Tuesday, March 29, 2011

Devastating Demand Destruction

While the assumption that supply and demand forces set market prices in the modern financial world is extremely flawed, it becomes a relevant consideration in a capitalist system with limited capacity for financial speculation. This is exactly the world we will be living in over the next ten years or so. Many so-called economists ignore the fundamental reality of limited resources (such as peak oil), and therefore overestimate the ability of producers to generate supply or find substitutes to these critical resources. Many peak oil theorists, on the other hand, believe that we will eventually be living in a supply-constrained world for energy, food and other material resources, and therefore many people will be priced out of the market for them.

They often cite official projections of increasing energy demand in "emerging markets" such as India or China as support, and there is no doubt that such has been the dominant trend in recent years. Even in the wake of the global financial crisis in 2007-08, many of these countries have continued to increase their levels of domestic energy consumption [1], as their industrial sectors have grown and governments around the world have backstopped financial markets. If there is one thing we should be very skeptical of in this discussion, however, it is official projections that extrapolate past trends into the future.

The past conditions that helped form those trends are never fixed, and the conditions generated by the trends will dynamically influence what happens next. Economic and financial realities determine social and political outcomes, and these outcomes coalesce to form a new reality of their own. As we are currently witnessing all across the Middle East, revolutions and military conflicts carry enormous consequences for human life. All wars, either directly or indirectly, are fought over resources (land, oil, minerals, water, etc.); religious and political ideologies are merely drugs ingested after the fact - an opium for the masses. Sometimes, we must entertain the most unpleasant thoughts, if for no other reason than their being realistic reflections of our potential future.

It stands to reason, then, that when resources become increasingly scarce due to ecosystem degradation, peak oil and climate change, violent conflict at the individual, community and nation-state level will become increasingly more likely to occur, which will also feed back into resource scarcity (i.e. oil supply disruptions in the Middle East). People will likely be exposed to this violence over the next few years, regardless of whether they live in Manhattan, London, Tehran, Beijing, Tokyo or many of the cities in between. In the frigid language of economics, systemic death (population collapse) is the ultimate form of demand destruction.

It is difficult, if not impossible, to predict whether a supply collapse will outrun demand destruction during this crucial time frame, or how the two will interact with each other. Another collapse in financial markets, by itself, is unlikely to overwhelm oil supply disruptions when peak oil awareness enters the mainstream dialogue, and it will most likely set up a sharper decline in supply than would have otherwise occurred. For that reason, there will certainly be at least a brief time period in which energy/food prices skyrocket, as well as the cost of finished goods, but it is not so certain how long that trend will last, and it could end much sooner than we would expect.

It is a distinct possibility that systemic demand destruction eventually wins out, especially in the age of nuclear, chemical and biological weapons of mass destruction. It is true that demand for energy and food becomes extremely inelastic to price changes at a certain threshold, but it is also true that central governments and markets simply do not care whether masses of people die from thirst, starvation or an inability to stay warm, and there is little they can do about it anyway. On top of that, we are already witnessing the devastating effects of climate change on human life, mostly in the form of floods and droughts, and billions more could die from accelerating atmospheric disturbance in the near future.

There is also the fact that our peaceful "solutions" to climate change and energy scarcity may be just as threatening to human life as the problem itself, as we are currently observing in Japan. Humans always tend to sacrifice long-term resilience for short-term profits, and our decisions in a complex society will always generate significant unintended consequences. India and China, the two most populous countries in the world, have vowed to continue their construction of nuclear power plants despite the ongoing disaster, albeit after they conduct a few "safety reviews". Eastern European countries, such as Russia, have decided to throw caution to the wind and will not delay their nuclear energy plans at all. [2].

Financially, these countries may find it nearly impossible to make good on these promises, since the up front and ongoing costs of construction and operation are staggering, especially when the cost of credit and oil is high (longer delays in construction mean more interest paid to bankers). Even if they do manage to build a few more plants in a hurry, however, any major flood, intentional sabotage and/or human errors (all likely events) could render them perpetual radioactive liabilities, rather than providers of cheap energy. A similar logic applies to the more forceful ways of securing energy, such as the "War on Terror", as they only create more incentives for dissident groups to formulate and launch large-scale attacks on the aggressor states.

Realistically, a range of predicaments from a lack of cheap oil, clean water, productive topsoil, stable weather patterns or critical bee populations (for pollination [3]) could absolutely decimate global food production in upcoming years. The scenario that would result from a combination of all of these things is nearly unimaginable, but, unfortunately, has a significant chance of occurring. Of course, what scares me the most are not the predicaments themselves, but the violent ways in which human populations, armed with advanced weaponry, will react to them. When push comes to shove, we are not a friendly species, and we will not voluntarily migrate to greener pastures like the lemmings do. In fact, we have nowhere left to migrate to.

Perhaps we will not suffer mass extinction at the mercy of a nuclear holocaust, but instead a worldwide pandemic. Humans tend to forget that they are not the only living species which adapts to and exploits the populations of other living beings. A virus, such as one of the influenza variety, would have a field day in our global, highly inter-connected society, especially in the midst of an economic depression (H1N1 killed 50 million people in the early 20th century [4], and new strains may currently be evolving in unpredictable ways). Lastly, NASA has recently confirmed that our solar system will directly align with the center of the Milky Way Galaxy in December of 2012, and a large energetic release will cause massive solar eruptions, which will in turn obliterate Earth's electromagnetic fields, along with every layer of its atmosphere.

Well, alright, that last one isn't so certain at this point, but, if it did happen, would you even be surprised?

Wednesday, March 23, 2011

Language, Logic and Lies

Our global human society, at this unique point in time, is perhaps the most complex series of inter-connected relationships in the known Universe. It has functioned as an intricate web of economic, social, cultural and political structures that have fed off of each other in locally unpredictable, yet generally stable ways. Everything from our computers and cars to our health care products, homes and groceries pass through each thread of this web and are ultimately churned out by the complex machine.

Considering the fact that human beings have only existed for a very tiny fraction of the time since life first evolved on Earth (<0.00005%), the level of complexity we have generated is truly remarkable. Yet, there is really only one thing that makes any of this complexity possible - the ability to communicate and preserve information and emotions through the use of human language (spoken, written, drawn, signed, etc.). For all we know, other living beings, such as apes and dolphins, have similar levels of cognitive ability (information processing, logical reasoning, emotional sensitivity, etc.) as humans. What would prevent them from creating "societies" with our level of complexity is their inability (unwillingness?) to preserve complicated communications between each other and materially build upon them over time.

Imagine, for a moment, that you are born into the world completely deaf and blind. Your mind would still formulate memories and ideas about those memories and other sensations, most likely at an extremely high level of "clarity", but it would be practically impossible for you to communicate any of these thoughts to other human beings. You would have no attachment to an economic, social or political unit, and from your perspective, these arrangements would not even exist. At the same time, the underlying reality of the Universe would be simple - a reality that is perhaps most clearly reflected in the famous credo articulated by Rene Descartes:

"I think (cogito), therefore I am (ergo sum)."
You can easily doubt your five senses, but you simply cannot doubt the fact that you have doubts. This type of simple existence has not really occurred in any human population (beyond some very minimal extent) during the history of our evolution, since it could not be naturally selected for material survival over generations. Most people who are born with genetic abnormalities that consequently make them "deafblind" are not completely deaf or blind, and only recent developments in medical technology and social care have significantly increased their chances of survival (this trend will not last).

If you can easily doubt your own senses, then it stands to logic that it is even easier to doubt the senses of another, expressed through that person's language, or the language of third, fourth... nth parties removed.
Humans evolved not only the ability to learn to communicate distinct ideas and emotions, but to communicate through increasingly more complex forms. As material resources were exploited and economic structures expanded, human language has adapted and grown as well, becoming more specialized and complex. Regardless of the specific form a mainstream language takes (English, Spanish, Hindi, etc.), the primary evolved function of its common usage is to maintain material exploitation and growth within or across regions.

In 2009, it was estimated that there are anywhere from 5,000 to 10,000 "living human languages", which are defined as those "in wide use as a primary form of communication by a specific group of living people". [1]. While many have "died" (no speakers as primary language) or gone "extinct" (no speakers at all) over time, the general trend has been an increase in the number of languages, especially when considering all of the various dialects and also "constructed languages" (those that were consciously created by humans, rather than natural evolution over time - i.e. computer programming languages).

Some may argue that this plethora of languages has allowed humans to communicate increasing amounts of meaningful ideas with each other, but, in my opinion, this argument is simply not valid. In 1936, at the age of 25, the philosopher Alfred Jules Ayer completed a work entitled Language, Truth and Logic, which fleshed out specific criterion for determining whether a statement has any "meaning". [2]. The statement must either be tautological or verifiable to have meaning, with the former referring to statements that are necessarily true by their definition (under any circumstances), such as mathematical or logical identities.

To be "weakly" verifiable (capable of being probabilistically, rather than conclusively, confirmed), an empirical proposition must have practical conditions under which it can be affirmed or denied. While Ayer also asserted that empirical propositions have meaning if they can be theoretically (in principle) tested, I would under-emphasize, if not completely disregard, this assertion in modern society (for reasons discussed later).

Perhaps the most important function of human language in the modern world has been to communicate information about the "real world" (external environment) through empirical propositions, with the intention of influencing the thoughts or behaviors of others by asserting the truth of such propositions. I would wholeheartedly admit that I sometimes use empirical propositions, carefully crafted in my writing and asserted as truth, to describe the nature of reality to my readers.

The adjective "wholeheartedly" is a good example of this craft, as it is intended to influence your thoughts about my attitude, but adds very little substance to the sentence. While I am confident that most of my propositions are practically verifiable through a combination of logical identities and reasonably accurate models/data, making them "meaningful", I will refrain from continuing down this same path for the rest of the article.

Instead, I will try to infuse the underlying analytic (philosophical) proposition of this article with more clarity in meaning through the use of an example. The following is a passage from a CNN article regarding the recent "Coalition" air-strikes on Libya [3]:  

Coalition forces made "very effective" progress Monday toward their goal of enforcing a U.N. Security Council resolution intended to protect civilians from attack by forces loyal to Libyan leader Moammar Gadhafi, the head of U.S. forces in Libya told reporters.
My Analysis: The sentence above contains two propositions that are constructed to assert truths about reality, but have very little, if any, "meaning".
(1) Coalition forces, as represented by the head of U.S. forces, told CNN reporters that they made very effective progress on Monday towards their goal of enforcing a U.N. Security Council Resolution.

The truth asserted is that the missile attacks in Libya were designed to enforce a U.N. Security Council Resolution, and the Coalition forces believe they made a lot of progress towards that end. To practically verify the truth or falsity of this assertion, it would have to be possible to examine video/audio recordings or primary witness descriptions of the negotiations that took place in the U.N. meeting before the resolution vote, the complete and original copy of the U.N. Resolution, any detailed records of strategic plans developed for the attacks, video or witness accounts of the results of missile attacks and also to question the head of U.S. forces about the alleged statements to CNN reporters, such as the following:
"I assess that our actions to date are generally achieving the intended objectives," said Gen. Carter Ham, commander of U.S. Africa Command. "We think we have been very effective in degrading his ability to control his regime forces."
While all of these things may be theoretically possible, none of them can practically be done by any individual or entity existing on Earth. Our global society has built-in hurdles that would prevent any person, organization, court of law, etc. from gathering all of this information for assessment. It should be noted that I am not making any value judgments about the CNN article or its reporting practices, even though my commentary may create that impression (an illusion of complex human language).
(2) The U.N. Security Council Resolution was intended to protect Libyan civilians from attack by military forces that take direction from Ghadhafi or are, at least, fighting to protect his position in power.
The proposition asserted is that the above is, in fact, true, regardless of what any third party has said. In the original passage, the relevant phrase is structured so that "the head of U.S. forces in Libya told reporters" condition does not apply to it, especially since the only quoted words are "very effective", which relates only to the first proposition. Once again, we would have to conduct extensive interviews with U.N. representatives and, more importantly, relevant executive officials that influence and determine outcomes of U.N. resolution discussions, to assess their intentions with any significant degree of probability.
Of course, almost every proposition in this article and many others fails to meet a basic threshold of practical verifiability, given the enormous amount of evolved complexity that we are dealing with. While these propositions may have no "meaning" in the Ayer sense, that does not suggest that they have no value to their readers at all.

Propaganda comes in the form of outright lies (consciously misstating the truth), partial-truths (consciously withholding part of truth or context needed), truth revealed for misdirection (consciously done) or asserted truths that simply have no meaning (consciously or subconsciously done). The latter are perhaps the most misleading and subversive, since they constantly inform our complex reality through network media, yet we have no way of affirming or denying their validity.

They do, however, provide us with key insights into the collective mindset of those making the propositions. The frequency and extent at which mainstream corporate media outlets, politicians and academics use these propositions reveal a surprisingly clear thread of our global society's complex web; one in which seemingly diverse and "professional" institutions all maintain and reinforce the same descriptive narratives of reality.

When the majority of citizens in Western nations ask why their dwindling tax dollars are spent on military operations in other countries, ones they perhaps had never heard of before, a somewhat coherent response must be provided. Meaningless propositions are the most effective way to validate this response, since meaningful ones are scarce, contrary to the narrative and usually appeal to logic, rather than emotion. As a result, we end up with propositions and narratives that sound something like this:

An oppressed population in Libya has decided to rebel against their leader, Moammar Gadhafi, and, in response, this leader has decided to massacre innocent civilians and restore his oppressive order. A coalition of dozens of nations, with diverse interests, subsequently convened and decided that Gadhafi's actions are universally unacceptable and clear violations of objective standards of international law. After the Security Council, consisting of five permanent members (U.S., U.K., China, Russia and France), adopted a resolution, the U.S. and European nations launched missile attacks on various "command-and-control" sites that are critical to Gadhafi's oppressive strategy, as a means of enforcing the resolution and its underlying intentions. These attacks have been largely successful at immobilizing military forces loyal to Gadhafi and will, therefore, ultimately save the lives of Libyan civilians and restore peace. In addition, with stability returned to Northeast Africa, the national security of Western nations is also enhanced.
Is this narrative supported by meaningful propositions, either analytically or empirically? No, it is not. It is propaganda, which is almost always either a complete lie or a severe distortion of the truth. Lies work well to preserve material exploitation and growth in cultures that do not value the truth, because they also do not embrace uncertainty or doubt. They trust in the language of others, because, without it, the material world becomes too simple for their acquired tastes.

The current trend towards greatly reduced complexity, however, is not a matter of choice, and it has the power to transform the most compelling narratives, supported by meaningless propositions, into the most obvious mockeries of straight forward logic. These narratives eventually take a stand in direct opposition to the thoughts we are all initially born with:

"I am thirsty."

"I am hungry."

"I am..."

Friday, March 18, 2011

The Math is Different at the Top (Part III - Will Water Set the World on Fire?)

The first two articles in this series (Part I, Part II - Financial Threats to Power) discussed the effects of the ongoing financial crisis from the perspective of global financial elites, who have traditionally used such crises to concentrate more wealth and power in the national and international institutions (corporations, government agencies, etc.) which they control. It was suggested that the recent sociopolitical developments in Africa and the Middle East, while driven primarily by the deterioration of the global financial system, are not enough to rid the system of the parasitic elites in charge.

In fact, it is highly likely that either a) the "popular" insurrection currently taking place in Libya was partially fomented by the U.S. military-industrial complex or b) the insurrection is in the process of being co-opted by the same, which would obviously like nothing better than to gain control of Libya's oil reserves. [1], [2].  Throughout the latter half of the 20th century, financial contracts and direct/indirect military interventions were repeatedly used to extract critical resources from these regions, but now there is no more ability or time to rely on the former. Even the traditional CIA tactic of organizing, training and implementing regional coups may be too unreliable and time-consuming at this point.

Despite their control over vast networks of intelligence and propanda, the elites have not managed to convince the local populations of these countries that their interventionist policies are in the least bit helpful. A majority of people in Egypt, Libya, Afghanistan, etc. are entirely opposed to foreign interference and/or occupation, but, unfortunately, this sentiment is largely irrelevant to the elites. If bitter and protracted civil wars break out all across the region, the elites will simply continue to go about their business, securing resources and strategic locations, while the rest of the world watches on with apathetic indignation. However, the simple math guiding the strategy of elites takes a detour into complexity when widescale sociopolitical disruptions begin occurring throughout the developed world, including Japan, the U.S. and Europe, as they will soon enough.

How do you contain a population of fiending debt addicts experiencing their worst stages of withdrawal? Is the imposition of martial law and suspension of due (legal) process enough, or will the sheer desperation of the people win out? The elites may be able to circumvent the constitutional protections of various countries, but, as so many other things in our systemic world, that tactic is a double-edged sword, because people will have very little reason to hold out for a better future once those most basic governmental protections have been stripped away. A renewed storm of rapid financial turmoil will most assuredly take the developed world "by surprise" in the next year or so, but it is not exactly clear how people will react, how governments will respond or how large the scale of systemic disruption will be.

The closest historical example we have to the current financial crisis is the Great Depression, and the elites certainly emerged from the other side of that event more powerful than ever. There is evidence that the same group of moneyed elites actually financed both the Third Reich and the Allies during World War II, which of course ended only after the U.S. developed nuclear weapons of mass destruction and dropped two of them on Japan. They then proceeded to "hedge" their bets again and financed both the U.S. Empire and the Soviet Empire, and currently we see a major shift of investment capital to China. At those earlier and simlper times, however, there were plentiful reserves of fossil fuels available and natural ecosystems had only been partially exploited by industrial process.

In Part II, it was posited that global wealth inequality is a good measure of socioeconomic complexity resulting from finance, but overall complexity is best measured by global energy consumption. This measure has been exponentially increasing for well over a century now, and the trend has both destroyed natural ecosystems and depleted at least half of the world's oil reserves, which had comprised the largest source of net energy and corresponding increases in complexity. The explosion of global financial instruments after World War II greatly exacerbated this dynamic, since it allowed additional industrial activity that would not have otherwise occurred. This article will specifically focus on ecosystem degradation as a significant, near-term threat to financial elites, as it dramatically effects very critical (strategically, economically, politically) parts of our global system.

Water Ecosystem Degradation

It is one thing for large populations to lose their real and perceived financial wealth, but an entirely more disruptive thing for those populations to lose access to clean water and adequate food. There are two nations that provide the quintessential example of a breeding ground for sociopolitical instability brought on by industrialization and resulting environmental degradation - Pakistan and India. The former state was arbitrarily created after the end of British colonial rule of India in 1948, and its borders were drawn in a fashion that exarcebated long-standing tensions between Muslim and Hindu populations and divided control over critical resources. Both of these countries are labeled as suffering from "acute water scarcity" by the United Nations, and this trend will  significantly contribute to chronic food shortages, as they both rely on irrigated agriculture for exports and also to feed their growing populations. [3].

Much of India's water scarcity is directly or indirectly (population growth) caused by the industrialization of its economy. The discharge of untreated sewage from urban areas into rivers and streams has introduced many organic and inorganic toxins into surface waters. Heavy use of fertilizers and pesticides in the agricultural sector have significantly contributed to polluting almost 70% of the country's surface water and a growing number of groundwater reserves, rendering much of them unsuitable for human consumption, irrigation or industrial processes. There are also many other industrial factors making this horrible water situation even worse, including the destruction of forest, wetland and coastal  ecosystems, as well as climate change (discussed more in Part IV). [4].

Pakistan is in a very similar situation, as it relies on water resources for agriculture and industry, which have in turn degraded the quality of its surface and groundwater over many years. [5]. Of course, it also shares many of the same sources of water with India (Indus River and its tributaries), and this fact sets up the likelihood of greatly increased conflict (perhaps full-blown war) between the two states within the next few years. India is already in the process of constructing 33 new hydro-electric dams, some of which are located in the hotly-disputed Kashmir territory, and studies indicate that their cumulative storage of river water could divert significant amounts of water from Pakistan during its growing season. [6]. These projects may be in violaton of the Indus Water Treaty of 1960 (dealing with water sharing), but humans find it easy to make such agreements when resources are abundant, and as they quickly evaporate (or contaminate), painfully desperate countries cannot be expected to, and will not, continue to recognize international law.

Neither of these countries have significant domestic sources of energy (other than hyrdro-electric), both have a growing number of people born into poverty (India is the second-most populus country in the world, contains some of the most densely populated areas, and has one of the poorest populations), and both have dwindling water resources that are critical for agriculture, industry and households. [7]. It is truly a ticking timebomb that encompasses two states with a bitter ethnic/religous rivalry and nuclear arsenals waiting in the wing. The latter fact, along with India's importance to the global economy, makes upheaval in these countries a major threat to financial elites attempting to maintain global order and control. The Indus River Basin is often reffered to as one of the birthplaces of human civilization, and it could very well ignite the fire that eventually burns the power structures of modern civilization to the ground.

Many of the disturbing environmental trends mentioned above can also be found in another state with a major economies (second largest) and a nuclear arsenal, albeit to a somewhat lesser extent - China. An unoffical Census report has recently estimated that total discharges of harmful chemicals into China's rivers and lakes amount to 30.3 million tons in 2007, twice the number that had been officially reported. Government planners had estimated that Chinese water sources could only handle about 7.4 million tons of discharge a year, which is more than three times less than what the report found. Much of the discharge comes from industrial processes and chemical agricultural, which account for 90% of its water consumption.

Due to a rapidly growing economy and population, environmental degradation, increasing droughts and wealth inequality, almost a quarter of China's population (primarily in the North) did not have access to safe drinking water as of 2009 and nearly 15% currently suffer from water-related illnesses. [8], [9]. China is also the largest exporter of agricultural crops in the world, and water scarcity is becoming an imminent threat to this industry. Many farmers in the Northern plains have already stopped producing wheat because of unreliable surface water and no access to groundwater. Chinese agriculture employs 300 million people in the country, and anywhere from 5-19% of the population already suffered from "hunger" according to the World Food Programme's estimates in 2006.

It is then clear that a majority of the world's population is quickly losing its access to adequate water supplies necessary for maintaining production and consumption, and will therefore fall deeper into sickness, hunger and bloody warfare. Although the financial elites in power are most likely aware of these trends and their implications, it is still a situation unlike any other they have ever encountered in history. Destruction of water ecosystems in India and China, along with the tense dynamic between India and Pakistan, reflect irreversible environmental trends that will unfold in a very chaotic, non-linear manner, and the ensuing outcomes will be largely outside of the control of financial power elites.

Many other large countries are well down the path to facing isses of water (food) scarcity in the upcoming future, including the U.S., as they have destroyed their natural ecosystems through industrial development and toxic agriculture. However, the ecosystems of most developed countries are still capable of providing sufficient water to their populations at this point, and it is unlikely that another "Deep Water Horizon" event will incite a populist revolution. The more pressing concern for those countries is access to cheap and efficient energy, as they completely rely on such energy for the production of numerous goods, the provision of services (i.e. healthcare), transportation, international trade and industrial agriculture.

Next time, in the final part of this article series (Part IV), we will explore the issues of peak oil and climate change from the perspectives of financial elites, who will witness these systemic instabilities quickly spread across our global networks, leaving no developed country immune from its devastation, especially those that rely on imported oil to meet a signficant portion of its domestic energy consumption needs.The sheer lack of preparedness or resilience in these regions for a systemic energy or environmental shock is mind-boggling at the individual perspective, but perhaps it is precisely the state of dependency that financial elites want their populations to be in when these crises hit. At the same time, the elites themselves may be the ones who are truly dependent on environmental, economic and social systems that are generally predictable and stable; ones that simply cannot exist without access to increasing net energy.

The Math is Different at the Top (Part IV - When the Lights Go Out)

The first three articles in this series, Part I - The Math is Different at the Top, Part II - Financial Threats to Power, Part III - Will Water Set the World on Fire, discussed the impacts of financial deterioration and  ecosystem degradation (specifically water-based) on the ability of financial elites to retain economic and political power through centralized, global institutions.

A majority of the populations in the developed world or strategically critical countries (India, Pakistan, China, etc.) will be traumatized by the ongoing destruction of financial wealth, as well as water resources necessary for agriculture and household consumption (and, ironically, industry as well). Many of these locations can be considered "central hubs" of our global network civilization, and they must be coherently maintained for the overall system to have any meaningful structure (order).

It is possible, however, that these crises will be used by the elites as justification for further concentration of wealth and in power in their hands, through military interventions, the abrogation of legal protections, the implementation of oppressive legislative/executive policies, etc. So far, the global financial crisis has worked like a charm towards furthering this goal, as evidenced by the immense transfer of wealth that has occurred in the developed world since 2008. 

The imminent lack of adequate water resources in India, Pakistan and China, three countries with stockpiles of nuclear weapons, will be much more difficult for the elites to manage, but it is certainly not out of the question. China already has an authoritarian government in place that has been coerced to do the bidding of financial elites, and the same could be said of those in India and Pakistan, which are extremely corrupt and largely inept.

Billions of people throughout these regions may revolt in pure desperation, but we are still talking about a hungry, thirsty and disorganized mob facing off against a coordinated, well-equipped cadre of power elites, with every tool of oppression at their disposal (assuming relevant military commanders cooperate). That dynamic changes, however, when the issue of peak oil (decreasing global net energy availability) is factored into the equation, especially since our "central hubs" are net oil importers.

It is generally accepted that, since the discovery of fossil fuels about 150 years ago, at least half of all the crude oil in global reserves has been depleted. In the U.S. (largest per capita consumer of fossil fuels), this oil provided an energy return on energy invested (EROEI) of about 100:1 in 1930, but it is now less than 20:1 for imported oil and 10:1 for domestic (>85% of our crude oil is imported) []. No other alternative energy source (except hydroelectric) even comes close to these ERsOEI, and some, such as biodiesel, are probably net energy losers. [1]

The technical aspects of peak oil production have been thoroughly-documented by numerous analysts, and most of them conclude that it will become exponentially more difficult and expensive to maintain the current supply of global oil, especially when considering environmental concerns and the impact of the financial crisis. As credit markets deteriorate at an accelerated pace and financial economies renew their deflationary spiral, there will be much less capital investment in developing and maintaining oil production, refinery and transportation facilities.

An equally important fact is that oil exporting countries will continue to reduce their exports at an increasingly faster pace than the rate of production decline, as they require more oil for domestic energy consumption or as a part of other strategic policies. [2]. On top of that, resource conflicts generated between or within states could also take significant production capacity off-line and/or destroy already-extracted stores and related infrastructure (i.e. invasion of Iraq, potential invasion of Iran, Libyan "insurrection", potential revolution in Saudi Arabia, etc.)

Note the Steeper Negative Slope (rate of decline) in Net Exports vs. Production

Note the Steeper Negative Slope (rate of decline) in Net Exports vs. Production

These analysts also conclude that alternative energy sources will not come close to offsetting the net energy declines created by increasing gaps in oil supply and demand, given the various physical (thermodynamic - EROEI, resource - water scarcity), financial (front-loaded costs of scaling up production) and political constraints (greedy, short-sighted lobbies). []. The scope of systemic shifts that can be analyzed under the umbrella of peak oil is almost limitless, and many of these issues are highly inter-connected, but this article will, of course, only focus on its threat to a small group of financial elites in power. This tiny fraction of the population has benefited the most from gains in net energy and the global oil trade, and they stand to lose the most from its collapse as well.

The U.S. Military (Department of Defense) is the largest single institutional consumer of energy in the world, and more than 80% of its energy budget was spent on oil in 2008. It relies on oil for almost all of its critical functions, from transporting its troops to providing them with food, toothpaste and toilet paper, as well as the manufacture of weapons and armor, among other things. This institution, combined with a network of major financial institutions and a few dozen primary defense contractors (Boeing, Lockheed Martin, Xe, etc.), represent the core of global elite power structures and their most valuable mechanism of oppression.

U.S. soldiers are already some of the most over-worked and under-paid employees in the developed world, and human beings can only take so much abuse before their loyalty to an abstract concept gives way to basic needs and expectations. Still, just as discretionary spending freezes do not affect "defense spending", we can expect that oil rationing will divert large amounts of energy away from industry, transportation and possibly agriculture towards the Pentagon. In addition, the U.S. military has already positioned itself in strategic locations near the world's largest oil reserves, and will most likely use the rapidly progressing unrest in Middle Eastern nations to further justify expansion of this presence.

But, how far can this over-reaching logic carry the elites in power? Zbigniew Brzezinski, National Security Advisor to President Carter and notorious geopolitical strategist for the U.S., has accurately analogized the expansion of financial hegemony to a game of Chess. The players who take a hard bee-line for the opponents' major pieces make themselves acutely vulnerable and are bound to eventually suffer defeat. According to Brzezinski, this vulnerability takes the form of a "global political awakening", in which populist sentiment overwhelms the domination of power [3]:

America needs to face squarely a centrally important new global reality: that the world's population is experiencing a political awakening unprecedented in scope and intensity, with the result that the politics of populism are transforming the politics of power. The need to respond to that massive phenomenon poses to the uniquely sovereign America an historic dilemma: What should be the central definition of America's global role? [4]
By "uniquely sovereign", he means a country that is sovereign as a small group of powerful people  administering its policies, not as a democratic nation. What Brzezinski failed to recognize, however, was that these people no longer have the luxury of carefully crafting globalist policies in resource-rich regions, as he did with the Mujahideen in Afghanistan and the Shah in Iran [5], due to peak finance and oil.

They have created an environment in which their only option to move forward is brute force, and it is simultaneously the worst option. In the process of deploying military hardware to secure critical resources such as oil, significant portions of these resources will be destroyed and increasing resistance will be met. Brzezinski also ignored the fact that "populism" would not be isolated to the system's developing periphery, but would rapidly spread to its center.

The recent events in Japan provide a vivid example of how our world's central hubs are extremely mal-adapted to energy scarcity. Here is a country that has been in a zombie financial state for two decades after a credit implosion in the 1980s, but could still boast that it was gradually weaning itself off of coal and imported oil for energy and substituting natural gas and uranium instead. In 2008, when it was still the second-largest economy in the world (now third-largest), Japan generated almost 40% of its electricity from nuclear power. [6].

A record-breaking, yet entirely predictable earthquake (and resulting tsunami), however, has led to severe complications at three of its nuclear power plants (Stoneleigh from TAE provides an excellent analysis of the situation here), which may reverse years of "progress" in its nuclear industry, and leave tens of millions of people without power for at least months. [7]. All of a sudden, access to increasing amounts of mined coal and imported oil appear to be more important than ever, but such resources no longer exist. The extent of systemic physical and economic damage resulting from this event is yet to be seen, and is most likely being drastically under-estimated by the mainstream at this point.

While experts are already predicting this event to be one of the "costliest natural disasters on record", it was no more "natural" than the BP Deep Water Horizon oil spill at a practical level. The staggering consequences are entirely a function of humanity's relentless march towards increasing energy consumption, economic growth and global complexity. As Richard J. Samuels, MIT's Director of the Center for International Studies, put it in an interview with CNN:

Question: Why did Japan so readily turn to nuclear power when the country experienced the terrible effects of nuclear radiation when it was bombed during World War II?

Samuels: It's a good question, but it's a fairly easy one to answer. Despite that history, Japan is resource poor. And its resource poverty trumped its unpleasant history with nuclear radiation. That is, Japan knew that it would need more resources if it were going to transform itself into a global powerhouse. And it had no oil. It was running out of coal and there was no liquefied natural gas in the 1950s.
In fact, the critical nuclear situation in Japan is a microcosm of the critical global situation that will erupt over the next five or ten years, if not sooner. The risk to Japanese citizens is that radioactive isotopes will leak outside of the nuclear containment facilities, into the atmosphere and then into their bodies, where they will endogenously (without external interactions) release large amounts of harmful energy (to living beings) as they decay from unstable chemical arrangements into stable ones (the probabilistic rate of collective decay is predictable, but the decay of individual isotopes is not). [], []. This process of release is a dynamic fact of nature, and one that occurs at some of the smallest and largest scales of the Universe, as well as every scale in between.

The sad truth is that tens of thousands of people could end up dying from an earthquake, tsunami or exposure to nuclear radiation, and the financial elites would simply use those deaths to their material advantage, just as they did after Chernobyl in the Soviet Union, Hurricane Katrina in New Orleans or last year's earthquake in Haiti. Energetic releases on such scales occur very frequently in human society and nature, and our socioeconomic systems, while increasingly vulnerable to them, have so far absorbed them in stride.

Corporate media pundits are simultaneously talking about how tragic the disaster in Japan has been, and how it could also provide an opportunity for renewed economic growth through the rebuilding of its infrastructure. This latter claim is obviously nonsense to anyone who thinks about it for more than two seconds, but it reflects the fact that power elites are not at all shaken by the consequences of this event so far. They are actually benefitting from the "ratings" it generates in corporate media, and stand to benefit much more from financing the rebuilding of homes, schools, roads, factories, etc.

So what will it take to shake this arrogant sense of invincibility out from the consciousness of elites? It could be systemic financial deterioration, water scarcity, other environmental disasters or a combination of such events, but as mentioned throughout this series, it is quite possible that global structures of power will adapt to all of these things. However, peak oil represents an energetic release generated in the very heart of global human civilization, the industrial economy, which will spread through all of its extremities, up its spine and into its brain.

When tens of millions of people in the developed world are forced to live without access to basic electricity or fuel for transportation, along with any other expected luxuries, no amount of whitewashing or clever propaganda will dull the systemic shock. Television ratings won't soar, because consumers of entertainment will have neither the ability nor desire to watch themselves suffer in real-time. All bets are off when the energy finally stops flowing and the lights go out, and, right now, the financial elites are running the biggest, most complex bets on the table.

Friday, March 11, 2011

Propaganda and Paradise

‎"By the skillful and sustained use of propaganda, one can make a people see even heaven as hell or an extremely wretched life as paradise." - Adolf Hitler

Japan, the world's third largest economy, gets hit by a record-breaking Earthquake, Tsuanmi and a critical nuclear meltdown situation, the Eurozone is continuing to crumble (Greek 2-year bonds trading near all-time high 17% yield [1]), U.S. consumer credit markets are continuing to break down [2] and... the U.S. equity markets are surging (Friday, March 11)! Why? It is most likely because a few big players are speculating on the prospect of QE3 with unspeakable leverage, and this propsect is primarily premised on the fact that shadow and conventional banking liabilities plunged by $440B in Q4 of 2010. [3] How does any of this make sense?

Well, it is a combination of profound ignorance and malicious propaganda. There was a time when the ponzi-racket U.S. stock market kept itself afloat by convincing investors that strategic investments in the "right" companies will produce phenomenal returns, as those companies expand and rake in profits from sales. Now, the average investor is too afraid and incredulous to accept that narrative, so the ponzi-runners are cleverly exploiting that fear to take the game into overtime. Readers, it is time to willfully suspend your  disbelief.

The economy/markets are obviously facing the propsect of massive deflation and price drops, and the Fed's monetary policy is the only thing that can prevent this otherwise inevitable outcome. This latter fact is evidenced by the market rally in 2009 after the implementation of QE1, but economic data continued to deteriorate in 2009-10 because it wasn't quite enough, and the financial troubles of pesky foreign countries also interfered with our recovery. Hence, we needed to implement QE Lite and QE2 throughout 2010. Double overtime.

For a little while there, the markets put forth a strong rally and some offically-published economic data showed improvement, including a slight uptick in shadow banking liabilities, which are really the most important ingredients of our credit-driven economy. Alas, the most recent reports show that consumer and banking deleveraging is still in full force, the housing market is in fraudulent shambles, the jobs markets barely exists anymore and, oh yeah, the rest of the world is randomly falling apart.

See, didn't we tell you that deflation was a threat?? There is one, and only one, solution to these problems - more legally-sanctioned th... sorry, quantative easing. When asked about food/gas price inflation in Queens, NY today (Friday, March 11th), Bill Dudley from the Fed countered the inflation concerns with the following comment [4]:

"Today you can buy an iPad 2 that costs the same as an iPad 1 that is twice as powerful..."
The people in the audience did not react so kindly to that callous remark, and one person observed that he couldn't "eat an iPad".

"No", thought Dudley to himself, "but you can look like a fool when all of those prices come crashing down".

See, we told you that deflation was the threat! Now, we must embark on a QE program the likes of which the world has never witnessed before. Triple overtime. The eyes of hedge fund managers, leveraged to the gills, light up like Christmas trees, as they speculate that heaven has finally arrived on Earth. All of those long bets will surely pay off as the markets once again take off on expectations of QE and the backs of  major prop desks around the world. Every last drop of juice will be squeezed out of this Orange and into our bank accounts.

Not so fast, cautions the wise investor. The markets are getting sick and tired of this game, which has already gone on for way too long. People are literally dying across the world because of your leverage, and the rest of them may decide not to sit still for their scheduled executions. "That's it", they say, "no more". We're calling the game on account of a tsunami. You big-shot players may be Ph.D.s (doctors of propaganda), but you lack common sense. When you rig the game and steal everything away from the people, they have nothing to left to play for; nothing left to lose. There are no more profits to be extracted. Your proposal of QE3 will fall flat before it barely gets off the ground, and even if it does become official policy, the markets will sell the news in a hurry.

On the other hand, maybe I'm just too eager to see this wretched world tranform into a modest paradise.

Thursday, March 10, 2011

The Math is Different at the Top (Part II - Financial Threats to Power)

Part I in this article series briefly discussed a simple paradigm that has governed human societies since at least the Industrial Revolution - the one which dictates that most major economic policies implemented throughout the world have benefited ever fewer and more centralized institutions of power. This straightforward logic accelerated greatly after World War II and the explosion of debt-dollar finance in the 1970s (elimination of gold standard), but was taken to its ridiculous extreme after the onset of the global financial crisis in 2007-08.

We were repeatedly told that major financial institutions were in "deep trouble"after the American sub-prime housing meltdown, yet these very institutions reported all-time record revenues and corresponding bonuses in 2009-2010, just one year after the global economy was on the brink of collapse. Meanwhile, wealth inequality in terms of incomes, financial worth and net worth has never been greater in the developed world. Regardless of whether this phenomenal transfer of wealth was a premeditated, coordinated effort by global financial elites, or a more "natural" result of financial evolution in a capitalist system, it is undeniable that the practical effects are the same - the rich get richer and more powerful while the poor get poorer and more desperate.

It is the latter fact that potentially poses a serious threat to the financial elites and their existing structures of power, as perhaps evidenced by the popular revolts throughout Africa and the Middle East, and to a lesser extent, the EU periphery and South Asia. This article will explore specific developments of the ongoing financial crisis from the perspective of financial elites, and their goals of maintaining the global structures of power that provide order. The financial crisis reflects a systemic, structural instability that may reverse the global trend towards increased socioeconomic complexity, which has always fed into and off of the concentration of wealth and power.

Complexity as a function of finance, therefore, is perhaps measured best by levels of global wealth inequality, and as mentioned before, these levels are still getting worse (more unequal). However, there comes a tipping point at which an overly-complex system begins to consume itself, as the peripheral networks and central hubs become less stable and less attached to the overall structure of the system. In this sense, the more damaging a crisis is to the ability of populations around the world to maintain their relative share of the global wealth pie, meager as it may be, the more difficult it will be for existing financial elites to maintain global complexity, order and control.

The bottom of this pyramid (~70% of world's adult population) primarily represents the poorest regions and countries of the world, where people have lived meager existences (by material Western standards) for so long now that they simply do not expect any better, which also means that they have minimal psychological attachment to shaky promises of financial prosperity. Many segments of Africa (>90% of continent's population), South Asia (>90% of India's population), Latin America and the Middle East fall into this category, and the latest financial crisis has sadly made the living situation worse for them, due to increases in food/energy costs largely fueled by speculative debt.

As discussed in Part I, it is unlikely that sociopolitical disruptions in these regions, chaotic as they may get, will significantly loosen the financial elites' grip on the levers of power, and could even serve to tighten it (i.e. justifications for U.S. military interventions in the Middle East to secure oil reserves). Indeed, such disruptions in these regions were, in the past, intentionally orchestrated by the elites during the latter half of the 20th century in order to extract crucial resources and political concessions. Furthermore, many of the countries in these regions were dominated or manufactured by European colonialism over centuries [1], and are therefore no strangers to systematic exploitation and oppression.

Notable exceptions to this "rule" may be Pakistan and India, as they both have nuclear arsenals and the latter is absolutely critical to the  global  telecommunications industry (these countries will be discussed more in Part III, in the context of short-term environmental crises). We must, then, turn our focus to the middle and upper segments of this pyramid, which represent 30% of the world's adult population. China contains a full third of the people in the middle segment ($10K-$100K), and its population has become increasingly dependent on stability in global financial markets.

An article from the Shanghai Daily News suggests that Chinese elites may actually be targeting a 30% reduction in real estate prices through higher interest rates, property taxes and more regulatory hurdles to purchasing property, in a "Thunder Attack" designed to deflate the Chinese housing bubble. [2]. While this information does not qualify as much more than a speculative rumor at this point, it suggests that high-level Chinese officials, at the very least, are fully aware of the bubble and its inevitable implosion.

At the very most, it implies that these officials and their sponsors are going to prematurely throw the citizens of China into a deflationary recession, in which the financial winners and losers can be hand-picked, a la Lehman, and all of the remaining losses can be borne by taxpayers. It is true that, given the level of housing inflation in China (which may be extremely under-estimated by official data [3]), it would be prudent for officials to implement some measures designed to cool down speculation and help borrowers pay off their debts, but there is an inherent conflict of interest contained within such measures. Any policies that provide systemic relief to debtors will be adverse to the interests of financial elites, so we can expect that none will be undertaken, and instead Chinese officials will follow the Japan-U.S. precedent of "extend and pretend".

China has had the fastest rate of economic growth for years now and boasts the second-largest economy in the world, but despite or because of this fact, income inequality has gotten much worse between urban and rural segments of the population and significantly less than 10% of the population is defined as being a part of the "middle class". [4]. Many of these people have been incentivized to invest their savings into stocks and real estate in recent years, as the interest paid on savings does not even come close to keeping pace with the rate of domestic inflation. Already, the Shanghai Stock Index has lost more than 50% from its peak in 2007, and real estate prices will follow suit soon enough. []. It then becomes evident that mounting instability in financial markets could generate substantial sociopolitical unrest among large swaths of the seemingly comfortable urban population, which will realize that, contrary to popular belief, they had never left their rural countrymen behind.

Of course, China is also the largest exporter and second-largest importer of material goods in the world, which makes it extremely significant to economic trends in developed states. Europe, Japan and the U.S. alone comprise 77% of the wealth pyramid's upper segment (net worth between $100K-$1M), and their populations hold at least half of their net worth in financial assets (bonds and equities) and have the highest levels of debt in the world. From this fact alone, we see why another crash in the real estate, equity and credit markets of these regions, fueled by the ongoing financial crisis, would obliterate much of the current and future (expected) wealth of the world, greatly reducing complexity and potentially throwing a huge monkey wrench into the schemes of global elites.

Yet, it is undeniable that these schemes have continued on since 2007, as governments in these regions have subsidized financial losses and supported fraudulent accounting practices to hide them. The "blood funnel" of powerful financial institutions has kept them alive by draining productive capital from workers, taxpayers and gullible investors. How long can this process continue in the face of increasing market instability, rising unemployment, deteriorating public finances and corresponding sociopolitical decay?

Perhaps the more disturbing question is whether financial and sociopolitical deterioration will sharply reduce global complexity, as reflected by wealth/power inequality, or instead will provide the elites with an opportunity to concentrate even more power in the bowels of international institutions such as the IMF and World Bank. John Perkins, in the Prologue to Confessions of an Economic Hitman, provides a stunning  example of how the latter logic has prevailed in regions such as Latin America, and describes its general mechanism of action:

In 2003, I departed Quito [Ecuador] in a Subaru Outback and headed for Shell [named after the oil company] on a mission that was like no other I had ever accepted. I was hoping to end a war I had helped create. As is the case with so many things we EHMs [economic hit men] must take responsibility for, it is a war that is virtually unknown anywhere outside the country where it is fought. I was on my way to meet with the Shuars, the Kichwas, and their neighbors the Achuars, the Zaparos, and the Shiwiars -- tribes determined to prevent our oil companies from destroying their homes, families, and lands, even if it means they must die in the process. For them, this is a war about the survival of their children and cultures, while for us it is about power, money, and natural resources. It is one part of the struggle for world domination and the dream of a few greedy men, global empire.

That is what we EHMs do best: we build a global empire. We are an elite group of men and women who utilize international financial organizations to foment conditions that make other nations subservient to the corporatocracy running our biggest corporations, our government, and our banks. Like our counterparts in the Mafia, EHMs provide favors. These take the form of loans to develop infrastructure -- electric generating plants, highways, ports, airports, or industrial parks. A condition of such loans is that engineering and construction companies from our own country must build all these projects. In essence, most of the money never leaves the United States; it is simply transferred from banking offices in Washington to engineering offices in New York, Houston, or San Francisco. Despite the fact that the money is returned almost immediately to corporations that are members of the corporatocracy (the creator), the recipient country is required to pay it all back, principal plus interest. If an EHM is completely successful, the loans are so large that the debtor is forced to default on its payments after a few years. When this happens, then like the Mafia, we demand our pound of flesh. This often includes one or more of the following: control over United Nations votes, the installation of military bases, or access to precious resources such as oil or the Panama Canal. Of course, the debtor still owes us the money -- and another country is added to our global empire.
In the developed world, our "favors" came in the form of high-limit credit cards, zero-down mortgages
and publicly-financed entitlements. Now, the powerful banks (through their puppet politicians) have come to our doorsteps, demanding their pound of flesh, which takes the form of subsidies for the extremely rich and austerity for everyone else. Perhaps the most vivid examples of this mafioso dynamic have taken place in Europe, where many EU members (Germany, France, Italy, Spain, Greece, etc.) and the UK have hoisted "harsh" austerity plans on their citizens.

The citizens of Ireland are currently facing an austerity plan worse than anyone else, as the ruling party agreed to tackle 40% of their proposed budget reduction (8% of GDP) in 2011 alone [5], but there has been very little popular dissent in response. Greece has experienced some extremely violent protests over the last year, but Athens is a far cry from Berlin or London. Students in the UK held a rowdy protest over tuition hikes at the end of last year, but so far none of the European protests/riots have influenced any significant changes in economic or political policies. [6]. Continued deterioration in global financial markets will lead to stronger and more frequent popular outbursts, and politicians may be forced to ease up on austerity measures as their respective elections draw near. These concessions could keep European populations relatively obedient and docile for another year or so, but they will ultimately be too few, offered way too late.

In the U.S., President Obama's proposed budget for 2011, which was released two months after he extended the Bush tax cuts for the wealthiest Americans (projected to increase the federal deficit by almost $900B over two years [7]), would allegedly reduce the deficit by $1.1T over the next decade. This reduction would be achieved in part by cutting financial aid and heating energy subsidies to those Americans already living below the poverty line. While the politicians have not yet mustered the courage to touch Medicare and Social Security, their financial masters are already figuring out how to manipulate public perception for their benefit (Bloomberg, Oct. 2010):

"Almost three in five say privatization of the Medicare program, with assistance for low-income seniors, should be considered when lawmakers discuss how to close the budget gap. A majority, though, oppose raising the age at which people can start receiving Medicare benefits.

Americans are narrowly against lawmakers considering Social Security privatization as a means to reduce the deficit. Forty-eight percent say that should be off the table versus 44 percent who want the possibility looked at. Almost three in four favor lawmakers studying removal of the Social Security tax cap so wages over $107,000 a year are taxable.

More than 55 percent of those surveyed under the age of 65 say they aren’t confident they’ll get the same benefits from Social Security and Medicare that seniors are getting today."
There is no doubt that entitlement spending needs to and will be reduced, but it is the context in which this reduction takes place that is most important. Benefit cuts combined with privatization would be ideal for the financial elites, as that frees up money to pay interest on federal debt and provides them more funds on which to levy hefty fees and commissions. The process is even more stark at the state level, where governments are beginning to slash every part of their budgets except the one most exploitative and burdensome, interest paid on debt owed to bankers.

In fact, the main reason why municipalities are so cash-starved right now is that banks are refusing to roll over the unproductive debt that they saddled on these communities in the first place. At the same time, they can use speculative financial instruments (i.e. CDS) to short municipal bonds and profit from deterioration in public finances. If I was a completely objective observer, who had left the ground and was floating through the upper levels of the Earth's atmosphere, then I would be forced to remark that this controlled demolition, frustrating and chaotic up close, is simply beautiful from miles away.

Still, the financial contract killers are not finding their hits so easy to carry out in states such as Wisconsin, Nevada, Ohio, Indiana and New Jersey. Governors and Congressmen in these states have attempted to implement legislation that would block the ability of public unions to engage in collective bargaining over their salaries and benefits, which would then make it easier to shove the elites' austerity agenda down their throats. The protesting public union workers may still be ignorant of the economic reality they are bound to face, but they do show us that values of self-dignity and communal, organized resistance still remain active in the center of a cold and soulless financial empire.

It is certainly premature to declare some kind of popular victory in the developed world, but, by the same token, the elites can hardly afford to ignore the new, tricky variables now incorporated into their equations. Large segments of the populations in China, Europe and the U.S. are beginning to face the very real prospect that the wealth they currently have will quickly deform into a distant memory, and the wealth they expected to have was never meant to be. Through social media, telecommunications and sheer will power, the disenchanted have an ability to share their frustrations and organize demonstrations on a meaningful scale.

There is still a legitimate possibility that those people living in "central hubs" of our global network will remain brainwashed a bit too long, and/or their efforts to confront the financial elites will fall a hair too short. It would certainly be a mistake to underestimate the tendency of financially-enslaved people to follow their fellow lemmings right off the edge of a cliff. However, there are more fundamental, non-financial systems that pose a near-term threat to those attempting to maintain a global network of power. While financial capitalism has been a large force behind the expansion of socioeconomic complexity (and corresponding wealth/power inequality) in recent years, energy and environmental resources are ultimately the bedrock foundations of every complex system on Earth.

The third article in this series will focus on ecosystem degradation, energy scarcity and climate change as major complications to the otherwise simple calculations of global financial elites. Any wealth that manages to survive the worst phases of the global financial crisis will only be as valuable as the Earth's environmental and energy systems allow it to be. It will certainly be difficult to continue concentrating wealth when there is very little left to concentrate, but, at the same time, it would be naive to assume that the elites have not considered critical issues such as peak oil and climate change. Next time, we will explore the plausibility of less than 0.5% of the global human population being able to control the other 99.5% as the world burns around them.

Tuesday, March 1, 2011

The Math is Different at the Top (Part I)

It's not rocket science.

It's just basic arithmetic; 2+2 = 4 ...

Privately-owned central banks + discretionary monetary policy = systemic corruption/oppression.

If the Food & Drug Administration had 100% of its shares owned by private pharmaceutical companies, and, a few months after implementing some radical new regulatory directives, these companies began making record profits and their executives receiving record bonuses, then it wouldn't be too difficult to understand why. Well, that's not necessarily a hypothetical as much as a sad representation of reality, but the connection is even more blatant in the case of the "Federal" Reserve. It's 100% owned by private financial institutions, which receive 6% annual dividends on their shares, and have enormous control over the selection of its Board of Governors, who in turn have enormous control over its Open Market Operations.

After the Fed launched its "QE1" and "QE2" programs in 2008 and 2010, the two most aggressive monetary directives ever undertaken in America (they will combine to total ~$2.5T in debt-asset purchases [1]), the banks have posted "their two best years in investment banking and trading". For the five biggest institutions (Goldman Sachs, JP Morgan, Citigroup, Morgan Stanley, Bank of America), revenues generated in 2010 were only exceeded by those of one other year in history, 2009. [2]. These two years just happened to follow the onset of the worst economic depression the world has ever experienced, which is still right on track to surpass the global financial and social turmoil caused by the Great Depression. If you think that is an irresponsible exaggeration, then just stop and reflect on the fact that Germany and Japan did not have any access to nuclear or biological weapons of mass destruction back in the 1930s.

Moreover, the worst financial effects of the Great Depression were primarily limited to the Americas and Europe, while the latest credit bubble had stretched its tenatcles to every single corner of the globe. North Africa and the Middle East have already descended into the belly of the financial beast, and it is highly likely that certain parts of Europe (i.e. Greece, Spain, Portugal, Italy) and Asia (i.e. Vietnam, Pakistan, Sri Lanka, etc.) will shortly (within the next year) follow their footsteps down the beaten path. We must remember that the financial elites running the Fed and IMF are not only concerned with making vast sums of money, but also retaining and expanding their grip on the global levers of power. So is it a coincidence that many of these politically unstable countries had been targets of American imperialistic (financial) domination for years now, and that their sociopolitical deterioration presents glaring opportunities for outright regional intervention by the U.S. military-industrial complex?

Perhaps not, since the U.S. has often used economic catastrophe to direct economic and political policy in other countries and concentrate ever-more financial wealth in the hands of a few global corporations. Naomi Klein briefly outlines the dynamics of this process in the Introduction of her acclaimed book, The Shock Doctrine, under the direction of its most notorious proponent, Milton Friendman:

"Friedman first learned how to exploit a shock or crisis in the mid-70s, when he advised the dictator General Augusto Pinochet. Not only were Chileans in a state of shock after Pinochet's violent coup, but the country was also traumatised by hyperinflation. Friedman advised Pinochet to impose a rapid-fire transformation of the economy - tax cuts, free trade, privatised services, cuts to social spending and deregulation.

It was the most extreme capitalist makeover ever attempted anywhere, and it became known as a "Chicago School" revolution, as so many of Pinochet's economists had studied under Friedman there. Friedman coined a phrase for this painful tactic: economic "shock treatment". In the decades since, whenever governments have imposed sweeping free-market programs, the all-at-once shock treatment, or "shock therapy", has been the method of choice.

The invasion of Iraq was a more recent and brutal deployment of "shock therapy", which was premised on the existential threat of Saddam Hussein in possession of imaginary WMD, and this time the U.S. military was directly involved (and still is). So there is no lack of credible evidence and common sense to suggest that such "shock" tactics are now being focused on both developed and developing economies in an attempt to create a new global, neo-liberal financial order. However, the scope, scale and specific consequences of the latest financial crisis are not things which can be easily controlled by a few powerful insitutitons such as the Fed, IMF, World Bank or even the Pentagon, if they can be controlled at all.

Many of the existing power structures in the oil-rich Middle East are clearly targets of destabilization by the financial empire, but it is unclear whether Egypt's revolution was a part of the plan, since Mubarak has always been a tried-and-true ally of the financial elite, and surely the same is true of the House of Saud. Mubarak's departure may very well be a non-factor for the economic/political realities faced by the Egyptian people, but it can definitely be viewed as a deeply symbolic event. As I alluded to before, the once-propagandized threats of "WMD" and "terrorists" in the region appear to have manifested themselves as actual forces of disruption to be reckoned with. Libya's Qadaffi has always been a stubborn thorn in the empire's side, so he would not be missed, but if he were to actually blow up the country's oil pipelines on his way out [3], the elites would probably not be very happy about it.

Then again, such a catastrophe could provide just the economic shock needed to justify more forceful intervention in the region, if any such justification is even needed at this point. The problem is that, while the original arithmetic is simple enough to understand, complex systems of nature always have a way of introducing unexpected variables into the equation. Are we just following the simple logic which dictates that every economic policy is crafted for the benefit of financial elites, or are we manufacturing an elaborate narrative in which every single event is a stepping stone towards a final pre-conceived destination? One thing we can be certain of is the fact that no complex network can be maintained without some level of integrity in its central hubs, where most of the activity takes place.

The major financial executives may be raking in record stacks of stolen dough, but average American and European citizens are intensenly watching their wealth evaporate into thin air as they become increasingly desperate with every passing day. The same could be said of China and India, where there are enormous credit bubbles just itching to pop, and combined comprise more than 11% of the world's GDP and almost 40% of the entire world's population. [4], [5]. It will be increasingly difficult for any group of human beings, no matter how powerful, to maintain a global financial order as the masses wake up from their fleeting dreams of unbridled propserity. Seated comfortably at my computer, writing about global financial trends marked by increasing wealth inequality, I can confidently say that two plus two always equals four. Sitting atop the ivory towers of Washington and Wall Street, the math is perhaps a bit more difficult and a bit less certain.

*Part II in this series will discuss the deterioration of ecosytems underlying the industrial/financial global economy, and how this dynamic introduces even more uncertainty for the financial elites.