The End of Money and the Future of Civilization
By Tim Jenkin
Created 12/22/2009 - 16:09
If the global economy were broken up into local units, would there be any need for national governments? Would it not make more sense for governments to scale down to the size of the economic units? The decentralization and democratization of the exchange process can only be achieved through traders establishing their own mutual credit clearing circles and independent private and community currencies.
The following is a review of Thomas Greco's The End of Money and the Future of Civilization [1] (Chelsea Green Publishing).
Thomas Greco is the most radical writer on money today. The title of the book suggests that the future of civilization depends on abandoning money as we know it. What could be more radical and revolutionary than that? Yet Greco does not come across as some wild revolutionary wanting to turn the world upside down. His style is calm and systematic throughout. He talks us through the historical record and shows how the current financial system has shaped and governs our world. The argument of the book is that if we are to tackle the gigantic issues of our time, we have to understand how money works and adopt a new way of doing money. We do not have to re-invent it entirely, for it has evolved over the centuries and we are now entering a new era where modern technologies allow us to move away from the existing centralized, globalized, monopolized and privatized money system that is a tragic relic of history, and toward a truly modern, democratic money system that belongs to the commons.
Greco is brilliant at exposing the workings of our current money system and explaining how this can evolve into a new system. But all the time there is this feeling that he is holding back, that he is not following his own arguments to their logical conclusion. "Prognostication is a hazardous business -- something that is best avoided," he tells us. He does hint at where new monetary trends might take us but leaves most of it to our imaginations. So if you are hoping to find out what the future of civilization will look like, you will be disappointed. It is only in the epilogue that he touches on the prospects for civilization, and then in only two pages.
This review is neither a critique nor a summary of the book; it is about what it says between the lines and what would result if we were to follow the logic of Greco's arguments. In the same way as he wants to "liberate the exchange process," this is an attempt to liberate some of his ideas to ensure that their full potential is realized.
The first eight chapters set the scene for the main theme of the book, which is that the prevailing money system has brought humanity to the brink of disaster in many different ways. It is the money system that defines how our economies work and has set them on an unsustainable growth-oriented trajectory. Today it is the "money power" that rules the world:
"I have argued that control of money and exchange mechanisms is the key structural element that determines the distribution of power, and that it must be the main focus if any degree of community empowerment and self-determination is to be achieved. A money monopoly, whether in private hands or government controlled, is inimical to freedom and equity."
In order to realize a new monetary paradigm, money-as-we-know-it needs to be "depoliticised." This can only be accomplished by the separation of money and the state. Under the current arrangement the banking cartel creates money as debt and charges interest on it while governments get to spend as much as they want without regard to tax revenues. Legal tender laws and banking regulations endow the banking cartel with the exclusive power to issue money (as debt), which we are forced to use (through legal tender laws). The collusion between political power and financial power is the root cause of the mega-crises facing humanity.
The Evolution of Money
In this chapter we are taken on a journey through history that explains how money evolved as a reaction to the inconveniences of barter. While this is extremely helpful in understanding how the current money system came about and how it can be transcended, Greco could have expressed his proposals more powerfully had he considered the broader concept of the evolution of exchange systems instead of money alone. Money is a sub-set of exchange, a period in the evolution of exchange systems where exchange was mediated by value representations, either in the form of tangible commodities or instruments of various degrees of abstraction. Exchange is not reducible to money and so when the history of money is abstracted from the history of exchange it appears to be linear, starting with commodity money, evolving through symbolic money, credit money and towards some kind of credit clearing system that Greco says is the highest stage of money.
If a history of the evolution of exchange systems had been provided instead, the process would have appeared less linear and more of a Hegelian dialectic, spiralling upwards to higher and higher forms. Certain forms appear to repeat themselves through history. Exchange did not start with barter or with any hard exchange medium that could be identified as money. Exchange is a property of life on earth and not something special or unique to humans. Nature itself provides all sorts of feedback mechanisms to regulate and control exchange but what is unique about human exchange is that humans developed their own systems to regulate and control it. Initially this would have been in the form of mental records of who did or gave what to whom. Various mnemonic devices were introduced to keep a more accurate record. The earliest civilizations learned how to record exchanges on clay tablets; the Incas kept the record by tying knots in pieces of string (quipus); in many places artifacts like notched bones and tally sticks were used. Numeracy and writing arose out of the need to keep records of exchanges (accounting). In a sense "keeping the record" in this way was an earlier form of the mutual credit clearing process that Greco proposes, where today computers replace the primitive mnemonic devices.
After the earlier information-based exchange systems came the era of money-based exchange systems, where exchange was organized by the mediation of "stuff" instead of information. This was inevitable when trading increased both in quantity and in distance. With primitive technologies it was no longer possible to keep the record accurately. Money did that simply by being an abstract and portable representation of the real values that were being exchanged. The problem with "stuff" money is that it can be appropriated. It has to be created, distributed and controlled, and these functions always fell into the hands of the powerful who used it to increase their power over the rest of society. This has come to its apotheosis with the current global money system, which is in the process of morphing into a single world currency. Today the money power is all-powerful, rendering national governments insignificant.
The evolution of exchange systems will not stop with credit clearing, as Greco suggests. It is possible to see another swing back to money-based exchange systems after a brief period of information-based exchange systems. When the energy crisis really begins to bite as we enter the steep downside of peak oil, there may not be enough energy to power the millions of computers that will be needed to run a global credit clearing network. A higher form of tangible money might have to be re-introduced, but hopefully next time we will have learnt that its creation, issuance and control must not fall into private hands and thereby become monopolized.
The Third Evolutionary Stage -- The Emergence of Credit Clearing
In this chapter we are introduced to the concept of credit clearing, comparing the credit clearing process of banks today with mutual credit clearing. In the first instance the economic players use bank-borrowed credit (money) to clear debts between themselves; in the latter mutual credit (self-issued IOUs) is used instead. Where bank credit is used the monetary output has to be greater than the monetary input because interest has to be paid on top of the principal amount borrowed. Since the difference between the output and the input was not created at loan time, the deficit can only come from further borrowing down the line. This means that the system has to continually expand, creating an unstable situation prone to crisis and collapse when output does not meet the requirements. Where mutual credit is used there is no need for interest, for there is no third party providing any service that the traders in the circle can't provide themselves. This keeps the system in equilibrium as the full proceeds of production go to the producers and are not siphoned off by a parasitic class who play no part in the production/distribution process. The removal of interest from the equation not only removes the parasites, it also removes the expansionary imperative.
In removing the need for any third party currency or credit instruments, direct credit clearing makes conventional money and banking obsolete. By freeing themselves from "the limitations by monopolized bank-credit and government money," traders will be creating a "new economy" in which conventional money plays no part. Greco is not talking about a complementary currency here, but an entirely new exchange system that excludes the financial industry as we know it, central banking, fractional-reserve banking, the political money nexus and everything else that flows from removing the concept of interest from the concept of money.
Credit clearing is a truly revolutionary idea which, if it were to be taken up in a big way, would shake the foundations of the prevailing economic, social and political order. Perhaps Greco does not follow through the full implications of his proposals out of fear of turning his book into a manual of revolutionary change!
Ignoring what the monetary elite might do if they felt that "their" money system was under threat, let us take a look at where the widespread implementation of credit clearing circles could take us.
If, as Greco suggests, a network of locally-based "circles" was implemented -- not one giant clearing mechanism to replace the existing one -- these circles would result in an economy consisting of a multitude of discrete, locally-based, mini economies without the huge concentrations of capital that characterize the present global economy. This would reduce the size of production units to a community scale and eliminate the opportunities for globalised mega-corporations. This is precisely what the world needs at this time, but it would also mean the deconstruction of the present globalized economy.
Not only that, by eliminating the political nexus and breaking the economy up into locally administered units, would there be any need for the kind of national governments that now reign the earth? Would it not make more sense for governments to scale down to the size of the economic units? Would these then still be called governments, or should they just be called local administrations responsible for providing public services in the areas where the clearing circles operate?
If 'governments' were to scale down surely politics too would be very different if the focus was local instead of national. There would be no place for nationwide political parties, for the concept of nation would become much more fuzzy. Taking this line of thinking to its ultimate conclusion, would nation states make sense any more? Currently nations map to the areas where their currencies operate, but if money systems were more granular then so too would 'nations'. When reduced to city-sized units or smaller, would these still be nation states, or would we be back to the city states of ancient Greece?
Solving the Money Problem and Credit Clearing
According to Greco the "money problem" can be defined as: Legal tender status for central bank-created currency; the monopolization of credit by the banking cartel; and the lack of an operational measure of value and unit of account that is independent of political currencies. Distilled to its essence it is the concentration of power by the financial elite through its monopolization of money. This has been achieved through a pact with government, which has given the money monopoly such power that today it is not inaccurate to say that governments are the junior partners in this alliance.
Reformers who believe that there is a political solution to this unhealthy arrangement fail to understand that governments are fully tied into and dependent on this system, and are not the primary decision makers about what happens and how it works. Even if governments did have the will and the power to wrest control of the issuance of credit from the banking cartel, the situation would not be a lot different. The historical record suggests that where governments have come out on top their monopolization of credit has led to militarization, wars, expansion and a weakening of democratic processes.
The money problem will not be solved by shifting the issuing power, even if governments are able to do it debt free. What is required is the ending of the money monopoly. This means the decentralization and democratization of the exchange process. Again this can only be achieved through traders establishing their own mutual credit clearing circles and independent private and community currencies.
By creating their own local currencies traders can liberate the exchange process and disperse the money power amongst themselves. It is in fact a lot more than just the exchange process that is liberated when a usury-free exchange system is adopted. Ruling classes have always used control over the exchange system as the basis of their power. Usury (interest) has always been one of the main instruments they have used. Attempts to undermine that basis would result in class warfare in the form of "currency wars." The ruling class would appeal to its allies in government to quash any attempts to "undermine the economy." Widespread adoption of mutual credit clearing would seriously weaken class rule and usher in a period of democracy where for the first time in history power really would belong to the people.
Mutual credit clearing circles fall under the category of information-based exchange systems and are not part of the money-based camp. Where the organizing principle is information and not exchange media, the terminology needs to be quite different. Because the distinction between these two types of exchange systems is seldom made, they are usually conflated and the terminologies merged. Using concepts from the "old" system to explain how the "new" one works can lead to confusion and conceals the potential of the latter.
Although Greco insists that "every piece of currency is a credit obligation -- an IOU of a particular issuer" and "money is nothing more than credit," in information-based exchange systems (such as the mutual credit clearing circles he proposes) the concepts of credit and issuance are outdated, relics of the dominant, money-based exchange system that we are so used to.
Credit, as commonly understood, is an agreement between trading parties and an obligation on the part of the recipient of the credit: I give you something now and you give me something else later (or you borrow from a bank and settle with me now and transfer that obligation to the bank). It is a normal exchange but with a time delay between delivery and settlement, and that time delay is usually represented by some kind of a credit instrument with an interest component. The interest is always explained as the "compensation" or the "penalty" imposed by the giver of the credit for having to wait for settlement.
In an information-based exchange system when there is a transfer of value from a seller to a buyer there is no agreement between the two and no direct obligation on the part of the buyer to the seller. Both the agreement and the obligation are social, and they apply to both sides. Buyers must agree to sell in order to "pay" for their purchases, and sellers must agree to purchase so that buyers can sell. Another way of putting it is that traders must agree to sell in order to buy and buy in order to sell. Everyone has an obligation to the community to keep their mean balance as close to zero as possible. Clearing is the process of ensuring that balances remain at or near to zero.
This could be called community credit but that is stretching the meaning of credit to something else. The community does not "issue" credit; all that happens is that the system records (as a balance debit) the quantity of value received by the buyer. The value received needs to be offset by the provision of goods and services of an equivalent value so that the debit can be cleared. There is no place for interest in this scheme because the community does not require compensation for the delay in settlement. Everyone delays settlement and so if everyone is penalized for doing so, then everyone should benefit from the penalties, but penalties and benefits would cancel each other out and so be pointless.
As there is no credit in an information-based exchange system and certainly no physical currency, the term "issue" has no meaning as well. When money is issued into circulation it implies that it has substance -- it has been "created" -- and that it circulates between trading parties (i.e. it passes from hand to hand). Information can neither be issued nor can it circulate. It is always retrospective -- a record of what has already happened. While the use of the terms "issue" and "circulate" can help us visualize what is happening because we are so used to them, they are best avoided as they add unnecessary complexity and prevent us seeing that information is a better organizer and regulator than "stuff."
Following on from removing the conventional concepts of credit and issuance, the concept of paying (pay, payments etc.) can also be removed from the list of concepts associated with information-based exchange systems, such as clearing circles. To "pay" is normally understood as giving something in return for something received. Most usually to "pay" for something means to give money in exchange for whatever was received.
When the exchange system does not have any tangible or symbolic representations of value (i.e. money) but only keeps records of the transfers of value, the concept of "payment" is rendered meaningless. Nothing "goes" from the buyer to the seller and so there is no "payment." The buyer needs to "pay" for what was received by delivering like value back to the community, but this is a different meaning for the word "pay" than it is commonly understood. The "payment" here is the settlement of a social obligation, not a direct transfer of value to the seller in recompense.
As buyers do not "pay" sellers in information-based exchange systems, the next question that arises is: who enters the transactions into the system (records them on the computer)? This might at first seem like a trivial matter and the intuitive answer is that the buyer should do it, as buyers have always "paid" sellers and by entering the transaction they are in effect "paying" or "settling" with their sellers.
It is the counter-intuitive, however, that is the most meaningful. Vendors would never tolerate a system where the buyers walk off with the goods, trusting that they will go home and enter the transactions into their PCs. It is not in the interest of buyers to enter transactions as that debits their accounts. Sellers would quickly get very frustrated if they had to chase their buyers after every sale.
Sellers entering transactions is about as revolutionary as mutual credit clearing itself, for it turns upside down the normal buyer/seller relationship, in particular the employer/employee relationship. It also streamlines business processes by removing the need for accountants and for the whole rigmarole of sending statements, waiting for checks, chasing customers to pay, bad debts, cash flow problems, waiting in bank queues to deposit checks etc.
The great power of the employing class of capitalism (and socialism) derives from the way that money-based exchange systems work. Businesses are in business to make money and the revenue from production accrues to the owners of the business. As buyers of labor, employers are greatly empowered by the fact that they control the supply of money in their businesses. This keeps their workers in thrall as they are in a weak position vis a vis their employers. Their wages and salaries are paid to them by their employers who are in a position to determine, withhold or terminate payments at any time.
Under a credit clearing scenario employees would not be "paid" by their employers. As the sellers of labor they would be in a position to credit themselves against their employers. This turns the normal employer/employee relationship on its head. Employees would be greatly strengthened in relation to their employers as the latter would no longer be in a position to unilaterally withhold or terminate their wages/salaries. The very concepts of wages and salaries, which are associated with the concepts of paying and remuneration, would also become meaningless.
How this would actually work in practice is difficult to say because it would depend on the agreements between employees and their employers. Perhaps it would lead to a situation where the concepts of employer and employee would change their meaning, as well as the concepts of employment and jobs. When "employees" are enabled to credit themselves and debit their "employers" they are no longer part of a "workforce" but independent service providers with livelihoods.
We can go on with this train of thought, but it becomes increasingly fuzzy as we are entering the realm of the imaginary here. There are no mutual credit clearing circles out there that we can monitor for trends, apart from numerous LETS groups and other similar exchange systems that are too small and insignificant to provide any meaningful clues.
The Next Big Thing in Business: A Complete Web-Based Trading Platform
"As we've shown, money today is not what it used to be, and tomorrow ... well, tomorrow we won't use money at all."
Although it has a long history, the money system of today was developed and adapted for the industrial age. It has always been able to generate practically unlimited amounts of credit, especially after it was delinked from limited precious metals. It has also been able to produce more credit than is necessary for normal trading in order to cover the interest requirement. This has forced economies based on this money system to be locked onto an endless growth path. Growth has been possible while there has been the energy to power the growth, but as we enter the downward slope of the peak oil bell-shape and growth becomes more difficult, so it will become increasingly difficult to service the interest requirement. Because interest is contingent on growth, you could say that the "production" of credit also has a bell shape and maps on top of the energy production bell shape. We have thus reached "peak credit” and "peak interest." This is a dangerous contradiction for a money system that can only work on the upward slope of the energy production curve.
We are now supposed to be moving into the post-industrial world, the information age, but with a money system designed for the industrial age. Until the computer revolution and the advent of the Internet it simply was not possible to have a purely information-based exchange system. The complexity of keeping track of each and every trade on a global scale could only be achieved by using a money system where each trading entity kept track of its own supply of money and used banks to clear and settle accounts with other trading entities. While this worked, it was hugely inefficient and labor intensive. It needed interest to finance itself. A new money system based entirely on information can keep track of each and every transaction so efficiently that its running costs are negligible. All that would be required from users is a small service fee to keep the system running. A service fee does not require an underlying economy that is geared to keeping its money system working.
While much of what was done manually by banks is now performed by computers, money today still works in pretty much the same way as it has always done. It is issued into circulation as debt by third parties outside of the trading circuit and even where there is innovation in payment systems, such as PayPal, "it only allows the transfer of the same old bank-created debt-money".
Greco suggests that we can do better than all the existing forms of "electronic" money that are already out there. To become true alternative payment systems they would have to offer interest-free lines of credit to some or all of their account holders. Until this happens there is nothing stopping anyone from setting up a non-political trading platform that is essentially a credit clearing circle. To be successful it requires four basic components:
A marketplace
A social network
A means of payment
A measure of value or pricing unit
Many of these are already available on the Internet but what is required is that they are integrated to form a new "trading space" free of the negative aspects of conventional money and that will "enable the evolution of civilization toward greater peace, prosperity and sustainability."
We are not provided with any clues about how this can be achieved, but it is unlikely to be provided by any of the "big players" today or a new startup until one of them is prepared to provide the service without expecting any reward in conventional money. This will require a huge leap of faith because the provider will have to believe that its rewards will come from providing the service alone and not from extraneous sources.
The End of Money and the Future of Civilization is a powerful book that should be read not only by everyone in the complementary currency movement, but by all those concerned about what is happening on the economic, social, political and environmental fronts. It is almost impossible to understand what is happening in the world today without understanding how our lives are governed by the "politicized global debt-money regime." Greco reminds us that the slide to a despotic materialistic feudalism can only be averted if the processes of exchange and finance are recreated.
For more information on Thomas Greco and his work, click here. [2] Visit Tim Jenkin's blog at Community Exchange Network [3].
Thumbnail image by Neubie [4], courtesy of Creative Commons license.
Source URL: http://www.realitysandwich.com/end_money_future_civilization
Links:
[1] http://www.chelseagreen.com/bookstore/item/the_end_of_money_and_the_future_of_civilization:paperback
[2] http://reinventingmoney.com/
[3] http://communityexchange.ning.com/profiles/blog/list?user=ddtp8saru8k2
[4] http://www.flickr.com/photos/neubie/
Friday, February 26, 2010
Jim Kunstler's Economic Forecast 2010
Jim Kunstler, author of The Long Emergency, wrote his 2010 forecast the last week of December, 2009.
The Center does Not Hold... But Neither Does the Floor
Introduction
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?
The great muddlement out there, this inability to form a coherent consensus about what's happening, is especially frightening when, as is the case today, even the intelligent elites appear clueless or patently dishonest, in any case unreliable, in their relations with reality. President Obama, for instance - a charming, articulate man, with a winning smile, pectorals like Kansas City strip steaks, and a mandate for "change" - who speaks incessantly and implausibly of "the recovery" when all the economic vital signs tell a different story except for some obviously manipulated stock market indexes. You hear this enough times and you can't help but regard it as lying, and even if it is lying ostensibly for the good of the nation, it is still lying about what is actually going on and does much harm to the project of building a coherent consensus. I submit that we would benefit more if we acknowledged what is really happening to us because only that will allow us to respond intelligently. What prior state does Mr. Obama suppose we're recovering to? A Potemkin housing boom and an endless credit card spending orgy? The lying spreads downward from the White House and broadly across the fruited plain and the corporate office landscape and through the campuses and the editorial floors and the suites of absolutely everyone in charge of everything until all leadership in every field of endeavor has been given permission to speak untruth and to reinforce each others lies and illusions.
How dysfunctional is our nation? These days, we lie to ourselves perhaps as badly the Soviets did, and in a worse way, because where information is concerned we really are a freer people than they were, so our failure is far less excusable, far more disgraceful. That you are reading this blog is proof that we still enjoy free speech in this country, whatever state of captivity or foolishness the so-called "mainstream media" may be in. By submitting to lies and illusions, therefore, we are discrediting the idea that freedom of speech and action has any value.
Where We Are Now
2009 was the Year of the Zombie. The system for capital formation and allocation basically died but there was no funeral. A great national voodoo spell has kept the banks and related entities like Fannie Mae and the dead insurance giant AIG lurching around the graveyard with arms outstretched and yellowed eyes bugged out, howling for fresh infusions of blood... er, bailout cash, which is delivered in truckloads by the Federal Reserve, which is itself a zombie in the sense that it is probably insolvent. The government and the banks (including the Fed) have been playing very complicated games with each other, and the public, trying to pretend that they can all still function, shifting and shuffling losses, cooking their books, hiding losses, and doing everything possible to detach the relation of "money" to the reality of productive activity.
But nothing has been fixed, not even a little. Nothing has been enforced. No one has been held responsible for massive fraud. The underlying reality is that we are a much less affluent society than we pretend to be, or, to put it bluntly, that we are functionally bankrupt at every level: household, corporate enterprise, and government (all levels of that, too).
The difference between appearance and reality can be easily seen in the everyday facts of American economic life: soaring federal deficits, real unemployment above 15 percent, steeply falling tax revenues, massive state budget crises, continuing high rates of mortgage defaults and foreclosures, business and personal bankruptcies galore, cratering commercial real estate, dying retail, crumbling infrastructure, dwindling trade, runaway medical expense, soaring food stamp applications. Meanwhile, the major stock indices rallied. What's not clear is whether money is actually going somewhere or only the idea of "money" is appearing to go somewhere. After all, if a company like Goldman Sachs can borrow gigantic sums of "money" from the Federal Reserve at zero interest, why would it not shovel that money into the burning furnace of a fake stock market rally? Of course, none of this behavior has anything to do with productive activity.
The theme for 2009 - well put by Chris Martenson - was "extend and pretend," to use all the complex trickery that can be marshaled in the finance tool bag to keep up the appearance of a revolving debt economy that produces profits, interest, and dividends, in spite of the fact that debt is not being "serviced," i.e. repaid. There is an awful lot in the machinations of Wall Street and Washington that is designed deliberately to be as incomprehensible as possible to even educated people, but this part is really simple: if money is created out of lending, then the failure to pay back loaned money with interest kills the system. That is the situation we are in.
The inertia displayed by our system - especially its manifest ability to keep stock markets levitating in the absence of value creation - is strictly a function of its size and complexity. It is running on fumes. I thought it would finally crash and burn in 2009. The Dow Jones industrial average certainly fell on its ass last March, bottoming in the mid-6000 range. But then it picked its sorry ass off the ground and rallied back up again thanks to bail-outs and ZIRPs and really no other place to look for returns on the accumulated wealth of the past two hundred years, especially for large institutions like pension funds that need income to function. I'd called for a Dow at 4000. A lot of readers ridiculed that call. Was it really that far off?
A feature of 2009 easily overlooked is what a generally placid year it was around the world. Apart from the election uproar in Iran, there were few events of any size or potency to shove all the various wobbly things - central banks, markets, governments, etc - into failure mode. So things just kept wobbling. I don't think that state of affairs is likely to continue. With that, on to the particulars.
The Year Ahead
Just about everything which evaded fate via gamed numbers, budgets, and balance sheets in 2009 seems destined to hit a wall in 2010. To pick an arbitrary starting point, it is hard to see how states like California and New York can keep staving off monumental changes in their scale of operations with further budget trickery. Those cans they've been kicking down the street have fallen through the sewer grate. What will they do? They can massively raise taxes or massively lay off employees and default on obligations - or they can do all these things. The net result will be populations with less income, arguably impoverished, suffering, and perhaps very angry about it. Will Washington bail the states out, too? I wouldn't be surprised to see them pretend to do so, but not without immense collateral damage in everybody's legitimacy and surely an increase in US treasury interest rates.
But backing up a moment, I'm writing between Christmas and New Year's Eve. The frenzied distractions of the holidays ongoing for much of Q4-2009 are still in force. In a week or so, when the Christmas trees are hauled out to the curbs (and it turns out that municipal garbage pickup has been curtailed for lack of funds) a picture will start to emerge of exactly how retail sales went leading up to the big climax. My guess is that sales were dismal. Reports of such will start a train of events that sends many retail companies careening into bankruptcy, including some national chains, leading to lost leases in malls and strip malls, leading to a final push off the cliff for commercial real estate, leading to the failure of many local and regional banks, leading to the bankrupt FDIC having to go to congress directly to get more money to bail out the depositors, leading again to rising interest rates for US treasuries, leading to higher mortgage interest rates for whoever out there is crazy enough to venture to buy a house with borrowed money, leading to the probability that there are few of the foregoing, leading to another hard leg down in house values because so few are now crazy enough to buy a house in the face of falling prices - all of this leading to the recognition that we have entered a serious depression, which is only a facet of the greater period of hardship we have also entered, which I call The Long Emergency.
This depression will be a classic deleveraging, or resolution of debt. Debt will either be paid back or defaulted on. Since a lot can't be paid back, a lot of it will have to be defaulted on, which will make a lot of money disappear, which will make many people a lot poorer. President Obama will be faced with a basic choice. He can either make the situation worse by offering more bailouts and similar moves aimed at stopping the deleveraging process - that is, continue what he has been doing, only perhaps twice as much, which may crash the system more rapidly - or he can recognize the larger trends in The Long Emergency and begin marshaling our remaining collective resources to restructure the economy along less complex and more local lines. Don't count on that.
his downscaling will happen whether we want it or not. It's really a matter of whether we go along with it consciously and intelligently - or just let things slide. Paradoxically and unfortunately in this situation, the federal government is apt to become ever more ineffectual in its ability to manage anything, no matter how many times Mr. Obama comes on television. Does this leave him as a kind of national camp counselor trying to offer consolation to the suffering American people, without being able to really affect the way the "workout" works out? Was Franklin Roosevelt really much more than an affable presence on the radio in a dark time that had to take its course and was only resolved by a global convulsion that left the USA standing in a smoldering field of prostrate losers?
One wild card is how angry the American people might get. Unlike the 1930s, we are no longer a nation who call each other "Mister" and "Ma'am," where even the down-and-out wear neckties and speak a discernible variant of regular English, where hobos say "thank you," and where, in short, there is something like a common culture of shared values. We're a nation of thugs and louts with flames tattooed on our necks, who call each other "motherfucker" and are skilled only in playing video games based on mass murder. The masses of Roosevelt's time were coming off decades of programmed, regimented work, where people showed up in well-run factories and schools and pretty much behaved themselves. In my view, that's one of the reasons that the US didn't explode in political violence during the Great Depression of the 1930s - the discipline and fortitude of the citizenry. The sheer weight of demoralization now is so titanic that it is very hard to imagine the people of the USA pulling together for anything beyond the most superficial ceremonies - placing teddy bears on a crash site. And forget about discipline and fortitude in a nation of ADD victims and self-esteem seekers.
I believe we will see the outbreak of civil disturbance at many levels in 2010. One will be plain old crime against property and persons, especially where the sense of community is flimsy-to-nonexistent, and that includes most of suburban America. The automobile is a fabulous aid to crime. People can commit crimes in Skokie and be back home in Racine before supper (if supper is anything besides a pepperoni stick and some Hostess Ho-Hos in the car). Fewer police will be on guard due to budget shortfalls.
I think we'll see a variety-pack of political disturbance led first by people who are just plain pissed off at government and corporations and seek to damage property belonging to these entities. The ideologically-driven will offer up "revolutionary" action to redefine some lost national sense of purpose. Some of the most dangerous players such as the political racialists, the posse comitatus types, the totalitarian populists, have been out-of-sight for years. They'll come out of the woodwork and join the contest over dwindling resources. Both the Left and the Right are capable of violence. But since the Left is ostensibly already in power, the Right is in a better position to mount a real challenge to office-holders. Their ideas may be savage and ridiculous, but they could easily sweep the 2010 elections - unless we see the rise of a third party (or perhaps several parties). No sign of that yet. Personally, I'd like to see figures like Christopher Dodd and Barney Frank sent packing, though I'm a registered Democrat. In the year ahead, the sense of contraction will be palpable and huge. Losses will be obvious. Everything familiar and comforting will begin receding toward the horizon.
Markets and Money
I'll take another leap of faith and say that 6600 was not the bottom for the Dow. I've said Dow 4000 for three years in a row. Okay, my timing has been off. But I still believe this is its destination. Given the currency situation, and the dilemma of no-growth Ponzi economies, I'll call it again for this year: Dow 4000. There, I said it. Laugh if you will...
I'm with those who see the dollar strengthening for at least the first half of 2010, and other assets falling in value, especially the stock markets. The dollar could wither later on in the year and maybe take a turn into high inflation as US treasury interest rates shoot up in an environment of a global bond glut. That doesn't mean the stock markets will bounce back because the US economy will only sink into greater disorder when interest rates rise.
Right now there are ample signs of trouble with the Euro. It made a stunning downward move the past two weeks. European banks took the biggest hit in the Dubai default. Now they face the prospect of sovereign default in Greece, the Baltic nations (Estonia, Latvia, Lithuania), the Balkan nations (Serbia, et al, Spain, Portugal, Italy, Ireland, Iceland and the former soviet bloc of Eastern Europe. England is a train wreck of its own (though not tied into the Euro), and even France may be in trouble. That leaves very few European nations standing. Namely Germany and Scandinavia (and I just plain don't know about Austria). What will Europe do? Really, what will Germany do? Probably reconstruct something like the German Deutschmark only call it something else... the Alt.Euro? As one wag said on the Net: sovereign debt is the new sub-prime! The Euro is in a deeper slog right now than the US dollar (even with our fantastic problems), so I see the dollar rising in relation to the Euro, at least for a while. I'd park cash in three month treasury bills - don't expect any return - for safety in the first half of 2010. I wouldn't touch long-term US debt paper with a carbon-fiber sixty foot pole.
I'm still not among those who see China rising into a position of supremacy. In fact, they have many reasons of their own to tank, including the loss of the major market for their manufactured goods, vast ecological problems, de-stabilizing demographic shifts within the nation, and probably a food crisis in 2010 (more about this later).
Though a seemingly more stable nation than the US, with a disciplined population and a strong common culture with shared values, Japan's financial disarray runs so deep that it could crash its government even before ours. It has no fossil fuels of its own whatsoever. And in a de-industrializing world, how can an industrial economy sustain itself? Japan might become a showcase for The Long Emergency. On the other hand, if it gets there first and makes the necessary adjustments, which is possible given their discipline and common culture, they may become THE society to emulate!
I'm also not convinced that so-called "emerging markets" are places where money will dependably earn interest, profits, or dividends. Contraction will be everywhere. I even think the price of gold will retrace somewhere between $750 and $1000 for a while, though precious metals will hold substantial value under any conditions short of Hobbesian chaos. People flock to gold out of uncertainty, not just a bet on inflation. My guess is that gold and silver will eventually head back up in value to heights previously never imagined, and it would be wise to own some. I do not believe that the federal government could confiscate personal gold again the way it did in 1933. There are too many pissed off people with too many guns out there - and I'm sure there is a correlation between owners of guns with owners of gold and levels of pissed-offness. A botched attempt to take gold away from citizens would only emphasize the impotence of the federal government, leading to further erosion of legitimacy.
Bottom line for markets and money in 2010: so many things will be out of whack that making money work via the traditional routes of compound interest or dividends will be nearly impossible. There's money to be made in shorting and arbitrage and speculation, but that requires nerves of steel and lots and lots of luck. Those dependent on income from regular investment will be hurt badly. For most of us, capital preservation will be as good as it gets - and there's always the chance the dollar will enter the hyper-inflationary twilight zone and wipe out everything and everyone connected with it.
Peak Oil
It's still out there, very much out there, a huge unseen presence in the story, the true ghost-in-the-machine, eating away at economies every day. It slipped offstage in 2009 after the oil spike of 2008 ($147/barrel) over-corrected in early 2009 to the low $30s/barrel. Now it's retraced about halfway back to the mid-$70s. One way of looking at the situation is as follows. Oil priced above $75 begins to squeeze the US economy; oil priced over $85 tends to crush the US economy. You can see where we are now with oil prices closing on Christmas Eve at $78/barrel.
Among the many wishful delusions operating currently is the idea that the Bakken oil play in Dakota / Montana will save Happy Motoring for America, and that the Appalachian shale gas plays will kick in to make us energy independent for a century to come. Americans are likely to be disappointed by these things.
Both Bakken and the shale gas are based on techniques for using horizontal drilling through "tight" rock strata that is fractured with pressurized water. It works, but it's not at all cheap, creates plenty of environmental mischief, and may end up being only marginally productive. At best, Bakken is predicted to produce around 400,000 barrels of oil a day. That's not much in a nation that uses close to 20 million barrels a day. Shale gas works too, though the wells deplete shockingly fast and will require the massive deployment of new drilling rigs (do we even have the steel for this?). I doubt it can be produced for under $10 a unit (mm/BTUs) and currently the price of gas is in the $5 range. In any case, we're not going to run the US motor vehicle fleet on natural gas, despite wishful thinking.
Several other story elements in the oil drama have remained on track to make our lives more difficult. Oil export rates continue to decline more steeply than oil field depletion rates. Exporters like Iran, Mexico, Saudi Arabia, Venezuela, are using evermore of the oil they produce (often as state-subsidized cheap gasoline), even as their production rates go down. So, they have less oil to sell to importers like the USA - and we import more than 60 percent of the oil we use. Mexico's Pemex is in such a sorry state, with its principal Cantarell field production falling off a cliff, that the USA's number three source of imported oil may be able to sell us nothing whatsoever in just 24 months. Is there any public discussion about this in the USA? No. Do we have a plan? No.
A new wrinkle in the story developing especially since the financial crisis happened, is the shortage of capital for new oil exploration and production - meaning that we have even poorer prospects of offsetting world-wide oil depletion. The capital shortage will also affect development in the Bakken play and the Marcellus shale gas range.
Industrial economies are still at the mercy of peak oil. This basic fact of life means that we can't expect the regular cyclical growth in productive activity that formed the baseline parameters for modern capital finance - meaning that we can't run on revolving credit anymore because growth simply isn't there to create real surplus wealth to pay down debt. The past 20 years we've seen the institutions of capital finance pretend to create growth where there is no growth by expanding financial casino games of chance and extracting profits, commissions, and bonuses from the management of these games - mortgage backed securities, collateralized debt obligations, credit default swaps, and all the rest of the tricks dreamed up as America's industrial economy was shipped off to the Third World. But that set of rackets had a limited life span and they ran into a wall in October 2008. Since then it's all come down to a shell game: hide the giant pea of defaulted debt under a giant walnut shell.
Yet another part of the story is the wish that the failing fossil fuel industrial economy would segue seamlessly into an alt-energy industrial economy. This just isn't happening, despite the warm, fuzzy TV commercials about electric cars and "green" technology. The sad truth of the matter is that we face the need to fundamentally restructure the way we live and what we do in North America, and probably along the lines of much more modest expectations, and with very different practical arrangements in everything from the very nature of work to household configurations, transportation, farming, capital formation, and the shape-and-scale of our settlements. This is not just a matter of re-tuning what we have now. It means letting go of much of it, especially our investments in suburbia and motoring - something that the American public still isn't ready to face. They may never be ready to face this and that is why we may never make a successful transition to whatever the next economy is. Rather, we will undertake a campaign to sustain the unsustainable and sink into poverty and disorder as we fight over the table scraps of the old economy... and when the smoke clears nothing new will have been built.
President Obama has spent his first year in office, and billions of dollars, trying to prop up the floundering car-makers and more generally the motoring system with "stimulus" for "shovel-ready" highway projects. This is exactly the kind of campaign to sustain the unsustainable that I mean. Motoring is in the process of failing and now for reasons that even we peak oilers didn't anticipate a year ago. It's no longer just about the price of gasoline. The crisis of capital is making car loans much harder to get, and if Americans can't buy cars on installment loans, they are not going to buy cars, and eventually they will not be driving cars they can't buy. The same crisis of capital is now depriving the states, counties, and municipalities of the means to maintain the massive paved highway and street system in this country. Just a few years of not attending to that will leave the system unworkable.
Meanwhile President Obama has given next-to-zero money or attention to public transit, to repairing the passenger railroad system in particular. I maintain that if we don't repair this system, Americans will not be traveling very far from home in a decade or so. Therefore, Mr. Obama's actions vis-Ã -vis transportation are not an intelligent response to our situation. And for very similar reasons, the proposal for a totally electric motor vehicle fleet, as a so-called "solution" to the liquid fuels problem, is equally unintelligent and tragic. Of course something else that Mr. Obama has barely paid lip-service to is the desperate need to retool our living places as walkable communities. The government now, at all levels, virtually mandates suburban arrangements of the most extremely car-dependent kind. Changing this has to move near the top of a national emergency priority list, if we have one.
Even with somewhat lower oil prices in 2009, the airlines still hemorrhaged losses in the billions, and if the oil price remains in the current zone some of them will fall back into bankruptcy in 2010. Oil prices may go down again in response to crippled economies, but then so will passengers looking to fly anywhere, especially the business fliers that the airlines have depended on to fill the higher-priced seats. I believe United will be the first one to go down in 2010, a hateful moron of a company that deserves to die.
My forecast for oil prices this year is extreme volatility. A strengthening dollar might send oil prices down (though that relationship has temporarily broken down this December as both oil prices and the dollar went up in tandem for the first time in memory). So could the cratering of the stock markets, or a general apprehension of a floundering economy. But the oil export situation also means there is less and less wiggle room every month for supply to keep pace with demand, even in struggling economies if they are dependent on foreign imports. Another part of the story that we don't pay attention to is the potential for oil scarcities, shortages, and hoarding. We may see the reemergence of those trends in 2010 for the first times since 1979.
Geopolitics
The retracement of oil prices in 2009 took place against a background of relative quiet on the geopolitical scene. With economies around the world sinking into even deeper extremis in 2010, friction and instability are more likely. The more likely locales for this are the places where most of the world's remaining oil is: the Middle East and Central Asia. The American army is already there, in Iraq and Afghanistan, with an overt pledge to up-the-ante in Afghanistan. It's hard to imagine a happy ending in all this. It's increasingly hard to even imagine a strategic justification for it. My current (weakly-held) notion is that America wants to make a baloney sandwich out of Iran, with American armies in Iraq and Afghanistan as the Wonder Bread, to "keep the pressure on" Iran. Well, after quite a few years, it doesn't seem to be moderating or influencing Iran's behavior in any way. Meanwhile, Pakistan becomes more chaotic every week and our presence in the Islamic world stimulates more Islamic extremist hatred against the USA. Speaking of Pakistan, there is the matter of its neighbor and adversary, India. If there is another terror attack by Pakistan on the order of last year's against various targets in Mumbai, I believe the response by India is liable to be severe next time, leading to God-knows-what, considering both countries have plenty of atom bombs.
Otherwise, the idea that we can control indigenous tribal populations in some of Asia's most forbidding terrain seems laughable. I don't have to rehearse the whole "graveyard of empires" routine here. But what possible geo-strategic advantage is in this for us? What would it matter if we pacified all the Taliban or al Qaeda in Afghanistan? Most of the hardest core maniacs are next door in Pakistan. Even if we turned Afghanistan into Idaho-East, with Kabul as the next Sun Valley, complete with Ralph Lauren shops and Mario Batali bistros, Pakistan would remain every bit as chaotic and dangerous in terms of supplying the world with terrorists. And how long would we expect to remain in Afghanistan pacifying the population? Five years? Ten Years? Forever? It's a ridiculous project. Loose talk on the web suggests our hidden agenda there was to protect a Conoco pipeline out of Tajikistan, but that seems equally absurd on several grounds. I can't see Afghanistan as anything but a sucking chest wound for dollars, soldiers' lives, and American prestige.
What's more, our presence there seems likely to stimulate more terror incidents here in the USA. We've been supernaturally lucky since 2001 that there hasn't been another incident of mass murder, even something as easy and straightforward as a shopping mall massacre or a bomb in a subway. Our luck is bound to run out. There are too many "soft" targets and our borders are too squishy. Small arms and explosives are easy to get in the USA. I predict that 2010 may be the year our luck does run out. Even before the start of the year we've seen the attempted Christmas bombing of Northwest-KLM flight 253 (Amsterdam to Detroit). One consequence of this is that it will only make air travel more unpleasant for everybody in the USA as new rules are instated limiting bathroom trips and blankets in the final hour of flight.
As far as the USA is concerned, I think we have more to worry about from Mexico than Afghanistan. In 2009, the Mexican government slipped ever deeper into impotence against the giant criminal cartels there. As the Cantarell oil field waters out, revenue from Pemex to the national government will wither away and so will the government's ability to control anything there. The next president of Mexico may be an ambitious gangster straight out of the drug cartels, Pancho Villa on steroids.
Another potential world locale for conflict may be Europe as the European Union begins to implode under the strains of the monetary system. The weaker nations default on their obligations and Germany, especially, looks to insulate itself from the damage. Except for the fiasco in Yugoslavia's breakup years ago, Europe has been strikingly peaceful for half a century. For most of us now living who have visited there, it is almost impossible to imagine how violent and crazy the continent was in the early twentieth century. I wonder what might happen there now, with more than a few nations failing economically and the dogs of extreme politics perhaps loosed again. History is ironical. Perhaps this time the Germans will be the good guys, while England goes apeshit with its BNP. Wouldn't that be something?
One big new subplot in world politics this year may be the global food shortage that is shaping up as a result of spectacular crop failures in most of the major farming regions of the world. The American grain belt was hit by cold and wet weather and the harvest was a disaster, especially for soybeans, of which the USA produces at least three-quarters of the world's supply. Crops have also failed in Northern China's wheat-growing region, in Australia, Argentina, and India. The result may range from extremely high food prices in the developed world to starvation in other places, leading to grave political instability and desperate fights over resources. We'll have an idea where this is leading by springtime. It maybe the most potent sub-plot in the story for 2010.
Conclusions
The Long Emergency is officially underway. Reality is telling us very clearly to prepare for a new way of life in the USA. We're in desperate need of decomplexifying, re-localizing, downscaling, and re-humanizing American life. It doesn't mean that we will be a lesser people or that we will not recognize our own culture. In some respects, I think it means we must return to some traditional American life-ways that we abandoned for the cheap oil life of convenience, comfort, obesity, and social atomization.
The successful people in America moving forward will be those who attach themselves to cohesive local communities, places with integral local economies and sturdy social networks, especially places that can produce a significant amount of their own food. I don't think that we'll be living in a world without money, some medium of exchange above barter, but it may not come in the form of dollars. My guess is that for a while it may be gold and silver, or possibly certificates issued by bank-like institutions representing gold-on-hand. In any case, I doubt we'll arrive there this year. This is more likely to be the year of grand monetary disorders and continued shocking economic contraction.
Political upheaval can get underway pretty quickly, without a whole lot of warning. I'm still waiting to hear the announced 2009 bonuses for the employees of the TBTF banks. All they said before Christmas was that thirty top Goldman Sachs employees would be paid in stock instead of money this year, but no other big banks have made a peep yet. I suppose they'll have to in the four days before New Years. I still think that could be the moment that shoves some disgruntled Americans into the arena of protest and revolt. Beyond that, though, there is plenty room for emotions to run wild and for behavior to get weird.
President Obama will have to make some pretty drastic moves to salvage his credibility. I see no sign of any intention to seriously investigate or prosecute financial crimes. Yet the evidence of misdeeds piles higher and higher - just this week new comprehensive reports of Goldman Sachs's irregularities in shorting their own issues of mortgage-backed securities, and a report on the Treasury Department's issuance of treasuries to "back-door" dumpers of toxic mortgage backed securities. And on Christmas Eve, when nobody was looking, the Treasury lifted the ceiling on Fannie Mae and Freddie Mac's backstop money to infinity. Even people like me who try to pay close attention to what's going on have lost track of all the various TARPs, TALFs, bailouts, stimuli, ZIRP loans, and handovers to every bank and its uncle in the land.
Good luck to readers in 2010. To paraphrase Tiny Tim: God help us, every one....
The Center does Not Hold... But Neither Does the Floor
Introduction
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?
The great muddlement out there, this inability to form a coherent consensus about what's happening, is especially frightening when, as is the case today, even the intelligent elites appear clueless or patently dishonest, in any case unreliable, in their relations with reality. President Obama, for instance - a charming, articulate man, with a winning smile, pectorals like Kansas City strip steaks, and a mandate for "change" - who speaks incessantly and implausibly of "the recovery" when all the economic vital signs tell a different story except for some obviously manipulated stock market indexes. You hear this enough times and you can't help but regard it as lying, and even if it is lying ostensibly for the good of the nation, it is still lying about what is actually going on and does much harm to the project of building a coherent consensus. I submit that we would benefit more if we acknowledged what is really happening to us because only that will allow us to respond intelligently. What prior state does Mr. Obama suppose we're recovering to? A Potemkin housing boom and an endless credit card spending orgy? The lying spreads downward from the White House and broadly across the fruited plain and the corporate office landscape and through the campuses and the editorial floors and the suites of absolutely everyone in charge of everything until all leadership in every field of endeavor has been given permission to speak untruth and to reinforce each others lies and illusions.
How dysfunctional is our nation? These days, we lie to ourselves perhaps as badly the Soviets did, and in a worse way, because where information is concerned we really are a freer people than they were, so our failure is far less excusable, far more disgraceful. That you are reading this blog is proof that we still enjoy free speech in this country, whatever state of captivity or foolishness the so-called "mainstream media" may be in. By submitting to lies and illusions, therefore, we are discrediting the idea that freedom of speech and action has any value.
Where We Are Now
2009 was the Year of the Zombie. The system for capital formation and allocation basically died but there was no funeral. A great national voodoo spell has kept the banks and related entities like Fannie Mae and the dead insurance giant AIG lurching around the graveyard with arms outstretched and yellowed eyes bugged out, howling for fresh infusions of blood... er, bailout cash, which is delivered in truckloads by the Federal Reserve, which is itself a zombie in the sense that it is probably insolvent. The government and the banks (including the Fed) have been playing very complicated games with each other, and the public, trying to pretend that they can all still function, shifting and shuffling losses, cooking their books, hiding losses, and doing everything possible to detach the relation of "money" to the reality of productive activity.
But nothing has been fixed, not even a little. Nothing has been enforced. No one has been held responsible for massive fraud. The underlying reality is that we are a much less affluent society than we pretend to be, or, to put it bluntly, that we are functionally bankrupt at every level: household, corporate enterprise, and government (all levels of that, too).
The difference between appearance and reality can be easily seen in the everyday facts of American economic life: soaring federal deficits, real unemployment above 15 percent, steeply falling tax revenues, massive state budget crises, continuing high rates of mortgage defaults and foreclosures, business and personal bankruptcies galore, cratering commercial real estate, dying retail, crumbling infrastructure, dwindling trade, runaway medical expense, soaring food stamp applications. Meanwhile, the major stock indices rallied. What's not clear is whether money is actually going somewhere or only the idea of "money" is appearing to go somewhere. After all, if a company like Goldman Sachs can borrow gigantic sums of "money" from the Federal Reserve at zero interest, why would it not shovel that money into the burning furnace of a fake stock market rally? Of course, none of this behavior has anything to do with productive activity.
The theme for 2009 - well put by Chris Martenson - was "extend and pretend," to use all the complex trickery that can be marshaled in the finance tool bag to keep up the appearance of a revolving debt economy that produces profits, interest, and dividends, in spite of the fact that debt is not being "serviced," i.e. repaid. There is an awful lot in the machinations of Wall Street and Washington that is designed deliberately to be as incomprehensible as possible to even educated people, but this part is really simple: if money is created out of lending, then the failure to pay back loaned money with interest kills the system. That is the situation we are in.
The inertia displayed by our system - especially its manifest ability to keep stock markets levitating in the absence of value creation - is strictly a function of its size and complexity. It is running on fumes. I thought it would finally crash and burn in 2009. The Dow Jones industrial average certainly fell on its ass last March, bottoming in the mid-6000 range. But then it picked its sorry ass off the ground and rallied back up again thanks to bail-outs and ZIRPs and really no other place to look for returns on the accumulated wealth of the past two hundred years, especially for large institutions like pension funds that need income to function. I'd called for a Dow at 4000. A lot of readers ridiculed that call. Was it really that far off?
A feature of 2009 easily overlooked is what a generally placid year it was around the world. Apart from the election uproar in Iran, there were few events of any size or potency to shove all the various wobbly things - central banks, markets, governments, etc - into failure mode. So things just kept wobbling. I don't think that state of affairs is likely to continue. With that, on to the particulars.
The Year Ahead
Just about everything which evaded fate via gamed numbers, budgets, and balance sheets in 2009 seems destined to hit a wall in 2010. To pick an arbitrary starting point, it is hard to see how states like California and New York can keep staving off monumental changes in their scale of operations with further budget trickery. Those cans they've been kicking down the street have fallen through the sewer grate. What will they do? They can massively raise taxes or massively lay off employees and default on obligations - or they can do all these things. The net result will be populations with less income, arguably impoverished, suffering, and perhaps very angry about it. Will Washington bail the states out, too? I wouldn't be surprised to see them pretend to do so, but not without immense collateral damage in everybody's legitimacy and surely an increase in US treasury interest rates.
But backing up a moment, I'm writing between Christmas and New Year's Eve. The frenzied distractions of the holidays ongoing for much of Q4-2009 are still in force. In a week or so, when the Christmas trees are hauled out to the curbs (and it turns out that municipal garbage pickup has been curtailed for lack of funds) a picture will start to emerge of exactly how retail sales went leading up to the big climax. My guess is that sales were dismal. Reports of such will start a train of events that sends many retail companies careening into bankruptcy, including some national chains, leading to lost leases in malls and strip malls, leading to a final push off the cliff for commercial real estate, leading to the failure of many local and regional banks, leading to the bankrupt FDIC having to go to congress directly to get more money to bail out the depositors, leading again to rising interest rates for US treasuries, leading to higher mortgage interest rates for whoever out there is crazy enough to venture to buy a house with borrowed money, leading to the probability that there are few of the foregoing, leading to another hard leg down in house values because so few are now crazy enough to buy a house in the face of falling prices - all of this leading to the recognition that we have entered a serious depression, which is only a facet of the greater period of hardship we have also entered, which I call The Long Emergency.
This depression will be a classic deleveraging, or resolution of debt. Debt will either be paid back or defaulted on. Since a lot can't be paid back, a lot of it will have to be defaulted on, which will make a lot of money disappear, which will make many people a lot poorer. President Obama will be faced with a basic choice. He can either make the situation worse by offering more bailouts and similar moves aimed at stopping the deleveraging process - that is, continue what he has been doing, only perhaps twice as much, which may crash the system more rapidly - or he can recognize the larger trends in The Long Emergency and begin marshaling our remaining collective resources to restructure the economy along less complex and more local lines. Don't count on that.
his downscaling will happen whether we want it or not. It's really a matter of whether we go along with it consciously and intelligently - or just let things slide. Paradoxically and unfortunately in this situation, the federal government is apt to become ever more ineffectual in its ability to manage anything, no matter how many times Mr. Obama comes on television. Does this leave him as a kind of national camp counselor trying to offer consolation to the suffering American people, without being able to really affect the way the "workout" works out? Was Franklin Roosevelt really much more than an affable presence on the radio in a dark time that had to take its course and was only resolved by a global convulsion that left the USA standing in a smoldering field of prostrate losers?
One wild card is how angry the American people might get. Unlike the 1930s, we are no longer a nation who call each other "Mister" and "Ma'am," where even the down-and-out wear neckties and speak a discernible variant of regular English, where hobos say "thank you," and where, in short, there is something like a common culture of shared values. We're a nation of thugs and louts with flames tattooed on our necks, who call each other "motherfucker" and are skilled only in playing video games based on mass murder. The masses of Roosevelt's time were coming off decades of programmed, regimented work, where people showed up in well-run factories and schools and pretty much behaved themselves. In my view, that's one of the reasons that the US didn't explode in political violence during the Great Depression of the 1930s - the discipline and fortitude of the citizenry. The sheer weight of demoralization now is so titanic that it is very hard to imagine the people of the USA pulling together for anything beyond the most superficial ceremonies - placing teddy bears on a crash site. And forget about discipline and fortitude in a nation of ADD victims and self-esteem seekers.
I believe we will see the outbreak of civil disturbance at many levels in 2010. One will be plain old crime against property and persons, especially where the sense of community is flimsy-to-nonexistent, and that includes most of suburban America. The automobile is a fabulous aid to crime. People can commit crimes in Skokie and be back home in Racine before supper (if supper is anything besides a pepperoni stick and some Hostess Ho-Hos in the car). Fewer police will be on guard due to budget shortfalls.
I think we'll see a variety-pack of political disturbance led first by people who are just plain pissed off at government and corporations and seek to damage property belonging to these entities. The ideologically-driven will offer up "revolutionary" action to redefine some lost national sense of purpose. Some of the most dangerous players such as the political racialists, the posse comitatus types, the totalitarian populists, have been out-of-sight for years. They'll come out of the woodwork and join the contest over dwindling resources. Both the Left and the Right are capable of violence. But since the Left is ostensibly already in power, the Right is in a better position to mount a real challenge to office-holders. Their ideas may be savage and ridiculous, but they could easily sweep the 2010 elections - unless we see the rise of a third party (or perhaps several parties). No sign of that yet. Personally, I'd like to see figures like Christopher Dodd and Barney Frank sent packing, though I'm a registered Democrat. In the year ahead, the sense of contraction will be palpable and huge. Losses will be obvious. Everything familiar and comforting will begin receding toward the horizon.
Markets and Money
I'll take another leap of faith and say that 6600 was not the bottom for the Dow. I've said Dow 4000 for three years in a row. Okay, my timing has been off. But I still believe this is its destination. Given the currency situation, and the dilemma of no-growth Ponzi economies, I'll call it again for this year: Dow 4000. There, I said it. Laugh if you will...
I'm with those who see the dollar strengthening for at least the first half of 2010, and other assets falling in value, especially the stock markets. The dollar could wither later on in the year and maybe take a turn into high inflation as US treasury interest rates shoot up in an environment of a global bond glut. That doesn't mean the stock markets will bounce back because the US economy will only sink into greater disorder when interest rates rise.
Right now there are ample signs of trouble with the Euro. It made a stunning downward move the past two weeks. European banks took the biggest hit in the Dubai default. Now they face the prospect of sovereign default in Greece, the Baltic nations (Estonia, Latvia, Lithuania), the Balkan nations (Serbia, et al, Spain, Portugal, Italy, Ireland, Iceland and the former soviet bloc of Eastern Europe. England is a train wreck of its own (though not tied into the Euro), and even France may be in trouble. That leaves very few European nations standing. Namely Germany and Scandinavia (and I just plain don't know about Austria). What will Europe do? Really, what will Germany do? Probably reconstruct something like the German Deutschmark only call it something else... the Alt.Euro? As one wag said on the Net: sovereign debt is the new sub-prime! The Euro is in a deeper slog right now than the US dollar (even with our fantastic problems), so I see the dollar rising in relation to the Euro, at least for a while. I'd park cash in three month treasury bills - don't expect any return - for safety in the first half of 2010. I wouldn't touch long-term US debt paper with a carbon-fiber sixty foot pole.
I'm still not among those who see China rising into a position of supremacy. In fact, they have many reasons of their own to tank, including the loss of the major market for their manufactured goods, vast ecological problems, de-stabilizing demographic shifts within the nation, and probably a food crisis in 2010 (more about this later).
Though a seemingly more stable nation than the US, with a disciplined population and a strong common culture with shared values, Japan's financial disarray runs so deep that it could crash its government even before ours. It has no fossil fuels of its own whatsoever. And in a de-industrializing world, how can an industrial economy sustain itself? Japan might become a showcase for The Long Emergency. On the other hand, if it gets there first and makes the necessary adjustments, which is possible given their discipline and common culture, they may become THE society to emulate!
I'm also not convinced that so-called "emerging markets" are places where money will dependably earn interest, profits, or dividends. Contraction will be everywhere. I even think the price of gold will retrace somewhere between $750 and $1000 for a while, though precious metals will hold substantial value under any conditions short of Hobbesian chaos. People flock to gold out of uncertainty, not just a bet on inflation. My guess is that gold and silver will eventually head back up in value to heights previously never imagined, and it would be wise to own some. I do not believe that the federal government could confiscate personal gold again the way it did in 1933. There are too many pissed off people with too many guns out there - and I'm sure there is a correlation between owners of guns with owners of gold and levels of pissed-offness. A botched attempt to take gold away from citizens would only emphasize the impotence of the federal government, leading to further erosion of legitimacy.
Bottom line for markets and money in 2010: so many things will be out of whack that making money work via the traditional routes of compound interest or dividends will be nearly impossible. There's money to be made in shorting and arbitrage and speculation, but that requires nerves of steel and lots and lots of luck. Those dependent on income from regular investment will be hurt badly. For most of us, capital preservation will be as good as it gets - and there's always the chance the dollar will enter the hyper-inflationary twilight zone and wipe out everything and everyone connected with it.
Peak Oil
It's still out there, very much out there, a huge unseen presence in the story, the true ghost-in-the-machine, eating away at economies every day. It slipped offstage in 2009 after the oil spike of 2008 ($147/barrel) over-corrected in early 2009 to the low $30s/barrel. Now it's retraced about halfway back to the mid-$70s. One way of looking at the situation is as follows. Oil priced above $75 begins to squeeze the US economy; oil priced over $85 tends to crush the US economy. You can see where we are now with oil prices closing on Christmas Eve at $78/barrel.
Among the many wishful delusions operating currently is the idea that the Bakken oil play in Dakota / Montana will save Happy Motoring for America, and that the Appalachian shale gas plays will kick in to make us energy independent for a century to come. Americans are likely to be disappointed by these things.
Both Bakken and the shale gas are based on techniques for using horizontal drilling through "tight" rock strata that is fractured with pressurized water. It works, but it's not at all cheap, creates plenty of environmental mischief, and may end up being only marginally productive. At best, Bakken is predicted to produce around 400,000 barrels of oil a day. That's not much in a nation that uses close to 20 million barrels a day. Shale gas works too, though the wells deplete shockingly fast and will require the massive deployment of new drilling rigs (do we even have the steel for this?). I doubt it can be produced for under $10 a unit (mm/BTUs) and currently the price of gas is in the $5 range. In any case, we're not going to run the US motor vehicle fleet on natural gas, despite wishful thinking.
Several other story elements in the oil drama have remained on track to make our lives more difficult. Oil export rates continue to decline more steeply than oil field depletion rates. Exporters like Iran, Mexico, Saudi Arabia, Venezuela, are using evermore of the oil they produce (often as state-subsidized cheap gasoline), even as their production rates go down. So, they have less oil to sell to importers like the USA - and we import more than 60 percent of the oil we use. Mexico's Pemex is in such a sorry state, with its principal Cantarell field production falling off a cliff, that the USA's number three source of imported oil may be able to sell us nothing whatsoever in just 24 months. Is there any public discussion about this in the USA? No. Do we have a plan? No.
A new wrinkle in the story developing especially since the financial crisis happened, is the shortage of capital for new oil exploration and production - meaning that we have even poorer prospects of offsetting world-wide oil depletion. The capital shortage will also affect development in the Bakken play and the Marcellus shale gas range.
Industrial economies are still at the mercy of peak oil. This basic fact of life means that we can't expect the regular cyclical growth in productive activity that formed the baseline parameters for modern capital finance - meaning that we can't run on revolving credit anymore because growth simply isn't there to create real surplus wealth to pay down debt. The past 20 years we've seen the institutions of capital finance pretend to create growth where there is no growth by expanding financial casino games of chance and extracting profits, commissions, and bonuses from the management of these games - mortgage backed securities, collateralized debt obligations, credit default swaps, and all the rest of the tricks dreamed up as America's industrial economy was shipped off to the Third World. But that set of rackets had a limited life span and they ran into a wall in October 2008. Since then it's all come down to a shell game: hide the giant pea of defaulted debt under a giant walnut shell.
Yet another part of the story is the wish that the failing fossil fuel industrial economy would segue seamlessly into an alt-energy industrial economy. This just isn't happening, despite the warm, fuzzy TV commercials about electric cars and "green" technology. The sad truth of the matter is that we face the need to fundamentally restructure the way we live and what we do in North America, and probably along the lines of much more modest expectations, and with very different practical arrangements in everything from the very nature of work to household configurations, transportation, farming, capital formation, and the shape-and-scale of our settlements. This is not just a matter of re-tuning what we have now. It means letting go of much of it, especially our investments in suburbia and motoring - something that the American public still isn't ready to face. They may never be ready to face this and that is why we may never make a successful transition to whatever the next economy is. Rather, we will undertake a campaign to sustain the unsustainable and sink into poverty and disorder as we fight over the table scraps of the old economy... and when the smoke clears nothing new will have been built.
President Obama has spent his first year in office, and billions of dollars, trying to prop up the floundering car-makers and more generally the motoring system with "stimulus" for "shovel-ready" highway projects. This is exactly the kind of campaign to sustain the unsustainable that I mean. Motoring is in the process of failing and now for reasons that even we peak oilers didn't anticipate a year ago. It's no longer just about the price of gasoline. The crisis of capital is making car loans much harder to get, and if Americans can't buy cars on installment loans, they are not going to buy cars, and eventually they will not be driving cars they can't buy. The same crisis of capital is now depriving the states, counties, and municipalities of the means to maintain the massive paved highway and street system in this country. Just a few years of not attending to that will leave the system unworkable.
Meanwhile President Obama has given next-to-zero money or attention to public transit, to repairing the passenger railroad system in particular. I maintain that if we don't repair this system, Americans will not be traveling very far from home in a decade or so. Therefore, Mr. Obama's actions vis-Ã -vis transportation are not an intelligent response to our situation. And for very similar reasons, the proposal for a totally electric motor vehicle fleet, as a so-called "solution" to the liquid fuels problem, is equally unintelligent and tragic. Of course something else that Mr. Obama has barely paid lip-service to is the desperate need to retool our living places as walkable communities. The government now, at all levels, virtually mandates suburban arrangements of the most extremely car-dependent kind. Changing this has to move near the top of a national emergency priority list, if we have one.
Even with somewhat lower oil prices in 2009, the airlines still hemorrhaged losses in the billions, and if the oil price remains in the current zone some of them will fall back into bankruptcy in 2010. Oil prices may go down again in response to crippled economies, but then so will passengers looking to fly anywhere, especially the business fliers that the airlines have depended on to fill the higher-priced seats. I believe United will be the first one to go down in 2010, a hateful moron of a company that deserves to die.
My forecast for oil prices this year is extreme volatility. A strengthening dollar might send oil prices down (though that relationship has temporarily broken down this December as both oil prices and the dollar went up in tandem for the first time in memory). So could the cratering of the stock markets, or a general apprehension of a floundering economy. But the oil export situation also means there is less and less wiggle room every month for supply to keep pace with demand, even in struggling economies if they are dependent on foreign imports. Another part of the story that we don't pay attention to is the potential for oil scarcities, shortages, and hoarding. We may see the reemergence of those trends in 2010 for the first times since 1979.
Geopolitics
The retracement of oil prices in 2009 took place against a background of relative quiet on the geopolitical scene. With economies around the world sinking into even deeper extremis in 2010, friction and instability are more likely. The more likely locales for this are the places where most of the world's remaining oil is: the Middle East and Central Asia. The American army is already there, in Iraq and Afghanistan, with an overt pledge to up-the-ante in Afghanistan. It's hard to imagine a happy ending in all this. It's increasingly hard to even imagine a strategic justification for it. My current (weakly-held) notion is that America wants to make a baloney sandwich out of Iran, with American armies in Iraq and Afghanistan as the Wonder Bread, to "keep the pressure on" Iran. Well, after quite a few years, it doesn't seem to be moderating or influencing Iran's behavior in any way. Meanwhile, Pakistan becomes more chaotic every week and our presence in the Islamic world stimulates more Islamic extremist hatred against the USA. Speaking of Pakistan, there is the matter of its neighbor and adversary, India. If there is another terror attack by Pakistan on the order of last year's against various targets in Mumbai, I believe the response by India is liable to be severe next time, leading to God-knows-what, considering both countries have plenty of atom bombs.
Otherwise, the idea that we can control indigenous tribal populations in some of Asia's most forbidding terrain seems laughable. I don't have to rehearse the whole "graveyard of empires" routine here. But what possible geo-strategic advantage is in this for us? What would it matter if we pacified all the Taliban or al Qaeda in Afghanistan? Most of the hardest core maniacs are next door in Pakistan. Even if we turned Afghanistan into Idaho-East, with Kabul as the next Sun Valley, complete with Ralph Lauren shops and Mario Batali bistros, Pakistan would remain every bit as chaotic and dangerous in terms of supplying the world with terrorists. And how long would we expect to remain in Afghanistan pacifying the population? Five years? Ten Years? Forever? It's a ridiculous project. Loose talk on the web suggests our hidden agenda there was to protect a Conoco pipeline out of Tajikistan, but that seems equally absurd on several grounds. I can't see Afghanistan as anything but a sucking chest wound for dollars, soldiers' lives, and American prestige.
What's more, our presence there seems likely to stimulate more terror incidents here in the USA. We've been supernaturally lucky since 2001 that there hasn't been another incident of mass murder, even something as easy and straightforward as a shopping mall massacre or a bomb in a subway. Our luck is bound to run out. There are too many "soft" targets and our borders are too squishy. Small arms and explosives are easy to get in the USA. I predict that 2010 may be the year our luck does run out. Even before the start of the year we've seen the attempted Christmas bombing of Northwest-KLM flight 253 (Amsterdam to Detroit). One consequence of this is that it will only make air travel more unpleasant for everybody in the USA as new rules are instated limiting bathroom trips and blankets in the final hour of flight.
As far as the USA is concerned, I think we have more to worry about from Mexico than Afghanistan. In 2009, the Mexican government slipped ever deeper into impotence against the giant criminal cartels there. As the Cantarell oil field waters out, revenue from Pemex to the national government will wither away and so will the government's ability to control anything there. The next president of Mexico may be an ambitious gangster straight out of the drug cartels, Pancho Villa on steroids.
Another potential world locale for conflict may be Europe as the European Union begins to implode under the strains of the monetary system. The weaker nations default on their obligations and Germany, especially, looks to insulate itself from the damage. Except for the fiasco in Yugoslavia's breakup years ago, Europe has been strikingly peaceful for half a century. For most of us now living who have visited there, it is almost impossible to imagine how violent and crazy the continent was in the early twentieth century. I wonder what might happen there now, with more than a few nations failing economically and the dogs of extreme politics perhaps loosed again. History is ironical. Perhaps this time the Germans will be the good guys, while England goes apeshit with its BNP. Wouldn't that be something?
One big new subplot in world politics this year may be the global food shortage that is shaping up as a result of spectacular crop failures in most of the major farming regions of the world. The American grain belt was hit by cold and wet weather and the harvest was a disaster, especially for soybeans, of which the USA produces at least three-quarters of the world's supply. Crops have also failed in Northern China's wheat-growing region, in Australia, Argentina, and India. The result may range from extremely high food prices in the developed world to starvation in other places, leading to grave political instability and desperate fights over resources. We'll have an idea where this is leading by springtime. It maybe the most potent sub-plot in the story for 2010.
Conclusions
The Long Emergency is officially underway. Reality is telling us very clearly to prepare for a new way of life in the USA. We're in desperate need of decomplexifying, re-localizing, downscaling, and re-humanizing American life. It doesn't mean that we will be a lesser people or that we will not recognize our own culture. In some respects, I think it means we must return to some traditional American life-ways that we abandoned for the cheap oil life of convenience, comfort, obesity, and social atomization.
The successful people in America moving forward will be those who attach themselves to cohesive local communities, places with integral local economies and sturdy social networks, especially places that can produce a significant amount of their own food. I don't think that we'll be living in a world without money, some medium of exchange above barter, but it may not come in the form of dollars. My guess is that for a while it may be gold and silver, or possibly certificates issued by bank-like institutions representing gold-on-hand. In any case, I doubt we'll arrive there this year. This is more likely to be the year of grand monetary disorders and continued shocking economic contraction.
Political upheaval can get underway pretty quickly, without a whole lot of warning. I'm still waiting to hear the announced 2009 bonuses for the employees of the TBTF banks. All they said before Christmas was that thirty top Goldman Sachs employees would be paid in stock instead of money this year, but no other big banks have made a peep yet. I suppose they'll have to in the four days before New Years. I still think that could be the moment that shoves some disgruntled Americans into the arena of protest and revolt. Beyond that, though, there is plenty room for emotions to run wild and for behavior to get weird.
President Obama will have to make some pretty drastic moves to salvage his credibility. I see no sign of any intention to seriously investigate or prosecute financial crimes. Yet the evidence of misdeeds piles higher and higher - just this week new comprehensive reports of Goldman Sachs's irregularities in shorting their own issues of mortgage-backed securities, and a report on the Treasury Department's issuance of treasuries to "back-door" dumpers of toxic mortgage backed securities. And on Christmas Eve, when nobody was looking, the Treasury lifted the ceiling on Fannie Mae and Freddie Mac's backstop money to infinity. Even people like me who try to pay close attention to what's going on have lost track of all the various TARPs, TALFs, bailouts, stimuli, ZIRP loans, and handovers to every bank and its uncle in the land.
Good luck to readers in 2010. To paraphrase Tiny Tim: God help us, every one....
Comparing investment to environmental investing
Two articles on how we can weather the current crises from an investment perspective, the first considering solely economic factors, second from an ecological and economic perspective. Please realize the first article is three years old, and the second is almost a year old, so I include them here only for comparison as to what environmental investment actually look like, as opposed to investing only for short-term individual bottom-line considerations. The environmentally conscious suggestions still hold for those of you still capable of investing.
Article 1
Economic Disruption: Weathering the Storm
By: Ken Dabkowski
12/17/2007
Ever since Dr. David Martin gave a speech at The Arlington Institute in July of 2006, his economic report of opaque data-driven certainties has elicited many questions from friends, not the least of which is, “Well, what do we do about all of this?”
Given our position as think tank and not financial adviser, we have worked with Dr. Martin and other advisers to gather some general thinking points, sectors, and emergent fundamentals that are worthy of consideration. Although we cannot offer advice, it is, after all, helpful to see how the architects of scenarios and analysis manage their personal businesses and investments based on their own insights. In our scenario driven world, we would suggest that this is a thoughtful approach which outlines fundamental principles for weathering the financial storms to come.
Discretionary asset allocation to restructuring debt:
If you have your mortgages and credit cards paid off and have discretionary liquidity, sections one, two and three will be particularly applicable. If you hold a debt position, you will find sections three, four and five particularly applicable. These considerations apply to business and personal investments and are based on the analysis found in Dr. Martin’s July 2006 speech:
http://archive.arlingtoninstitute.org/library/ArlingtonInstituteAddress
Transcript_eng.pdf
and TAI Alert #11:
http://arlingtoninstitute.org/tai-alert-11-major-financial-disruption
Fundamental #1: Consider Diversifying globally.
Consider diversifying a portion of your assets into a GB Pound/Euro basket. Most of the international corresponding banks have foreign exchange and currency desks. Super regional banks like Wachovia have the ability to do this.
Consider converting your payment and contracts:
Consider restructuring some or all revenue bearing contracts such that they are denominated in GB Pounds or Euro. At a minimum, it might be worth thinking about doing this with future contracts. Holding contracts payable in both currencies would maintain a diversity of currency risk. Payments in currencies that are more closely linked to a true sovereign bank may attenuate the current dollar exposure risks. Options here are to open an international account using any bank that will allow for one. An electronic banking option might be useful so that you can make your holdings liquid in US Dollars as you need them. For example, consider converting funds back into dollars on a monthly or semi-monthly basis to pay your credit card bills or your employees – however, repatriate only what you need when you need it. If you don’t need it, leave it where it is. Remember, anything over $5K USD or more may trigger an individual Suspicious Activity Report (SAR) under 12 CFR 21. The Bank Secrecy Act was set up, among other things, to provide a means by which Federal authorities could detect money laundering and so the SAR is an important consideration.
Fundamental #2: Consider researching companies that diversify globally.
• The London (FTSE), German (Xetra DAX), Netherlands (AEX), France (CAC) and New York markets list companies where the primary profit or value of transaction is based on business transacted in Euro or GB Pound denominated transactions. Note that General Electric’s CEO Jeff Immelt recently gave an interview in which he reported that GE’s profit will come largely from overseas markets.
• It would be well to analyze each company’s growth plan. Look for existing (primarily profitable) revenue/income coming from non-dollar denominated sources.
• For US listed companies – a diversified reach in their revenue base and profit diversification that includes non-US Dollar business would give more cushion.
• Some classes and sectors within classes could provide a fairly decent opportunity using these guidelines.
Sector examples:
Food - retail and production: People need to eat. As the number of farms in the US dwindles, food will continue to require significant transportation networks. With the potential drought/flood conditions caused by climate change and rising energy prices, margins on this will probably increase.
Transportation/shipping: For example, in the European shipping sector, shippers that are involved in freight in terms of ground transportation are doing better than companies shipping cargo containers. Companies shipping liquid natural gas and other energy supplies are doing better than commercial shipping lines.
Basic infrastructure, beverage distribution, water purification: As a sub-sector of food sector, filtration as well as bottling companies have historically done a good job at tracking the food sector when there is destabilization.
Precious usable metals and materials: These are also a potential winner. Things like copper and silicon will still be in high demand for production purposes until nanotech becomes scalable. Gold may increase in value as a parking place but may not be liquid at high prices. Aluminum recycling, plastics/polymer engineering/recycling companies also stand to benefit from higher priced commodities.
Volatile Investments:
Fundamentals: High risk, high reward, derivative/public equity based, non-essential, non-transparent.
Specifics: See links at the top of the document.
Fundamental #3: Consider account accessibility.
Ask the question, “Can I get to get to a physical location and talk with a person?” Electronic environments may not always be stable or predictable. More than one mode of communication will provide more options.
Fundamental #4: Examine your credit agreements.
In the coming environment, many people may be more interested in restructuring their debt situation than in focusing on investing. Take a look at how Americans have historically dealt with debt. The old thesis said, “Put everything into your home and borrow against it.” A new thesis would begin with knowing where you stand on your personal debt.
Read your agreements:
Read the fine print of your mortgage, second mortgage, and home equity line of credit. Read the terms of your refinancing paperwork and personal credit card paperwork. Determine what factors may change triggers in credit facilities.
Many people do not know that their mortgage is subject to mortgage interest and repayment rate resets (increases) under certain market conditions. When you start to search through the fine print, look for your covenant exposures. Deep inside credit agreements there are often a whole series of requirements regarding the value of an underlying asset which is securing a debt, i.e. the loan to value ratio. If there are significant alterations in the value of the asset, there are remedies available to accelerate the payment of the loan. These resets have nothing to do with subprime rate increases.
For example, if the underlying value of the asset (house, car, boat, etc.) devalues 10%, and you were leveraged at the original value of the asset, the banks have the ability to change the rates of interest and repayment. Therefore, in a market where housing prices are devaluing on a mass scale, it would be wise to know how much the underlying value of your house could be adjusted, based upon appraisal. As the property value degrades, you could find yourself in a breach of your loan agreement.
As a house is devalued, there is less value securing a loan and the loan portfolio of a lending institution becomes more and more risky. In order to recoup as much of the investment as it can, the lending institution may legally increase interest rates and speed up your payment schedule. This may increase your mortgage payment and may also increase the amount of money going toward interest rather than principal.
Therefore, barring wild cards of large scale legislation and financial regulation, if your debt (mortgage) contract(s) have such terms you may want to start to pay down your exposure on outstanding consumer debt and re-finance debt rather than putting money into safe haven currency investment or safe cash denominated investments. Furthermore, in a highly volatile market, the amount of money saved on interest payment may potentially be greater than the growth on investments. Tax benefits may also be decreased by paying off loans, however, in most cases, the loss of deductions will be offset by the savings in increasing interest payments.
Consideration: Pull out all your loan documentation and read the fine print. Look for mention of triggers that could bring an alteration in terms (higher interest or acceleration of repayment) based on an insufficiency of collateral.
*These exposures may exist on your credit cards as well. It would be well to pay off the debt with the highest interest rates first!
Fundamental #5: Know who owns what
Find out from your bank who owns the mortgage. Many loans have been bundled and sold to third parties as equities (these have also been resold many times over). At the moment, courts have ruled that until proof of ownership exists, banks cannot foreclose on the asset. However, if a bank or third party can prove ownership (or if the legal ruling changes), then they will have the ability to foreclose on the property. Therefore, this second point illustrates why a solid strategy may be to pay down home equity loans particularly those who have been sold to 3rd party institutions.
Regulatory Wild Cards:
As the Bush Administration unleashed its plan to tackle the housing foreclosure crisis (http://www.npr.org/templates/story/story.php?storyId=16981165) other institutions are scrambling to come up with solutions. This may change the considerations above in a positive or negative way. Consider for the moment what was reported in a Financial Times article on 12/13/2007, “The Bank of England and the Bank of Canada, meanwhile, announced sweeping changes to their collateral rules to allow banks to pledge a much wider range of securities in exchange for funds.” (http://www.ft.com/cms/s/0/d9e03c62-a8bb-11dc-ad9e
-0000779fd2ac.html?nclick_check=1)
On one hand this development seems to free up liquidity in the market and ease the burden on people who want to acquire mortgages. Commercial banks will be able to borrow from their central banks using non-traditional collateral. However, depending on what is accepted as collateral, we may see similar problems beginning to emerge as occurred in the subprime lending debacle. Changing collateral rules lacks transparency and accountability and, if not held in check, banks will be forced, similar to the subprime situation, to foreclose on assets that don’t add up to the value of the lent capital.
Conclusion:
Above we have given consideration to some fundamentals about how to restructure debt and allocate discretionary funds. Please let us know what you think and send comments to info@arlingtoninstitute.org.
John L. Petersen
Publication Date:
12/17/2007
Carolyn Raffensperger’s reply to above:
Investments for environmental and community sufficiency
Friday, April 10, 2009 at 11:56am
In January of 2008, the Arlington Institute published an article about how those who anticipated the US financial crisis were investing their money. http://www.arlingtoninstitute.org/tai-alert-13-economic-disruption-weathering-storm
I wrote this in response.
The recommendations in Weathering the Storm appear to this environmentalist
to be short sighted. The likely storm is going to be environmental as well
as economic.
Given the probable combined meltdown, discretionary money can be used to
reinforce certain principles. My concern is that most of your recommendations could generate positive feedback loops, increasing both environmental and economic trouble.
I use the following principles:
A. Use investments to build local and regional resilience, particularly in
the areas of water and food infrastructure. Municipal bonds are one financial vehicle for doing this.
B. Growth for growth's sake is a failed proposition and increases instability. Accordingly, high interest rates are prima facie suspect.
C. 1) There are two parallel economies in the U.S., the for-profit and the not-for-profit. They operate under different legal rules and for different purposes. Done well, moving money out of the for-profit economy into the not-for-profit arena increases community resiliency.
C. 2) Invest now in nonprofits. Money given to them now will be used more wisely than investing in distant global ventures, especially if the economy crashes and burns. The operative word is now.
D. Money is a proxy. There are no proxies in nature. Shorten the supply
chain of proxies feeding (economically) off of proxies.
E. To the extent possible invest in things that will benefit you AND future
generations. Again, think of the municipal bond model rather than corporate stock.
F. Business has the capacity to adapt quickly and make change faster than
government. Use investments to leverage the kind of change necessary to
create sustainability. The point here is that speed can be harmful to the
environment (rapid development of technologies that could be disastrous) or
advantageous. Let's increase the velocity of change towards sustainability.
G. Scale is critical. Almost anything on a big enough scale can
be an environmental calamity. Use investments to leverage scale down.
H. A great deal of middle America's investments are geared toward caring for the exigencies of old age -- medical care, housing, etc. We are afraid of the costs of being old and infirm, dependent on a flimsy social security. A cultural revisioning of elder care and status as a community matter rather than an individual matter, would recalibrate some of the demand for economic growth.
All in all, I use my money in such a way to foster care of the future, including mine, but especially those beings to come. I used to see my discretionary income as a matter of self-sufficiency. I now see it as a means for increasing community sufficiency. Living in a community that has environmental, infrastructural and cultural integrity is more likely to provide resilience for the coming storms both economic and environmental.
Carolyn Raffensperger
Science and Environmental Health Network
http://www.sehn.org
Article 1
Economic Disruption: Weathering the Storm
By: Ken Dabkowski
12/17/2007
Ever since Dr. David Martin gave a speech at The Arlington Institute in July of 2006, his economic report of opaque data-driven certainties has elicited many questions from friends, not the least of which is, “Well, what do we do about all of this?”
Given our position as think tank and not financial adviser, we have worked with Dr. Martin and other advisers to gather some general thinking points, sectors, and emergent fundamentals that are worthy of consideration. Although we cannot offer advice, it is, after all, helpful to see how the architects of scenarios and analysis manage their personal businesses and investments based on their own insights. In our scenario driven world, we would suggest that this is a thoughtful approach which outlines fundamental principles for weathering the financial storms to come.
Discretionary asset allocation to restructuring debt:
If you have your mortgages and credit cards paid off and have discretionary liquidity, sections one, two and three will be particularly applicable. If you hold a debt position, you will find sections three, four and five particularly applicable. These considerations apply to business and personal investments and are based on the analysis found in Dr. Martin’s July 2006 speech:
http://archive.arlingtoninstitute.org/library/ArlingtonInstituteAddress
Transcript_eng.pdf
and TAI Alert #11:
http://arlingtoninstitute.org/tai-alert-11-major-financial-disruption
Fundamental #1: Consider Diversifying globally.
Consider diversifying a portion of your assets into a GB Pound/Euro basket. Most of the international corresponding banks have foreign exchange and currency desks. Super regional banks like Wachovia have the ability to do this.
Consider converting your payment and contracts:
Consider restructuring some or all revenue bearing contracts such that they are denominated in GB Pounds or Euro. At a minimum, it might be worth thinking about doing this with future contracts. Holding contracts payable in both currencies would maintain a diversity of currency risk. Payments in currencies that are more closely linked to a true sovereign bank may attenuate the current dollar exposure risks. Options here are to open an international account using any bank that will allow for one. An electronic banking option might be useful so that you can make your holdings liquid in US Dollars as you need them. For example, consider converting funds back into dollars on a monthly or semi-monthly basis to pay your credit card bills or your employees – however, repatriate only what you need when you need it. If you don’t need it, leave it where it is. Remember, anything over $5K USD or more may trigger an individual Suspicious Activity Report (SAR) under 12 CFR 21. The Bank Secrecy Act was set up, among other things, to provide a means by which Federal authorities could detect money laundering and so the SAR is an important consideration.
Fundamental #2: Consider researching companies that diversify globally.
• The London (FTSE), German (Xetra DAX), Netherlands (AEX), France (CAC) and New York markets list companies where the primary profit or value of transaction is based on business transacted in Euro or GB Pound denominated transactions. Note that General Electric’s CEO Jeff Immelt recently gave an interview in which he reported that GE’s profit will come largely from overseas markets.
• It would be well to analyze each company’s growth plan. Look for existing (primarily profitable) revenue/income coming from non-dollar denominated sources.
• For US listed companies – a diversified reach in their revenue base and profit diversification that includes non-US Dollar business would give more cushion.
• Some classes and sectors within classes could provide a fairly decent opportunity using these guidelines.
Sector examples:
Food - retail and production: People need to eat. As the number of farms in the US dwindles, food will continue to require significant transportation networks. With the potential drought/flood conditions caused by climate change and rising energy prices, margins on this will probably increase.
Transportation/shipping: For example, in the European shipping sector, shippers that are involved in freight in terms of ground transportation are doing better than companies shipping cargo containers. Companies shipping liquid natural gas and other energy supplies are doing better than commercial shipping lines.
Basic infrastructure, beverage distribution, water purification: As a sub-sector of food sector, filtration as well as bottling companies have historically done a good job at tracking the food sector when there is destabilization.
Precious usable metals and materials: These are also a potential winner. Things like copper and silicon will still be in high demand for production purposes until nanotech becomes scalable. Gold may increase in value as a parking place but may not be liquid at high prices. Aluminum recycling, plastics/polymer engineering/recycling companies also stand to benefit from higher priced commodities.
Volatile Investments:
Fundamentals: High risk, high reward, derivative/public equity based, non-essential, non-transparent.
Specifics: See links at the top of the document.
Fundamental #3: Consider account accessibility.
Ask the question, “Can I get to get to a physical location and talk with a person?” Electronic environments may not always be stable or predictable. More than one mode of communication will provide more options.
Fundamental #4: Examine your credit agreements.
In the coming environment, many people may be more interested in restructuring their debt situation than in focusing on investing. Take a look at how Americans have historically dealt with debt. The old thesis said, “Put everything into your home and borrow against it.” A new thesis would begin with knowing where you stand on your personal debt.
Read your agreements:
Read the fine print of your mortgage, second mortgage, and home equity line of credit. Read the terms of your refinancing paperwork and personal credit card paperwork. Determine what factors may change triggers in credit facilities.
Many people do not know that their mortgage is subject to mortgage interest and repayment rate resets (increases) under certain market conditions. When you start to search through the fine print, look for your covenant exposures. Deep inside credit agreements there are often a whole series of requirements regarding the value of an underlying asset which is securing a debt, i.e. the loan to value ratio. If there are significant alterations in the value of the asset, there are remedies available to accelerate the payment of the loan. These resets have nothing to do with subprime rate increases.
For example, if the underlying value of the asset (house, car, boat, etc.) devalues 10%, and you were leveraged at the original value of the asset, the banks have the ability to change the rates of interest and repayment. Therefore, in a market where housing prices are devaluing on a mass scale, it would be wise to know how much the underlying value of your house could be adjusted, based upon appraisal. As the property value degrades, you could find yourself in a breach of your loan agreement.
As a house is devalued, there is less value securing a loan and the loan portfolio of a lending institution becomes more and more risky. In order to recoup as much of the investment as it can, the lending institution may legally increase interest rates and speed up your payment schedule. This may increase your mortgage payment and may also increase the amount of money going toward interest rather than principal.
Therefore, barring wild cards of large scale legislation and financial regulation, if your debt (mortgage) contract(s) have such terms you may want to start to pay down your exposure on outstanding consumer debt and re-finance debt rather than putting money into safe haven currency investment or safe cash denominated investments. Furthermore, in a highly volatile market, the amount of money saved on interest payment may potentially be greater than the growth on investments. Tax benefits may also be decreased by paying off loans, however, in most cases, the loss of deductions will be offset by the savings in increasing interest payments.
Consideration: Pull out all your loan documentation and read the fine print. Look for mention of triggers that could bring an alteration in terms (higher interest or acceleration of repayment) based on an insufficiency of collateral.
*These exposures may exist on your credit cards as well. It would be well to pay off the debt with the highest interest rates first!
Fundamental #5: Know who owns what
Find out from your bank who owns the mortgage. Many loans have been bundled and sold to third parties as equities (these have also been resold many times over). At the moment, courts have ruled that until proof of ownership exists, banks cannot foreclose on the asset. However, if a bank or third party can prove ownership (or if the legal ruling changes), then they will have the ability to foreclose on the property. Therefore, this second point illustrates why a solid strategy may be to pay down home equity loans particularly those who have been sold to 3rd party institutions.
Regulatory Wild Cards:
As the Bush Administration unleashed its plan to tackle the housing foreclosure crisis (http://www.npr.org/templates/story/story.php?storyId=16981165) other institutions are scrambling to come up with solutions. This may change the considerations above in a positive or negative way. Consider for the moment what was reported in a Financial Times article on 12/13/2007, “The Bank of England and the Bank of Canada, meanwhile, announced sweeping changes to their collateral rules to allow banks to pledge a much wider range of securities in exchange for funds.” (http://www.ft.com/cms/s/0/d9e03c62-a8bb-11dc-ad9e
-0000779fd2ac.html?nclick_check=1)
On one hand this development seems to free up liquidity in the market and ease the burden on people who want to acquire mortgages. Commercial banks will be able to borrow from their central banks using non-traditional collateral. However, depending on what is accepted as collateral, we may see similar problems beginning to emerge as occurred in the subprime lending debacle. Changing collateral rules lacks transparency and accountability and, if not held in check, banks will be forced, similar to the subprime situation, to foreclose on assets that don’t add up to the value of the lent capital.
Conclusion:
Above we have given consideration to some fundamentals about how to restructure debt and allocate discretionary funds. Please let us know what you think and send comments to info@arlingtoninstitute.org.
John L. Petersen
Publication Date:
12/17/2007
Carolyn Raffensperger’s reply to above:
Investments for environmental and community sufficiency
Friday, April 10, 2009 at 11:56am
In January of 2008, the Arlington Institute published an article about how those who anticipated the US financial crisis were investing their money. http://www.arlingtoninstitute.org/tai-alert-13-economic-disruption-weathering-storm
I wrote this in response.
The recommendations in Weathering the Storm appear to this environmentalist
to be short sighted. The likely storm is going to be environmental as well
as economic.
Given the probable combined meltdown, discretionary money can be used to
reinforce certain principles. My concern is that most of your recommendations could generate positive feedback loops, increasing both environmental and economic trouble.
I use the following principles:
A. Use investments to build local and regional resilience, particularly in
the areas of water and food infrastructure. Municipal bonds are one financial vehicle for doing this.
B. Growth for growth's sake is a failed proposition and increases instability. Accordingly, high interest rates are prima facie suspect.
C. 1) There are two parallel economies in the U.S., the for-profit and the not-for-profit. They operate under different legal rules and for different purposes. Done well, moving money out of the for-profit economy into the not-for-profit arena increases community resiliency.
C. 2) Invest now in nonprofits. Money given to them now will be used more wisely than investing in distant global ventures, especially if the economy crashes and burns. The operative word is now.
D. Money is a proxy. There are no proxies in nature. Shorten the supply
chain of proxies feeding (economically) off of proxies.
E. To the extent possible invest in things that will benefit you AND future
generations. Again, think of the municipal bond model rather than corporate stock.
F. Business has the capacity to adapt quickly and make change faster than
government. Use investments to leverage the kind of change necessary to
create sustainability. The point here is that speed can be harmful to the
environment (rapid development of technologies that could be disastrous) or
advantageous. Let's increase the velocity of change towards sustainability.
G. Scale is critical. Almost anything on a big enough scale can
be an environmental calamity. Use investments to leverage scale down.
H. A great deal of middle America's investments are geared toward caring for the exigencies of old age -- medical care, housing, etc. We are afraid of the costs of being old and infirm, dependent on a flimsy social security. A cultural revisioning of elder care and status as a community matter rather than an individual matter, would recalibrate some of the demand for economic growth.
All in all, I use my money in such a way to foster care of the future, including mine, but especially those beings to come. I used to see my discretionary income as a matter of self-sufficiency. I now see it as a means for increasing community sufficiency. Living in a community that has environmental, infrastructural and cultural integrity is more likely to provide resilience for the coming storms both economic and environmental.
Carolyn Raffensperger
Science and Environmental Health Network
http://www.sehn.org
Tuesday, February 16, 2010
Peak Oil
Crude Awakening: The Effects of “Peak Oil”
By Monica Perez Nevarez
“My grandfather rode on a camel, my father rode in a car, I ride in a jet, my children will ride in cars, and my grandchildren will ride on camels.” Sheik Rashid bin Saeed Al Maktoum, Prime Minister of the United Arab Emirates and Emir of Dubai 1912-1990.
Don’t think that just because gas prices have been inching down recently, that oil will ever be cheap again. Civilization is facing the peak of world oil production, and that has some startling repercussions.
Fossil fuels in general and petroleum in particular have been one of the most important stimuli of economic growth and prosperity in history, allowing humans to live comfortably, but beyond their environmental means. Since oil is a finite resource, when oil production decreases, modern technological society will be forced to change drastically in order to adapt to its new reality. Or at least to the reality of the late 19th century, before fossil fuels became the premier source of energy. And that is precisely what a small cadre of geophysicists, scientists and academics have been saying will happen for decades.
“There is no comprehensive substitute for oil in its high-energy density, ease of handling, myriad end-uses, and in the volumes in which we now use it. The peak of world oil production and then its irreversible decline will be a turning point in Earth history with worldwide impact beyond anything previously seen. And that event will surely occur within the lifetimes of most people living today.” Youngquist, 2004
Decades of Whispers
The consequences of running out of oil to industrial society was envisioned by historian Henry Adams in 1893, quantified by architect Frederick Ackerman in 1932, and graphed by geophysicist King Hubbert in 1949.
Henry Adams, Historian (1838-1918) and great grandson of the second President of the United States defined energy broadly to include not only steam engines or electricity but also any force capable of organizing and directing people. Adams concluded that electrification was part of a larger process of historical acceleration, which would lead to an inevitable social decline. It seemed probable to him that the ultimate result of exploiting new energy systems would be the apocalyptic end of history. (David E. Nye, Electrifying America. 1990)
Frederick Lee Ackerman, Architect (1878-1950): In 1919, Ackerman was a founding member of the Technical Alliance (later Technocracy Inc.). The group consisted of a broad spectrum of eminent professionals. In 1932 Ackerman published his seminal paper “The Technologist Looks at the Depression”, wherein he observed that new energies were accelerating social change.
From about 4000 B.C.E. to 1750 C.E., Ackerman noted, the common welfare was limited to the work that man could do with his hands and a few crude tools. Social change, he concluded, involves a change in the techniques people use to live and work. A “social steady state” is any society in which the quantity of energy expended per capita shows no appreciable change as a function of time, whereas a society where the average quantity of energy expended per capita undergoes appreciable change exhibits “social change.” So the energy per capita equals the total amount of energy expended divided by the population. (Ackerman, 1932)
Hubbert’s Peak
In 1949 geophysicist M. King Hubbert, noted that world energy consumption per capita, after historically rising very gradually from about 2,000 to 10,000 kilogram calories per day, then increased to a much higher level in the 19th century. Further, he believed it possible for global society to maintain a high level of energy consumption indefinitely (later he labeled this “Course I”). But he also realized that society could permanently collapse back to “the agrarian level of existence” (“Course III”).
The historical data through 2003 now rules out Hubbert’s most optimistic Course I. This leaves global society with only two feasible futures: Course II (an orderly decline of energy consumption to a medium steady state) and Course III (collapse to the agrarian level of existence).
After many revisions, Hubbert’s “Peak Oil” theory predicted that United States oil production would hit its highest point between 1965 and 1970. According to Hubbert, the production rate of a limited resource follows a roughly symmetrical bell-shaped curve based on the limits of exploitability and market pressures. His model has since been used by many others to predict the peak petroleum production of the whole world. To his credit, worldwide oil discoveries have been less than annual production since 1980, and no new “light sweet crude” fields have been found since the 1960’s even though billions of dollars have been spent looking for them.
Back from the Future? The Olduvai Theory
In 1976 Richard C. Duncan, Ph.D., posited a theory that when fossil fuels run out society would slide into a post-industrial Stone Age which he named the Olduvai Theory. He concluded then that the “life expectancy of Industrial Civilization is horribly short and measured in world energy-use per person” (see a copy here http://postindustrialcivilization.blogspot.com/ ). He based his theory on the facts that fossil fuel reserves were finite and that as population increased, energy demand increased. He named his theory Olduvai (also known as the Transient Pulse Theory) as a metaphor to suggest an impending return to an agrarian society when we run out of fossil fuels because some of the earliest human fossil remains have been found in the Olduvai Gorge in Tanzania. The “Transient Pulse” second name explains that because there is only a finite amount of fossil fuels on earth, their lifecycle is discovered, exploited, and then experiences a sharp drop off as the reserves are exhausted. Therefore the “Pulse” is transient, not recurring.
In October 1989 Duncan gave a speech at the American Society of Engineering Educators Conference in New York, titled "Evolution, Technology, and the Natural Environment: A Unified Theory of Human History", in which he concluded that the broad sweep of human history can be divided into three phases: The first, or pre-industrial phase was a very long period of equilibrium when economic growth was limited by simple tools and weak machines. The second or industrial phase was a very short period of non-equilibrium that ignited with explosive force when powerful new machines temporarily lifted all limits to growth. The third, or de-industrial phase lies immediately after the second phase, during which industrial economies will decline toward a new period of equilibrium, limited by the exhaustion of non-renewable resources and continuing deterioration of the natural environment. It wasn’t until 1993 that Duncan was able to test his theory with actual population numbers from the United Nations and British Petroleum which showed there had been a peak in 1978 and a steady decline after that.
Although all primary sources of energy are important, the Olduvai theory postulates that electricity is the essence of the Industrial Civilization, and currently demand can only be satisfied by fossil fuels. World energy production per capita increased strongly from 1945 to its all-time peak in 1979. Then from 1979 to 1999 - for the first time in history - it decreased at a rate of 0.33% per year (the Olduvai 'slope'). From 2000 to 2011, according to the Olduvai theory, world energy production per capita will decrease by about 0.70% per year (the 'slide') and may create unprecedented unemployment, economic hardship, and homelessness. Then around the year 2012 the theory posits there will be a worldwide rash of electrical blackouts. These blackouts, along with other factors, will cause energy production per capita by 2030 to fall to the same value it had in 1930, the year petroleum became society’s cheapest source of energy. The rate of decline from 2012 to 2030 is 5.44% a year (the Olduvai 'cliff'). Thus, by definition, the duration of Industrial Civilization is about 100 years.
Repercussions
The impact of Peak Oil will depend on the rate of decline, use of other fossil fuels to take up the slack, developing stringent conservation measures and adopting effective alternative sources of energy (wind, solar, water, fourth-generation nuclear). If alternatives are not found, the products produced with oil such as fertilizers, detergents, solvents, adhesives, and most plastics, would become scarce and expensive, not to mention the direct uses for oil such as transportation and generating electricity. This rise in the cost of petroleum will lower living standards, and in the worst case scenario could lead to worldwide economic collapse, particularly in light of its effect on food production. With increased tension between countries over dwindling oil supplies, political situations may change dramatically and inequalities between countries and regions may be exacerbated, posing a national security threat to many countries. As if that were not enough, the use of other fossil fuels to generate power, in particular coal, will have a much more deleterious effect on the environment than petroleum, with some scientists such as Dr. James Hanson, from NASA’s Goddard Space Center, going as far as saying that all coal fired electricity plants that cannot capture CO2 emissions should be bulldozed to the ground because they will damage the environment much more than petroleum ever will.
“Where mainstream forecasts showed output rising steadily each year in a great upward curve that kept up with global demand, Dr. Sadad Al-Husseini’s calculations showed [oil] output leveling off, starting as early as 2004. Just as alarming, this production plateau would last 15 years at best, after which the output of conventional oil would begin a gradual but irreversible decline.” Tapped Out by Paul Roberts, National Geographic, June 2008
Timing the Peak
So when is Peak Oil going to happen? Predictions of the timing of peak oil include the possibilities that it has recently occurred, that it will occur shortly, or that a plateau of oil production will supply world demand for several more decades. None of these predictions dispute the peaking of oil production, and disagree only on when it will occur. But the fact is that there’s plenty of evidence that oil production has already peaked, and growing demand from developing giants like China and India may skew these results even further.
Mathew Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, and CEO of the largest energy investment house in the US, said in a recent Youtube video that "...peaking is one of these fuzzy events that you only know clearly when you see it through a rear view mirror, and by then an alternate resolution is generally too late." According to his calculations, oil production peaked in May 2005.
Kenneth s. Deffeyes argues that world oil production peaked on December 16, 2005. Data from the US Energy Information Administration show that world production leveled out in 2004, and reached a peak in the third quarter of 2006, and an October 2007 retrospective report by the Energy Watch Group concluded that this was the peak of conventional oil production. Sadad Al Husseini, former head of Saudi Aramco’s production and exploration department, stated in an October 29, 2007 television interview that oil production had likely already reached its peak in 2006, and that assumptions by the International Energy Agency and Energy Information Administration of production increases by OPEC are "quite unrealistic."
“All the easy oil and gas in the world has pretty much been found. Now it’s time for the harder work of finding and producing oil from more challenging environments and work areas.” William J. Cummings, major oil-company spokesman, December 2005
Texas oilman T. Boone Pickens, CEO of British Petroleum, stated in 2005 that worldwide conventional oil production was very close to peaking, and in August 2008 issued a challenge to America to convert to alternate sources of energy through the “Pickens Plan” (http://www.pickensplan.com/theplan/) . Pickens knows that a nation holding less than 3% of the world’s oil reserves while guzzling 20% of the world’s production will never be able to drill its way out of its dependency on foreign oil. He also considers it absolute madness — financially and in terms of national security — to be spending $700 billion every year on imported oil produced in volatile and in some cases hostile countries.
His answer is to develop wind power in states with steady, forceful winds (like Texas) and use it instead of natural gas to produce electricity (natural gas now generates about one-fifth of the power in the United States). He would then use the natural gas saved to fuel cars and trucks. He predicts that oil imports would drop by 40% and the country would save $300 billion a year. It is not clear whether natural gas is the right choice for Puerto Rico. On a macro scale, it is possible that one large intra-island railway and an efficient metropolitan mass transit system may open the door for electric cars as personal transportation options, and the added expense of changing to natural gas could be avoided. Currently there are electric cars being produced for all sectors of the economy: from “daily commute” vehicles to load bearing trucks, to luxury sedans, to expensive” exotics”. There is something for everyone. As for the dollars sent overseas, Puerto Rico spends $4 billion dollars a year at current prices; but what is even more enervating, one out of every seven kilowatt/hours of electricity produced is “lost”, or a loss of revenue of $602 million in 2007, and a cumulative $2.5 billion over the last six years.
Studies from around the world show that the Great Plains states are home to the greatest wind energy potential in the world. The Department of Energy reports that 20% of America's electricity can come from wind, and North Dakota alone has the potential to provide power for more than a quarter of the country.
There are, Pickens concedes, obstacles. The country would need to rebuild the power grid to transmit wind energy from the Great Plains to consumers in the big population centers. It would need lots of service stations capable of selling natural gas. And automakers would need to produce cars that run on natural gas. There are about 8 million such vehicles in the world, but only 142,000 in the United States.
Mr. Pickens is putting his money where his ideas are, and in Texas he has begun assembling the pieces of a huge wind farm. He estimates the cost at $6 billion to $10 billion (his Mesa Power is the lead investor). He confidently forecasts that this wind farm and others like it will not only reduce the demand for oil but create thousands of construction and operating jobs.
In Puerto Rico, a debate has been raging over a wind farm that was recently given permission to proceed on the southwest coast of the island. While wind power in general is a no-brainer as an alternative source of energy for Puerto Rico, placing the wind farm next to a migratory bird sanctuary was an unfortunate choice, as well as its leeward location on the island, which does not make the most efficient use of the Trade winds that constantly bathe the windward coast (the northeast edge) of the island. Business Puerto Rico tried unsuccessfully to communicate with its developer.
The Cost of Change
The problem is that most people don’t really understand the total cost of implementation; the direct costs to the electricity grid. Without electricity, nothing can be produced, and the investment required to maintain what already exists today is staggering. Richard Duncan thinks that “permanent blackouts are coming and sooner or later the power grids will go down and never come back up.” Why? The International Energy Agency (IEA, 2004) estimates that the cumulative worldwide energy investment funds required from 2003 to 2030 would be about $15.32 trillion. Thus the IEA projects that the worldwide investment funds essential for electricity will be 3.7 times the amount needed for oil alone, and more than all of that required for oil, gas, and coal combined. The already debt-ridden nations, cities, and corporations will not be able to raise the investment funds required by 2030 for world energy. (Not to mention the vastly greater investment funds required for agriculture, roads, streets, schools, railroads, water resources, sewer systems, and so forth.) And going after offshore or shale sands will only be a stop-gap solution that lengthens the use of fossil fuels by a few years, and is not a long-term solution.
“Highly hyped liquid substitute fuels, such as ethanol from corn and liquids from coal or oil shale, come with their own unique baggage. They can't be scaled up quickly, require huge energy and water inputs, and pose a range of environmental problems.” Huffington Post
The ramifications of Peak Oil are legion, because it is the basis of so many businesses, so many products, and is such a large part of everyday life. It affects all individuals, all companies, all nations, all foreign policy, the balance of power between nations, all industrial food production and the global economy in ways too numerous to be obvious to the individual consumer. Richard Holbrook, former US Ambassador, recently interviewed on Fareed Zakarias’s CNN show, Global Public Square (GPS) summarized it this way: “Every single day, $2.2 Billion dollars flow to oil producing countries from oil consuming countries; $1.3billion comes from the US alone. Venezuela rakes in $250 to $300 million dollars a day, which President Chavez spends by investing five times as much on Latin American Aid as the US does, in that way shoring up their support, as well as buying $50 billion dollar’s worth of military weapons from Russia last year, and in that way potentially destabilizing relations with the US. There is a huge transfer of wealth to countries that are at odds with US interests, and the petrodollars are changing the balance of power in this hemisphere. Petro power is no doubt changing the world. The problem is that economic decline weakens the US more than war.” Putting that into a local perspective, Puerto Rico may become the refuge of last resort for the rest of the poorer nations in the Caribbean.
“We need to mobilize for [an energy] war. It’s time to get going. It’s a matter of personal responsibility.” James Woolsey, former Director of the CIA, who owns a self-sufficient solar-powered home and a hybrid car, speaking about Peak Oil. We Were Warned: Running out of Gas, CNN Special investigations Unit, August 2008
“Solar powered homes are a hedge against Peak oil.” We Were Warned: Running out of Gas, CNN Special investigations Unit, August 2008
To further exacerbate the situation, oil producers will tend to keep a little more for themselves rather than selling it on the open market. One study, the Export Land Model, shows that the amount of oil available internationally drops much faster than production in exporting countries because the exporting countries maintain set-asides for their internal growth in demand and therefore deprive the global market of that amount of oil.
Peak oil would leave many people unable to afford petroleum-based fuel for their cars, and force them to move to cities or higher density areas, where walking and public transportation are more viable options. People will have to choose between their jobs in the city, and their homes and lifestyles in the suburbs. One theory being bandied about is that everyone will move into ten or twenty mega-cities. Who knows? Suburbia may become the slums of the future. There are solutions: mass-transit, long-distance trains and bullet trains, new pedestrian areas within cities, “smart growth” and “New Urbanism”, but they all entail planning, financing, and change. Inevitably, the hardest hit sector of the population will be the commuters. Unless suburbs can be transformed to include commercial, services and manufacturing companies within a twenty mile radius of where people live, those communities will be too isolated to make them useful living spaces.
"The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. 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." US Department of Energy, Hirsh Report, Peaking of World Oil Production: Impacts, Mitigation, & Risk Management, 2005
Peak Oil, Industrial Agriculture and Food Scarcity
Since the 1940s, agriculture has dramatically increased its productivity, due largely to the use of petrochemical derived pesticides, fertilizers, and increased mechanization (the so-called “Green Revolution”, when industrial farming was born). This has allowed world population to more than double over the last 50 years. However, every “energy unit” delivered in food grown using modern industrial techniques requires over ten energy units to produce and deliver. Many agriculture, petroleum, sociology, and ecology experts have warned that the ever decreasing supply of oil will inflict major damage to the modern industrial agriculture system causing a collapse in food production ability and food shortages. One problem stems from the fact that a field that has been doused with petrochemicals takes years, sometimes decades, to become productive again, so once the petrochemicals are gone, all the land currently under industrial farming practices will be unusable for organic farming: the land will be inert, and could turn to desert. This situation has given new impulse to the “local food” movement, which originally was an offshoot of organic farming, and now is fast becoming the only intelligent alternative to growing food.
Another example of the chain reactions which could be caused by Peak Oil involves growing biofuels; the problems caused by farmers raising corn, sugar and soy for inefficient energy production has lowered food production and caused food prices to rise. This “food versus fuel” issue will be exacerbated as demand for ethanol and biofuel increases. In Puerto Rico, farmers desperate to make a profit have decided to try anything in order to keep working, even if it means growing crops that have succeeded in other countries (sugar in Brazil), but are contraindicated for Puerto Rico considering the island must be food-secure, and every inch of land spent on ethanol will take away land that can be used for growing edible goods. In the absence of an overall plan for the economic development of the island, farmers have to keep their income stream flowing. This makes the publication of the Land Use Plan and a cogent Transition Plan back to sustainable agrarian methods important first steps towards a stable future.
One positive effect of oil shortages might be a full return to organic farming in order to satisfy the sustainability requirement of food production. In light of Peak Oil concerns, organic methods can be maintained indefinitely and they use no petroleum-based pesticides, herbicides, or fertilizers. Some farmers using modern organic-farming methods have reported yields as high as those available from conventional farming. Industrial farming may have to evolve back into smaller, family owned plots near their markets. Organic farming is more labor-intensive and would require a shift of a work force from urban to rural areas, and distribution may be limited to a couple of hundred miles away from the end-user, making local farms a small business opportunity for the future.
Conclusion
Based on finite fossil fuel resources, energy per capita is indeed headed towards a cliff, and this may lead mankind back to an agrarian society if action is not taken to address this problem. The journey back to Olduvai is basically unavoidable once the fossil fuels are used up. The only chance civilization has is deciding whether it wants to change in a managed and orderly form to sustainable practices or change abruptly and violently while blindly holding on to an ever decreasing resource.
Here at Business Puerto Rico we think it is within our capacity to build a new energy gathering infrastructure to substitute for the decline in conventional fossil fuels; Puerto Rico certainly has the talent. By combining energy efficiency measures with the simultaneous expansion of alternate energy sources, we can secure a civilized transition into the XXI century. A tremendous opportunity exists to build a more sustainable energy future and building this future will provide vast opportunity for economic growth and prosperity. But it will take dedication to sustainable methods of living and working, consensus from all sectors on a shared vision of the future, and a little sacrifice from everyone: individuals that must learn to conserve and use resources wisely, as well as businesses that must learn new ways of doing business, and a government that frames the business environment and the natural environment in ways that allow both to grow and thrive. Amassing great wealth in fewer and fewer hands will become harder to do; spreading the wealth may end up saving a company, as counter-intuitive as that may sound.
This generation faces the most daunting challenge ever faced by humanity: the effects of Peak Oil and Climate Change. Both have about a ten year window before catastrophic consequences permanently derail civilization’s progress. There can be no doubt that just as the Global Economy has shaken up our economic way of life, these two other factors need serious attention immediately, and any viable solution will have to respect all three world-wide trends.
“It’s hard to get a man to understand something when his income depends on him not understanding it.” -Upton Sinclair
Ultimately, what this situation calls for is letting go of preconceived ideas: how people “ought” to live, how much they “should” spend or consume, where they “must” work. The opportunity presents itself to visualize a totally different future than what we had expected; and that may not be a bad thing.
By Monica Perez Nevarez
“My grandfather rode on a camel, my father rode in a car, I ride in a jet, my children will ride in cars, and my grandchildren will ride on camels.” Sheik Rashid bin Saeed Al Maktoum, Prime Minister of the United Arab Emirates and Emir of Dubai 1912-1990.
Don’t think that just because gas prices have been inching down recently, that oil will ever be cheap again. Civilization is facing the peak of world oil production, and that has some startling repercussions.
Fossil fuels in general and petroleum in particular have been one of the most important stimuli of economic growth and prosperity in history, allowing humans to live comfortably, but beyond their environmental means. Since oil is a finite resource, when oil production decreases, modern technological society will be forced to change drastically in order to adapt to its new reality. Or at least to the reality of the late 19th century, before fossil fuels became the premier source of energy. And that is precisely what a small cadre of geophysicists, scientists and academics have been saying will happen for decades.
“There is no comprehensive substitute for oil in its high-energy density, ease of handling, myriad end-uses, and in the volumes in which we now use it. The peak of world oil production and then its irreversible decline will be a turning point in Earth history with worldwide impact beyond anything previously seen. And that event will surely occur within the lifetimes of most people living today.” Youngquist, 2004
Decades of Whispers
The consequences of running out of oil to industrial society was envisioned by historian Henry Adams in 1893, quantified by architect Frederick Ackerman in 1932, and graphed by geophysicist King Hubbert in 1949.
Henry Adams, Historian (1838-1918) and great grandson of the second President of the United States defined energy broadly to include not only steam engines or electricity but also any force capable of organizing and directing people. Adams concluded that electrification was part of a larger process of historical acceleration, which would lead to an inevitable social decline. It seemed probable to him that the ultimate result of exploiting new energy systems would be the apocalyptic end of history. (David E. Nye, Electrifying America. 1990)
Frederick Lee Ackerman, Architect (1878-1950): In 1919, Ackerman was a founding member of the Technical Alliance (later Technocracy Inc.). The group consisted of a broad spectrum of eminent professionals. In 1932 Ackerman published his seminal paper “The Technologist Looks at the Depression”, wherein he observed that new energies were accelerating social change.
From about 4000 B.C.E. to 1750 C.E., Ackerman noted, the common welfare was limited to the work that man could do with his hands and a few crude tools. Social change, he concluded, involves a change in the techniques people use to live and work. A “social steady state” is any society in which the quantity of energy expended per capita shows no appreciable change as a function of time, whereas a society where the average quantity of energy expended per capita undergoes appreciable change exhibits “social change.” So the energy per capita equals the total amount of energy expended divided by the population. (Ackerman, 1932)
Hubbert’s Peak
In 1949 geophysicist M. King Hubbert, noted that world energy consumption per capita, after historically rising very gradually from about 2,000 to 10,000 kilogram calories per day, then increased to a much higher level in the 19th century. Further, he believed it possible for global society to maintain a high level of energy consumption indefinitely (later he labeled this “Course I”). But he also realized that society could permanently collapse back to “the agrarian level of existence” (“Course III”).
The historical data through 2003 now rules out Hubbert’s most optimistic Course I. This leaves global society with only two feasible futures: Course II (an orderly decline of energy consumption to a medium steady state) and Course III (collapse to the agrarian level of existence).
After many revisions, Hubbert’s “Peak Oil” theory predicted that United States oil production would hit its highest point between 1965 and 1970. According to Hubbert, the production rate of a limited resource follows a roughly symmetrical bell-shaped curve based on the limits of exploitability and market pressures. His model has since been used by many others to predict the peak petroleum production of the whole world. To his credit, worldwide oil discoveries have been less than annual production since 1980, and no new “light sweet crude” fields have been found since the 1960’s even though billions of dollars have been spent looking for them.
Back from the Future? The Olduvai Theory
In 1976 Richard C. Duncan, Ph.D., posited a theory that when fossil fuels run out society would slide into a post-industrial Stone Age which he named the Olduvai Theory. He concluded then that the “life expectancy of Industrial Civilization is horribly short and measured in world energy-use per person” (see a copy here http://postindustrialcivilization.blogspot.com/ ). He based his theory on the facts that fossil fuel reserves were finite and that as population increased, energy demand increased. He named his theory Olduvai (also known as the Transient Pulse Theory) as a metaphor to suggest an impending return to an agrarian society when we run out of fossil fuels because some of the earliest human fossil remains have been found in the Olduvai Gorge in Tanzania. The “Transient Pulse” second name explains that because there is only a finite amount of fossil fuels on earth, their lifecycle is discovered, exploited, and then experiences a sharp drop off as the reserves are exhausted. Therefore the “Pulse” is transient, not recurring.
In October 1989 Duncan gave a speech at the American Society of Engineering Educators Conference in New York, titled "Evolution, Technology, and the Natural Environment: A Unified Theory of Human History", in which he concluded that the broad sweep of human history can be divided into three phases: The first, or pre-industrial phase was a very long period of equilibrium when economic growth was limited by simple tools and weak machines. The second or industrial phase was a very short period of non-equilibrium that ignited with explosive force when powerful new machines temporarily lifted all limits to growth. The third, or de-industrial phase lies immediately after the second phase, during which industrial economies will decline toward a new period of equilibrium, limited by the exhaustion of non-renewable resources and continuing deterioration of the natural environment. It wasn’t until 1993 that Duncan was able to test his theory with actual population numbers from the United Nations and British Petroleum which showed there had been a peak in 1978 and a steady decline after that.
Although all primary sources of energy are important, the Olduvai theory postulates that electricity is the essence of the Industrial Civilization, and currently demand can only be satisfied by fossil fuels. World energy production per capita increased strongly from 1945 to its all-time peak in 1979. Then from 1979 to 1999 - for the first time in history - it decreased at a rate of 0.33% per year (the Olduvai 'slope'). From 2000 to 2011, according to the Olduvai theory, world energy production per capita will decrease by about 0.70% per year (the 'slide') and may create unprecedented unemployment, economic hardship, and homelessness. Then around the year 2012 the theory posits there will be a worldwide rash of electrical blackouts. These blackouts, along with other factors, will cause energy production per capita by 2030 to fall to the same value it had in 1930, the year petroleum became society’s cheapest source of energy. The rate of decline from 2012 to 2030 is 5.44% a year (the Olduvai 'cliff'). Thus, by definition, the duration of Industrial Civilization is about 100 years.
Repercussions
The impact of Peak Oil will depend on the rate of decline, use of other fossil fuels to take up the slack, developing stringent conservation measures and adopting effective alternative sources of energy (wind, solar, water, fourth-generation nuclear). If alternatives are not found, the products produced with oil such as fertilizers, detergents, solvents, adhesives, and most plastics, would become scarce and expensive, not to mention the direct uses for oil such as transportation and generating electricity. This rise in the cost of petroleum will lower living standards, and in the worst case scenario could lead to worldwide economic collapse, particularly in light of its effect on food production. With increased tension between countries over dwindling oil supplies, political situations may change dramatically and inequalities between countries and regions may be exacerbated, posing a national security threat to many countries. As if that were not enough, the use of other fossil fuels to generate power, in particular coal, will have a much more deleterious effect on the environment than petroleum, with some scientists such as Dr. James Hanson, from NASA’s Goddard Space Center, going as far as saying that all coal fired electricity plants that cannot capture CO2 emissions should be bulldozed to the ground because they will damage the environment much more than petroleum ever will.
“Where mainstream forecasts showed output rising steadily each year in a great upward curve that kept up with global demand, Dr. Sadad Al-Husseini’s calculations showed [oil] output leveling off, starting as early as 2004. Just as alarming, this production plateau would last 15 years at best, after which the output of conventional oil would begin a gradual but irreversible decline.” Tapped Out by Paul Roberts, National Geographic, June 2008
Timing the Peak
So when is Peak Oil going to happen? Predictions of the timing of peak oil include the possibilities that it has recently occurred, that it will occur shortly, or that a plateau of oil production will supply world demand for several more decades. None of these predictions dispute the peaking of oil production, and disagree only on when it will occur. But the fact is that there’s plenty of evidence that oil production has already peaked, and growing demand from developing giants like China and India may skew these results even further.
Mathew Simmons, author of Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy, and CEO of the largest energy investment house in the US, said in a recent Youtube video that "...peaking is one of these fuzzy events that you only know clearly when you see it through a rear view mirror, and by then an alternate resolution is generally too late." According to his calculations, oil production peaked in May 2005.
Kenneth s. Deffeyes argues that world oil production peaked on December 16, 2005. Data from the US Energy Information Administration show that world production leveled out in 2004, and reached a peak in the third quarter of 2006, and an October 2007 retrospective report by the Energy Watch Group concluded that this was the peak of conventional oil production. Sadad Al Husseini, former head of Saudi Aramco’s production and exploration department, stated in an October 29, 2007 television interview that oil production had likely already reached its peak in 2006, and that assumptions by the International Energy Agency and Energy Information Administration of production increases by OPEC are "quite unrealistic."
“All the easy oil and gas in the world has pretty much been found. Now it’s time for the harder work of finding and producing oil from more challenging environments and work areas.” William J. Cummings, major oil-company spokesman, December 2005
Texas oilman T. Boone Pickens, CEO of British Petroleum, stated in 2005 that worldwide conventional oil production was very close to peaking, and in August 2008 issued a challenge to America to convert to alternate sources of energy through the “Pickens Plan” (http://www.pickensplan.com/theplan/) . Pickens knows that a nation holding less than 3% of the world’s oil reserves while guzzling 20% of the world’s production will never be able to drill its way out of its dependency on foreign oil. He also considers it absolute madness — financially and in terms of national security — to be spending $700 billion every year on imported oil produced in volatile and in some cases hostile countries.
His answer is to develop wind power in states with steady, forceful winds (like Texas) and use it instead of natural gas to produce electricity (natural gas now generates about one-fifth of the power in the United States). He would then use the natural gas saved to fuel cars and trucks. He predicts that oil imports would drop by 40% and the country would save $300 billion a year. It is not clear whether natural gas is the right choice for Puerto Rico. On a macro scale, it is possible that one large intra-island railway and an efficient metropolitan mass transit system may open the door for electric cars as personal transportation options, and the added expense of changing to natural gas could be avoided. Currently there are electric cars being produced for all sectors of the economy: from “daily commute” vehicles to load bearing trucks, to luxury sedans, to expensive” exotics”. There is something for everyone. As for the dollars sent overseas, Puerto Rico spends $4 billion dollars a year at current prices; but what is even more enervating, one out of every seven kilowatt/hours of electricity produced is “lost”, or a loss of revenue of $602 million in 2007, and a cumulative $2.5 billion over the last six years.
Studies from around the world show that the Great Plains states are home to the greatest wind energy potential in the world. The Department of Energy reports that 20% of America's electricity can come from wind, and North Dakota alone has the potential to provide power for more than a quarter of the country.
There are, Pickens concedes, obstacles. The country would need to rebuild the power grid to transmit wind energy from the Great Plains to consumers in the big population centers. It would need lots of service stations capable of selling natural gas. And automakers would need to produce cars that run on natural gas. There are about 8 million such vehicles in the world, but only 142,000 in the United States.
Mr. Pickens is putting his money where his ideas are, and in Texas he has begun assembling the pieces of a huge wind farm. He estimates the cost at $6 billion to $10 billion (his Mesa Power is the lead investor). He confidently forecasts that this wind farm and others like it will not only reduce the demand for oil but create thousands of construction and operating jobs.
In Puerto Rico, a debate has been raging over a wind farm that was recently given permission to proceed on the southwest coast of the island. While wind power in general is a no-brainer as an alternative source of energy for Puerto Rico, placing the wind farm next to a migratory bird sanctuary was an unfortunate choice, as well as its leeward location on the island, which does not make the most efficient use of the Trade winds that constantly bathe the windward coast (the northeast edge) of the island. Business Puerto Rico tried unsuccessfully to communicate with its developer.
The Cost of Change
The problem is that most people don’t really understand the total cost of implementation; the direct costs to the electricity grid. Without electricity, nothing can be produced, and the investment required to maintain what already exists today is staggering. Richard Duncan thinks that “permanent blackouts are coming and sooner or later the power grids will go down and never come back up.” Why? The International Energy Agency (IEA, 2004) estimates that the cumulative worldwide energy investment funds required from 2003 to 2030 would be about $15.32 trillion. Thus the IEA projects that the worldwide investment funds essential for electricity will be 3.7 times the amount needed for oil alone, and more than all of that required for oil, gas, and coal combined. The already debt-ridden nations, cities, and corporations will not be able to raise the investment funds required by 2030 for world energy. (Not to mention the vastly greater investment funds required for agriculture, roads, streets, schools, railroads, water resources, sewer systems, and so forth.) And going after offshore or shale sands will only be a stop-gap solution that lengthens the use of fossil fuels by a few years, and is not a long-term solution.
“Highly hyped liquid substitute fuels, such as ethanol from corn and liquids from coal or oil shale, come with their own unique baggage. They can't be scaled up quickly, require huge energy and water inputs, and pose a range of environmental problems.” Huffington Post
The ramifications of Peak Oil are legion, because it is the basis of so many businesses, so many products, and is such a large part of everyday life. It affects all individuals, all companies, all nations, all foreign policy, the balance of power between nations, all industrial food production and the global economy in ways too numerous to be obvious to the individual consumer. Richard Holbrook, former US Ambassador, recently interviewed on Fareed Zakarias’s CNN show, Global Public Square (GPS) summarized it this way: “Every single day, $2.2 Billion dollars flow to oil producing countries from oil consuming countries; $1.3billion comes from the US alone. Venezuela rakes in $250 to $300 million dollars a day, which President Chavez spends by investing five times as much on Latin American Aid as the US does, in that way shoring up their support, as well as buying $50 billion dollar’s worth of military weapons from Russia last year, and in that way potentially destabilizing relations with the US. There is a huge transfer of wealth to countries that are at odds with US interests, and the petrodollars are changing the balance of power in this hemisphere. Petro power is no doubt changing the world. The problem is that economic decline weakens the US more than war.” Putting that into a local perspective, Puerto Rico may become the refuge of last resort for the rest of the poorer nations in the Caribbean.
“We need to mobilize for [an energy] war. It’s time to get going. It’s a matter of personal responsibility.” James Woolsey, former Director of the CIA, who owns a self-sufficient solar-powered home and a hybrid car, speaking about Peak Oil. We Were Warned: Running out of Gas, CNN Special investigations Unit, August 2008
“Solar powered homes are a hedge against Peak oil.” We Were Warned: Running out of Gas, CNN Special investigations Unit, August 2008
To further exacerbate the situation, oil producers will tend to keep a little more for themselves rather than selling it on the open market. One study, the Export Land Model, shows that the amount of oil available internationally drops much faster than production in exporting countries because the exporting countries maintain set-asides for their internal growth in demand and therefore deprive the global market of that amount of oil.
Peak oil would leave many people unable to afford petroleum-based fuel for their cars, and force them to move to cities or higher density areas, where walking and public transportation are more viable options. People will have to choose between their jobs in the city, and their homes and lifestyles in the suburbs. One theory being bandied about is that everyone will move into ten or twenty mega-cities. Who knows? Suburbia may become the slums of the future. There are solutions: mass-transit, long-distance trains and bullet trains, new pedestrian areas within cities, “smart growth” and “New Urbanism”, but they all entail planning, financing, and change. Inevitably, the hardest hit sector of the population will be the commuters. Unless suburbs can be transformed to include commercial, services and manufacturing companies within a twenty mile radius of where people live, those communities will be too isolated to make them useful living spaces.
"The peaking of world oil production presents the U.S. and the world with an unprecedented risk management problem. As peaking is approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented. 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." US Department of Energy, Hirsh Report, Peaking of World Oil Production: Impacts, Mitigation, & Risk Management, 2005
Peak Oil, Industrial Agriculture and Food Scarcity
Since the 1940s, agriculture has dramatically increased its productivity, due largely to the use of petrochemical derived pesticides, fertilizers, and increased mechanization (the so-called “Green Revolution”, when industrial farming was born). This has allowed world population to more than double over the last 50 years. However, every “energy unit” delivered in food grown using modern industrial techniques requires over ten energy units to produce and deliver. Many agriculture, petroleum, sociology, and ecology experts have warned that the ever decreasing supply of oil will inflict major damage to the modern industrial agriculture system causing a collapse in food production ability and food shortages. One problem stems from the fact that a field that has been doused with petrochemicals takes years, sometimes decades, to become productive again, so once the petrochemicals are gone, all the land currently under industrial farming practices will be unusable for organic farming: the land will be inert, and could turn to desert. This situation has given new impulse to the “local food” movement, which originally was an offshoot of organic farming, and now is fast becoming the only intelligent alternative to growing food.
Another example of the chain reactions which could be caused by Peak Oil involves growing biofuels; the problems caused by farmers raising corn, sugar and soy for inefficient energy production has lowered food production and caused food prices to rise. This “food versus fuel” issue will be exacerbated as demand for ethanol and biofuel increases. In Puerto Rico, farmers desperate to make a profit have decided to try anything in order to keep working, even if it means growing crops that have succeeded in other countries (sugar in Brazil), but are contraindicated for Puerto Rico considering the island must be food-secure, and every inch of land spent on ethanol will take away land that can be used for growing edible goods. In the absence of an overall plan for the economic development of the island, farmers have to keep their income stream flowing. This makes the publication of the Land Use Plan and a cogent Transition Plan back to sustainable agrarian methods important first steps towards a stable future.
One positive effect of oil shortages might be a full return to organic farming in order to satisfy the sustainability requirement of food production. In light of Peak Oil concerns, organic methods can be maintained indefinitely and they use no petroleum-based pesticides, herbicides, or fertilizers. Some farmers using modern organic-farming methods have reported yields as high as those available from conventional farming. Industrial farming may have to evolve back into smaller, family owned plots near their markets. Organic farming is more labor-intensive and would require a shift of a work force from urban to rural areas, and distribution may be limited to a couple of hundred miles away from the end-user, making local farms a small business opportunity for the future.
Conclusion
Based on finite fossil fuel resources, energy per capita is indeed headed towards a cliff, and this may lead mankind back to an agrarian society if action is not taken to address this problem. The journey back to Olduvai is basically unavoidable once the fossil fuels are used up. The only chance civilization has is deciding whether it wants to change in a managed and orderly form to sustainable practices or change abruptly and violently while blindly holding on to an ever decreasing resource.
Here at Business Puerto Rico we think it is within our capacity to build a new energy gathering infrastructure to substitute for the decline in conventional fossil fuels; Puerto Rico certainly has the talent. By combining energy efficiency measures with the simultaneous expansion of alternate energy sources, we can secure a civilized transition into the XXI century. A tremendous opportunity exists to build a more sustainable energy future and building this future will provide vast opportunity for economic growth and prosperity. But it will take dedication to sustainable methods of living and working, consensus from all sectors on a shared vision of the future, and a little sacrifice from everyone: individuals that must learn to conserve and use resources wisely, as well as businesses that must learn new ways of doing business, and a government that frames the business environment and the natural environment in ways that allow both to grow and thrive. Amassing great wealth in fewer and fewer hands will become harder to do; spreading the wealth may end up saving a company, as counter-intuitive as that may sound.
This generation faces the most daunting challenge ever faced by humanity: the effects of Peak Oil and Climate Change. Both have about a ten year window before catastrophic consequences permanently derail civilization’s progress. There can be no doubt that just as the Global Economy has shaken up our economic way of life, these two other factors need serious attention immediately, and any viable solution will have to respect all three world-wide trends.
“It’s hard to get a man to understand something when his income depends on him not understanding it.” -Upton Sinclair
Ultimately, what this situation calls for is letting go of preconceived ideas: how people “ought” to live, how much they “should” spend or consume, where they “must” work. The opportunity presents itself to visualize a totally different future than what we had expected; and that may not be a bad thing.
The Value of Coral Reefs
By Monica Perez Nevarez
In order for people to realize the economic importance of coastal ecosystem conservation, Graham Castillo of Estudios Tecnicos Inc. recently released a study giving a monetary value to coral reefs in Puerto Rican waters. The study valued coral reefs at $1.6 billion dollars and includes all the different uses that one can attribute to them, including the resources, services, and passive value they offer. From being a safe-haven to smaller fish, they provide food and shelter and sustain a wide variety of marine plants and animals. As for humans, reefs attract sportsmen and women, fishermen and tourists alike.
Clownfish and Anemone http://flickr.com/photos/thailandbeach/429304694/
Castillo, who analyzed eight natural reserve areas from the point of view of their economic value, including the islands of Vieques and Culebra, stated that for the tourism sector alone, the reefs had a value of $700 million. Of that figure, $300 million are derived from hotel-related activities. He stressed the importance of mitigating the release of CO2 into the atmosphere, as this causes the sea to become acidic, which could potentially kill most of the existing reefs.
Culebra http://flickr.com/photos/iqqmut/2796810164/
The economist went on to say that “activities centered on coral reefs are the main source of recreation for tourists, especially scuba diving and snorkeling”. In addition, “protecting Puerto Rico’s coastal areas represents a value of $10 million dollars because that is where most of the island’s land-based tourism takes place, especially in the beaches, mangroves, and tidal pools”.
The study, formally known as Economic Valuation of Coral Reefs and Associated Resources in Eastern Puerto Rico: Fajardo, Cordillera Reefs, Culebra and Vieques, was published during the “Conversatiorio de Arrecfes de Coral”, or Forum on Coral Reefs which the Department of Natural Resources sponsored last August.
Scuba Diving http://flickr.com/photos/coismarbella/2844649950/in/pool-25751933@N00
Local fishing was valued at $450 million a year; services, investigation and education received $1 million in value, and $10 million were granted for costal protection, while $700 million was attributed to tourism and recreation. Passive value (existing, future, inheritable, and biodiversity) totaled $899 million. “This measures the disposition of a person paying for the resource” said Castillo. Besides giving the reefs a monetary value, the study “is a reference for legislative budget decisions” regarding the use of these resources. Castillo went on to suggest more services, investigation and education should be funded in order to conserve the reefs properly.
Coral Reef Ecosystem http://flickr.com/photos/coismarbella/2848366480/in/pool-25751933@N00
Over 500 million people worldwide depend on marine ecosystems to feed themselves, protect their homes and businesses from hurricanes, as well as for their enjoyment or recreation; and yet very little money is spent in safeguarding the coastal zones and maritime ecosystems that are so vital to both tourists and locals alike. Castillo hoped the study would open the eyes of legislators and tourism related business owners, so that conservation of this most delicate of resources became part of the economic and business agenda.
Tuesday, December 01, 2009
Climate Scams Won’t Save the Planet
December 1, 2009 · By Janet Redman
Cap and trade is a scheme that tries to sell business-as-usual as a solution to global warming.
Whether you listen to NPR or Rush Limbaugh, you’ve probably heard about climate change. And if you’ve heard about climate change, chances are you’ve also heard about “cap and trade.” It’s a scheme that tries to sell business-as-usual as a solution to global warming.
Here’s how it works. The government puts a limit on how much greenhouse gas can be released in a year (the cap), and industries covered by the system are issued an equivalent number of emissions permits. As the cap is tightened each year, permits become scarcer and thus more valuable. The increasing value of the permits is supposed to encourage dirty industries to clean up their act fast, and sell their spare permits to the dinosaurs that didn’t innovate. That’s the trade.
The theory behind cap and trade is that the planet doesn’t care where you reduce emissions, as long as you stay under the cap. And by trading permits, you maximize efficiency and make it profitable for corporations to shrink their carbon footprints.
Everybody wins, right? Wrong. A new short film, The Story of Cap & Trade, released by the Story of Stuff and Free Range Video (www.storyofcapandtrade.org) explains why the real of story of cap and trade is that it’s easy to scam, riddled with loopholes, and a dangerous distraction from the real change needed to protect people and the planet.
First of all, cap and trade programs are easy to cheat. In Europe, where carbon trading has been under way since 2005, energy corporations were asked how many permits they needed and were given that amount for free. But they made out like bandits when they still raised consumer prices as if they had paid top dollar. The result: more than $30 billion in windfall profits. And to add insult to injury, emissions didn’t decline because corporations had overestimated how many permits they needed. Under the U.S. cap and trade law snaking its way through Congress, 85 percent of the carbon credits would be given away to polluting industries for free.
Here’s the second problem. Cap and trade includes offsets—a kind of carbon trading that allows polluters to finance projects outside the cap that purport to cut emissions, and then claim the cuts for their own. Even in theory, offsets don’t lower emissions—they simply move reductions from one place to another. In reality, offsets are rarely “additional”—meaning that the cleaner projects were going to happen anyway. But because the offset creates carbon credits, the company that provided finance has permits to keep polluting at home. Even if the atmosphere doesn’t care where pollution comes from, the people who live next to the power plants and factories do.
Unfortunately, many offsets are just scams. Consider the case of Sinar Mas. This pulp and paper company cut down native forest in Indonesia, causing major devastation, and then planted palm oil trees on the wasteland it had created. Guess what it got for that? Offset credits for reforesting. This company destroys an entire forest ecosystem, installs a monoculture industrial plantation, and can still turn a profit from selling the trees cut down, the palm oil produced in their place, and carbon credits. As a result, a company somewhere else can continue to pollute. It doesn’t make any sense.
Third, carbon trading creates a new derivatives market in carbon credits that’s ripe for speculation. Remember the mortgage crisis, where bad loans were bundled and resold ad nauseum? Now imagine the investment banks that brought us the financial crisis gambling on carbon derivatives—and toxic carbon credits backed by nothing but hot air—creating a carbon bubble. This time when the bubble bursts, we could lose more than our houses. Our planet's ability to sustain life as we know it is at stake.
Above all, cap and trade is a dangerous distraction from what we must do to avert climate chaos. That includes shifting public support from fossil fuels to wind, solar, and other renewable energy alternatives, rebuilding our economy around new jobs in clean industries and energy efficiency improvements, and promoting policies that reward real innovators, not dirty industries.
Cap and trade is a scheme that tries to sell business-as-usual as a solution to global warming.
Whether you listen to NPR or Rush Limbaugh, you’ve probably heard about climate change. And if you’ve heard about climate change, chances are you’ve also heard about “cap and trade.” It’s a scheme that tries to sell business-as-usual as a solution to global warming.
Here’s how it works. The government puts a limit on how much greenhouse gas can be released in a year (the cap), and industries covered by the system are issued an equivalent number of emissions permits. As the cap is tightened each year, permits become scarcer and thus more valuable. The increasing value of the permits is supposed to encourage dirty industries to clean up their act fast, and sell their spare permits to the dinosaurs that didn’t innovate. That’s the trade.
The theory behind cap and trade is that the planet doesn’t care where you reduce emissions, as long as you stay under the cap. And by trading permits, you maximize efficiency and make it profitable for corporations to shrink their carbon footprints.
Everybody wins, right? Wrong. A new short film, The Story of Cap & Trade, released by the Story of Stuff and Free Range Video (www.storyofcapandtrade.org) explains why the real of story of cap and trade is that it’s easy to scam, riddled with loopholes, and a dangerous distraction from the real change needed to protect people and the planet.
First of all, cap and trade programs are easy to cheat. In Europe, where carbon trading has been under way since 2005, energy corporations were asked how many permits they needed and were given that amount for free. But they made out like bandits when they still raised consumer prices as if they had paid top dollar. The result: more than $30 billion in windfall profits. And to add insult to injury, emissions didn’t decline because corporations had overestimated how many permits they needed. Under the U.S. cap and trade law snaking its way through Congress, 85 percent of the carbon credits would be given away to polluting industries for free.
Here’s the second problem. Cap and trade includes offsets—a kind of carbon trading that allows polluters to finance projects outside the cap that purport to cut emissions, and then claim the cuts for their own. Even in theory, offsets don’t lower emissions—they simply move reductions from one place to another. In reality, offsets are rarely “additional”—meaning that the cleaner projects were going to happen anyway. But because the offset creates carbon credits, the company that provided finance has permits to keep polluting at home. Even if the atmosphere doesn’t care where pollution comes from, the people who live next to the power plants and factories do.
Unfortunately, many offsets are just scams. Consider the case of Sinar Mas. This pulp and paper company cut down native forest in Indonesia, causing major devastation, and then planted palm oil trees on the wasteland it had created. Guess what it got for that? Offset credits for reforesting. This company destroys an entire forest ecosystem, installs a monoculture industrial plantation, and can still turn a profit from selling the trees cut down, the palm oil produced in their place, and carbon credits. As a result, a company somewhere else can continue to pollute. It doesn’t make any sense.
Third, carbon trading creates a new derivatives market in carbon credits that’s ripe for speculation. Remember the mortgage crisis, where bad loans were bundled and resold ad nauseum? Now imagine the investment banks that brought us the financial crisis gambling on carbon derivatives—and toxic carbon credits backed by nothing but hot air—creating a carbon bubble. This time when the bubble bursts, we could lose more than our houses. Our planet's ability to sustain life as we know it is at stake.
Above all, cap and trade is a dangerous distraction from what we must do to avert climate chaos. That includes shifting public support from fossil fuels to wind, solar, and other renewable energy alternatives, rebuilding our economy around new jobs in clean industries and energy efficiency improvements, and promoting policies that reward real innovators, not dirty industries.
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