburbia is quickly turning into Suburbistan and our way of life is very negotiable after all, we can see the Cargo Cults taking shape along of course with the blame game.

Normally, our mythology is based on something “We” should or will do and normally it is centered on our faith in technology overcoming all obstacles. Many times, our solution is worded, “Something will come along.”

Trouble is, the thing with Cargo Cults is that it doesn't.

Now What?

The answer really boils down to what type of future you’re preparing for.

Is it:

A.      Ever advancing progress, sustained average quality of life, where we debate how the environment should be preserved like some relic for future generations. Someone with this meme might say, “We should use alternative energies because lower emissions mean a healthier planet for our children.”

 

B.      A gradual decline from peak industrialization and technology into an post industrial dark age over a prolonged period of time (10’s to 100’s of years) where societies adapt over time in generally a continuous fashion. Someone with this meme might say, “OK, so maybe we might not colonize Mars and maybe society has or will inevitably peak – but the decline will be manageable, we will innovate, conserve and adapt as a result along the way, and overall this process won’t have a major impact to my way of life during my lifetime.”

 

C.      A fast collapse where the world as we know it undergoes sharp discontinuities in a relatively short period of time (3-10 years) due to a number of interrelated trigger points. Someone with this meme might say, “The curtains are about to close on NASCAR, Wal-Mart and the suburban way of life. You better get serious about local food production because the days of large scale agribusiness with a just-in-time distribution system run by refrigerated diesel trucks are numbered.”

 

If you’re a Case C person, once you leave the big picture, it is tough for most people to face reality because of what it asks of you a very personal level, depending on your individual situation:

 

Was my advanced degree a waste of time and money?

Will there be a tech field job for me in 5 years?

Should I wait it out and if things really get worse then I’ll start to react?

Will the market eventually sort things out after the first few major market disruptions?

Should I just cash out, buy a homestead and start to learn to live off the land?

Should I even worry about things like home value or preparing for retirement?

 

So as always the answer to “now what” depends on who, what and where you are.

And of course understanding and doing part take time and commitment. You may even be a person who deep down feels more life purpose in a Case C world, or may even romanticize the idea of a post consumer-driven culture, and the psychological treatment of that issue is well being where I want to take this write-up today.

 

I do sense a voice of “the way it ought to be” in some of the prognostic write-ups I’ve come across that deals with these issues due to disenchantments of suburban living and feel-good consumerism. And of course the various end-of-days religious theme is another element to consider in getting your own arms around it all.

 

In any event, what makes the doing part difficult is in spite of the various progressive movements, history shows us that people will generally do something until they can no longer do it any longer.

 

In other words, why should  I bust my hump preparing for a world where I can’t do or acquire the things I take for granted today, by using my spare time to learn to grow my own food or learn how to fix something myself if I still live in a time and place where I can just go to store or pay someone? Or why should I take a chance and reach out to my neighbors and start these frank discussions about how we’d manage without city water and prolonged power outages, when there’s a chance when my future will look more like Case B, a more continuous descent?

 

Trouble is if we’re facing Case C, then if you wait until Case C is the future we face, then you won’t have time to adapt.

 

So the “now what” depends on your personal understanding about the ongoing process and interconnectedness of collapse and then how you take measured actions in response as far as what you do to adapt how you come to terms with it all. It comes down to personal scenario planning - your day planner and your checkbook – how you spend your time and money.

 

Or you can do nothing and hope really hard for Case A.

Letting Go of Our Entitlement Mentality

Can the US manage an orderly decline in its standard of living? That seems to be the prevailing question in the early part of the 21^st century.

After living through the collapse of the Soviet Union, Dmitry Orlov has some very sharp insight into the phases of societal collapse and how that compares with what we’re experiencing in the US. Dmitry describes the phases of progression as financial, commercial, political, social and cultural. Right now, most Americans are becoming intimately familiar with financial unraveling, while survivalist types have been preparing for the head for the hills phase for decades. In countries like Haiti and North Korea, priced out of the commodities markets, collapse has reached the later phases.

The analogy for our collective confusion and denial of a frog in a pan water, complacent as the water gradually heats to a boil is useful.

Many seem to be anticipating some singular, catastrophic IT to happen when in reality, collapse usually results from a series of unresolved, interrelated crises. In the later case, collapse at least in the early stages, is individual and the pain you feel is proportional to where you started on the food chain – or simply put, the poor suffer first, the middle class in turn disappears while the rich can make due for some time on their proverbial lifeboats.

So no, this isn't something that happens in 100 years or when "it really hits the fan" or when the stock market tanks. From recent moves in the US and UK to essentially nationalize the banking system to keep the system propped up, looking at things in currency-denominated terms has less real meaning. Zimbabwe is of course the extreme example in that respect.   

So IT is happening now and has been happening for years depending on where you're standing.   

Facing the confluence of issues, one of our biggest liabilities is our entitlement mindset. The entitlement mentality we’ve developed during a period of post WWII wealth and prosperity becomes more obsolete with each passing day. Entitlements require abundance and in the years ahead, all signs point to anything but. Our mindsets, rooted from ancestors on a nation of 4 million with unbounded natural resources, applied to a tapped out nation of 300 million do not hold water.

There is little sense in complaining about the cost of gas because we feel entitled to something like 500 man-hours of work in a $3 gallon of unleaded. And there is little sense in continuing on with our expectations for government and municipal services that can only be subsidized with cheap energy and undervalued resources which subsidizes a strong housing market which subsidizes services through property tax receipts which subsidizes related debt asset bubbles and so for and so on. At a more basic level, with wheat, milk, rice, corn and other food costs soaring, the entitlement to cheap food will vanish one way or another rising well beyond the historic low 10% of income level we've taken for granted.   

That said I’m continually amazed by the media’s ability to focus on issues in isolation with regards to the housing bust or financial crisis or higher food costs.

And what is a dollar anyway?

It seems our mental construct of value will inevitably be priced less in terms of dollars, Euros or Rubles and more in terms of tangible items as central banks of the world continue to inflate their currencies to feign growth during an unprecedented era of monetary inflation. As an example, oil priced in terms of other commodities does not look that much more expensive than it did in 2000. If the money supply has doubled over the past 7 years and we continue to use more than we find then what else would you expect?  

Unfortunately, this isn’t the type of “change” our leaders discuss. Most of the change relates to cul-de-sac entitlement mentality, when the change we need to acknowledge is nothing less than a Swan Song for 200 years of industrial growth.

Eskom, the South African Long Emergency, Platinum and Fuel Cells

When Eskom, the South African utility company, failed to meet the power demand, South Africa plunged prematurely into a Long Emergency.

Prospects that they will get the power situation back in order are not good. It takes years to build out capacity so once a utility gets behind the power curve, the effort becomes one of running uphill on a slippery treadmill. To get a handle on the real human impact on how the power grid failure has rippled out to impact infrastructure, services and lives, read this letter from a South American farmer.

"...The first reaction to the power emergency took the form of a rush for candles, refilling of gas bottles and the purchasing of generators (if you could get them). Then the complacency set it, business learnt to sit through power outages, retail shops were forced to close their doors for a few hours a day. There was and is a shortage of food supplies, food went bad in the fridges and had to been thrown away. It was kind of charming in a strange kind of way, to eat dinner by candle light and forgo the ‘soapies’ on TV. Traffic lights were out over a large number of suburbs and delays in getting to business meetings became the norm. The schools are unable to teach a full day’s lesson. The internet service providers and the mobile phone companies’ frequently have service delays or are just plain ‘off line’. The battery runs out on your laptop and that’s the days productive work is over until the power is back on…Patients in ICU or undergoing operations, as the power grid went down, were at risk of and did, die..."

Without enough power, the platinum mines have had to cut production, and since South Africa produces 80% of the world’s supply, platinum has sky-rocketed to over $2000 per ounce. South Africa's platinum production comes mainly from Rustenburg, Impala and Lonrho, which means that South Africa has a much tighter chokehold on the platinum supply than OPEC countries have on oil. 

As it stands, platinum is extremely rare. All the platinum ever mined throughout history would fill a 25 foot square cube. Platinum supplies are always tight, because it takes approximately ten tons of mined ore to get just one ounce of the metal. Still platinum is a cornerstone in the grand vision of the hydrogen economy since most fuel cell designs use platinum as a catalyst.

Isn’t it ironic that most long-term energy policies involves migrating a fleet of cars and infrastructure, run on a diminishing fuel source in unfriendly, unstable countries, to hydrogen which ultimately requires a scarce metal from South Africa, a county not exactly known for its political stability?

A study by consultants TIAX, for the U.S. Energy Department, has claimed platinum will not run out though.  It believes platinum use will drop 75% to 15g a fuel cell once hydrogen cars become viable, so let’s be even more aggressive and base our model of what it would take to move the world’s fleet of cars to hydrogen on 10g of platinum per fuel cell. For now, we’ll forget about other challenges with hydrogen such as storage, cost to transport and the fact that it is an energy carrier, not an energy source, and the production of hydrogen is mostly powered by natural gas and other fossil fuel inputs. To be fair, palladium and other metals have also been explored for use in fuel cells, but they have similar supply limitations.

Let's just focus on the link between fuel cells and platinum.

In 2002 there were 590 million cars on the road. Clearly that number has increased given the ramp-up in auto ownership in China and India over the past 5 years, but let’s use 600 million cars as a conservative estimate. In 2006, total global platinum production reached a record level of 6.79 million ounces.

A back of the napkin calculation tells us that if we were to somehow hold production flat at record 2006 levels, then we’d need to divert the entirety of 46 years of global platinum production to supply 600 million cars with fuel cells. 

So simple math does not support a massive hydrogen overhaul and that assumes no supply disruptions, such as a power crisis due to a shortage of coal, in one of the most resource rich parts of the world, which impacts the mines.

The point is not to debate the specifics of fuel cell efficiency and make silly assumptions like the one I made above about an overnight fleet replacement, but instead to make a more general point that the availability of inputs for alternative energy infrastructure is impacted by the same resource supply constraints as the fossil fuels they are designed to replace.

In world with ever increasing interconnectedness and resource scarcity, one broken link in a supporting supply chain impacts another and so forth and so on -as in this one isolated case where Eskom coal power limits platinum mining which has a major impact of the viability of fuel cells.

That said, we’d be wise to make our future living arrangements with something in mind other than fantasy and wishful thinking.

What Would You Do in a World Made by Hand?

The silence is deafening.

There is no buzz and hum of traffic.

The pavement slowly succumbs to the earth after a few years of neglect.

Every so often the electricity flickers on and you’re startled by the momentary crackle of a distant evangelist blurting through the radio.

Store shelves are empty, windows are broken and any material that could have been salvaged has long since disappeared. 

You hear rumors of how the rest of the nation is fairing but have no real idea without any electronic communication. There were riots. There was a deadly flu epidemic.  Two major cities were destroyed. Shipping ports have long since shut down. Global commerce is replaced by bartering and the world has become a salvaging operation. There is effectively no central government, though you hear rumors of a President up North, while factions, cults and other lifeboat communities band together here and there and conflicts result.

The motor of the world has stopped, but still you go on.

This is the world that James Howard Kunstler paints in his “World Made by Hand” for one small town in upstate New York dealing with a post-industrial reality.

Kunstler has become the Paul Revere of peak everything awareness urging Americans to wake up to some unwelcome realities we face in the early 21^st century.

Whether you fall in the doomer camp or believe like Thomas Friedman that the world will remain flat or you fall somewhere in between, this is a very gripping novel.

Kunstler’s vivid descriptions of human adaptability, resourcefulness and making due when you can no longer take anything for granted leads you to believe he has been to that place and come back to tell us this story, revealing one poignant scene after another.

The narrative is told through the eyes of Robert Earle, a software executive in “the old world”, who now works as a carpenter years after the flu took his wife and daughter. He recalls jet-setting to places like Las Vegas and Orlando for trade conventions back in the high octane days. Things he took for granted in the fat years, consume much of his time now since you eat what you can either produce or trade for. He converted an old refrigerator to a smoker, made the rear patio of his house a summer kitchen with a wood stove and rigged a metal firebox above the shower head for warm water. He misses what used to be simple, easily obtainable things like black pepper, cinnamon and coffee.

In and around the town of Union Grove, you fell into one of a few camps: You might live and work on Stephen Bullock’s old orchard farm, or become part of the New Faith religious sect who just settled into town and bought the old dilapidated high school and converted it into a hermitage. Or you might fall into Wayne Karp’s circle of motor heads who claimed the landfill and controlled most of the salvage trade or, like Robert Earle, you remained a townsperson trying to manage in an age without any social safety nets.

Yes, Kunstler’s book is speculative fiction, but in a world of cascading, escalating and unresolved crises, truth may ultimately prove stranger than fiction.

If nothing else, you should read this book and ask yourself what would you do in a world made by hand?

Reality-based Optimism

There was a memorable line in a movie, which itself wasn’t really memorable which went, “If you can’t give a man something to love, give him something to hope for and if you can’t give him hope just give him something to do.”

I can’t help but put that line squarely into the context of where we are in 2008.

Here we are in the midst of an election year, another on-going pageant which rewards those who make you feel, well the most loved or the most hope and if nothing else at least assure each of us we’ll have a meaningful role to play in the future.

National morale is low with the sinking economy, housing bust and war in the Middle East. Political pundits ramble on about who will carry the torch into America’s future while the average guy just shrugs and wonders how we’ll continue to finance guns or butter for that matter.

Daytime radio hosts, Times editorialists and business tycoons of glory days espouse their personal solutions and “we ought to’s” and “we need to just’s” in order to rebuild, regain, re-entrench our way into the future.

But underneath the public spectacle of Hillary’s tears and sound bites edited for mass consumption, I do sense a growing number of people with a keen awareness of the interconnectedness of the converging economic, social, energy and environmental crises in an age of increasing scarcity.

Trouble is it’s socially deadly to have frank discussions about these matters among a population that grew up with Disney World, happy movie endings and believe in ever advancing progress, abundance and prosperity.

So few do.

No presidential candidate has said, “No, we’re not having a housing slowdown; really the suburban expansion which has had a nice run for 60 years, and through which we’ve squandered much of our post WWII wealth, has topped out. It’s pretty much downhill from here and when you think about the relationship between Suburbia, the American economy and way of life, that’s going to hurt.”

No financial guru interviewed by cable news would say, “No, we’re really not about to have a recession, what you’re seeing is just one of the first waves of the collapse of the financial system. But really what else would you expect after 30 years of divergence between the paper, debt-based economy and the world’s ability to back it with hard assets and resources? Now we're faced with the fallout of a combination of consumer and national debt, years of growing trade deficits, underfunded government obligations, retirement system collapse and a massive derivative implosion. If you think subprime and collateralized debt obligations was fun, just wait until the $50 trillion credit default swap mess gets going.”

Or, “Yes, Asia is growing and is the story of the 21^st century, but do you really think 700 million Chinese can live like Americans running errands to Wal-Mart and Home Depot in their knock-off Excursions?”

No Federal Reserve Chairman would admit, “The average person is going to get waylaid by the combined freight trains of deflation from the credit and housing bust and inflation from skyrocketing commodity prices. But don’t worry as you won’t feel the pinch of inflation if you don’t plan on eating, driving, keeping your home warm or watching ‘American Idol’. But we’ll do our best to inject so much funny money into the system that if you did manage to save a buck, I’d advise you go ahead and spend it today, since it will be worth much less tomorrow."

No talk radio host who claims environmental restrictions are the reason we're not energy independent would actually say, "Even if we opened up the entire continental shelf, quickly invented the seismic equipment, had a growing fleet of newer offshore rigs to drill these deep offshore wells, discovered two new North Seas, then maybe we could spend $500 billion and maybe end up 10 years from now with 6 million barrels per day of fresh supply. Trouble is we have none of those things. And 10-15 years from now, our 73 million barrels per day of current crude production could easily be down to 50 or 45 based on depletion rates of existing fields. Even if you had another 6 million barrels per day, you'll have much less than you have today."

Nor would he say, "Sure we’re going to be more and more energy independent and we’re almost certain to meet our goals of importing less oil and refined fuel. What would you expect since there is less and less available on the world market?”

You get the gist.

But none of this is to say there is no hope.

It is to say that hope is personal responsibility as is dealing with reality.

And in a culture consumed with pop positivism, I found Kathy McMahon’s article on why blind, unfounded optimism in the face of what confronts us is well…downright neurotic.

Panglossian Disorders and Their Subtypes

Panglossian Disorder: “The neurotic tendency toward extreme optimism in the face of likely cultural and planetary collapse.”

Temporal Subtypes:
Scarlet O’Hara-ism- “I’ll just have to think about that tomorrow.” A strategy of denial that allows the person to temporally compartmentalize the feared event(s).
Futurism: “Sure, that will happen, but it will occur after all of us are long dead.” A belief that something that might happen in the distant future is no concern in the present.
Y2K features : “They said everything would collapse with 2000, and it didn’t.” A belief that any prior concern about societal problems that didn’t occur demonstrates the impossibility of any others happening in the future.

Angry Subtypes:
Rhett-Butlerist Features - “Peak Oil? Planetary Collapse? Frankly, my dear, I don’t give a damn.” Aggressive denial of information not in keeping with one’s world view.
Kill the Messenger Redirection : “Why are you telling me this? What kind of sicko focuses on these kinds of facts? You need help!” The belief that those who bring bad news are doing it for malevolent reasons.

Narcissistic Subtypes:
Rigid Cheney-ism: “The American Way of Life is non-negotiable.” The belief that any undesirable change can be avoided by a sheer act of will.
Survivalistic features : “Hey, if the rest of the world is doomed, I don’t worry about it, because I’ve got mine.” A belief that personal preparation is adequate.

Religious Subtypes:
Religiousity : “God/The Planet/Mother Nature loves humans. He/She/It would never permit massive die-off.” Or “If that happens, I just put my faith in my Savior.”
Neoliberal Econo-manic Tendencies : “The market will sort it out.” A belief that market forces control all--- including geological realities.
Nascarian Features : “People love their automobiles. A solution will have to be found to keep us driving.”

Subtypes with Denial or Minimization as the Central Feature:
Pure Denial: “That can’t be right. It’s just impossible.”
Minimalization as a primary defense : “There may be some shortages, but I doubt it will be as bad as you say.”

Subtypes with Histrionic, Helplessness, Acquiescence or Submissive Features:
Submissive Features : You're probably right. [Shrug]" Too hard/scary to think about... A response that acknowledges the reality of the threat, but is emotionally frozen or unwilling to devote emotional time and energy to the matter.
Histrionic Features : “I just don’t know anything about that. Oh, Golly, I hope you’re wrong. That’s all I can say. Oh Golly, I just can’t think about it.”

Subtypes with Delusional or Magical Thinking:
Meglomatic Features :“This simply won’t happen to me.” A belief in one’s specialness, which will save them from the consequences affecting those around them.
Paternalistic Features : "The government/corporations will sort it out." A belief in the infallibility of organizational structures to resolve problems they aren’t willing to even acknowledge.
Doubting Thomas Features : “Peak Oil is a scam by the Oil Companies to raise prices!” Minimizing the possibility of the crisis by the belief that some one or some group has ultimate control over its happening.
Pure Cornucopian Features : “The more we need, the more they’ll be.” A belief that continued progress and provision of material items for mankind can be met by advances in technology.
The Flinestonian : “The stone-age didn’t end because they ran out of stones.” A belief that modern innovation is eternal.
Frank Zappa-ism : “As soon as things get really bad, they’ll come up with something.” A belief that necessity is the mother of invention.
Magical Thinking : “Don’t worry, we can build a car that can run on air!” Proposes solutions that are clearly outside the realm of physics.
McGiveristic Features - A belief that massive planetary problems can be solved with ordinary/common items found readily at hand. Eg.: “Pig dung will be the next fossil fuel.” Or “Coke Cans can be turned into solar panels.”

Facing Questions in a New Year

What a year it was.

As for 2008, I’ll spare you any prognostications.

What do I know anyway? Real people make real bets with their love, time and money. Everything else is just gossip and speculation.

Besides, there are already too many crystal balls in the air right now.

And I just can’t begin the year with yet another article with facts and figures on resource scarcity, oil export shortages, a global credit implosion, environmental collapse, toxic collateralized debt instruments, national debt, housing collapse, dollar crisis, foreclosure epidemic, sky rocketing food prices, stagflation, inflation, deflation and so on and so forth.

Either you’ve been paying attention or you’re already dealing with the consequences or you've been sleeping happily.

I do suspect that 2008 will be a year where an early majority, in a classic adoption curve sense, will start to answer “yeah…but really” to lip service answers to some of the larger questions such as:

Do you think doubling oil prices year over year is more due to “speculation” and “above ground issues” or stark realities about supply and demand?

Do you think the US will withdraw its military, whether a Democrat or Republican wins the Presidential election, within the next 3 years from the world’s largest energy corridor, a position of tremendous geopolitical leverage over Europe and Asia?

Do you think alternatives that have poor net energy returns, not to mention subsidized by government and produced, transported and maintained with the resources they are supposed to displace are true “solutions” that require no real sacrifice on our part?

Do you think oil exporting countries will keep increasing exchange of the world's most important commodity for petrodollars when their internal demand is skyrocketing and production decreasing?

Do you think it makes sense to grow our energy supplies in large scale when world food supplies are at multi-decade lows?

Do you think the world economy will grow and produce more jobs and business will go on as normal when oil fails to meet demand and substitutes fail to “fill the gap” in a developed and developing world where absolutely everything is supported by an interconnected fabric of readily available and cheaply produced hydrocarbons?

Do you think you can finance an empire on debt for years without ever paying the tab in some way, shape or form - most probably continued erosion of currency value?

Do you really think the dollar’s diminishing status as the world’s reserve currency isn’t going to impact you when the trade of the century and one of the key reasons for US strength, has been our ability to exchange our paper dollars we could print at will for real goods and services of other countries?

Have you thought about how ripple effects of an on-going financial crisis on municipal and state investment funds could impact your benefits, your children’s education or your local health services due to budget shortfalls?

Do you believe we can sustain the unsustainable by substition of different means towards the same ends?

Do you think China is going voluntarily slow their growth rate, go green and risk societal upheaval by taking the foot of the pedal when even at 10% growth, the economy fails to employ millions?

Do you think we’ll continue to have a cozy trading partner arrangement with China when we really start butting heads over resources in Africa and the Middle East?

When faced with these questions and the painful laws of unintended consequences when large-scale political solutions are implemented in haste especially in an election year, it seems wise to be honest with ourselves and answer these questions as individuals first, before heading down the path of groupthink towards “solutions” that exacerbate the problems more than help.

Why Grow?

A few years ago, a CEO and friend of mine asked the business question, “Why grow”? We ended up settling on the simple answer that generally a business should only grow to reduce the unit cost, a basic principle of economies of scale.

I tend to think about that conversation when I travel across the outer reaches of cities like Houston with wave upon wave of Big Box retailers and chain restaurants that in many eyes have memorialized some of the Frankensteinian aspects of concepts like standardizing assets to reduce cost when scaling a business. 

I’m not here to socially criticize growth, or gravity for that matter, but I do think it’s worth reflecting back to some of the reasons that the Americanized growth impulse is there to begin with, since we’re faced more and more with reconciling this impulse in an era diminishing resources and environmental concerns.

Picking a mid-stream starting point for brevity, much of that growth impulse rests on the shoulders of a few Enlightenment-era philosophers. Francis Bacon, the father of modern science rooted the idea of harnessing nature and criticized the Greeks for spending most of their time asking Why things worked. Bacon was more interested in the How with his Scientific Method.

Then Descartes came along and really commoditized nature into a resource through mathematics, coordinate planes and measurements. With Descartes, we became less concerned about nature’s subjectivity and reduced it to a universal rational domain. If we could map it and plot it, we can control it regardless of what the It was.

John Locke in turn was a huge influence on our founding fathers. He taught us that land left wholly to nature is waste and that the negation of nature is the way to happiness. Humans were liberated by the accumulation and consumption of nature’s bounty.

Locke’s ideas were firmly implanted into the frontier mentality which pitted man against nature. Eventually, after the western US was settled and we became used to having unlimited land and natural resources to tame and harness, the suburbs became a substitution for the frontier and automobiles replaced horses. Automobiles, which we base our living arrangement and economy around is a fitting name, representing autonomy and mobility – two basic principles of the American Dream. 

Is it any wonder then why we couldn’t resist that creamy nougat of fossil fuels at nature’s finger tips, to base our world and expectations of perpetual growth on, since surely something else would come along?

Landslide

At a very basic level, we’re creatures of habit and repeat the same behaviors because frankly they haven’t killed us yet.

And just as water doesn’t flow uphill, most people choose the least resistive path to wealth, love, happiness, feeding their bellies, visiting a relative or fetching their morning coffee.

At the same time we look around at others who have similar behaviors that reinforce our own, even though we’re very suspect of those behaviors and understand how destructive or short-lived they are. After all, we tend to look to others for guidance in how to behave. Psychologists call this phenomenon cognitive dissonance and it has a lot to do with the reason why we’re in some of the binds we’re in.

It also helps explain why many of our larger energy or environmental issues have for the most part become spectator sports in the blogosphere. Politics and activism for the most part revolves around substitution of the means to prolong the same behavior, even if the behavior is the issue to begin with. And with each election, there’s a misguided hope that putting the right man or woman in office might right the course and allow us to continue down a similar lifestyle path just in slightly different ways.

It is a tough nail to swallow that we’ve based every aspect of our living arrangement on cheap, abundant energy and we’re entering a permanent era of increasingly more expensive, scarce energy. That’s a nice way to say that our suburbs, schools, medical care, grocery stores, transportation infrastructure, trips to the Gap will become more and more obsolete and simply untenable with each passing year. So to really DO something means we have to reassess everything about who we are, what we do and how we live. All this in the face of everyone around us continuing to do what we’ve been taught, trained and programmed to do so long as they can continue to do it.

Eventually, change happens whether forced or voluntary, but for now the challenge for most of us in an era of remaining choices, is simply forming the awareness of how the inertia here resembles the Stevie Nicks song “Landslide” in that we’re afraid of changing ‘cause we’ve built our life around you…

Peak Friendliness

My wife came in from work the other night and said that she thought people were becoming less friendly on the highways and in general. I couldn’t help but hop-skip right over symptoms such as a divisive war, and draw the core reasons back to our growth-addicted society at or near its high water mark of expansion, heading kicking and screaming into an unwelcome age of energy decent.

So I said, “I think we’ve sailed on past Peak Friendliness.”

1.) An eroding resource base means that most people are working harder for less and will continue to work harder for even less and in turn become more competitive with peers for all the products and benefits of that shrinking resource base. Think about how nasty animals in the wild become during droughts. Less water ultimately means less food. It’s just not pretty. Technology, health, education, construction, big box retail, food, sports, and communications - all these industries are ultimately based on how cheaply we can extract and discard stuff from and back into the earth: Oil, fresh water, metal ore and other building blocks that support our way of life. And yes, at a very basic level, less oil is less food. At a higher level, as humans we don’t miss what we’ve never had, but we absolutely hate the idea of losing what we have had. When we lose it, as unfortunately more and more of the former middle class is discovering, we find someone – usually not like us - or something to blame when the outsourced technology job or bubbly housing market does not faithfully return.

2.) As a society becomes more complex, the benefits of that complexity reach diminishing returns and start to decline. As a case in point, consider how most new technology industries or business ideas have an impact that is further and further removed from adding real value to an average person's quality of life.  There is a wide gap of usefulness between the invention of pottery and most of the electronic doo-dads displayed in airliner shopping catalogues.

3.) Technology in all of its glory and conveniences has commoditized many sensual benefits. For instance, most people consider a heated home a good thing and I agree. But in the past to have heat, you'd have to cut down some trees, stack the wood and build a fire and that was often a family or tribal ordeal. As another example, in the past, most musical experiences were local with sounds that emanated from actual instruments with physical human contact. Now much of the music we hear is produced by MP3 players which convert a digital stream of electronic pulses to sound. In other words, technology puts an artificial barrier between the benefit and the cause of that benefit. Again, most people like turning a dial for heat, as opposed to chopping down trees, and MP3 players and I don’t disagree – after all, I have a degree is in engineering so I’m not a Luddite - but for most of our human existence we've had to gather wood and make our own music or visit someone who could play it. You do lose something in the translation – mostly the genuine appreciation of that benefit, the human bonding experience and the identify we form required to obtain the benefit, because it is so far removed.

4.) Most of us have been conditioned that accumulating nice things makes us happier, but accumulation becomes ever more difficult as economic and societal growth slows because of an eroding resource base. You can borrow time and continue to expand an economy with big credit engines that support, for example a market for bets on collateralized bad loans to people who will never pay them back, and print currency to essentially purchase energy for free on which to base that growth, but eventually the reality of growth limits sets it.

So just as we cope with the steepening treadmill due to #1 to achieve #4, we perceive the diminishing returns of #2 and #3 and that just plain makes a lot of people indifferent and unfriendly.

Luckily, we’re adaptable, so over time we’ll just have to reclaim the things that used to make us laugh, smile and be decent to one another before happiness equated to cash-out-refi’s, 24-hour drive-through Taco Shacks and every movie ever made on-demand always…

Resource Limits, Peak Oil and the Dollar System

It is old, mainstream news that we live in an era of inconvenient truths.

Internalization is a different matter altogether though.

Let’s recap:

The world’s resources are finite.

Our appetite for growth is not.

Something has to give.

Plenty of books, such as “Limits to Growth”, “Plan B 2.0” and “Natural Capitalism” have been written on the strained relationship between the global economy, the human ecological footprint and an earth that is struggling to maintain it. The effects of overshoot – or humanity living beyond the earth’s ability to sustain it indefinitely – are staring us down: Soil erosion, falling water tables, lower crop yields, depleted fisheries and forest decimation. Many of these effects are inter-related by positive feedback loops.  

Exaggerating the trend is a global economy based on an industrial system that discounts the true value of natural resources and the services they provide. Fueling the flames of unsustainable growth is an economic system based on relatively unbounded credit expansion and fiat currencies with no direct valuation ties to resource commodities.

According to the Limits of Growth study, since 1981, as an aggregate we’ve been living in overshoot where we consume resources faster than the earth can replenish them. This means that we need more than 1 earth to keep living the way we do. This also means that for example: Water tables are drawn down faster than their refresh rate due to irrigation demands; Timber is harvested faster than saplings can take their place leading to soil erosion; Fish are harvested faster than they can reproduce. 

As with any overshoot condition, you can deplete a store of something faster that you replenish it for a while without running empty - Think of running water into a ½-full bathtub while the water drains from beneath at a faster rate. You stay wet for a while, but eventually you’re naked in an empty tub.

Great - Another Oil Peakist

Oil of course is a finite resource, but the issue is not that we are running out of oil. The issue – and in all likelihood the biggest challenge we face in the early part of the first half of the 21st century – is reaching Peak Oil - the period of maximum global oil production. After reaching Peak Oil, the overall trend for oil production is decline towards an unbridgeable supply-demand gap as the cost to extract and produce the oil that remains continues to climb. 

The concept of Peak Oil originated with a geophysicist King Hubbert who in 1956 accurately predicted, and was scoffed by many, that US oil production would peak in 1970. Since that time production has declined and the US has imported an increasing share of oil with reprieves with the Prudhoe Bay and North Sea finds. The ideal shape of the production over time curve is the familiar Gaussian or bell shaped curve; however, production curves for individual wells, oilfields, countries or total global output are of course highly variable and shaped by a number of factors. 

In reality, the “peak” may look like a bumpy plateau. Peak oil analyst Colin Campbell expects the progression to go as follows:

• Price shock as the capacity limit is breached
• Economic recession cutting demand
• Price collapse as the market overreacts to small imbalances between surplus and shortage
• Economic recovery followed by increased demand
• Price shock as falling capacity limits are again breached

So I’ll Buy a Hybrid

Unfortunately, reaching peak oil production, in our business-as-usual world, has impacts well beyond what we pay at the pump. The social and economic effects of reaching Peak Oil, as the gap between demand and supply widens, on an unprepared and cheap-oil dependent population are absolutely convulsive. We have all heard the environmental battle cries condemning the energy abusive American image of driving an SUV from a McMansion to a Walmart to buy cheap, imported goods sourced by a moving, just-in-time warehouse of planes, ships and wheels from 12,000 miles away.

Taken a step further, cheap oil is so pervasive and so fundamental to just about everything we associate with modern life, that it is a scary thought experiment when you take Peak Oil to the next logical steps. During the oil bonanza, we’ve been tapping into millions of years of solar energy of biomass stored in the form of energy-dense hydrocarbons. Oil is a feedstock for the production of petrochemical building blocks that are used to make everything from furniture, Barbie dolls, toothbrushes, aspirin, CD’s, integrated circuits, house wiring, credit cards, panty hose, deodorant and on and on.

Fundamentally, cheap oil has artificially increased the earth’s ability to support and feed a growing population now over 6 billion. In a major sense, we’ve been eating oil for decades given modern agricultural practices that provide the means to fertilize, cultivate, harvest and transport crop yields. In the current agribusiness model, it takes about 10 calories of energy to bring 1 food calorie to market.

Where In the Curve Are We?

The short answer is no one really knows. Production curves only become apparent from the overused term rearview mirror, but some of the puzzle pieces are coming together. As a reference point, global oil production has held in the 84MBarrels/day range from October 2004-March 2006. “Proven” (in quotes since reserves of many OPEC members, including Saudi Arabia is highly contested) worldwide reserves at the end of 2003 numbered about 1.1 trillion barrels. To date the world has consumed roughly 1 trillion barrels of oil with a total current yearly consumption of about 31 billion barrels.

While there is very little debate about whether oil production will peak, there is much debate about when. Dates range from 2006 to 2070. There are a number of issues with predicting when. For starters, nationalized oil companies such as Saudi Aramco are very secretive about field-by-field production and reserve statistics. Additionally, OPEC member countries are motivated to overstate reserve statistics to drive higher quotas and in turn higher oil revenues just as publicly traded oil companies are motivated to boost valuation through higher reserve numbers. There is also much debate about the depletion rates of maturing oil fields which source the majority of the world’s oil. All in all, historically predicting oil demand and supply has been a very inaccurate game.

Despite the lack of clarity on timing, there is little debate that global production will peak with Saudi oil production. In 2003, Mathew Simmons published “Twilight in the Desert”, a detailed assessment of the state of Saudi Arabia’s oil production capabilities. Simmons based his study on technical information on Saudi oil fields sourced from decades of Society of Petroleum Engineers (SPE) journals articles written by Aramco engineers. The findings shook the ground of key assumptions US and world energy planners live by:

• Saudi Arabian oil is so plentiful and can be produced so inexpensively that its supply could be expanded to any realistic level the world might need at least through 2030.
• Saudi Arabia will be able to produce as much as 20-25M Barrels/day within the next 2-3 decades.

These assumptions are clearly expressed through the US Middle Eastern foreign and military policy ensuring the flow of oil to Western markets. Saudi Arabia currently produces about 9M Barrels/day or ~11% of the world total. As I studied Simmons book, several key themes emerged:

• 90% of all the oil that Saudi has ever produced has come from 7 giant fields located in a very small portion of the kingdom.
• The Kingdom’s 3 most important fields - Ghawar, Abqaiq and Safaniya - have been producing at very high rates for over 50 years.
• Ghawar, the world’s largest oilfield, has accounted for ~60% of Saudi’s total production for the 2nd half of the 20th century.
• Production in key fields has been maintained by water injection that keeps pressure high in huge underground reservoirs.
• New projects, originally intended to increase net production are only substituting for depletion of maturing fields.
• According to the Petroleum Review, 90% of known reserves are in production and as much as 70% of the world’s producing fields are now in decline with decline rates averaging between 4 and 6% per year.
• While Saudi Aramco has extensively employed the most advanced oilfield technologies, the general effect of new extraction techniques in other giant oilfields has been to increase the rate of depletion without altering the field’s ultimate recovery.
• Exploration efforts in other parts of the kingdom have been disappointing and yielded very little.

To summarize, Simmons concluded, with painstaking attention to technical findings from engineering journals, that Saudi’s oil output was highly dependent on a small number of aging oilfields, each with very significant and well-documented production challenges. Simmons placed a ton of doubt on the assumption that Saudia Arabia could continue to act as the world’s swing producer indefinitely.

Now consider some other pieces to the puzzle:

• According to ChevronTexaco, oil production is declining for 33 out of 48 significant oil-producing nations.
• According to HIS Energy Inc. in 2005 a total of ~5 billion barrels of oil were discovered in new fields, while ~31 billion barrels of oil were extracted and used worldwide. The analogy here is that the oil industry is replacing whales with minnows.
• According to a separate study by Mathew Simmons, in 2001 the world had only 120 oilfields that produced over 100,000 barrels per day. These giant oilfields accounted for half the world’s oil supply.
• Just about all of these oil fields were discovered in the 1940’s, 50’s, 60’s and 70’s.
• The 14 largest oilfields, which had an average age of over 50 years, accounted for over 20% of global oil supply.
• The peak oil discovery year was 1965.
• In the last 40 years only 4 super-giant oilfields were discovered outside of the middle east and all 4 are in depletion (Daqing - China, Samotler- Russia, Prudoe Bay – Alaska, Cantarell – Mexico)
• Supergiant oil fields, typically experience a 50% production decline within 10 years of peaking.
• The ratio of energy expended in getting the oil out of the ground to the energy produced by that oil in the US oil industry has fallen from 28:1 in 1916 to 2:1 in 2004.
• Sada al-Husseini, former head of exploration and production at Saudi Aramco during a recent interview with the New York Times said that the industry could not continue to sustain annual growth in world demand of 2 million barrels and the annual decline in production from existing fields of over 4 million barrels per day.

In February 2005, a report by Science Applications International (SAIC), led by Robert Hirsch, for the US Department of Energy concluded that it would take 20 years of crash program scale of effort of all government and industry resources to avert major fuel shortages. The Hirsh report begins with the statement, “The peaking of world oil production presents the U.S. and world with an unprecedented risk management problem…Viable mitigation options exist on both the supply and demand sides, but to have substantial impact, they must be initiated more than a decade in advance of peaking.”

Now ask yourself, given the high likelihood of facing Peak Oil within 20 years and the urgency for 20 years of concerted effort to avert widespread social and economic disruptions it will cause, what real actions have you seen by industry or government? Many actions seem to stop with a bumper sticker by populist candidates condemning Big Oil. Yes, there has been some pricing collusion amongst the majors. Get over it. The real issues are geological.

Impacts on the American Empire and Globalism

Our American landscape and economy is shaped by the automobile and an underlying assumption of perpetual cheap oil. Goodyear trumped the trolley, Ford fed on the frontier mythology substituting a car for a horse, Eisenhower got his interstate system and the rest of America’s decentralized lifestyle took its course.

With the end of cheap oil, we may see in our lifetimes that suburban expansion was the biggest misallocation of capital in world history. The American consumer lifestyle, powered by cheap oil and the Federal Reserve credit engine, is now centered on constructing, furnishing, connecting, wiring, supporting and financing suburban expansion. A sudden emergence of Peak Oil would be especially harsh on this unsustainable lifestyle.

Much as been written about a post-Peak Oil universe, so there is little use to do more than summarize in my own few words:

Peak Oil will curb globalization and inevitably spawn an age of re-localization. We will travel less, live closer to where we work, eat more local foods and generally wean ourselves from the orgy of conveniences we’ve grown accustomed to in the blimp of time known as the oil age.

The Dollar System

The Dollar system has a key role in the larger framework of consumption, resource scarcity and oil depletion. Until the last few years it seemed the world generally had faith in the US Dollar as a reserve currency since the time Nixon cut the gold standard. Over time, the US has run up enormous debt and huge trade deficits, but the exporting countries of the world have soaked our debt to keep their exports competitive. In some respects, the Dollar System was a brilliant scheme for a lone superpower.

Meanwhile the US government has followed on the heels of so many past, not to tax and not to cut budgets, but instead to borrow evermore against the future. Never before has the world’s commerce been based in large part on a reserve currency been backed by a country with government and a population so deeply in debt. We just can’t seem to buy enough of what we don’t need with money we don’t have. I can’t think of a time in history when good things happened because a government and its people ran up huge deficits and debts. Think clipping the coins in Rome, burning marks for heat in 1920’s hyperinflation-torn Germany and more recently Argentina. But we’re the US right? We have been the dominant empire for over 100 years. It is the world’s privilege to fund our debt because they need us to consume and in this information age, we no longer need to make tangible things for export. Manufacturing is for poor countries. The same poor countries with a much lower average income but much higher savings rate. The same poor countries that fund our debt and now start to influence our foreign policy. 

Since the departure from the gold standard in 1973, the global economy has increasingly become based on US debt-based consumption. No longer was currency fixed to any true store of value – something finite – a rare and precious resource that had to be pulled out of the ground.

Prior to 1973, trade imbalances were usually kept in check because fixing currency values to gold essentially provided a feedback mechanism. When the world was on a gold standard, gold was the only reserve asset with which countries would finance investment and trade imbalances. If much more gold entered a country than left it, economic overheating and inflation would occur since a surplus of gold led to credit creation. When prices in turn rose in the surplus country, its exports would decline (because they were more expensive in other countries) and its imports would rise (because their currency would buy more) until balance was re-established. With dollar-based reserve assets, there is no longer such a feedback mechanism. As the US purchases more from foreign nations than they from the US, and as their investment income from their US investments (including interest they earn on their ownership of many of U.S. Treasury bonds) grows faster than what the US invests in their nations, the US owes them the difference.

The Current Account is the broadest gauge of the country's trade performance, because it not only measures trade in goods and services, but also investment flows between nations. At the end of 2005, the cumulative Current Account deficit was $3.8T. Foreign central banks in Asia and US trading partners with large trade surpluses have reinvested their dollar surpluses in US dollar-denominated assets to prevent increased valuation of their currency which would reduce exports. This foreign acquisition of US stock, corporate bonds and US agency debt (e.g. Fannie Mae, Freddie Mac and the Federal Home Loan Bank system) have helped fuel the stock market bubble, led to the misallocation of corporate capital and helped drive US property prices to excessive levels. In short – asset inflation. Consider that over 17 years, the Dow Jones Industrial Average rose over 1000% between 1983 and 2000 and US aggregate housing values increased 73% between 1997 and 2005.

The credit creation that the dollar standard made possible has resulted in overinvestment across most industries, producing excess capacity. Additionally, globalization and free trade with countries with very low labor costs has reduced the price of goods that the US imports, holding down inflation. In short, the consumption engine is still running with plenty of credit fuel and cheap foreign labor to extract resources, package and ship them overseas to willing US buyers.

The rest of the world has become reliant on exporting to the US and has allowed the US to pay for much of its imports on credit. As a result, the ratio of total US debt to GDP increased from 169% in 1980 to 292% in 2002. This last statistic quantifies the common perception that many Americans are living beyond their means. For now the world is willing to accept paper for real goods and services.

At this point, record numbers of bankruptcies and corporate and agency accounting fraud have raised serious doubts about the creditworthiness of the US. As a result, exporting countries have 2 choices: To continue to invest their dollar surpluses in US dollar-denominated assets despite reasons to believe they are less secure or to convert their dollar surpluses into their own currencies, which would cause their currencies to appreciate causing their exports and economic growth to decline. The unwinding of these trade imbalances would culminate in a substantial devaluation of the US dollar and a global economy slump because the US economy will soon no longer be able to generate a supply of secure US dollar-denominated investments used by the rest of the world to recycle its now $700B annual current account surplus.

In the meantime, since the Stock Market collapse in 2000, US Federal Reserve monetary policy of running the money print presses and sustaining artificially low interest rates led to hyper-inflated asset values and the current housing bubble. Low interest rates and higher property values resulted in a consumer-led recovery (US consumers accounted for about 70% of GDP in 2001) funded in large part by borrowing against home equity. Goldman Sachs estimated that total housing-equity withdrawal rose to 7.4% of personal disposable income. Once home prices stop rising, and this income from capital gains vanishes, US consumers will spend less and the largest component of the GDP will contract having a major impact on the global economy. As of October 2006, even with a slumping housing market, consumers are pedaling along. Eventually, the housing slump may spark the recession that temporarily decreases oil demand as we bump along the peak oil plateau.

How dependent are we on sprawl powered by cheap oil? On June 18th of 2005, the “Economist” quantified the current housing bubble in a time when property values are central to the US economy. Over the last 4 years, consumer spending and residential construction have accounted for 90% of the total growth in GDP and 2/5ths of all private-sector jobs have been in the housing related sector.

How big is the housing bubble? During the last 5 years, the total value of residential property in developed countries rose by more than $30T to over $70T, an increase equal to 100% of those countries combined GDPs.

History shows that asset bubbles such as that in the US before the Depression, Japan in the 1980’s, Thailand in the 1990’s and the US stock market in 2000 begins with an excess of credit due to trade and investment surpluses. The crucial characteristic these crisis had in common was that in one way or another, either through trade imbalances or extraordinary capital inflows, foreign assets entered the banking system of the country affected and acting as high powered money triggered through a process of credit creation and over-investment, an unsustainable surge in asset prices and economic activity that ended in severe recession, a systemic banking crisis and drastically higher government debt.

In bubbles, investment turns to speculation. Bubbles burst when the credit extended to finance the speculative ventures can not be repaid. Imagine how suburban housing and its inhabitants will fair as we start to tumble down the right side of the oil production curve.

So Now What?

I suppose I’m un-American for not believing the seamless transition to the mythical hydrogen economy through a transition phase where biofuels and other alternatives fill the fossil fuel void. After all, we’ve been conditioned to worship technology with the frontier outlook that resources are abundant.

I’m also discouraged by most alternative energies which have so far demonstrated terrible energy ratios and are all in some way, shape or form based on a fossil fuel platform. The Tar Sands of Canada – the North American cornucopia argument - deserve a lengthy treatment but to date have proven to be very energy intensive and no substitute for high oil flow rates required to replace conventional sources. Meanwhile, deep sea, Arctic and Antarctic frontiers are speculative projects that can only delay peak oil rather than avoid it.