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Clusterfuck Nation Archives
April 9, 2007
Last week, I was in Illinois walking the majestic Beaux Arts-vintage main quad of the State U in Champaign-Urbana. The flowering trees were in full bloom, the grass was green and speckled with dandelions, and the leaves on the privet hedges were unfurling. Then I came home to upstate New York where everything is brown, gray, and dead-looking, and humps of snow still remain on the north side of every building. I called the heating oil man to get 100 gallons because our tank was close to running on fumes and the daily high temperature lingered in the 30s.
This is the flip side of the abnormally warm early winter we had. The jet stream, for whatever reason, has pulled a flag of frigid air over the northeast US, the region which proportionately uses the most oil for home heating, as opposed to natural gas. The weather forecast says they see frigid days and nights as far ahead as they dare to look.
Gasoline use typically shoots up around this time of year as spring breakers hit the road. Meanwhile, US Department of Energy's EIA reports that US refinery inputs are115,000-barrels-a-day short of their 15-million-barrel-a-day "threshold" (which I take to mean their required capacity to keep things humming), while imported gasoline supplies (we get some of that, too) also fell short. The EIA's monthly report concludes: "...consequently, as gasoline demand began to grow in earnest in April, gasoline supply has failed to keep pace, resulting in continued significant stock declines and sharp upward pressure on gasoline prices in recent weeks." Gasoline prices are now 11.9 cents per gallon higher than at this time last year.
The EIA has to be more reality-based about current activity than their future projections, because the current import-export and refinery figures are out there for other people and other data-gathering organizations to see. The EIA's future projections are a joke. They are based on the fantasy that everything will be okay despite what we see happening now. The EIA projects that all the world's oil producers will increase their oil production hugely by 2030. They see Saudi Arabia shooting up to 17.1 million barrels a day when, in fact, Saudi production fell 7 percent just over the past year alone to 8.4 mm/b/d. They see Mexico shooting way up, despite the announcement last year by Pemex that the Cantarell field (60 percent of Mexico's total production) is crashing at a minimum rate of 15 percent a year. They see Russia zooming way up, despite the fact that Russia is probably past the 70 percent mark of its original total reserves. If you go to this EIA chart, you'll see practically everybody's production shooting way up in the decades ahead, even the US, which, in reality, has seen nothing but steady annual decline for more than thirty years (we produce half now of what we did in 1970).
The EIA is a perfect reflection of the public it serves. It appears to conduct daily business in a responsible way while it resolutely refuses to face the obvious realities of the future. My own town is a good example of non-reality-based planning. Our mayor announced last week that we are going to construct a 1500-space parking structure to go along with an expansion of our minor-league convention center, all based on money raised through bonds. I can't imagine a worse investment. The last thing this town will see in the years ahead is an increase in motor-oriented tourism. And the last thing that business organizations will spend their money on in a future of energy scarcity and diminished revenues will be trade shows.
The price of gasoline seems to be the only signal that the American public receives on its collective walkie-talkie. It looks to me as though gasoline prices will head close to the $4-a-gallon range in some parts of the country this summer. When that happens, the US government, as represented by the DOE's reporting agency (EIA) will not have a coherent story for the public. I imagine as this occurs, the new Democratic-controlled congress will call for hearings to investigate US oil companies. They'll haul in the executives from Exxon-Mobil and the rest of the bunch and threaten them with a punishing windfall profits tax. I wonder if the oil company chieftains will tell the politicians the truth: that peak oil is for real and it's here.
April 2, 2007
In the Zone
The fiasco in real estate and mortgage lending seems finally to be breaking through the reality shield of the mainstream media. Last week, for example, NPR's nightly Marketplace show actually ran a segment saying that the production homebuilders were choking on unsold houses and that (as if NPR had just discovered this) the mortgage industry was rife with irregularities in lending standards! And that this seems to have led to a lot of mischief! And that it may actually have repercussions throughout the financial sector and maybe even the economy in general! Golly!
It's been a long slog for the dullards at NPR, and elsewhere in the mainstream media.
Meanwhile, also last week, the General Accounting Office came out with a report last week that acknowledges some problems ahead on the world energy scene -- oil in particular -- with possible adverse implications for the US. It's the first time that any responsible party in the executive branch has acknowledged the situation, but the tenor of the report was -- how shall I say -- fucking unbelievably stupid and craven -- insofar as it suggested global oil could top out somewhere around the year 2030 (possibly sooner!). The poor grinds in the GAO didn't want to stick their necks out too far on that one.
Independent researchers studying the global oil situation -- including retired geologists for major oil companies -- have established a pretty firm consensus that we are already in the zone of the global oil production peak -- meaning that whether we are just past, passing now, or passing imminently, the effects are already thundering through the complex systems we depend on to maintain advanced industrial societies. For instance, the crashing of Mexico's Cantarell oil field (60 percent of Mexico's production) means that inside of five years the US will receive no more imports from what has been its third leading source. Being in the zone means that the world's oil exporters in the aggregate will see their exports drop seven to eight percent this year -- because nations like Saudi Arabia, Iran, Venezuela, and even Norway are using more of their own oil and have less to send out. Being in the zone means that new pricing arrangements will be made, taking the power away from the spot futures markets in New York and London, and shifting that power to long-term deals made by nationalized producers like Russia and Iran, who may decide to embargo consuming nations who don't dance to their tune. Being in the zone means that people in poorer nations will starve because so much of the corn grown in North America will go to ethanol distilleries instead of the dirt-floor kitchens in the Third World.
The more interesting point in all this, for the moment, is that the media has still not put together the collapse of the housing bubble and the permanent oil crisis. These events will be happening simultaneously. The housing industry, so-called, will never recover because the oil crisis spells the end of the suburban build out. The cycle is over. The big production homebuilders will go down and never come back. We won't need any more retail, either. We won't be building anymore WalMarts and Target stores, and the thousands now running will die off just as the giant Baluchitherium of the Asian steppes crapped out in the early Miocene epoch.
The end of the suburban build-out will be a stupendous trauma for the United States because, unfortunately, we have made it the basis of our economy for a generation, as well as our living arrangement. Not only will incomes and livelihoods be lost on the grand scale, and never come back, but, as the global oil predicament deepens, the existing fabric of our vast suburbs will become increasingly useless and worthless. The people stuck in them will lose whatever wealth they have accumulated and our arrangements for daily life will become increasingly nightmarish.
This is the part of the story that the mainstream media still can't put together. Peak oil and the housing bust are a mutually-reinforcing clusterfuck.
March 26, 2007
For all of you out there disposed to twang on me for riding a jet airplane all the way to Maui, please consider that United flight 35 would have flown from San Francisco to Maui with or without me on it. Here's the deal: I had to go to San Fran to give a talk at the Commonwealth Club. From there, I had a lecture gig on Maui. I stayed three extra days and nights -- since I'd come all that way. So, sue me. Now, to the business at hand, which is my impressions of Maui.
Beautiful as much of it may be, it is hard not to view it through a tragic lens. Most of the damage on Maui has been inflicted over the past 30-odd years -- that is, since the Pepsi Generation got their mitts on the island. Certainly, there were massive prior insults, starting with the first landings of the Haole (foreigners, in particular caucasians) in the late 18th century, the introduction of cattle, eucalyptus trees, the mongoose, the monoculture of sugar cane, and other intrusions that upset the island's ecology. But the boomer-hippies really iced it.
Those who managed to stop smoking marijuana long enough to string two consecutive thoughts together grokked the related notions of tropical paradise and land development with predictable results. That is, they turned the place into just an annex of California. The flatlands were allowed to develop along the lines of Fresno or Lodi, while the uplands became Pacific Palisades Lite. The longest stretch of the best beaches in the place with the least rainfall was converted into a strip of jive-plastic supersized resort hotels. The automobile was given first dibs in all civic design matters.
The island's beauty has not been entirely defeated, but the usual complaints are heard for the usual reasons -- mainly, that the overwhelming majority of buildings, both residential and commercial (including the big hotels), are graceless industrial sheds, deployed artlessly on over-engineered streets, which has conditioned the public to believe that all man-made things are worthless pieces of shit. This in turn conditions the public to believe that nothing man-made can be ultimately beneficial, which makes it impossible for us to imagine coexistence with the rest of nature, and so on into the usual swamps of suburban dialectic.
The terrain, of course, has largely determined the situation with the car. Maui is mostly composed of two rugged mountains, and cars have made it possible for people other than farmers to settle the slopes. Without motor vehicles, a person living up in Makawao, maybe two or three thousand feet above sea level, would be lucky to get down to the main trading town once a month, let alone to a job every day. But work-a-day Maui operates just like work-a-day California, and all the associated norms of behavior are in place. You drive everywhere for everything.
As far as I could tell, even the educated locals out in Maui today are consumed with the same trivialities about traffic and "density" that you'd hear back in any mainland town. They are not thinking beyond the usual NIMBY issues. But it seems perfectly obvious that Maui life will change drastically in a future of oil-and-gas scarcity. The commercial airlines are the "canaries in the coal mine" of advanced industrial civilization, and they are very sick canaries right now -- even with the price of oil relatively stable the past six months.
The airlines have pared down their employee ranks about as far as possible. The scene at the Maui airport this Sunday was a clusterfuck -- largely due to the fact that United Airlines had only one person manning the ticket counter, and 98 percent of the visitors have to check through luggage. A couple more rounds of oil price spikes and the airlines are going to be lying tits up with glazed eyes. Perhaps aviation will then reorganize itself on a smaller scale serving only the elite, for a while, anyway. In any case, that will be the end of the mass middle class consumer phase of commercial aviation -- and also of mass middle class type tourism.
Few people on Maui I spoke to were mentally prepared for the implications of this. But it's perfectly obvious that the Hawaiian Islands will become much more isolated again, and that the way of life that has developed there since 1970 will have to change drastically. I'm glad I went. I don't know if I'll ever go back. Beautiful as it was, I got tired of being in the car all the time and there was really no place to walk.
March 19, 2007
Amazing Mental Rot
From the Florida Sun-Sentinel:
BOCA RATON – Retired Federal Reserve Chairman Alan Greenspan, speaking at a Futures Industry Association annual conference here on Thursday, said the problems of the subprime mortgage market had more to do with home prices than easy credit.
"If we could wave a wand and housing prices go up 10 percent, the subprime mortgage problem would disappear," he said.
What kind of a rock does this fucking idiot Alan Greenspan live under?
The median price for a house in my region of the US (northeast) was $380,000 in the third quarter of 2006. Median annual income, meanwhile, was about $46,000. If, by some miracle (in a land of negative savings) someone with an income of $46,000 had managed to save enough to make a 20 percent down payment ($76,000) on the aforesaid median-priced house and got a 30-year mortgage for the remainder ($314,000) at 7 percent interest, his monthly payment would be $2089. Add to that $250 a month in local property and school taxes and insurance and that brings it up to $2339. That adds up to $28,068 a year in house payments. Let's say the poor bastard pays $8,000 a year in combined income tax and FICA witholding. That leaves him with a grand total of $9,932 for everything else. Then there's the yearly cost of owning a car, including installment payments, insurance, gasoline, and maintenance: around $6,000 a year. Oh yeah, if he's a prudent fellow, he's got health insurance, let's say a practically useless high-deductible policy costing $3,000 a year. That leaves approximately $57 a week for groceries, laundry, the collection plate at church, and everything else. (Too bad he can't afford cable TV and the Internet.)
So, if housing prices went up 10 percent, how fucked would Mr. Median Income be?
Of course, the scenario above was based on the most conservative type of mortgage. If Mr. Median Income had gotten a creative mortgage, let's say a no money down, interest only, payment option, adjustable rate mortgage, he would have been a little more solvent until the re-set. Then after enjoying the place for a year or so, he'd either have to sell it pronto, or default on his payments. And because all his payment option shortfalls would have been back-loaded onto the principal, the mortgage obligation would be more like $400,000 now. This is a bummer, selling into a down market.
I guess Alan Greenspan is right. If the price of houses only went up 10 percent a year, or every half a year, or maybe every month, guys like Mr. Median Income could stay ahead of the game. Of course, sooner or later under conditions of perpetually rising house prices, houses would have to be priced out of everybody's range except for Donald Trump, Paris Hilton, and a handful of other lucky, beautiful people who dwell in the perfumed ethers above the pathetic lumpenprole median zone. Perhaps by then, Mr. Median Income would have won the grand prize on American Idol -- or better yet, crapped out and won an Oscar for best supporting actor instead -- and then he would be a beautiful, rich-and-famous celebrity with the ability to buy as many houses as he ever wanted.
I wonder if the new Fed Chairman, Mr. Ben Bernanke is as wise as Mr. Greenspan? Let's hope so.
March 12, 2007
Here's an idea: when the securities markets go south along with the rest of the US economy in 2007, maybe the smoothies on Wall Street should receive end-of-year "cash-negative" bonuses, meaning instead of a check for, say, $25 million the day before Christmas, they get an invoice saying "please remit $25 million." Who to? Good question. One might suggest the nearest firefighters' or teachers' pension fund -- except the idiots who run those retirement funds bought mortgage-backed paper with their eyes open. Okay then, let's say the Wall Street boys send their checks into Amtrak. Maybe then the cafe car between Albany and New York City will re-open so that in the course of a 2.5 hour trip a person might get a drink of water.
A tsunami of nausea seems to be sweeping across the media now in recognition that the Potemkin edifice of mortgage finance is imploding like a discarded Las Vegas casino. What it comes down to is that several species of newly-engineered financial Frankenproducts have been based on loans for houses that will never be paid back. Not just a few loans. Massive numbers. These, in turn, have been bundled, swapped around, and leveraged into other plays which now depend, for instance, on x-number of unemployed car dealers and underpaid busboys ponying up the "vig" for some piece-of-crap collateral that will soon be a third its previously appraised value. It will be easier for the car dealers and busboys to walk away from these deals then it will be for the smoothies who used all this bundled bullshit to hedge credit default swaps and play the yen-to-Euro carry trade game to wiggle out of their positions. And the unwinding of all this fraud will almost certainly leave the nation economically spavined.
The amazing thing is how standards and norms for lending collapsed as completely as they did the past five years. One day you had bankers who retained a notion that lending per se required some prudent evaluation of the borrower's character and of the thing or enterprise borrowed for -- and the next day these protocols vanished. Once again I challenge the punctilious physicists out there by asserting that this astounding transformation is the product of entropy. Basically, you get a given system -- e.g. the US economy -- over-stoked on cheap energy (and even at $3 a gallon gasoline is cheap), and the system will throw off gobs of entropy. The more profligate the energy consumption, the more entropy results. It then expresses itself in various kinds of disorder, meaning anything from the immersive ugliness of the American built-up landscape to the behavior of people formerly attuned to such governing principles as moral hazard to retain the functional legitimacy of their livelihoods.
It is really a sort of systemic disease, generating poisons that seep into the far corners of the organism affected, in this case the USA. It will be manifest in the personal ruin of individual families, the collapse of institutions, the rising crime rate, and the rapid physical decay of things built too carelessly to be worth caring for.
I went around some neighboring towns here in upstate New York to look at the real estate yesterday. I was impressed by how uniformly crummy everything was -- and not only because it is nearly spring and layers of old dog shit are being revealed in the melting snowbanks. In the old houses priced above $300-K, the rotting sills and delaminating surfaces are plain to see. Of course, the buildings are worth something, but my guess is less than a third of the asking price by any realistic valuation. But at least these things were made of materials generally found in nature. The new houses were all glue and vinyl, and of course they were mostly built in places dissociated from any town itself, meaning the hapless owners will have to own multiple cars to live there and make multiple trips per day -- not a good prospect for the years ahead.
The story will be the same all over the nation. The owners of these things will get into terrible personal financial trouble. The property market will re-value the buildings, discounting all the previous wishful thinking about price. And the financial markets will stagger and collapse as the process thunders through the mendacious operations that all this wishful thinking spawned.
March 5, 2007
Singing the Vegetable Opera
The jive-finance economy had a few acidic burps last week -- or, at least, that's how it may seem in the days ahead as the equity markets finally upchuck the toxic notional junk "money" they have been gorging on in recent years. Has there ever been a financial collapse with brighter or louder warning signals?
I suppose the expectation (or hope) is that the quasi-mythical "plunge protection team" -- a "working group" of federal reserve officials and bankers -- will jump in and administer some soothing pepto-bismol, but frankly I don't see how that's possible this time. The poison at the bottom is a fetid mass of "non-performing" mortgages, billions upon billions of loans that strapped borrowers are not paying back, loans which, in the meantime, have been rolled over, rebundled into jive "securities" (ha!) and sold, and rolled over again and used as "leverage" for massive exotic bets and bloated arbitrages involving mere abstract figments of electronic digital pulses completely removed from any reality-based productive investment activity.
Among the leaders at the supply end of this racket has been General Motors -- that's right, the company that used to manufacture cars, the company about which one plutocrat once remarked what was good for [it] was good for the country. In fact, General Motors' main source of earnings for a long time now has been money-lending, not car-making (which only loses money). They started decades ago with GMAC, their own car-loan operation -- which makes sense if you are serious about selling cars -- but in the 1990s, with foreigners way out-selling GM's shitty cars, the company's financial wizards decided to venture into home loans and thus Ditech was born.
That's right, Ditech, the outfit that advertised incessantly on TV, promising that house-buyers could sleepwalk their way into mortgage approvals -- and thus frustrate all the smarmy, over-fed, punctilious bankers who obstructed such requests with pain-in-the-ass qualifying protocols and burdensome paperwork. Last week GM put off filing regular required financial reports because of disarray in its Ditech operation. Ditech is responsible for as much as $80 billion in mostly sub-prime house loans -- i.e. given to people with dubious prospects for repayment. But GM's Ditech is but one of scores of entities now choking on non-performing paper (and many of Ditech's rivals are now bankruptcy road kill).
What makes matters far worse is that all this wildly reckless lending has been in the service of a suburban sprawl-building juggernaut that will itself represent another layer of grotesque liability for the United States. The crash of the house-selling bubble, based on absurd asset inflation for things built badly in the wrong places, is coinciding exactly with a permanent oil crisis that will only exacerbate the locational disadvantages of houses built in the newest and furthest suburbs.
Evidence now conclusively shows that Saudi Arabia's oil production was down 8 percent in 2006 over 2005, even while the number of oil rigs went up substantially -- indicating that the Kingdom is drilling as fast as it can and still losing ground. (Production slipped from 9.9 million-barrels-a-day to about 8.4 mm/b/d.) Mexico's Cantarell field is crashing (minimum 15 percent annual decline and possibly much steeper rate, meaning in a year or two the US will cease getting oil imports from its number two foreign supplier). The North Sea is crashing, too. Russia is about show steep decline. Iran is past peak. Iraq, as every six-year-old knows, is the world's clusterfuck poster child. Indonesia (OPEC member) is now a net oil importer. Venezuela is past peak and full of loathing for the US. Nigeria is collapsing politically. No amount of corn is going save the Happy Motoring utopia, and that's really all our economy is now based on.
When the financial markets factor all this in -- and they really haven't yet -- I think we'll see a lot more of what they like to call "downside action." These things are all connected. The housing bubble was set into motion by $10-a-barrel oil at the turn of the millennium. Perhaps as much as half the jobs created since then have been in house-building, house-selling, house-buyership-enabling, house furnishing, and other things house-related. The whole final suburban blow-out enterprise has been a fantastic blunder. Now it's unraveling and the only "performing" loans will be the ones paid to the accounts receivable department in hell.
It ought to be an interesting week in the markets.
February 26, 2007
Jim Crow English
Something's been bugging me for a few weeks, since Joe Biden made that remark about Barack Obama being "articulate" -- after which everyone from Paula Zahn at CNN to the punditori at the Washington Post outdid each other jumping up and down deploring poor hapless Joe. The accepted idea, of course, was that Biden had foolishly revealed himself to be a racist for suggesting that Obama's language skills were exceptional for a person with more than one drop of African blood.
As usual in these matters, the uproar ended up being much more about white discomfort with the subject than the subject itself. After all, does anyone really doubt that there is such a thing as black English and that it is widely represented as such, explicitly, both in everyday speech and, to an even more extraordinary degree, in pop culture?
After the Biden gaffe, a number of black intellectuals and public figures went on the political talk shows to complain about white racism. Many of them spoke what I will dare to call standard English and expressed indignation that black people might be expected to speak black English and be singled out as exceptional when they did otherwise.
But isn't it actually the fact that we have succeeded in ghettoizing the English language? No public intellectual, let alone a professional educator, or a politician such as Jesse Jackson, would dare suggest that black children would benefit from being taught standard (or "white") English in school -- that is, drilled in its grammars and protocols the same way that arithmetic is taught. And white children who might attempt to practice speaking in black dialect would be excoriated for racist mockery, wouldn't they?
Is it okay to ask whether both manners of speech are equal? And if so, are they then not manifestly separate but equal? And if so, is English the last refuge of Jim Crow in America? And if so, why do white political progressives want to keep it that way? Or why would black people want to keep it that way? Is "diversity" just another way of saying Jim Crow?
Now watch the readers of this blog accuse me of racism for just asking these questions.
February 19, 2007
The Big Chill
One of the farmers who organized the Pennsylvania Association for Sustainable Agriculture's annual meeting put it nicely: "The ethanol craze means that we're going to burn up the Midwest's last six inches of topsoil in our gas-tanks."
The American public is in chill mode in more ways than one. We are finally freezing our asses off in the Northeast after a supernaturally mild December and January, and the heating oil trucks are once again making the rounds of the home furnaces (and running down their inventories). But we're also chillin' on the concept that there is an energy problem per se. The public is convinced that we are one IPO away from attaining the sovereign rescue remedy that will permit us to continue running our Happy Motoring utopia.
The public is bombarded daily with feel-good news about new bio-engineered bacteria that can turn sawmill refuse into high-test gasoline, cornucopias of miracle diesel beans, lithium batteries that will take you from Hackensack to Chicago on a single charge, and still (despite all the evidence against feasibility) hydrogen-powered SUVs. The public is convinced that we will enter a nirvana of "energy independence" just-in-time -- the same way that WalMart miraculously restocks it's shelves.
The truth is, we will never be energy independent as long as we remain a car-fixated society. It's that simple. If we can't let go of the sunk costs associated with Happy Motoring, we're probably not going to make it very far into the future, either as a nation or a viable economy or as an orderly society. By sunk costs I mean our previous investments in car-oriented infrastructure.
For the moment, I blame the Democrats (and I am a registered Democrat). One shouldn't expect rational thinking from the current generation of Republicans. The sheer fact that so many of them have sold their allegiance to the Born Again dominionist fold, where magical thinking rules, means that they are incapable of evaluating the energy predicament -- in fact, if they are sincere in their apocalyptic dogma, then many of them would probably welcome a global struggle over oil, with all the military mischief it would entail in the vicinity of the Holy Land.
No, I blame the Democrats. The Democrats are supposed to represent the reality-based faction of the general public. They should be able to do the math without getting sidetracked by Jesus-haunted visions of WalMart running on biodiesel. They should be willing to tell the public the hard truth before it's absolutely too late to make some collective decisions that would lessen the hardship in the circumstances we face -- like allocating some federal funds to passenger rail, or reforming codes, incentives, and subsidies that favor suburban sprawl, or replacing the FICA taxes with a gasoline tax (as proposed by oil man Jeffrey Brown of Dallas), or by aggressively promoting local agriculture.
Most of the university professors in the USA are liberals or progressives or Democrats, or at least not Republicans trafficking in magic. University professors in the so-called "hard sciences," especially, have to lead reality-based lives which encompass such ideas as cause and effect and conclusions derived from facts. They ought to know that we are not going to run the interstate highways on any combination of "alternative" fuels. Why are they not challenging the politicians who would pander to the public's delusions?
How about the policy wonks in the progressive foundations? Why is Amory Lovins of the Rocky Mountain Institute still trying to sell the snake oil of a "hyper-car," when its chief effect is to reinforce the mistaken idea that we can continue to be a car-dependent society?
This may be the Democrat's last chance to get their shit together. The Republicans are already done. You can stick a fork in them. But the Democrats have an opportunity to lead America back into a reality-based channel of history's stream. They can tell the truth about climate change, about oil-and-gas, and about the terrible misinvestments that we have to put behind us. They can prepare the public to deal with the new facts of life.
My guess is that this may happen with Al Gore emerging as the party's candidate for president. The 2008 election campaign has started way too early and the candidates who have announced so far, whatever their merits or demerits, are liable to exhaust themselves. If Al Gore intends to step up to the plate -- and I think he will -- he would be wise to chill out and wait until at least next fall. That seems to be what he is doing anyway.
February 12, 2007
You've really got to feel sorry for whoever gets sworn in as president in 2009. Whichever of the candidates gets there, he or she will be walking into a shit storm of trouble much worse than the domestic political turmoil that Lincoln faced in 1861.
By January 2009 we will surely be reeling from the "work out" of peak financial excess represented by the hedge fund fiesta and the reckless mortgage fiasco (from which the housing industry as we have known it will never recover). By 1/20/09 (inauguration day) the global oil crisis will be accepted as self-evident even by Cambridge Energy Research Associates (and its clients in the oil industry). By 1/20/09, we will have gone through two more global warming hurricane seasons. By 1/20/09 we will have spent several hundred billion dollars more maintaining our garrisons in the Middle East and elsewhere -- and the strategic concerns that have required them will still be there.
This translates into severe socioeconomic hardship at home and deteriorating influence on the geopolitical scene. Under the circumstances, Senator Barack Obama seemed perhaps oddly serene in last night's interview on CBS's "60 Minutes" with newsman Steve Kroft. It was not an idle, unmindful serenity, though. Obama, who spent many childhood years in Hawaii, seems to know what it's like to stand on the beach and watch a killer wave roll in. Just knowing that the killer wave is only one in an infinite succession of waves that will roll in eternally lends more dimension to this essentially tragic view -- and the tragic hero is typically the person required by destiny to get hammered by the killer wave, but goes forth to greet it anyway. Perhaps Obama's most appealing quality is his stoicism in the face of this awful assignment.
His most telling answer was to Kroft's question: "Why are you in such a hurry to become president?" Obama replied succinctly that "we may not have ten years" to get our national act back together. By saying this, he managed to get across what most Americans over eleven years of age must suspect in their heart-of-hearts, no matter how hard they are partying, or working to cover their re-set mortgage, or praying to Jesus for a winning lottery ticket: that circumstances will compel us to live differently, whether we like it or not.
Obama's stoicism extends into the minefield of race. He typically refuses to act as a shit-magnet for white America's obsessive guilt, especially the discomfort of "progressives" ever-desperate to prove their moral rectitude by groveling, patronizing, pandering, and disingenuously dancing the brotherhood shuffle. (The recent dust-up over Senator Biden's use of the word "articulate" in reference to Obama was a typical case of whites' discomfort with the inherent contradictions of their own "diversity" politics, with its separate-but-equal language code.) I would also like to be a fly on the wall of the figurative woodshed when Obama has a one-to-one with somebody like Al Sharpton.
For the record, Obama would be older on inauguration than several other presidents were, and he will have had more political experience than one-term congressman Abe Lincoln.
I would like to be a fly on the wall of the deluxe hotel suite where Senator Hillary tries to shake down Obama with the offer of a vice-president slot on her ticket. Never will Hillary's mouth scrunch into a tighter rictus as in the moment when he stoically tells her to go get fucked (so to speak).
Anyway, Obama's moment of launching has now come and gone. He flared off the pad in Springfield, Ill., last week and now the focus has to shift on what he actually thinks about this country and the behavior of its citizens. For now, he comes off as a straight-talking, competent person, comfortable in a difficult role -- and in these times of disappointment with virtually all authority figures, this is enough to inspire near-hysteria.
There will not have been a longer election campaign season in our history. We have all of this year and most of next to endure before the levers are pulled, or the chads punched, or the touch screens touched -- or whatever new fucked-up technology we devise for voting. The candidates (including Obama) may run out of things to say, or they may be overwhelmed by events. A dark horse may emerge from some surprising quarter and steal their thunder. Maybe next December 24th, Santa Claus will declare he's available for the job. (Americans would like that!) A nuke may go off in an uninspected shipping container in some port city. George W. Bush might impose a 50-cent-per-gallon war tax surcharge on the gas pumps. Who knows. . . ?
February 5, 2007
The Agenda Restated
Out in the public arena, people frequently twang on me for being "Mister Gloom'n'doom," or for "not offering any solutions." I find this bizarre because I never fail to present audiences with a long, explicit task list of projects that American society needs to take up in the face of the combined problems I have labeled The Long Emergency. That the audience never hears this, and then indignantly demands such instruction, only reinforces my sense that the cognitive dissonance in our culture has gone totally off the charts.
Insofar as I just returned from a college lecture road trip, and heard the same carping all over again, I conclude that it's necessary for me to spell it all out a'fresh. I think of this not so much as a roster of "solutions" but as a set of reasonable responses to a new set of circumstances. (Not everything we try to do will succeed, that is, be a "solution.") So, for those of you who are tired of wringing your hands, who would like to do something useful, or focus your attention in a purposeful way, here it is.
- Expand your view beyond the question of how we will run all the cars by means other than gasoline. This obsession with keeping the cars running at all costs could really prove fatal. It is especially unhelpful that so many self-proclaimed "greens" and political "progressives" are hung up on this monomaniacal theme. Get this: the cars are not part of the solution (whether they run on fossil fuels, vodka, used frymax™ oil, or cow shit). They are at the heart of the problem. And trying to salvage the entire Happy Motoring system by shifting it from gasoline to other fuels will only make things much worse. The bottom line of this is: start thinking beyond the car. We have to make other arrangements for virtually all the common activities of daily life.
- We have to produce food differently. The ADM / Monsanto / Cargill model of industrial agribusiness is heading toward its Waterloo. As oil and gas deplete, we will be left with sterile soils and farming organized at an unworkable scale. Many lives will depend on our ability to fix this. Farming will soon return much closer to the center of American economic life. It will necessarily have to be done more locally, at a smaller-and-finer scale, and will require more human labor. The value-added activities associated with farming -- e.g. making products like cheese, wine, oils -- will also have to be done much more locally. This situation presents excellent business and vocational opportunities for America's young people (if they can unplug their Ipods long enough to pay attention.) It also presents huge problems in land-use reform. Not to mention the fact that the knowledge and skill for doing these things has to be painstakingly retrieved from the dumpster of history. Get busy.
- We have to inhabit the terrain differently. Virtually every place in our nation organized for car dependency is going to fail to some degree. Quite a few places (Phoenix, Las Vegas, Miami....) will support only a fraction of their current populations. We'll have to return to traditional human ecologies at a smaller scale: villages, towns, and cities (along with a productive rural landscape). Our small towns are waiting to be reinhabited. Our cities will have to contract. The cities that are composed proportionately more of suburban fabric (e.g. Atlanta, Houston) will pose especially tough problems. Most of that stuff will not be fixed. The loss of monetary value in suburban property will have far-reaching ramifications. The stuff we build in the decades ahead will have to be made of regional materials found in nature -- as opposed to modular, snap-together, manufactured components -- at a more modest scale. This whole process will entail enormous demographic shifts and is liable to be turbulent. Like farming, it will require the retrieval of skill-sets and methodologies that have been forsaken. The graduate schools of architecture are still tragically preoccupied with teaching Narcissism. The faculties will have to be overthrown. Our attitudes about land-use will have to change dramatically. The building codes and zoning laws will eventually be abandoned and will have to be replaced with vernacular wisdom. Get busy.
- We have to move things and people differently. This is the sunset of Happy Motoring (including the entire US trucking system). Get used to it. Don't waste your society's remaining resources trying to prop up car-and-truck dependency. Moving things and people by water and rail is vastly more energy-efficient. Need something to do? Get involved in restoring public transit. Let's start with railroads, and let's make sure we electrify them so they will run on things other than fossil fuel or, if we have to run them partly on coal-fired power plants, at least scrub the emissions and sequester the CO2 at as few source-points as possible. We also have to prepare our society for moving people and things much more by water. This implies the rebuilding of infrastructure for our harbors, and also for our inland river and canal systems -- including the towns associated with them. The great harbor towns, like Baltimore, Boston, and New York, can no longer devote their waterfronts to condo sites and bikeways. We actually have to put the piers and warehouses back in place (not to mention the sleazy accommodations for sailors). Right now, programs are underway to restore maritime shipping based on wind -- yes, sailing ships. It's for real. Lots to do here. Put down your Ipod and get busy.
- We have to transform retail trade. The national chains that have used the high tide of fossil fuels to contrive predatory economies-of-scale (and kill local economies) -- they are going down. WalMart and the other outfits will not survive the coming era of expensive, scarcer oil. They will not be able to run the "warehouses-on-wheels" of 18-wheel tractor-trailers incessantly circulating along the interstate highways. Their 12,000-mile supply lines to the Asian slave-factories are also endangered as the US and China contest for Middle East and African oil. The local networks of commercial interdependency which these chain stores systematically destroyed (with the public's acquiescence) will have to be rebuilt brick-by-brick and inventory-by-inventory. This will require rich, fine-grained, multi-layered networks of people who make, distribute, and sell stuff (including the much-maligned "middlemen"). Don't be fooled into thinking that the Internet will replace local retail economies. Internet shopping is totally dependent now on cheap delivery, and delivery will no longer be cheap. It also is predicated on electric power systems that are completely reliable. That is something we are unlikely to enjoy in the years ahead. Do you have a penchant for retail trade and don't want to work for a big predatory corporation? There's lots to do here in the realm of small, local business. Quit carping and get busy.
- We will have to make things again in America. However, we are going to make less stuff. We will have fewer things to buy, fewer choices of things. The curtain is coming down on the endless blue-light-special shopping frenzy that has occupied the forefront of daily life in America for decades. But we will still need household goods and things to wear. As a practical matter, we are not going to re-live the 20th century. The factories from America's heyday of manufacturing (1900 - 1970) were all designed for massive inputs of fossil fuel, and many of them have already been demolished. We're going to have to make things on a smaller scale by other means. Perhaps we will have to use more water power. The truth is, we don't know yet how we're going to make anything. This is something that the younger generations can put their minds and muscles into.
- The age of canned entertainment is coming to and end. It was fun for a while. We liked "Citizen Kane" and the Beatles. But we're going to have to make our own music and our own drama down the road. We're going to need playhouses and live performance halls. We're going to need violin and banjo players and playwrights and scenery-makers, and singers. We'll need theater managers and stage-hands. The Internet is not going to save canned entertainment. The Internet will not work so well if the electricity is on the fritz half the time (or more).
- We'll have to reorganize the education system. The centralized secondary school systems based on the yellow school bus fleets will not survive the coming decades. The huge investments we have made in these facilities will impede the transition out of them, but they will fail anyway. Since we will be a less-affluent society, we probably won't be able to replace these centralized facilities with smaller and more equitably distributed schools, at least not right away. Personally, I believe that the next incarnation of education will grow out of the home schooling movement, as home schooling efforts aggregate locally into units of more than one family. God knows what happens beyond secondary ed. The big universities, both public and private, may not be salvageable. And the activity of higher ed itself may engender huge resentment by those foreclosed from it. But anyone who learns to do long division and write a coherent paragraph will be at a great advantage -- and, in any case, will probably out-perform today's average college graduate. One thing for sure: teaching children is not liable to become an obsolete line-of-work, as compared to public relations and sports marketing. Lots to do here, and lots to think about. Get busy, future teachers of America.
- We have to reorganize the medical system. The current skein of intertwined rackets based on endless Ponzi buck passing scams will not survive the discontinuities to come. We will probably have to return to a model of service much closer to what used to be called "doctoring." Medical training may also have to change as the big universities run into trouble functioning. Doctors of the 21st century will certainly drive fewer German cars, and there will be fewer opportunities in the cosmetic surgery field. Let's hope that we don't slide so far back that we forget the germ theory of disease, or the need to wash our hands, or the fundamentals of pharmaceutical science. Lots to do here for the unsqueamish.
- Life in the USA will have to become much more local, and virtually all the activities of everyday life will have to be re-scaled. You can state categorically that any enterprise now supersized is likely to fail -- everything from the federal government to big corporations to huge institutions. If you can find a way to do something practical and useful on a smaller scale than it is currently being done, you are likely to have food in your cupboard and people who esteem you. An entire social infrastructure of voluntary associations, co-opted by the narcotic of television, needs to be reconstructed. Local institutions for care of the helpless will have to be organized. Local politics will be much more meaningful as state governments and federal agencies slide into complete impotence. Lots of jobs here for local heroes.
So, that's the task list for now. Forgive me if I left things out. But please don't carp at me, by letter or in person, that I am not providing you with anything to think about or devote your personal energy to. If you're depressed, change your focus. Quit wishing and start doing. The best way to feel hopeful about the future is to get off your ass and demonstrate to yourself that you are a capable, competent individual resolutely able to face new circumstances.
January 29, 2007
Martha Stewart was not an accident of history. She came along in the late 20th century as a kind of spirit guide to a society whose bad choices and misinvestments had led to the wholesale destruction of any place in America that people called home. And by this I mean the towns, neighborhoods, and city districts of our land, not just the individual dwellings.
By the 1980s, America had been converted, with monstrous efficiency, into what I have called a geography of nowhere, a panorama of identical highway strips, malls, big box warehouses, fried food out-parcels, and free parking wastelands -- all serving the endless new subdivision pods of single family houses. The ultimate result was a landscape full of places no longer worth caring about.
The program was carried out ruthlessly by big corporations and their hand-maidens, the road-builders, the house-builders, and the brotherhood of traffic engineers, but it was fully supported by the public at large and their elected local officials on the planning and zoning boards. It was both an "emergent" economic ecology -- a systemic response to decades of cheap oil and favorable geopolitics -- and a consciously mapped-out attempt to create a kind of Utopia, in this case a suburban Utopia of Happy Motoring. Whatever it was, nothing like it had ever been seen before.
It had many consequences but one of the worst was the impoverishment of public space. From the social point-of-view, it turned out that housing pods and highway strips lined with strip malls were a poor substitute for main street towns or walkable neighborhoods. Under the insane dictates of single-use zoning, each individual was trapped in a car for hours each day, often in vexing traffic with other isolated individuals, and also often in the company of little children with a low tolerance to being trapped and vexed. Older children lacking drivers' licenses lost access to other social realms beyond the subdivision of houses. The adventurous ones assembled in the bosky berms between the WalMarts and the KMarts to smoke a variety of drugs, worship Satan, and torture kitty cats. The rest were relegated to the room at home with the one-eyed-monster, the television.
The case was not much better for the adults. By the 1980s, both parents had to be out of the house generating income to pay the mortgage and especially to pay for the multiple cars needed to service the family headquarters. Mom went to work not because Betty Friedan said that actuarial science was more fun than managing a house, but because wages were stagnant and Dad could no longer make the family's ends meet.
Out of this sad and desperate circumstance, Martha Stewart arose. The promise of Stewartism was that if the public realm was now inaccessible or meaningless, then one should make the most of the private realm. This was accepted as self-evident by enough people to make Martha extremely wealthy. Luckily for Martha, her job was at home. She didn't have to drive thirty-eight miles to a cubicle in the billing office of Ramjack Medical and spend eight hours each day minutely examining spreadsheets on a computer monitor.
As her wealth and success increased, Martha's resources for doing things in and around the house enabled her to spin a fantasy of uber-homemaking that America found irresistible -- despite the fact that everyone else spent so much time away from the house that it was nearly impossible for them to emulate the goddess of hearth and home. Instead, they devoured her many publications and TV shows, finding consolation in all the beautifully portrayed scenes of Martha enacting the fantasy for them.
History is full of ironies and paradoxes, and one of them is that this avatar of home-making was relentlessly hunted down by federal prosecutors for allegedly scamming $40,000 on an insider stock sale, while true major league corporate CEO grifters walked off legally into their golden sunsets with hundreds of millions in back-dated stock options and other booty winkled out of feckless boards of directors.
It is also an ironic coincidence that at the exact time Martha Stewart went off to jail, the American home fantasy went totally off the rails. The systematic shut-down of America's manufacturing sector led policy-makers to insidiously try to replace it with a hyped-up housing industry. They kicked off the program by dropping the prime interest rate as close to zero as possible, making money extremely cheap to borrow. Everybody need a home, the logic went, including those who ordinarily wouldn't have qualified for regular mortgages that required substantial down payments, proof of employment, and other formalities. So the answer was to engineer a financing modality that would allow anyone to buy a house -- and thereby ramp up the "homebuilding" industry into super-hyper-turbo-overdrive, which would incidentally generate even more potential house-buyers among the many framers, trimmers, plumbers, electricians, painters, real estate agents, and sellers of Corian countertops, who made good wages or commissions on delivering the "product." Meanwhile, the new housing pods in evermore remote locations, where there were no towns, could be accessorized with all the requisite service infrastructure -- new highways, strip malls, Pizza Huts, WalMarts, Best Buys, and video rental joints, all of which had to be built by somebody, making for additional contracts, incomes, and potential house-buyers.
Meanwhile the financial wizards "innovated" methods for dispersing the risk associated with iffy loans (made to people with poor prospects for repayment) by bundling the mortgages into odd-lots and repackaging them as tradable securities, which could be used to "leverage" other finance "plays" yet more exotically abstracted from the actual making-and-selling real things of value. At the same time, the wizards converted the mortgage insurance business into a casino of swappable risk, materializing more fees and profits for themselves out of thin air.
This extremely complex racket worked well for a brief period of time, namely the period when the price of houses steadily increased, year after year, promoting the expectation that rising house "equity" was a permanent condition of life, and that the dependable annual increase in value could be "put to work" in the form of borrowing more money against it. The supposed increase in value protected those trafficking in swappable risk, since increased value banished the risk of loss, and the notion of moral hazard disappeared into the dumpster of history.
The whole racket floundered when several things changed or went awry. One was the sheer saturation of markets. Sooner or later, everybody who might possibly buy a house, got a house. The racket had had the perverse effect of stealing demand from the future by making house-buyers of those who were not really ready to buy -- e.g. very young adults with no savings or people with bad credit records. And not every immigrant from Bangladesh, El Salvador, or the Central African Republic could be positioned as a house buyer -- even under the now nearly nonexistent lending standards.
The next thing that went wrong was affordability. If absolutely everybody's house rose ten percent in value every year for years and years -- including every "pre-owned" raised ranch shitbox -- then sooner or later every house in America would cost at least half a million dollars. And with wages stagnant among the 90 percent who worked outside the financial services industry, sooner or later no house would be affordable to that 90 percent majority under even the most supernaturally lax lending provisions.
The final problem would come when central bankers had to raise interest rates so that customers for debt would accept the risk of investing in a national economy that was increasingly seen to be based on the engineering of modalities to get something for nothing.
This is the point we're at now. The whole system was greatly underwritten by the final peaking of available energy, chiefly oil, which made it possible in the first place to sell so much real estate in the farthest-flung outlands of the American landscape, including not only desert and swamp, but also prime farmland. The housing bubble began to collapse at exactly the moment that the world reached its all-time oil production peak: the summer of 2005.
Now the house market is both saturated and wildly mis-valued. Most of the new houses were built in places that will be logistically unfavorable as motoring becomes less affordable. Many of them are too large to heat as home heating becomes less affordable. The houses are overpriced. Those who must sell must drop their prices. Many such sellers will have to sell for less than the obligations still owed on their houses. The speculators have necessarily fallen by the wayside, because speculation is not possible in a falling market. Those who expected to sell old houses in older places for a half a million dollars or more to buy new houses in new places will have to stay put. As prices fall, the few potential buyers still left will step back in anticipation of further price drops. This "death spiral" will be self-reinforcing and take years to play out. As it occurs, many of the creatively-engineered contracts will be welshed on. Lenders will choke on "non-performing" mortgages. Mortgage-backed securities will lose their credibility and turn into junk or worse (worse-than-junk being certificates with no value whatsoever, not even pennies on the dollar). Bets, plays, leverages, positions, and hedges based on the idea that all these loans would continue performing will be wiped out.
The final result will be a dashed American Dream -- of a safe life in a happy home. Poor Martha Stewart will be seen as the goddess who failed. Well, she already has, really, having gone to prison and afterward retreated into her omnimedia fortress of corporate refuge (basically joining the enemy). As the middle class chokes and gets crushed under the weight of its unpayable debts and falling standards of living, Martha may be lucky to avoid getting eaten, along with a long list of other celebrity porkchops that an angry and grievance-filled public will turn on.
Finally, the idea that people could live happily ever after in "homes" devoid of any larger community context, or reality-based economic context, will fail. Perhaps we will even stop calling houses "homes" -- as we have been conditioned to do by the realtors hoping to manipulate all our subconscious desires for safety, familiarity, and order in this world of chaos and sorrow.
January 22, 2007
In It to Win It
Of all the president-wannabes who emerged from their thickets, mole holes, burrows, and termite mounds last week, the funniest was Senator Sam Brownback of Kansas who told a campaign kickoff audience that he was setting off on "the yellow brick road to the White House." Which raises an interesting question: is Brownback running for Wizard of Oz or for president? Brownback represents the Mid Western suburban evangelicals, a sort of death cult composed of people unaware that their own lifestyle has driven them crazy. Unbeknownst to those inside the Beltway or up in Manhattan, though, the heartland of America is in deep enough despair to elect a closet maniac like Brownback. Let's hope that he is found to be connected romantically to a male prostitute specializing in sadomasochism and humiliation.
Next out is Hillary, who looks as though she is going to jettison her surnames in the manner of Oprah, Madonna, and Paladin. Her kickoff announcement video was all medium and no message. She wants to have a presidency of feelings, and the main feeling is that America needs Mommy. The psychological failure of masculinity in this nation is that acute. Between the millions of lumpen "baby daddys" who impregnate their "shorties" and disappear, and the hundreds of loot-crazed corporate CEOs (not to mention the hapless President Bush), the male ethos has just about lost all credibility in this country. Mommy runs most of the households in the US, so why not the government, too?
In case you can't tell, I don't like Hillary. I regard her as a monster of ambition. I voted for her husband twice, but concluded sadly that he had accomplished little in relation to his supposed abilities. Bill Clinton now looks like just another wreck on the shoals of male egotism, and seems fated, in the classically tragic sense, to creep behind in his wife's footsteps until he is taken offstage by infarction or aneurysm (or perhaps she will just chew his head off, in the tradition of the more powerful female mantis).
My original beef is that Hillary virtually hijacked the New York state Democratic party in her 2000 senate bid -- as if there were no actual New Yorkers qualified to represent their state. Mommy was so powerfully entitled that the state party brass and the media bigwigs rolled over and didn't even question her poor residency qualifications, which were glaring. Since then, despite all her plaudits for seizing senatorial leadership, she has done little but grandstand in preparation for this moment of launching to higher office.
Hillary's presidential campaign kickoff announcement was saturated in phoniness, from the illusion of personal warmth to the bizarre leafy-green exterior background that suggested the announcement had been taped back in August and put in the freezer since then. Worldwide, Mommy leadership has not necessarily been such a great thing. Margaret Thatcher got more credit than she deserved for turning around the British economy (when, in fact, it was the North Sea oil bonanza that did it, and that's over now). Otherwise, the "Iron Lady" presided over more internal rot, including a disastrous open-door immigration policy and the dismantling of the railroad system. Indira Ghandi demolished civil liberties and presided over an extravaganza of grift before she was assassinated. Benazir Bhutto was run out office in Pakistan twice, most recently for money laundering.
Now, it still might be the case that America would benefit from a Mommy president, but please not this particular Mommy. Behind the WalMart smile sits Nemesis, the remorseless spirit of vengeance, obsessed with smiting enemies. That might work to advantage against the oriental despots lined up to eat America's lunch. But I'm more inclined to think that Hillary would use it against her own countrymen.
It's interesting that her out-of the-box campaign slogan is "In It to Win It," which sounds a bit like Gerald Ford's old "Whip Inflation Now (WIN)" button, which is to say the war cry of a loser. Check the "no" box on Hillary. Then check it again. And again.
Barack Obama blindsided Hillary last week, pretty much forcing her hand and making her look artificially spontaneous. I like Obama pretty well. What I like best about him is that he seems to be a genuinely normal human being. He wasn't born with any advantages and he doesn't resort to any false claims of disadvantage either. There's nothing puffed up about him, which is to say, nothing presidential. His popularity so far is based on this genuineness combined with an exceptional ability in writing and public speaking. He appears capable of talking straight. It's even possible he can see straight. He looks very young compared to his rivals, but in 2009 he'll be older than John F. Kennedy was in Dallas on November 22, 1963. The ominous note is struck because such a clear-eyed individual would seem to be naturally fated, in this nation of dangerous cranks, for assassination. Were he to get elected by some miracle, and then rubbed out by some cunning tattooed moron, you could probably kiss this nation farewell.
Then there is Bill Richardson, who I also like pretty well. Whatever else he represents, he emits a sense of gravitas, of a purposeful, accomplished, and intellectually-honest person. He's been on the world scene as an effective crisis negotiator and America's UN ambassador. He's been a Secretary of Energy, so it's possible he has some grip on the nation's fossil fuel problems. If nothing else, he will inject some seriousness into the debates.
Then there's John Edwards, who has essentially remained a candidate since his defeat for Vice-president in 04, babysitting the odious John Kerry. I like Edwards pretty well, too. His origins were humble. Despite his movie star exterior, he seems capable, decisive, and sympathetic. He has his finger on the pulse of the biggest not-yet-articulated campaign issue: the demolition of the middle class.
Deep in the background stands Al Gore. He seems to have overcome his "previously-owned" aura, but perhaps not his fear of the arena. He put out a great movie last year, but America needs something beyond a great movie producer.
There's no point in even discussing Joe Biden and Christopher Dodd, whatever their merits as husbands and fathers.
January 15, 2007
The Cheap Oil Mirage
The American public is understandably happy to see the bottom fall out of the oil futures market. But temporary circumstances are only sending them another false signal that everything is perfectly okay on the oil scene. And it only reinforces the foolish belief that when prices go up it is solely because corporate finaglers tweak them up on purpose. In fact, these days it's the other way around: often prices go down because corporate finaglers are tweaking the markets, dumping positions, playing shorts rather than acting like real oil users bidding on real contracts for delivery for real purposes like making gasoline. When oil goes up, as it certainly will again, it is primarily because of geology -- what's left in the ground -- and secondarily because of geopolitics -- where it's left in the ground (and what's happening there).
The supernaturally warm winter temperatures have also played a part, keeping inventories high while the home furnaces idle. (Last week it was 70 degrees in Albany, NY.) There is surely some demand destruction in the background. Third World nations are increasingly dropping out of the bidding (meaning their generators quit making electricity and their trucks stop running). And a contracting US economy may also play a part. But even these circumstances may not overcome the supply problems in the real oil world. Here's what's going on:
As a baseline, it helps to understand that the four largest super-giant oil fields of the world are now in decline. They have been responsible for producing 14 percent of the world's oil supply. They are now old and tired (thirty years is old in the oil world) and they are in depletion. These are The Cantarell field of Mexico, the Burgan field of Kuwait, the Daqing field of China, and the granddaddy of them all, the Ghawar field of Saudi Arabia.
The Cantarell field is a horror story. Pemex, the Mexican national oil company, tried to conceal the dire developments, because Cantarell alone is practically the whole Mexican oil industry. But it is now self-evident that Cantarell is crashing, with a 40 percent annual decline rate projected ahead, meaning a couple of years and it's out. Mexico is America's second largest source of oil imports (after No. 1 Canada and before No. 3 Saudi Arabia). When Cantarell crashes, the Mexican oil industry will crash and the US will be out a major source of imported oil. The US will also be out of imports that were so conveniently close they could be shipped by pipeline rather than tanker ships. For its part, Mexico will be out of a major source of export hard currency revenue and as its economy crashes will probably become even more politically unstable -- meaning more Mexican citizens desperately seeking to get out. Guess where.
Burgan is is in decline. The Kuwaitis announced it themselves last year. Daqing has been the major source of China's domestic oil, which is otherwise paltry, meaning Daqing's decline will only make China more desperate for imports. Ghawar remains shrouded in mystery, since Saudi Aramco does not welcome outside audits. But at 50 years old it is well past the mean age of peak production for oil fields and that alone probably tells the story. Beyond that, we know that Ghawar is producing with a (best case) 35 percent "water cut" (and perhaps much higher). They have to pump seawater into the field (a standard practice) to keep the oil coming out under pressure. The trouble is that they are getting this substantial water cut after redeploying their equipment for horizontal drilling -- an ominous sign. Saudi Arabia declared last year that it would increase production to 12 million barrels a day by 2009. By close of 2006, it appeared to have trouble producing 9 million, with prospects for a 4 percent annual decline rate in the years just ahead.
Elsewhere, Iran is not only past peak, but its domestic demand is so high that it cannot maintain its export levels. The North Sea, which saved the West's ass through the 1990s, is now crapping out at a steep decline rate. Iraq is on track to Palookaville, despite substantial reserves, and even if, by some miracle, its tired old oil infrastructure survives the war, the US may lose access to future production for geopolitical reasons that should be obvious.
Venezuela is past peak for conventional liquid crude and hurting badly for technical expertise to work its oil fields since Hugo Chavez purged the state oil company's management. Last year, Venezuela had to import Russian oil to avoid defaulting on contracts. Whatever the true condition of Venezuela's industry, Chavez is not disposed favorably toward the US -- he hosted Iran's president Ahmadinejad last week to signal that both of them were on the same page where the US was concerned.
The situation in US production is grim. We peaked in 1970. East Texas is near total depletion, with a 99 percent water cut (it produces "oil-stained water). Prudhoe Bay in Alaska now has a 75 percent water cut. We're on track to produce under 5 million barrels a day in 2007 (down from a 1970 high of about 10 million), and heading relentlessly further down year-on-year. We burn through more than 20 million barrels a day. Do the math and see above (re: potential imports) for our prospects.
So, for now the US public (here in the East, anyway) is enjoying both a winter-of-no-winter and a season of comfortably lower oil prices. The financial markets are doing a triumphal dance in expectation of soaring equity values. And the news media is lumbering along with its head up its ass.
Last week, however, the US Senate Committee on Energy and Natural Resources, in an extraordinary session, heard testimony that the nation is in grave danger of a permanent oil crisis. Some of these senators affected to be shocked and surprised. What planet have they been living on? What is the nation getting for the hundreds of million of dollars paid to their staffers? Outgoing Republican chair, Senator Pete Domenici (R-NM), said to the witnesses that “what you told us today is absolutely startling with reference to the future.” Is it too early for a dumbfuck of the year award?
Perhaps the most valuable message the committee got came from Dr. Flynt Leverett from the New America Foundation, who said: “…there is no economically plausible scenario for a strategically meaningful reduction in the dependence of the United States and its allies on imported hydrocarbons during the next quarter century.” That's the straight dope and we'd better stop pretending otherwise.
We'd also better stop pretending that alt.fuels such as ethanol, bio-diesel, coal liquids, or hydrogen will allow us to keep up the happy motoring. We have to make other arrangements for daily life. We don't have a moment to lose. Our "to do" list is very long. If we waste our time in recrimination or hand wringing we are going to lose the things we value most, including an orderly society. So, don't be fooled by the temporary fall in oil prices. We're in the zone of the long emergency.
January 8, 2007
Everyone was walking around upstate New York delirious in their shirtsleeves on Saturday as the thermometer soared into the sixties (an all-time record for January here). The resource cornucopians were beside themselves with glee as the price of crude oil nose dived down to the mid-$50 range, proving what ninnies we peak oil alarmists are. The mustard greens we planted last July are still growing in the garden. The cat caught a garter snake. And later that evening those fluffy things in the headlights were moths, not snowflakes.
It was hard not to enjoy the end of the world. But despite all the high spirits and the roller-bladers and the kids hoisting their Ben-and-Jerry's cones, one was provoked to wonder about all the deer ticks out there enjoying an extra breeding cycle, not to mention the deer themselves, fattening up on prematurely swelling buds, and the pine bark beetles we've been hearing about up the road in the Adirondacks.
And for the really farsighted, there is the contemplation of what summer might be like. After all, if it is 67 in January, might it be 107 in July? And maybe that won't be so groovy. The electric grid is much more stressed out when all the air-conditioners are humming across the land. I'm not looking forward to Lyme disease, West Nile virus, or maybe even Dengue fever, either.
While it seems morally upright to inveigh against global warming Al Gore style, personally I don't believe there is anything we will do about it, or can do about now. The feedback loops are in motion. Something ominous is underway far greater than our measly powers can correct. Even if we started it with about two hundred years of our fossil fuel fires, there is no evidence that can just stop burning coal, oil, and methane gas on the grand scale, or that the warming would stop if we did.
The response of our political leaders is laughable. The most "progressive" among them will demand rapid conversion of the US automobile fleet to hybrid engines. I am confident that this would do absolutely nothing to put the brakes on global warming.
As usual, I am much more interested in how events are likely to turn out than in how we wish them to turn out. My guess is that the weird weather we are getting will increasingly affect crop yields. With populations growing, and weather anomalies increasing, grain surpluses worldwide are now at their lowest point in decades. All the major grain-growing regions have suffered either significant drought (US, Australia, Ukraine, China, Argentina) or flooding (East Africa, India) in recent years. (See this report from the Food and Agriculture Organization of the United Nations.)
The poorer, "undeveloped" nations are feeling the pain first, as usual, and this pain is translating into political breakdown, violence, starvation, and genocide. At the same time, these poorer places are leaving the oil age behind. they have dropped out of the bidding as oil made its move above the $50-a-barrel mark. In these countries, there will no longer be fuel for electric generators or motor transport, and the primary manifestation of all that will be a breakdown of public health. Between the political death squads and the hospitals with no running water, tremendous forces for attrition are underway.
Oil priced beyond the means of Third Worlders means more for America, for the moment, and indeed the public here is glorying in still-affordable gasoline. Judging by the evidence in the supermarket aisles, there have been no noticeable Cheez Doodle shortages. There are certain Third World countries, however, that also happen to be major oil producers. Nigeria, for instance. It is already a very chaotic state. The oil there is extracted mainly by multinational corporations who pay substantial royalties and licensing fees to the Nigerian government. The people of Nigeria mostly do without. Increasingly, they are tapping into pipelines illegally and siphoning off oil. Meanwhile, a quasi Civil War has provoked assaults and kidnappings against the oil infrastructure and foreign workers. Sooner or later, Nigeria will become too chaotic and its oil supply will go off-line, so to speak, perhaps permanently. When that happens, the happy motorists in Atlanta and the San Fernando Valley may start to notice that something is happening.
Global warming will not get our attention this winter. It's too pleasurable here in the northeast US, where so many decisions are made. The new Democratic congress may blather about it, but there will be no policies or protocols, just as there will be none about the other "elephant in the room" -- overpopulation. There's not a damn thing we're going to do about it. You can deplore it, but then what?
Of course, I maintain that there is a broad range of actions we could take in the US that would constitute an intelligent response to this Long Emergency of climate change and oil depletion. The most important thing we could do at the moment is to stop debating about all the different "innovative" ways to run our cars, and come to grips with the fact that we have to leave the happy motoring era behind us, period. I don't see Nancy Pelosi taking the lead on this one. She'll just bring a new kindergarten veneer to the same old politics of denial. The mid-winter cherry blossoms will only make the denial seem more festive.
January 1, 2007
Forecast For the Year Ahead
First a Look Backward
Let's get this out of the way up front: the worst call I made last year was for the Dow to crumble down to 4000 when, in fact, it melted up to a new all-time record high of about 12,500. The reason we saw this, in my opinion, was that inertia combined with sheer luck to keep the finance sector decoupled from reality long enough for the Wall Street insiders to guarantee their 2006 Christmas bonuses -- perhaps the last they will ever see.
Finance has been trending away from economic reality since the Ronald Reagan era on an accelerating basis. By this I mean the role of finance no longer represents sets of mechanisms and institutions designed to raise legitimate capital for investment in legitimate productive activities. Finance is now an end in itself, essentially a racket. The capital is no longer capital, i.e. genuine wealth accumulated from previous productive activities. Now it is jive-capital: notional "wealth" spun out of activities that are fundamentally not productive -- for instance, sub-prime mortgages bundled into tradable securities. In reality, the mortgages backing these securities are contracts for repayment of huge loans made on hazardous terms by shifty means to people with poor prospects for making their payments for assets (suburban houses made of vinyl and glue) that are, in any case, fated to lose much of their nominal value, becoming worth less than the obligations yet due on them, and rapidly so.
The sub-prime loans were made in the first place because the contracting institutions (banks) could pass off the risks associated with these jive contracts by off-loading them to larger institutions such as the government sponsored enterprises Fannie Mae (the Federal National Mortgage Association) and Freddie Mac (the Federal Home Loan Mortgage Corporation) which are largely exempt from regulatory oversight and hence could buy up whatever cockamamie paper contracts they felt like buying and convert them into bonds, certificates said to represent future earnings. (Not.)
These mortgage backed securities were only one species of engineered abstract financial "instruments" among many orders of incomprehensibly abstract mutant financial "products" (derivatives, credit default swaps) and procedures (carry trade, leveraged buyouts,) based on the fundamental unreality that it is possible to get something for nothing.
The inertia part of the story is that this collective hallucination (that jive-capital was real) was sustained through 2006 by the sheer massive weight and flow of jive capital and its ability to elude scrutiny by countless chimerical conversions from one abstruse form to another -- from loan, to bond, to bet, to position, to Christmas bonus. . . . The final result, though, was a nation with an increasingly impoverished middle class, a bankrupt public treasury, and all remaining wealth (notional or residual) creamed off by a racketeering upper crust of logrolling insiders who, for the moment, could convert their dollars into multiple mansions, private jet planes, and sky boxes at the gladiatorial combats du jour.
Now, the rest of the US economy was increasingly composed of a suburban development hyper-boom that amounted to little more overall than a colossal misinvestment in a living arrangement with no future (and the irreparable destruction of the remaining US landscape). The building-and-selling of suburban houses and the ancillary accessorizing of them with collector highways, strip malls, and big box stores, fast food huts, and all the jobs associated with constructing, lending, evaluating, selling, servicing, and staffing these things, along with additional rackets like home equity withdrawal refinancing to keep the cash registers ringing in the Wal-Marts and Home Depots -- these were the activities supposedly keeping the "regular" (i.e. lumpenprole) economy chugging along. If you subtracted all this "housing bubble" activity from the rest of this economy since 2001 there was very little left besides, hair-styling, fried chicken, and open heart surgery.
Yet, marvelous to relate, the whole toxic, entropy-laden, creaking, reeking cargo of shit-and-deceit that comprised this system just managed to keep rolling along for another year without collapsing under its own stinking, fantastically stupid weight.
The luck part of the story came partly from the weather -- there was barely any hurricane activity in US territory last year and global warming was so advanced that the northern states set records for warm winter temperatures -- which redounded into the fossil fuel part of the 2006 story.
We came out of 2005 in very poor shape for oil and gas because so many platforms in the Gulf of Mexico were destroyed or damaged by Hurricanes Katrina and Rita -- something like 23 percent of total production capacity at the worst point, some of which never recovered -- not to mention the circumstances worldwide regarding oil supply (more on this ahead). The supernaturally warm winter kept home heating prices super low in early 2006. Nonetheless, oil prices began ramping up in the spring as we approached the happy motoring part of the year joined by fear of yet another harsh hurricane season. At midsummer, we got the spasm of the Hezbollah-Israeli war, which threatened to infect the oil-producing areas of the Middle East. Around this time, oil spiked to $78 a barrel.
But that little war terminated with next-to-zero immediate repercussions. Both Hezbollah and Israel went home to regroup. The US was not tempted to step on Hezbollah's sponsor, Iran, and Saudi Arabia kept its beak out of the beef, too. The world's focus returned to the ongoing fiasco of America's misadventure in Iraq, and that just ground on and on like a giant Cuisinart making human guacamole in wholesale batches day after day.
The hurricane season turned out to be a total bust. The panic buying of oil contracts at mid-summer turned to an autumn rout as inventories were already built up and bidders left the futures markets. Oil prices sank from $78 to the high $50s. The Amaranth hedge fund crapped out on an oil futures play. It was rumored that Goldman Sachs (its CEO Hank Paulson just elevated to Secretary of the Treasury last summer) used its vast resources to further queer the oil futures markets going into the November election to keep prices down and voters zonked out. Whether this was true or not, I simply don't know -- but obviously it didn't help preserve the Republican hold on congress.
But it brings us to a crucial final angle on the story-as-a-whole, which is that the stresses, distortions, and perversities we see in the financial markets and the economy are largely attributable to the peculiar circumstances of Peak Oil .-- namely, a grinding background reality that this point of the world's highest-ever petroleum production represents the final blow off of an economy that really has no future, an economy in which typical industrial growth is no longer possible. And if this growth, this ceaseless expansion of everything is no longer possible, if instead we enter a wholesale global contraction of available energy, of industrial activity, and expectation of future activity, why then the markers used to signify the expectation of growth (at least the retention of wealth) -- currencies, stock certificates, bonds, derivative contracts, mortgages -- all these things lose their legitimacy and finally their value. That is the fundamental underlying reality in Peak Oil's relation to our modern economies in general and to the finance sector that is supposed to serve it.
I will be so bold to say that I called the housing crash correctly last year, though the worst symptoms are slow to present for technical reasons. There's no question that the action on the real estate scene changed drastically in mid-year. The implosion of this mighty structure of fraud, folly, and misinvestment so far has taken place in such breathtaking slow-motion that its victims have not really felt the pain from the falling bricks yet. By late summer, buyers started evaporating. Real estate signs planted in lawns last June are still sitting there on New Years. Prices have come down a bit in many markets, including most of the hotties such as Florida, Phoenix, Las Vegas, San Diego, and Boston. But the buyers are still not bidding. Meanwhile, the sellers have dug in, determined to get something at least close to their wished-for inflated prices, egged on by their representatives, the realtors. This mutually reinforcing psychology cannot hold indefinitely. Many of these sellers don't have the luxury to wait around forever. Some have had to move to other houses in other places because of job changes, and are stuck paying two mortgages. Many are stuck with "creative" mortgages that all the evil ingenuity of the human mind conjured in recent years to enable the feckless to live above their means -- adjustable rate, payment optional, no money down contracts that suckered buyers into booby-trapped obligations whose initial low-interest terms lured them in and are now set to blow up in their faces as terms automatically re-set upwards to higher rates and "optional" deferred payments get backloaded onto the principal, putting the mortgage holders so far underwater on their contracts that a tour of the Titanic would feel like a day at the beach.
The trouble is, when both the sellers and their agents decide to get with the reality program and lower their prices, they will only stimulate a massive death spiral of house price deflation as buyers see the numbers go lower and hold out longer in the expectation that prices will go down even further. That would, of course, put more sellers into gross distress and lead them either to dump their properties or enter the cold waters of default and foreclosure. The whole process could run for a couple of decades, and as that occurs it will be made much much worse by oil depletion -- as so many suburban houses drastically lose locational value, combined with the consequences of poor construction carried out in cheap materials like vinyl and chipboard.
Add to this that the late stages of the hyper-boom caused so much "product" to be brought onto the market by the "production home builders" that there now exists an unprecedented oversupply of exactly the kind of crappy suburban houses (in all price ranges) that are bound to lose value going just a little bit forward. Foreclosures will only add more to the oversupply. In the subprime mortgage niche, defaults are officially reported to be running at 20 percent. Foreclosures are trailing because the process is so awkward, and many have not yet shown up in the housing markets. I predict that foreclosures on subprime mortgages will run above the 50 percent range when all is said and done.
As the music stops in the lending rackets, liquidity in the form of mortgage backed securities and other sources of hallucinated "money" will dry up, and will start to make itself felt in all the other arenas and regions that "money" has been migrating to. Jobs associated with house-building and all those ancillary enterprises -- big box shopping, chain restaurant revenues, car sales -- will disappear and incomes with them. Many home sales in past decade were made to people benefiting directly from the housing bubble. (The sheer number of real estate agents in America more than doubled since 2001.) This evaporation of both credit and incomes will impact the so-called "consumer economy", said to make up 70 percent of the total US economy. In other words, the term "depression" might be applicable as this economy lurches into actual contraction of more than a few percentage points.
This scenario suggests that earnings in corporations listed on the public stock exchanges -- the companies that elude acquisition by "private equity" -- would necessarily see severe drops in earnings, and therefore in stock value. While many commentators view the rise in the Dow as just another symptom of inflation -- asset inflation -- the activity in these assets -- companies making, doing, and selling things -- must be reported on a quarterly basis. And if that activity is trending strongly downward, then stock prices will trend down even if the value of the dollar is going down and it takes more dollars to buy an equivalent share of stock year-over-year. So I would conclude by again predicting a substantial drop in the Dow and other equity markets. To some extent, it seems to me that the 2006 blow off in stock prices was just another symptom of the finance sector being decoupled from economic reality since real GDP probably contracted one percent in the second half of the year while misreporting and delusional thinking drove stock prices up.
One would think that the US dollar is poised to take a beating, and indeed the signs have been abundant that this is underway -- especially when the value of the dollar started to implode against the Euro around Thanksgiving. It has leveled off since then. But since then there have been other moves around the world to de-link commodity prices from the US dollar and restate them in Euros, especially oil, and the dollar's plunge will probably continue. A lot of commentators around the web have pointed out the side benefit for the US government to promote dollar inflation: to inflate itself out of crushing debt. But the government can't accomplish this without destroying the purchasing power of ordinary Americans and whatever remains of their meager savings. I'd have to conclude that the Federal Reserve is out of tricks for goosing economic activity. Their last major trick was hitching a jive economy to a real estate bubble by making loan money available to any jabonie with a pulse and promoting the demise of lending standards. The gambit lasted five years and is now blowing up in America's face.
The Energy Predicament
Oil ended 2006 roughly where it began, at just over $60 a barrel. This reassured the public that all talk about Peak Oil was hysterical blather from a lunatic fringe. It was reinforced by publication of the mendacious Cambridge Energy Research Associates (CERA) report issued this fall -- a tragic document put out by a giant public relations firm representing the oil industry -- with the mission of staving off windfall profits taxes and other regulatory moves that a true resource emergency might recommend.
But beyond this debate, in the background, another ominous trend can account for the stalling of oil prices in 2006 -- totally unrecognized by the public and ignored by the news media: prices on the oil futures market leveled off because the Third World has effectively dropped out of bidding for it -- and using it. They cannot afford it at $60-a-barrel. The Third World has entered an era of energy destitution and it is manifesting in symptoms such as local resource wars, genocides, falling life expectancies, and in many places a near-total unraveling of the sociopolitical order. American mall-walkers and theme park visitors are oblivious to this tragic process, but it is perhaps the major reason why we are not now suffering from $100-per-barrel (or greater) oil prices (with the consequent unraveling of our sociopolitical and economic order).
The major trend on the oil scene the past 12 months is the apparent inability of the world to lift total production above 85 million barrels a day -- with demand now rising above that line. It is unclear how much more demand destruction will come out of the Third World before bidding intensifies between the developed nations. One commentator in particular, Dallas geologist Jeffrey Brown --a frequent contributor on the web's best oil debate site, TheOilDrum.com -- is advancing the idea that we are entering an oil export crisis that will presage a more general permanent world-wide oil emergency. Brown holds that the major oil exporting nations are using so much of their own product, because of rising populations, that their net exports are falling at an alarming rate, perhaps as much as 9 percent annually. This trend combines with general depletion rates now said to be around 3 percent a year.
The question of total oil reserves around the world remains somewhat murky, but Brown, Kenneth Deffeyes of Princeton, and others using a straightforward mathematical model, have stated that the world is roughly at the same point in all-time production as the Lower-48 United States was at in 1970, when America passed its all-time production peak. We know for certain that three of the four super giant oil fields (Daqing in China; Cantarell in Mexico; Burgan in Kuwait) are past peak and there is plenty of evidence that the greatest of them all, 50-year-old Ghawar in Saudi Arabia is not only past peak but perhaps "crashing" into a super-steep decline.
Discovery of new oil to replace the production from declining fields remains paltry. Chevron announced it's "Jack" discovery in the deepwater Gulf of Mexico with great fanfare this year, but neither conclusively demonstrated that all the wished-for oil was down there (between 3 and 15 billion barrels, Chevron said) or that they could get it out of there in a way that made sense economically, since the oil was extraordinarily deep and difficult to lift up.
Meanwhile, companies developing tar sand production in Alberta announced that their costs of production were rising substantially, while a reckoning lay ahead as to how much of Canada's fast-disappearing natural gas reserves will be squandered in melting tar. The oil shale project is going nowhere. American corporate farmers have entered into a racket with congress to subsidize ethanol production from corn and biodiesel fuel from soybeans. The American public remains ignorant of the tragic futility of this project, which depends on oil-and-gas "inputs" to keep the crop yields up and ultimately is a net energy "loser." As the world crosses into the uncharted territory of "The Long Emergency," Americans will find themselves having to chose between eating food and making fuel to keep the car engines running.
The signal failure of public debate in this country is embodied in our obsession with this particular theme -- how to keep the cars running by other means at all costs. Everybody from the greenest enviros to the hoariest neoliberal free market pimps believe that this is the only thing we need to worry about or talk about. The truth, of course, is that we have to make other arrangements for virtually all the major activities of everyday life -- farming, commerce, transport, settlement patterns -- but we are so over-invested in our
suburban infrastructure that we cannot face this reality.
The bottom line for oil in 2007: expect the bidding on the futures markets to regain intensity between the US, China, Europe, and Japan. A contracting US economy could take some demand out of the picture, but the sad truth is that we burn up most of the oil we use in cars, and American life is now so hopelessly based on incessant motoring that citizens cannot even go down to the unemployment office without driving. Geopolitical events can only make the oil supply situation worse and probably will. (See ahead.)
We are probably also in the early stages of a natural gas crisis in the US. Over the next decade, the gap between US demand for natural gas and dwindling supply may amount to one-and-a-half times the current equivalent of our oil imports. This is a staggering deficit. Natural gas is used for heating in more than half the houses in the US and accounts for just under 20 percent of our total electricity production. Domestic supply is crashing. We are drilling as fast as we can, with more and more rigs each year, just to to keep up. To make matters worse, the means of gas delivery -- through a vast web of pipeline networks around the nation -- makes "just-in-time" delivery the norm and, tragically, also makes "just-in-time" pricing normal, too. Thus, gas prices are responding only to the shortest-term signals -- for instance, unusually mild winter weather -- rather than to the catastrophic long-term reserve picture. Finally, we are unlikely to solve our natural gas problems with imports for technical reasons having to do with the cost and difficulty of moving the stuff by means other than pipelines and for geopolitical reasons, namely that most of the remaining gas in the world is in Asia. Bottom line: we could enter a home heating and electricity production crisis anytime. Massive price increases are likely to be required in order to reduce demand to the level of available supplies. This will be one of the major factors in the disabling of suburbia -- which is to say, normal American life.
The Iraq misadventure has turned self-evidently into a fiasco and the American public is understandably losing the will to persevere there. Ditto Afghanistan. The overall trend is for dwindling American influence over events in the Middle East. Whether this is a good thing or a bad thing in the long run is not as important as the sheer fact that it is happening.
Iran has benefited from every American misstep and sign of weakness and is seeking to become the regional hegemon. Is it worth it to them just to be the Big Cheese in the region? Or is this just a sort of booby prize in a contest between religious sects? Iran's current momentum is favorable toward this goal in the short term, but in the longer term Iran is faced with steeply depleting oil reserves and an exploding population that is growing restless under a now ossified regime of mullahs. Iran's natural gas reserves are impressive, but they cannot rely on them indefinitely for both export income and running their own electrical grid. While their pursuit of atomic weapons may be for real, it is also a fact that Iran must make plans for producing electricity without using up absolutely all of its fossil fuel -- and so their pursuit of atomic energy is not without practical necessity.
Shia influence, led by Iran, appears ascendant in the Middle East for the moment. Iraq is under Shia control (though Iraqi Shia are ethnically not Persian). Hezbollah is taking over Lebanon by degrees. Shia populations in Saudi Arabia are concentrated in the oil-producing area along the Persian Gulf. Iran and its Shia proxies appear avid to challenge Saudi Arabia's leadership -- and Arabia is, after all, the birthplace of Islam and the owner of its holiest shrines. What this boils down to is a collision between Saudi Arabia and Iran. However this plays out, in proxy wars or in direct conflict, it can only play havoc with Middle East oil production and export.
The players involved have the means to make enormous mischief if they want to. Any of them could take out a major oil installation with a jet plane and a suicide pilot, or missiles, or even with common small arms in a well-orchestrated operation. Doing so, of course, would so grievously damage the major importing nations that the global economy would seize up and effectively bring down the curtain on the industrial era. Other players currently lurking off-stage could make dramatic entrances in the year ahead -- for instance, Pakistan, perhaps the most dangerous nation in the world, a country held together with scotch tape and baling wire, with the world's biggest supply of angry Islamic maniacs and an arsenal of about twenty atomic bombs.
In short, the Middle East is rigged like a gargantuan booby trap, the biggest IED the world has ever seen. There are too many things that can go wrong, and countless possible combinations for Murphy's Law to come into play. As bloody and horrible as events have been in the Islamic world through 2006 -- including everything from the genocide in Darfur to the daily violence in Iraq and Afghanistan to the Hezbollah-Israel fight -- things can obviously get worse. At the bottom of all this are the exploding populations in a part of the world that has historically possessed only meager resources for human existence. Now that the most special resource of all -- abundant oil -- is heading into depletion all that remains on the horizon is a long, grinding competition among more people for less of every other resource. My guess is that the Middle East will shut down politically before it shuts down geologically. The process is underway. The populations aren't shrinking and the pressures are only getting worse. So I would predict greater disorder in the Middle East through 2007. The US may suffer a "double Dien Bien Phu" event of having to vacate both Iraq and Afghanistan at the same time.
Europe and Japan have been lurking quietly on the sidelines since the US was lured into the "War on Terror" in 2001. Japan imports 95 percent of its oil and gas. If those lifelines are severed, Japan is simply toast. The only question is whether they will take it lying down, or revisit other options like military adventure. Given their energy disadvantages, military adventuring seems unlikely this time around. Perhaps they just go medieval again and retreat into the comfortable romance of a Neo-Shogun island culture.
Europe has been coasting along letting America take all the heat in the Middle East. Europe's own energy supply (the North Sea) is crashing. Only Russia has substantial supplies -- though it, too, is past peak -- and will probably continue making moves to use its oil leverage for political advantage. Britain has been the most feckless European nation, utterly ignoring its own energy crisis as North Sea oil and gas dwindles down to nothing. France can take a little comfort in getting 70 percent of its electric power from nukes -- and the nations that maintain electric service will be the nations that remain civilized. Germany, Italy, and Spain are now at the mercy of their oil importers. They didn't behave as foolishly as the US did; they didn't destroy their public transit or their city centers or their local agriculture. But they still face great difficulties in reorganizing daily life to fit the requirements of the post-oil age.
China faces difficulties at least as awesome as the United States. They have zilch left for oil. Their ecological problems are worse, their political stability depends on an export economy that could fall apart in 2007 as WalMart shoppers spend fewer and less valuable dollars on things made in China's factories. A hundred million unemployed factory workers might make things hairy for a central government that enjoys little true legitimacy. And there is always the chance that Chinese internal politics will return to the psychotic state of the mid-1960s if the stress is too great. What I wonder is when China might begin to go adventuring into former Soviet lands such as Kazakhstan in search of oil. Perhaps 2007 is the year that China turns aggressive.
Elation ran through the body politic in November when the Republicans lost control of congress and the senate, and many state governments as well. But the Democrats have not shown any better understanding of the nation's economic and energy predicaments than the Republicans have. The Democrats are equally lost in fantasies about running WalMart and the interstate highway system on corn instead of petroleum. The Democrats are every bit as invested in our suburban gross liabilities as the Republicans have been. One way or another, we will either have to get some revolution in party ideology or the American political system is going to fail. Unfortunately, instead of ideas and agendas for facing our real problems, the public remains lost in a political personality showcase that is just one facet of our absurd celebrity culture.
My prediction for 2007 is that American politics will become more delusional, more based on false hopes for salvaging our tragic misinvestments, and more disappointing. I have stated many times on this blog that America faces a political readjustment of the kind not seen since the Civil War -- though not with the same plot and themes. I also believe that the feckless complacency of our current behavior could lead to a situation here in which Americans will beg an authoritarian leadership to tell them what to do. Winston Churchill famously remarked that Americans could always be relied upon to do the right thing -- after they had exhausted all the other possibilities. I hope we are not heading in that direction, but we are already romancing the "other possibilities" (like running WalMart on corn) instead of taking intelligent steps like fixing the railroads, or ending subsidies and incentives for suburban development, or slapping realistic taxes on gasoline.
To sum it all up, I believe 2007 will be the year that the US finally feels the pain. More disorder will appear in the system. More cries of anguish will be heard throughout the land. More paralysis will set in. The bid for leadership may not follow the current story line -- Barack...Hillary...Edwards...McCain...blah blah blah. Jokers and wild cards could step into the frame. America will be looking for a man on a white horse and instead they'll get Newt Gingrich on an electric Humvee.
December 18, 2006
Not So Wonderful
It's a Wonderful Life, Frank Capra's 1946 Christmas card to America, is full of strange and bitter lessons about who we were and who we have become. It also illustrates the perversity of history -- the fact that things sometimes end up the opposite of the way we expect.
The movie concerns the life and career of one George Bailey (Jimmy Stewart) and his neighbors in the prototypical main street town of Bedford Falls. The story's arc runs roughly from about 1910 to the 1946 "present." By the 1920s, young George yearns to break free of the "crummy little town" (as he calls it), but circumstances keep him bound to it through the years, and to the family business, a little local "building and loan" bank of the kind that also used to be called "thrifts" and later "savings and loans," now extinct institutions.
Bailey Building and Loan gets whipsawed by the boom of the 1920s and then the Great Depression. World War Two comes and goes. Over the decades, George is bedeviled by the town villain, scheming rival banker Mr. (no first name) Potter (Lionel Barrymore), who is always trying to shut down or take over Bailey Building and Loan.
Eventually, Mr. Potter gets the better of George, who attempts suicide, but is saved by an avuncular guardian angel named Clarence, who shows George how much worse off his town (and, by extension, the world) would be if George had never been born. The rest is George coming to his senses on Christmas Eve, amid caroling and bell ringing, realizing how wonderful all the vicissitudes of small town life, and family, and banking really have been.
It's a splendid, heartwarming movie in many ways (and I am not being facetious). It was released a year after the awful ordeal of World War Two ended -- which itself had followed the decade-long tribulation of the Great Depression. America was weary but victorious. Democracy and decency had triumphed over manifest evil -- but the memory of all that hardship lingered on. In 1946, we were a chastened, earnest, prudent, generous, and quietly confident nation of heroes who had managed to lick hard times and Hitler.The Jimmy Stewart portrayal of George Bailey was supposed to embody all the home front virtues in our national character that made victory possible.
Here's the weird part though. The main business of Bailey Building and Loan was financing the first new suburban subdivisions of the automobile age. In one of the movie's major set pieces, George Bailey opens Bailey Park, a tract of car-dependent cookie-cutter bungalows, and turns over the keys to the first house to the Italian immigrant Martini family. Had the story continued beyond 1946 into, say, the 1980s, (with George Bailey now a doddering Florida golfer), we would have seen the American landscape ravaged by suburban development, and the main street towns like Bedford Falls gutted and left for dead. That was the perverse outcome of George Bailey's good intentions. We also would have witnessed the Savings and Loan Crisis of the late 1980s, when changes in federal regulation opened the door to an orgy of looting and grift (acted out largely in suburban development scams) so extravagant that a quarter-trillion dollar federal bail-out was eventually required to cauterize the economic infection.
At a crucial point in the story, Clarence the guardian angel takes George Bailey on a tour of Bedford Falls as-if-George-had-never-been-born. Only the town is named Pottersville now. Main Street is lined with gin mills, strip clubs, and dance halls instead of wholesome banks, groceries, and pharmacies. (Oddly, casinos are absent, because in 1946 we lacked the vision to see how truly demoralized our nation could get.) Prostitutes ply the busy sidewalks. Now the weirdest thing is that Pottersville is depicted as a busy, bustling, lively place -- the exact opposite of what main streets all over America really became, thanks to George Bailey's efforts -- a wilderness of surface parking, from sea to shining sea, with WalMart waiting on the edge of every town like Moloch poised to inhale the last remaining vapors of America's morale. Frank Capra could imagine vibrant small towns turning their vibrancy in the direction of vice -- but he couldn't imagine them forsaken and abandoned, with the shop fronts boarded up and the sidewalks empty, which was the true tragic destiny of all the Bedford Falls in our nation.
Most ironically, today America's favorite main street town, Las Vegas, is Pottersville writ large, and most Americans see absolutely nothing wrong with it. How wonderful is that?
December 11, 2006
Since the financial "industry" decoupled from the US economy sometime in the past decade, it has been hard to tell, from a chicken-and-egg point-of-view what comes first -- obscenely huge year-end bonuses for Wall Street playas, or jacked up market indices. I mean, do these paper-shufflers get paid extra millions because the Dow goes over 12,000, or do they game the Dow over 12,000 to justify the extra millions? (Or game other sub-systems such as the commodities markets, the derivatives sector, the mortgage rackets, mergers-and-acquisitions, et cetera.) Echo answers. . . .
CNBC reports that fifty executives at Goldman Sachs will each receive bonuses of $25 million or more. Yes, you read correctly. $25 million each. And the reason, according to CNBC is that these sharpies would otherwise jump ship for hedge fund nirvana if not lavishly tipped. Morgan Stanley and Merrill Lynch also will each smack twelve employees over the head with golden stockings full of $25 million. Note, Goldman Sachs was rumored to have driven the price of oil down for the election season by applying huge sums of money to twiddle the futures market, and note, too, that the Secretary of the Treasury, Hank Paulson, was CEO of Goldman Sachs until the middle of last summer. But, of course, I am fond of saying that I am allergic to conspiracy theories.
I do have another theory, though. I admit, it's just a hunch, a wild-ass guess, a twinge in the gut. It's that come 2007 New York's new governor, Elliot Spitzer, and the new state attorney general, Andrew Cuomo, will go after these grifters like a couple of mastiffs in a basement full of rats -- just like Spitzer went after Dick Grasso, the CEO of the New York Stock Exchange, who, in 2003, received a "deferred compensation" package of $140-million, awarded by a hand-picked NYSE compensation committee composed of executives from the very listed companies Grasso was supposed to regulate. His venality unbound, Grasso then arranged to receive an additional $48-million when the embarrassed NYSE board made him step down from his job.
Of course, this whole sordid tale raises some ineffable questions, such as, how exactly does one's standard of living improve after, say, the first $140 million? How many private jet planes does it take to summon up that certain glow of contentment achieved among the testosterone-for-lunch-bunch? Anyway, the Grasso case is currently awaiting trial. So far, the New York State Supreme Court issued a summary decision ordering him to repay "a significant amount" of the gazillions he walked away with. The cheeky Grasso countersued the NYSE for "besmirching his name." Well he can sue me, too, because I am here to tell you that Dick Grasso's behavior as fiduciary for a non-profit corporation should be heralded from sea to shining sea as the most disgraceful species of money-grubbing turpitude conceivable in a sentient creature above the level of a howler monkey. I hope he spends the rest of his life doing Chinese fire drills in the civil courts and finally dies by getting sucked into the air intake of the starboard engine of his private jet five minutes after the re-po man shows up with a warrant for chattel surrender.
Excuse me. I am momentarily afflicted with the vapors. Let's just say that the inauguration of Messers Spitzer and Cuomo is but weeks away now, and leave it at that. Stay tuned.
I have another, slightly different idea, though, in a another vein. Casual observers like myself have described the US economy as being in a hideous state of unbalance. On the one hand, we have the aforementioned Wall Street smoothies raking in unbelievable bonus fortunes, while the rest of the nation sinks into home equity quicksand wearing lead-lined suits manufactured in ARM mortgage reset hell. The afflicted house owners can't even sell their houses because the market is glutted with houses just like theirs, now worth less than the mortgages owed on them and, guess what, the supply of Greater Fools has finally dried up.
Why doesn't the Wall Street bonus crowd, as a public service, step in and invest all their supernaturally-acquired dough in the suburban house market? To sort of even things out and prop things up. Since so much of their bonus dough was probably generated through the magic of mortgage-backed securities translated into hedges, carry plays, leveraged derivatives gambits, commodity shorts, credit default swaps, and other acts of financial legerdemain, then perhaps they owe it to salt-of-the-earth America -- the distressed home-owner middle class (not to mention the home-builders choking on oversupply of their "product") -- to step into the breach and pony up for some of those houses -- to prove that you really can base a post-industrial economy on real estate sales.
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