Zounds! Public sentiment toward the accelerating economic fiasco has shifted, seemingly overnight, from a mood of nauseated amazement to one of panicked grievance as the United States moves closer to an apparent comprehensive collapse -- and so ill-timed, wouldn't you know it, to coincide with the annual rigors of Santa Claus. The tipping point seems to be the Bernie Madoff $50 billion Ponzi scandal, which represents the grossest failure of authority and hence legitimacy in finance to date in as much as Mr. Madoff was a former chairman of the NASDAQ, for godsake. It's like discovering that Ben Bernanke is running a meth lab inside the Federal Reserve. And out in the heartland, of course, there is the spectacle of Illinois governor Rod Blagojevich trying to desperately dodge a racketeering rap behind an implausible hairdo.
What seems to spook people now is the possibility that everybody in charge of everything is a fraud or a crook. Legitimacy has left the system. Not even the the legions of Obama are immune as his reliance on Wall Street capos Robert Rubin, Tim Geithner, and Larry Summers seem tainted by the same reckless thinking that brought on the fiasco. His pick last week for chief of the SEC, Mary Shapiro, is already being dissed as a shill for the Big Bank status quo. In a few days we'll discover what kind of bonuses are being ladled out by the remaining Wall Street banks with TARP money and a new chorus of howls will ring out.
This is very dangerous territory. In dollar terms, the numbers being applied to the various problems are so colossal -- trillions! -- that the death of our currency seems assured. And in defiance of congress's express intentions, none of the TARP "money" has been applied to its targeted purpose of buying up "toxic" (i.e. fraudulent) securities hidden in the vaults of banks, pension funds, and municipal portfolios.
George W, Bush's personal bailout of General Motors and Chrysler is designed solely to postpone their bankruptcy and mass job layoffs until after the holidays. Otherwise, the $17.4 billion will probably be used by the companies to underwrite the extensive legal work required for the moment they must declare bankruptcy -- when Mr. Obama is in the White House. Meanwhile, the President-elect has ramped up his job-creation target overnight from two to three million, and some observers are catching a whiff of Soviet-style economic engineering ("...we pretend to work and they pretend to pay us....").
The years since Jimmy Carter have produced an astoundingly flaccid public, sunk in various addictions and distractions, but this is about to change. The darkling mood of political protest and violent activism that saturated my own young adult years is scudding up again on the horizon. Mr. Obama's pick for attorney general, the mild-looking Eric Holder, may be the key figure in the early months of the new government. If he doesn't commence some aggressive investigations and prosecutions -- beginning with Henry Paulson for insider trading when he was in charge of Goldman Sachs and shorting his own company's mortgage-backed securities -- then the whole Obama enterprise could fall under suspicion of illegitimacy. The bums who ran the US banking sector into a ditch have to account for their turpitudes. They can't be allowed to hide under a TARP.
Unfortunately, the legal system, and probably the legislative system, will be so buried in procedural bullshit from the unwind of countless enterprises and institutions, and the sorting out of the remnants, that it remains to be seen whether this generation of people-in-charge can even embark on a fresh start of anything connected to real everyday life in America. All this is starting to alarm the tattered residue of the middle classes, and from here it's a very short path to them being really pissed off.
When legitimacy erodes, anything goes. Nothing is respected including rules and personalities. The center doesn't hold and the new vacuum there is a tumultuous place. The same crisis of authority and legitimacy is spreading from nation to nation now. Soon, China will contend with a discontented army of the unemployed. Greece has been in an uproar for two weeks. Belgium's government just collapsed. Trade barriers are going up. Exports are falling away. The world's energy markets are not immune to these disorders. I would expect problems with the currently seamless supply lines that bring America two-thirds of the oil we use. Even a mild disruption of oil supplies could attach an anvil to the ankle of an economy already falling off a cliff.
Right now, the overwhelming sentiment is to get this country back to where we were, say, ten years ago, when everything was humming nicely: Clinton nostalgia. We're definitely not gong back there, though. It's an idle wish. And any set of policies designed to lead in that direction will prove very disappointing. Our destination is a land of much smaller-scaled local economies. We could retain our federal ties if the federal government can scale back appropriately from the bloated, feckless enterprise it has become. Otherwise, it might only get in the way and make matters worse, and the public in one region or another of North America might reach a decision that they are better off without it. That would be what's called a revolution.
The peak oil story has not been nullified by the scramble to unload every asset for cash -- including whomping gobs of oil contracts -- during this desperate season of bank liquidation. The main implication of the peak oil story is that we won't be able to generate the kind of economic growth that defined our way of life for decades because the primary energy resources needed for it will be contracting.
Just as global oil production peaked, our economy evolved into a morbid hypertrophy, and the chief manifestation of it was the suburban sprawl-building fiesta that has now climaxed in the real estate bust. By the early 21st century, when so much American manufacturing had been swapped out to Asia, there was no business left except sprawl-building -- a manifold tragedy which wrecked the banks that financed it, and left the ordinary people mortgaged to it with ruinous liabilities.
That economy is now in its death throes. The "normality" it represents to so many Americans is gone and can't be brought back, no matter how wistfully we watch it recede. Even so, it was obviously not good for the country. The terrain of North America has been left scarred by unlovable objects and baleful futureless vistas that, from now on, will shed whatever pecuniary value they once had. It represents the physical counterpart to the financial mess that has been left to the young generations to clean up -- and the job will take a very long time.
We have to, so to speak, get to place mentally where we can face the kinds of change that are now necessary and unavoidable. We're not there yet. It's not clear whether the elected new national leadership knows just how severe the required changes will really be. Surely the public would be shocked to grasp what's in store. Probably the worst thing we can do now would be to mount a campaign to stay where we are, lost in raptures of happy motoring and blue-light-special shopping.
The economy we're evolving into will be un-global, necessarily local and regional, and austere. It won't support even our current population. This being the case, the political fallout is also liable to be severe. For one thing, we'll have to put aside our sentimental fantasies about immigration. This is almost impossible to imagine, since that narrative is especially potent among the Democratic Party members who are coming in to run things. A tough immigration policy is exactly the kind of difficult change we have to face. This is no longer the 19th century. The narrative has to change.
The new narrative has to be about a managed contraction -- and by "managed" I mean a way that does not produce civil violence, starvation, and public health disasters. One of the telltale signs to look for will be whether the Obama administration bandies around the word "growth." If you hear them use it, it will indicate that they don't understand the kind of change we face.
It is hugely ironic that the US automobile industry is collapsing at this very moment, and the ongoing debate about whether to "rescue" it or not is an obvious kabuki theater exercise because this industry is hopeless. It is headed into bankruptcy with one hundred percent certainty. The only thing in question is whether the news of its death will spoil the Christmas of those who draw a paycheck from it, or those whose hopes for an easy retirement are vested in it. But American political-economy being very Santa Claus oriented for recent generations, the gesture will be made. A single leaky little lifeboat will be lowered and the chiefs of the Big Three will be invited to go for a brief little row, and then they will sink, glug, glug, glug, while the rusty old Titanic of the car industry slides diagonally into the deep behind them, against a sickening greenish-orange sunset backdrop of the morbid economy.
A key concept of the economy to come is that size matters -- everything organized at the giant scale will suffer dysfunction and failure. Giant companies, giant governments, giant institutions will all get into trouble. This, unfortunately, doesn't bode so well for the Obama team and it is salient reason why they must not mount a campaign to keep things the way they are and support enterprises that have to be let go, including many of the government's own operations. The best thing Mr. Obama can do is act as a wise counselor companion-in-chief to a people who now have to leave a lot behind in order to move forward into a plausible future. He seems well-suited to this task in sensibility and intelligence. The task will surely include a degree of pretense that he is holding some familiar things together and propping up some touchstones of the comfortable life. But the truth is we are all going to the same unfamiliar new territory.
The economy we're moving into will have to be one of real work, producing real things of value, at a scale consistent with energy resource reality. I'm convinced that farming will come much closer to the center of economic life, as the death of petro-agribusiness makes food production a matter of life and death in America -- as opposed to the disaster of metabolic entertainment it is now. Reorganizing the landscape itself for this finer-scaled new type of farming is a task fraught with political peril (land ownership questions being historically one of the main reasons that societies fall into revolution). The public is completely unprepared for this kind of change. We still think that "the path to success" is based on getting a college degree certifying people for a lifetime of sitting in an office cubicle. This is so far from the approaching reality that it will be eventually viewed as a sick joke -- like those old 1912 lithographs of mega-cities with Zeppelins plying the air between Everest-size skyscrapers.
The crucial element in the transformation underway will be emotion. The American experience for a few generations has produced an adult population with very childish instincts, increasingly worse each decade. For instance, the desperate power fantasies among the younger tattooed lumpenproles -- those with next-to-zero real economic power -- suggest a certain unappetizing playing-out of resource competition when the supply of Cheez Doodles and Pepsi starts to dwindle. But even the heretofore gainfully employed middle classes are pretty lost in fantasies at least of comfort an convenience. For years now, I have wondered how their sense of grievance and resentment will be expressed when the supermarket shelves run bare and the cardboard signs get taped over the local gas pump and the cable TV gets cut off for non-payment. You wonder, to put it bluntly, how far gone we really are.
In the twilight of the Bush days, in the twilight of the twilight season, a consensus has formed that we are headed into a long, dark passage leading we know not where. Even CNBC's Lawrence Kudlow has been reduced to searching for stray "mustard seeds" of hope on hands and knees in a bleak and tortured financial landscape. Half the enterprises in the land are lined up for some kind of relief bailout and a blizzard of pink slips has cut economic visibility to zero.
The broad American public voted for "change" but they thought that meant a "changing of the guard." Out with the feckless Bush; in with the charismatic Obama... and may this American life now continue just as it ever was. The change actually coming will be much more than they bargained for, namely our transition from a wealthy society to a hardship society. The sharp break is a product of our years-long failure to reckon with the energy realities of our time. We're still confused about that, but it's hard, otherwise, to ignore the massive disappearance of capital, asset values, livelihoods, domiciles, comforts, and necessities.
The price of oil is suddenly down to an astounding $40-odd per barrel. Those of us studying the Peak Oil story have said that the "bumpy plateau" years of peak production would be expressed in tremendous price volatility, and for exactly the reasons now evident -- that the high-price phase would mangle advanced economies, that they would fall back in paralysis, then respond anew to oil price collapses by straggling up again, only to be crushed again when a resumption in demand for oil drove the price back up.
What was not so generally anticipated was the wholesale destruction of global finance in the first phase of this period. This has now occurred so comprehensively that we know the banking business will never be the same again. It has also accelerated other plot-lines in the story. One affects the global oil industry itself: a lack of capital to go forward with the new oil projects that were designed to mitigate the present depletions in old oil fields. The result of this quandary is as likely to be oil shortages in 2009 as much as an extremely sharp snap-back in oil prices. The oil markets themselves are changing in the face of financial disruption. Between pirates lurking off the Horn of Africa, and a shortage in letters-of-credit that enable the shipping of anything for delivery between nations, the allocation system is impaired. This affects poorer nations the most, and when they don't get their oil shipments, conditions in these nations get worse. People lose incomes. Ethnic strife ramps up. All this will make it harder to move oil from the places where it is produced to the importing countries.
So much artificially-generated pixel "money" is being pumped into the system now that it will eventually overtake the quantity of capital currently vanishing in the form of exposed securities swindles, unwinding bad debt, and imploded worthless counter-party contracts. The pixel money will express itself as super or hyper inflation, lagging from 6 to 18 months from the time it was actually introduced in the form of bailouts. For the moment, money is moving into the presumed safety of US Treasury paper. Personally, the safety of this is not something I would presume. But in the current deflationary stage its hard to find any other place to park cash, and when asset values are crashing everywhere, cash is king. Gold is physically unavailable in the form that non-millionaires usually buy it in, ounce and half-ounce coins.
President-elect Obama has announced his intention to kick off a massive "stimulation" program when he hits the White House "running" in January. Early indications are that it will be directed at things like highway repair. If so, we will be investing long-term in infrastructure that we probably won't be using the same way in ten years. But I doubt there is any way around it. The American public can't conceive of living any other way except in a car-centered society. Anyway, some parts of our highway-bridge-and-tunnel system are already so decrepit that they pose a menace right now, and the clamor to direct "stimulation" there is already very strong -- backed by all the fraternities of engineers.
Stimulus aimed at perpetuating mass motoring will be a tragic waste of our dwindling resources. We'd be better off aiming it at fixing the railroads (especially electrifying them), refitting our harbors with piers and warehouses in preparation to move more stuff by boats, and in repairing the electric grid. Unfortunately, our tendency will be to try to rescue the totemic touchstones of everyday life, things familiar and comfortable, regardless of whether they have a future or not.
The ominous forces gathering out there will defeat these efforts and everyday life will reorganize itself some other way consistent with the single greatest trend: the force of contraction. Every sign we see is pointing in that direction, from the inability of the earth's ecology to support more human beings, to the dwindling of mineral and energy resources, to the destruction of farmland, to mischief in the climate. We just don't know how badly things will fall apart in the meantime, or how kind (or cruelly) people will act in the process.
Mr. Obama would be most successful if he could persuade the public how much more severe the required changes are than they currently realize, and inspire them to get with program of retrofitting American life to comply with these realities.
A lot of readers are twanging on me for refraining to castigate President-elect Obama for deeds yet undone. They're discouraged by the advisors and cabinet secretaries he's picked, ostensibly because the crew coming in are Washington "insiders," meaning they can't possibly see or do things differently.
My own starting point for this is the belief that in the years just ahead any sociopolitical entity organized at the giant scale will flounder -- this includes everything from the federal government to global corporations to factory farms to centralized high schools to national retail chains. So even expecting Mr. Obama's government to act effectively may be asking too much in a situation that will require mostly local action.
The meta-situation will be the overall decline of energy resources and the necessary downscaling of our activities. We are obviously in a transitional period between the old profligate energy economy and the new economy of relative scarcity. We have no idea how disorderly this transition will be, but there is certainly potential for tremendous instability in daily life.
For a while, perhaps, the federal government may retain some ability to affect the way things go, or give the appearance of doing so. This raises the issue of what Mr. Obama and his team really know about our energy predicament. The president-elect has made some noises -- recently on the 60 Minutes show -- that he understands something about the current price dislocations in the oil markets resulting from the larger financial turmoil. He alluded to the public's erroneous notion that current low-ish oil prices mean the oil problem is over. But does the incoming president know some of the following details?
For instance, does Mr. O know that global oil production appears to have peaked at around 85 million barrels a day, with poor prospects of ever getting beyond that? This single naked fact has broad ramifications, above all whether we can continue to think in terms of industrial "growth" as the benchmark for economic health. There are many interpretations of the current financial fiasco. Some of them are based on long-term technical wave theories. A more down-to-earth view suggests the shock of peak oil -- though it doesn't exclude wave theories.
Does Mr. O know that world oil discovery has fallen to insignificant levels after peaking long ago in the 1960s. Does he know we are finding no more super-giant oil fields on the scale of Arabia's Ghawar or Mexico's Cantarell, which have supplied most of the world's oil for the past forty years and are now running down? Does he know that you can't produce oil that hasn't been discovered? Does Mr. O know that virtually all the oil-producing nations have entered production decline. Surely someone has whispered in his ear about the IEA's projection that global oil production would fall 9.1 percent in the coming year.
Does Mr. O know that oil exports have been trending to decline at a steeper rate than oil depletion? That is, the exporting nations are losing their ability to send oil to the importers (like us) at a rate mathematically greater than the run-down in their production.They are using more of their own oil even while their production is going down. For example, Mexico is depleting overall at more than 9 percent a year (with the Cantarell field alone running down at more than 15 percent annually). Does he know Mexico's net exports are crashing? Mexico has been our number three leading source of imports. In a very few years they will not be able to send us any oil. A deluded American public has no idea that this is happening. Will Mr. O explain it to them?
Does Mr. O know that the "old major" oil companies (Exxon-Mobil, Texaco, Shell, et al) produce less than 10 percent of the world's oil now -- the other 90 percent coming from the foreign nationals -- and that blaming them for the situation is a waste of time. The foreign national companies are changing the landscape of the oil markets. They're making special contracts with "favored customers" rather than just putting their oil up for auction on the futures markets. One thing you can infer from this is that we're entering a period of national oil hoarding based on coming scarcity. The futures markets were based on relative abundance, and they will not operate very well in a climate of scarcity. Consider that the USA will probably not be among the "favored customers" for several oil producing nations. Figure that in with the coming loss of imports from Mexico (and Venezuela and Nigeria).
Does Mr. O know that the current drop in oil prices (due to massive financial deleveraging) has resulted in the cancellation or postponment of the very oil production projects that were hoped to offset the coming depletions? It's not worth it for an oil enterprise (private or foreign) to drill in deepwater or venture into arctic regions when oil is priced at $50-a-barrel -- if it costs $80 to get the stuff out of the ground. It's not worth digging up tar sands in Canada at that price. This halt in activity is going to boomerang back on the US in a year or so, with depletions ongoing everywhere and no new oil to take its place. Does Mr. O know that we're just as likely to see shortages as a resuming rise in oil prices here in the US during his coming term?
Does Mr. O know that the current re-inflation program being run by the Treasury and the Federal Reserve is so egregious that it may lead to loss of the dollar's legitimacy, to the renunciation of dollar holdings by other nations, to the down-rating of US Treasury debt instruments, and finally to an inability of the US to purchase foreign oil -- which comprises two-thirds of all the oil we use every day?
Does Mr. O know that we are not going to run the US automobile and truck fleet on any combination of alt.fuels? Continuing it by other means is a fantasy that will only disappoint us. The motoring era is coming to an end. Heroic investments in highway infrastructure to create jobs will be a tragic waste of our dwindling capital. The pressure for Mr. O to make these misinvestments will be enormous, perhaps insurmountable. There are probably not a thousand people in the US who agree with what I am saying -- meaning the consensus to keep the cars running at all costs overwhelms reality at the moment. Does Mr. O's concept of "change" include the possibility that we may have to live very differently in this society?
Chances are, if Mr. O knows any of these things he might be crucified in the polls and the media by acknowledging them. The only "change" that America really wants to hear about is evicting George Bush from the White House. They're sick of him and all the disturbance he has caused in their financial affairs. But beyond that, the American public is deathly afraid of the kind of changes we actually face -- such as, the end of consumer culture, the gross loss of value in suburban real estate (which forms the bulk of the middle class's private wealth), the prospect of food and fuel scarcities, the need to re-localize our lives, the need to physically shape up to stop the costly and unnecessary drain on our medical resources, to grow more of our own food, to work harder at things that actually matter, and to save whatever we can for a difficult future.
If Mr. O introduces any of these themes into the national discourse, the public and the media and the bloggers will all dump on him for failing to prop up the wild party that American life became in recent decades.
Though Citicorp is deemed too big to fail, it's hardly reassuring to know that it's been allowed to sink its fangs into the Mother Zombie that the US Treasury has become and sucked out a multi-billion dollar dose of embalming fluid so it can go on pretending to be a bank for a while longer. I employ this somewhat clunky metaphor to point out that the US Government is no more solvent than the financial zombies it is keeping on walking-dead support. And so this serial mummery of weekend bailout schemes is as much of a fraud and a swindle as the algorithm-derived-securities shenanigans that induced the disease of bank zombification in the first place. The main question it raises is whether, eventually, the creation of evermore zombified US dollars will exceed the amount of previously-created US dollars now vanishing into oblivion through compressive debt deflation.
My guess, given the usual time-lag factor, is that the super-inflation snap-back will occur six to eighteen months from now. And the main result of all this will be our inability to buy the imported oil that comprises two-thirds of the oil we require to keep WalMart and Walt Disney World running. At some point, then, in the early months of the Obama administration, we'll learn that "change" is not a set of mere lifestyle choices but a wrenching transition away from all our familiar and comfortable habits into a stark and rigorous new economic landscape.
The credit economy is dead and the dead credit residue of that dead economy is going where dead things go. It came into the world as "money" and it is going out of this world as a death-dealing disease, and we're not going to get over this disease until we stop generating additional zombie money out of no productive activity whatsoever. The campaign to sustain the unsustainable is, besides war, the greatest pitfall this society can stumble into. It represents a squandering of our remaining scant resources and can only produce the kind of extreme political disappointment that wrecks nations and leads to major conflicts between them. I don't know how much Mr. Obama buys into the current adopt-a-zombie program -- his Treasury designee Timothy Geithner was apparently in on this weekend's Citicorp deal -- but the President would be wise to steer clear of whatever the walking dead in the Bush corner are still up to.
All the activities based on getting something-for-nothing are dead or dying now, in particular buying houses and cars on credit and so it should not be a surprise that the two major victims are the housing and car industries. Notice, by the way, that these are the two major ingredients of an economy based on building suburban sprawl. That's over, too. We're done building it and the stuff we've already built is destined to loose both money value and usefulness as the wrenching transition goes forward.
All this obviously begs the question: what kind of economy are we going to live in if the old one is toast? Well, it's also pretty obvious that it will have to be based on activities productively aimed at keeping human beings alive in an ecology that has a future. Once you grasp this, you will see that there is no reason to despair and more than enough for all of us to do, so we can recover from the zombie nation disease and get on with the next chapter of American history -- and I sure hope that Mr. Obama will get with the new program.
To be specific about this new economy, we're going to have to make things again, and raise things out of the earth, locally, and trade these things for money of some kind that we earn through our own productive activities. Don't make the mistake of thinking this is optional. The only other option is to go through a violent sociopolitical convulsion. We ought to know from prior examples in world history that this is not a desirable experience. So, to avoid that, we really have to put our shoulders to the wheel and get to work on things that matter, and do it at a scale that is consistent with what the world really has to offer right now, especially in terms of available energy.
In my view -- and I know this is controversial -- a much larger proportion of the US population will have to be employed in growing the food we eat. There are many ways of arranging this, some more fair than others, and I hope the better angels of our nature steer us in the direction of fairness and justice. The prospects of a devalued dollar imply that we very shortly will not be able to get the all the oil-and-gas based "inputs" that have made petro-agriculture possible the past century. The consequences of this are so unthinkable that we have not been thinking about it. And, of course, the further implications of current land-use allocation, and the property ownership issues entailed, suggests formidable difficulties in re-arranging the farming sector. The sooner we face all this, the better.
As the fiesta of "globalism" (Tom Friedman-style) draws to a close -- another consequence of currency problems -- we'll have to figure out how to make things in this country again. We will not be manufacturing things at the scale, or in the manner, we were used to in, say, 1962. We'll have to do it far more modestly, using much more meager amounts of energy than we did in the past. My guess is that we will get the electricity for doing this mostly from water. It may actually be too late -- from a remaining capital resources point-of-view -- to ramp up a new phase of the nuclear power industry (and there are plenty of arguments from the practical and economic to the ethical against it). But we have to hold a public discussion about it, if only to clear the air and get on with other things, namely the new activities of alt.energy. But I would hasten to warn readers (again!) that we'll probably have to do these things more modestly too (don't count on giant wind "farms"), and that we are liable to be disappointed by what they can actually provide for us (don't expect to run WalMart on wind, solar, algae-fuels, etc).
In any case, we're not going back to a "consumer" economy. We're heading into a hard work economy in which people derive their pleasures and gratification more traditionally -- mainly through the company of their fellow human beings (which is saying a lot, for those of you who have forgotten what that's about). Our current investments in "education" -- i.e. training people to become marketing executives for chain stores -- will delude Americans for a while about what kind of work is really available. But before long, the younger adults will realize that there are enormous opportunities for them in a new and very different economy. We will still have commerce -- even if it's not the K-Mart blue-light-special variety -- and the coming generation will have to rebuild all the local, multi-layered networks of commercial inter-dependency that were destroyed by the rise of the chain stores. In short, get ready for local business. It will surely be part-and-parcel of our local food-growing and manufacturing activities.
I hate to keep harping on this -- but since nobody else is really talking about it, at least in the organs of public discussion, the job is left to me -- we have to get cracking on the revival of the railroad system in this country, if we expect to remain a united country. This is such a no-brainer that the absence of any talk about it is a prime symptom of the zombie disease that has eaten away our brains. Automobiles (the way we use them) and airplanes are utterly dependent on liquid hydrocarbon fuels, and you can be certain we'll have trouble getting them. You can run trains by other means -- electricity being state-of-the-art in those parts of the world that do it most successfully. I know that California just voted to create a high-speed rail link between Los Angeles and San Francisco. It's an optimistic sign, but it shows more than a little techno-grandiose over-reach. High speed rail would require a mega-expensive re-do of the tracks. We need to scale our ambitions for this more realistically. California (and every other region of America) would benefit much more from normal-speed trains running every hour on the hour on tracks that already exist than from a mega-expensive, grandiose sci-fi program that might not get built for ten years. The dregs of the Big Three automakers can and should be reorganized to produce the rolling stock for a revived railroad system.
Even amidst the financial carnage underway right now, the public is enjoying a respite from high-priced gasoline, but it is due to be short-lived. As I've already said, we are in danger not just of oil prices going way back up again, but of losing access to our supplies from the exporting countries. In other words, we're just as likely to face shortages as high prices, and soon. Oil shortages are certain to produce a political freak-out here unless we get our heads screwed on right -- and this means that Mr. Obama had better prepare quickly for a comprehensive action plan in the face of such an emergency (which has to include a robust public information initiative).
In the meantime, Mr. Obama must dissociate himself from all activities aimed at the care-and-feeding of zombies. Mr. Obama is correct that there is one president and one government at a time, and since this is the case in reality, he must avoid being contaminated by the choices they make as their clock ticks out. Obviously, world markets might be more disturbed if Mr. Obama were to step up and actively contradict everything that is being done to cultivate zombies right now. He is in a very delicate position. But being a man of intelligence and sensibility, he may successfully navigate this rough passage.
That this melt-down is building straight into the Christmas holidays is one of those accidents of history that leaves one reeling in wonder and nausea. The cable networks better be prepared to bombard the public with round-the-clock showings of It's A Wonderful Life, because they're going to need all the moral support they can get as zombies stalk through the silent night, holy night.
The G-20 came to Washington for the weekend and sucked all the air out of the city before announcing that they were really serious about patching all the leaks in the foundering ship of globalism. Well, they have to at least pretend that they are doing something. Meanwhile, the former bit player known as reality has taken center stage in the ship's main lounge. It is putting on an act even gnarlier than the Kit Kat Klub show in Cabaret.
This reality show is sending some clear signals to the denizens of the real and really crowded world. The main signal is that the trade and financing rackets of recent decades are over. The extravaganza of economic hypergrowth based on cheap resources is over. The promiscuous swapping around of risk and rewards is over. There is no global institutional framework for managing the impairment left in the wake of this binge. It will be up to the individual nations now to figure out their national lives and livings.
Alas, the financial impairment is still on-going world-wide and has quite a ways to run before it's finished working its hoodoo on the so-called advanced economies. The lame duck US economic posse so far has done everything possible except the two things that really matter: allow the fraudulent securities at the heart of the problem to be exposed to the light of day to determine their actual value; and allow those companies who trafficked in them to suffer the full consequences by going out-of-business. For the moment, they're content to shovel cash into the truck-bed of every enterprise in America that shows up at the Treasury loading dock. This can only have the effect of eventually destroying the value of that cash.
President-elect Obama's cagey appearance on 60-Minutes showed that he's hardly in a position to say anything of substance about this country's predicament as long as the old posse holds the levers of the economic machinery -- and retains the ability to run it into the ground before January 20, 2009. So many tribulations are now underway in our Republic that it is hard to fathom what the head of the federal government might do besides act as a kind of psychological counselor-in-chief to a land full of people in distress.
The world has changed faster than anyone realizes. One big question is how long the American people will stumble around in a daze before we get back to work doing constructive things in this country -- and by that I mean activities scaled to the resource realities of the years just ahead. More specifically, I mean how we are going to grow the food we eat without massive quantities of diesel fuel and petroleum-based "inputs" and also how we are going to make any of the useful products we need in an energy scarcer time.
Perhaps Mr. Obama knows that we're not going back to anything even close to the business-as-usual that shaped our lives for the generations born after 1945. I would advise him to begin thinking about this by dividing the problem into two parts. The first part is how his government might handle the sheer emotional fallout of a people whose standard-of-living will be pulled out from under them. For a while, perhaps the first year or so, the public is apt to be trusting and generous, especially regarding a president who has had some acquaintance with being short of cash himself, and who can speak English both clearly and empathetically. Mr. Obama stands a good chance at playing that role successfully, at least for a while.
The second part, though, is the more difficult operational and administrative matter of promoting the necessary downscaling of all the essential activities of daily life. This is especially difficult given the current trend of the government suddenly taking ownership of everything, from the banking system perhaps to certain areas of heavy industry (if Detroit gets its way). The Obama government will have to resist the temptation to prevent enterprises from failing. These failing things have to get out of the way before new activities can get underway. It will also require government leaders to tell the public the hard truth that it can't do everything we would like it to do.
The fiasco of medical care is certainly a product of connivance between greedy and heartless insurance companies, profit-driven hospitals, and avaricious drug-makers. But the public itself is responsible for its own suicidal diet of double cheez burritos and Dr. Pepper. How about a national health-care system with one basic requirement: to qualify, participants must be within ten pounds of their appropriate weight. Pretty harsh, huh? Maybe. But times are harsh too, and bound to get harsher. This system would have the great advantage of being absolutely clear. Let the United Way and other charities devote their resources to educating the recklessly obese about diet and exercise so they can eventually qualify.
The transportation quandary suggests that we have to move away from the private automobile and commercial trucking, and that the airline industry is certain to contract dramatically. When are we going to start the discussion about rebuilding a US public transit system that was once the envy of the world? It no longer matters how much Americans love their cars, or even how much investment we've made in car infrastructure. At some point, we just have to face the fact that democratic mass motoring is no longer on the program. Nor is a commercial economy based on incessant motoring. One other implication of this is the necessity to use our waterways for moving things and people again. Has anybody noticed, for instance, that the once-bustling New York City Harbor, possibly the biggest and best sheltered deepwater harbor in the world, has next-to-zero operating docks left along its massive perimeter? While you're at it, have a look at the waterfronts of Louisville, Cincinnati, Kansas City and a score of other inland port cities on great navigable rivers. What you'll see are condo sites, festival marketplaces, picnic grounds, and plain old empty lots -- everything but the infrastructure for commerce. We can't afford this anymore. We have to put these places back to work.
The G-20 leaders in Washington last week made a lot of noise about ramping up domestic spending. In the decades to come, this will not happen without import replacement -- which is just what it sounds like: instead of importing things you need, you make them at home, and people get paid a living wage to do it. Import replacement, by the way, is exactly how the United States rose in the 19th century to become the world's preeminent manufacturing nation. It doesn't foreclose trade with other countries, but it self-evidently changes the terms of that trade, and it would spell the end of the kind of predatory "globalism" that has led to the current state of gross imbalance and reckless destruction.
I believe this will happen whether we like it or not, because these things occur in cycles and the current cycle is obviously ending with a thundering crash of economies, modes of operation, habits and practices, and expectations. For better or worse, we have to move on to new ways of doing things.
I regard the most dangerous fantasy in America right now to be the wish that we can keep running things just the way they are now (my recurring synecdoche of WalMart, Walt Disney World, and the interstate highway system) by replacing oil and gas with "alternative fuels." This just ain't gonna happen. We're going to use every kind of alt.energy there is and they will still require us to live very differently than we did the past sixty years. The public just doesn't get this. I don't know whether President-elect Obama gets this. I hope he does, and I hope part of his new mission will be to clarify this state of affairs for the public in clear and effective speech. It's going to tick off a lot of them, but it's the theme music playing in the reality lounge right now, and Mr. Obama would be advised to take up the tune.
As the election campaign ground on like a 3000-mile race between a greyhound and an armadillo, the media kept harping on Barack Obama's vague promises of "change." We now know what the main promise was: regime change, right here in the USA, not in some place where the natives wear strange headgear. Mr. Obama's victory was a moment of epochal exhilaration, not least because he appears to be a decent and intelligent person self-made from a humble background -- someone who has personally bought tube socks in the K-mart, worried about money, and made many trips in a subway car.
The current occupant of the White House, however, has sedulously prepared for his successor the biggest shit sandwich the world has ever seen, and there is naturally some concern that Mr. Obama might choke on it. The dilemma is essentially this: the consumer economy we all knew and loved has died. There will be pressure from nearly every quarter to keep it hooked up to the costly life support machines even though it is dead. A different economy is waiting to be born, but it is nothing like the one that has died. The economy-to-come is one of rigor and austerity. It is not the kind of thing that a nation of overfed clowns is used to. Do we even have a prayer of getting to it, or are we going to squander our dwindling resources on life support for something that is already dead?
A case in point: the car industry. The Big Three, all functionally bankrupt, are now lined up for bail-outs from the treasury's bottomless checking account. Personally, I believe the age of Happy Motoring is over. Many Americans have already bought their last car -- they just don't know it yet. The current low-ish price of oil is a total fake-out, having to do much more with asset-dumping in the paper markets than the true resource supply-demand equation. Most of the world (the media for sure) has ignored preliminary leaks from the International Energy Agency's (IEA) forthcoming report which forecasts global oil depletion to be 9.1 percent in 2009. This is a staggering figure, very likely to offset whatever slack we see in global demand from the worldwide economic crisis. In fact, the global oil markets are poised for the most severe dislocations ever seen, meaning it's a toss-up what happens first in the USA: a major leg back up in oil prices, or shortages, hoarding, and rationing.
For my money (literally) there are only two main reasons that any portion of the car industry should be rescued at the present time: one, because we need somebody to manufacture engines for military vehicles, and two, because we need somebody to manufacture rolling stock for the revival in passenger railroad service that will have to be a centerpiece of the future economy if we want to remain a civilized nation.
Even the progressive factions of the public may be in for much more "change" than they bargained for. The global economy as we knew it is finished (despite British PM Gordon Brown's fatuous suggestion that we are ready to formalize it). The world is about to lose its "flatness" (sorry Tom Friedman) and get much rounder. For one thing, the racket of American "consumers" gobbling up the output of Asian factories in exchange for paper promises is over. For the moment, the Chinese are struggling with epic factory closures with the sudden prospect of a restive lumpenproletariet. The situation there is bound to get worse. Before long, these broke-and-hungry masses may actually challenge the present government. In the meantime, there's no telling what the (unelected) Chinese government might do either to keep itself in power, or genuinely defend its country's perceived economic interests. One thing is self-evident: we are not returning to the old racket of toys-for-treasury-bills. One thing China might do in economic self-defense is shed whatever US dollar-denominated paper is moldering in their vaults before it becomes valueless altogether.
As global trade relations wither, and they will, the US will be thrust back on its own devices, at the same time that oil resources grow punishingly scarce. Mr. Obama will have to contend with the necessary radical reform of all the activities necessary for daily life here. Near the top of the list -- invisible to most of the public so far -- will be the question of how we produce the food we need. Industrial farming is done, just as suburbia is toast. Mr. Obama will have to apply plenty of ass-time to the first stages of negotiating this bottleneck. I don't even know what he can do policy-wise, though he can certainly make it plain to the public that we have to grow more of our food close to home and do it with fewer engines and fewer oil-based soil supplements. It is a problem of such surpassing difficulty that it was not even close to being in the election arena. The transition will probably occur by means of "emergence." Self-evident necessity will prompt different behavior and different ways of doing things. Sooner or later, the new arrangements will self-organize -- if we don't squander resources defending an unsustainable status quo. One thing we can certainly predict is that growing our food will require more human labor and attention -- meaning there will be plenty of work for people currently losing their jobs at The Footlocker and Arby's, but it's far from certain whether they will be happy in their new vocations.
We're going to have to resume making things in the USA again, too, probably at a more modest scale, and probably fewer things than we are used to. We have no idea yet how this is going to happen. Like agriculture, manufacturing culture may have to return, if at all, emergently, as individuals and communities see opportunity in advantages like proximity to water-power and water transport. My guess is that corporate enterprise as we have known it -- at the continental and global scale -- is done for. I would not bet on any of the Fortune 500 carrying on the manufacturing work of the future using the plants-and-equipment that are familiar to them. The manufacturing of the future may be more like cottage industry than Proctor and Gamble. Yet, obviously, there will be tremendous efforts to prop up failing corporate enterprise and prevent natural bankruptcies from occurring.
Similarly, the retail part of the economy. Many observers think that Wal-Mart and its clones are immune to the larger forces swirling around us. Just because many cash-strapped people are hunting for bargains at WalMart these days does not insure the survival of the Big Box model very far into the future. In fact, in every trend we can see -- from the oil markets to events in China to the impoverishment of the US working class to the coming crisis in truck transport -- you can easily discern fatal weaknesses in this model. Local retail (and its support structures) is coming back. We just don't know how, yet, and we don't know how much capital and effort will be squandered trying to rescue WalMart, when the time comes. But the imperative re-scaling of commerce in America also represents huge opportunities for young people to get into their own businesses.
Mr. Obama will preside over the potential restructuring of all our systems, some of them in ways he and his supporters have not imagined. We haven't begun to see where fate will take higher education, but my guess is that it will no longer be a "consumer" activity, and that the hypertrophied land-grant diploma mills will have to to shrink or die as state financial support withers away, and all sorts of unnecessary professions from "public relations" to "marketing" cease to require certified graduates. The luxurious central high schools, utterly addicted to their yellow school bus fleets, will be left as a problem for the states and municipalities. I don't believe they can be rescued, and they are already failing in many other ways, not least, educating and properly socializing young humans.
In the months just ahead, Mr. Obama will certainly be swamped with straight-ahead cash problems in every area of American life, from the foundering pension funds to the bankrupt state treasuries to the beggaring corporations to the starkly dispossessed and hungry masses of the jobless and re-poed. I wasn't kidding when I came up with the label, "the long emergency," to describe the storm that we are heading into, along with Mr. Obama. Of course, the current president -- and Mr. Obama has been shrewd to point out there is only one president in office at a time --has more than two months to wreak additional havoc in the financial system. Right now, he's asking Mr. O, "...do you want fries with that sandwich I made for you?"
This is a nervous nation. Though I'm usually allergic to paranoia, something makes me think that there's a back office in the US Treasury that is buying the entire Dow Jones Industrial Index at opportune moments -- like fifteen minutes before the closing bell -- at the direction of Mr. Paulson. He seems to easily spend $50 billion a day on other dubious hand-outs. At that scale, buying the whole Dow would just take his walking-around money. The idea behind it, my paranoid fugue goes, is to jack up the stock market enough around election day to give the dimmer members of the voting public the idea that the financial fiasco is over and happy days are here again. You can't put this past the Republican party, despite John McCain's friendly turn on Saturday Night Live, consorting with "the enemy" for laughs.
Apart from that, McCain has run the flat-out most scurrilous campaign I've ever seen, despite his reputation as a war hero and a sterling fellow among the senators. He's run a campaign of malicious innuendo and slander, seemingly aimed at voters who would have trouble qualifying for the Special Olympics. And you have to wonder whether he actually requested Vice-president Dick Cheney to lay that "kiss-of-death" endorsement on him at the last moment. It could only have been better if Mr. Cheney borrowed some trick-or-treater's Darth Vadar costume for the grand occasion.
What many people are nervous about, of course, is the chance of shenanigans with the voting tally. Just one minor feature of the general paralysis gripping this society has been our inability to get rid of those mischievous Diebold computerized voting machines that leave no paper trail. By the way, these touchscreen voting units are an example of the diminishing returns of technology. There was nothing wrong with the old mechanical units, but by making over-investments in complexity we've just created more problems for ourselves. This ought to be a warning to those in the thrall of techno-triumphalism.
People are nervous not just because Mr. Obama might be swindled out of a victory, but because John McCain might get elected. Credibility in his judgment dissolved about eleven minutes after he picked the Bombshell from Wasilla to be a heartbeat away from the oval office. Anyway, the Republican Party needs to crawl off to a dark hole somewhere and either pupate into something better or die -- as the Whigs did in 1856. The Republican Party is not through wrecking America. They have three more months to destroy the US dollar and the economy that runs on it. And with Mr. Paulson shoving out pallet-loads of bundled dollars to the likes of JP Morgan, so they can continue doing the very thing that provoked this financial fiasco -- lending money recklessly to anyone with a pulse-- they might just "get her done!"
Other people are afraid that Mr. Obama will hand out bales of money, too, only to a different class of people. I suppose he will. I hope he will show restraint and apply it to public works that benefit all Americans -- such as my pet project of restoring passenger railroad service so people don't have to drive, for instance, from Atlanta to Louisville or Cleveland to Columbus. Even so, the new President will face not only a tide of woes created by his predecessor, but very likely, too, an obese and ineffectual federal bureaucracy unable to carry out even well-intentioned programs.
He will take office in what may be the darkest economic year this country has ever faced. 2009 shows every sign of being worse than this one, with house foreclosures and car re-pos accelerating, companies hemorrhaging jobs, oil prices heading back up (with shortages possible), and a large new group of the formerly middle class growing restive and sore in the background. It will be an historic act of governance if he can keep the lid on all this. Many people will be worrying, of course, whether he will even survive. The ghost of JFK and the dashed hopes he represented (however real or illusory) still haunt this nation.
Apart from the awful debt deflation and probable rebound hyper-inflation that will whipsaw the nation cross-eyed, the new president will face the energy question. I hope he learns the fundamental lesson: that the only way we can hope to become "energy independent" is to severely reform our car-dependent living arrangements and live more locally. Anybody who believes we're going to run the interstate highways and WalMart on solar, wind, tar sands (which belong to Canada, by the way), oil shale, methane gas, algae-diesel, or used fry-max® is going to be disappointed. We'll have to inhabit the terrain of North America differently -- in traditional towns, villages, cities (scaled smaller, to a lower energy diet), as well as a productive agricultural landscape that will require more attention from live human beings (and maybe help from our friends, the animals).
Much of the real work of the next president will be guiding a transition out of obsolete habits, practices, and expectations that we must shed whether we like it or not. The painful downscaling of the financial sector, from a bloated 20+ percent of the US economy back to something more in the 5 percent range, is only the first of these agonies. The transition away from suburbia -- our tragic misallocation of resources in an infrastructure for daily life with no future -- will be even more harrowing because of the psychology of previous investment, which will provoke a misguided effort to sustain the unsustainable, and squander our dwindling resources in the process.
I reject the label "gloom-and-doomer" where these difficult transitions are concerned. There's a lot about the way we live now that is disgusting, degrading, demoralizing, and socially toxic -- from our suicidal diet of processed fat, salt, and corn syrup byproducts to the spiritually punishing everyday realm of the highway strip to the fantastic loneliness and alienation of a people made hostage to a TV-consumer nexus of corporate colonialism. Were done with that. We just don't know it yet. Mr. Obama may not know it, either, but he is a trustworthy soul to hold our hands as we enter this unknown territory.
In the typhoon of commentary that's blown around the world a step behind the financial tsunami that's wrecking everything, two little words have been curiously absent: "fraud" and "swindle." But aren't they really at the core of what has happened? Wall Street took the whole world "for a ride" and now a handful of Wall Street's erstwhile princelings have shifted ceremoniously into US Government service to "fix" the problem with a "toolbox" containing a notional two trillion dollars. This strange exercise in financial kabuki theater will shut down sometime between the election and inauguration day, when the inaugurate finds himself president of the Economic Smoking Wreckage of the United States. What will happen?
I have thought for some time that things could get dangerously out of hand in America, despite our exceptionalist notion that we are immune to the common plot-lines of history. For starters, inauguration night will seem more like Halloween, as those two little words fly in to haunt the new president. So, a large and looming question is: who will be appointed the next attorney general of the US (to replace the human sash-weight currently occupying the office), and how soon will the federal marshals be scouring the wainscoted hallways of Goldman Sachs, JP Morgan Chase, not to mention a thousand Greenwich, Connecticut, hedge fund boiler rooms, with man-sized nets?
A story-line is already emerging to the effect that these birds really didn't quite know what they were doing in grinding out that multi-trillion dollar basket of alphabet securities sausage (a theme on Sunday's "60-Minutes" broadcast). Nobody will buy that line of bullshit, though -- and certainly not in the courtroom where, for instance, Mr. Hank Paulson will have to answer why his own firm of Goldman Sachs set up a special unit to short its own issues. It will be edifying to see how they answer.
In the meantime, however, millions of Joe-the-Plumber types will have gotten their pink slips, slipped helplessly into foreclosure, watched the repo men hot-wire their Ford pickups, and eaten down the kitchen cupboard to a single box of Kellogg's All-Bran (which had been sitting there for eleven years infested with weevils). They will be watching the official proceedings in the federal courtrooms with jaundiced eyes as they hunch in their tent cities, in the rain, sipping amateur-brand raisin wine bartered for a few snared rock doves. How long before the hardier ones among them venture out to Easthampton with long knives and matches?
It will bring little satisfaction though, and the disappointment could lead to a more inchoate outbreak of civil disorder that would be more like a free-for-all of vengeance and grievance. There will be a great outcry for the new government to "do something!" Perhaps that will finally bring the troops home from Iraq -- only for them to find that the Homeland has become Iraq....
If the financial system completes its self-destruction -- and that's looking more and more like a real possibility -- there will be several pretty awful consequences. One is that the United States will be forced to declare bankruptcy by repudiating its own debt. All those who took refuge in US Treasury bonds and bills will be like folks who sought shelter from a tornado in their out-house. That would go hand-in-hand with a massive currency inflation that is likely to follow the current phase of compressive liquidating deflation -- in which every possible asset is being sold off for less than its face value. That process is self-limiting due to the finite supply of real salable assets. The trillions of dollars injected into system while this is happening must eventually snap-back as people shed the last fungible article and compete for necessary commodities like food and fuel with dollars that are suddenly plentiful but worthless. At some point, the government may have to summon up a new currency. I don't think it will be anything like the "Amero" which the paranoid fringe incessantly mutters about as part of their fantasy in which the US, Mexico, and Canada all join up to become one country. But any "new dollar" would probably have to be backed by gold.
As we discover ourselves to be a much poorer nation, one of my correspondents put it: "the bogus risk-swapping economy must be replaced by a net value-added economy." That means actually making things, growing things, and rebuilding things, and that can only begin to happen if we do not stupidly sucker ourselves into a war with other nations who are liable to be extremely ticked off at us for destroying the global economy, but also competing with us for a dwindling supply of resources that are not equitably distributed around the world.
This means especially oil. I hope you're enjoying the temporarily cheap prices at the gas pumps, because this is purely a function of the compressive deleveraging that is going on right now, as contracts and positions held in energy markets are being dumped by everybody and his uncle to raise cash to meet margin calls. My guess is that oil and its byproducts will become much more difficult to get in the months ahead -- not just more expensive, but literally not available. The current falling price of oil has little to do with the real supply and demand fundamentals. It's simply a function of the markets being in near-total disarray. We're running on current inventory, and running it down. In the background, all kinds of peculiar and terrible things are happening. The entire apparatus of allocation and distribution is being thrown out of whack. The smaller tanker operations are going bankrupt. The "less-developed" nations are heading back to the 17th-century level of daily life without electricity. The oil exploration and development projects that were planned for hard-to-get oil netting $100-a-barrel minimum -- in places like the deepwater Gulf of Mexico, Siberia, and Central Asia -- are being shelved, which means the world has less of a chance to offset coming depletions in old fields.
The bottom line of all this is that we in the US could find ourselves in a situation of shortages, hoarding, and rationing. This would pretty much kill off whatever remains of the previous shuck-and-jive economy -- hamburger sales, theme park visits, Nascar weekends -- while it makes obvious the failures of our suburban living arrangements (and drives the value of housing there closer to zero).
The new president will have to be Franklin Roosevelt on steroids, with some Mahatma Gandhi and Florence Nightingale thrown in. My pet project of restoring the American passenger railroad system might seem pretty minor in the face of all this, but it's at least a place to start that will accomplish several things: allow people and things to get places without cars and trucks; put many thousands of people to work at many levels doing something of direct, practical value; and be a small step in rebuilding confidence that we are a society capable of accomplishing something.
It's fascinating to read the commentators in mainstream journals like The Financial Times and The Wall Street Journal all strenuously pretending that "the worst is over" (maybe... we hope... fingers crossed... hail Mary full of grace... et cetera). The cluelessness would be funny if it didn't involve a world-changing catastrophe. All nations that have reached the fork-and-spoon level of civilization are now engineering a vast network of cyber-cables that lead directly from their central bank computers to the Death Star that is hovering above world financial affairs like a giant cosmic vacuum cleaner, sucking up dollars, euros, zlotys, forints, krona, what-have-you. As fast as the keystrokes create currency-pixels, the little electron-denominated units of exchange are sucked out of the terrestrial economies into the black hole of money death. That's what the $700-billion bail-out (excuse me, "rescue plan") and all its associated ventures are about.
To switch metaphors, let's say that we are witnessing the two stages of a tsunami. The current disappearance of wealth in the form of debts repudiated, bets welshed on, contracts cancelled, and Lehman Brothers-style sob stories played out is like the withdrawal of the sea. The poor curious little monkey-humans stand on the beach transfixed by the strangeness of the event as the water recedes and the sea floor is exposed and all kinds of exotic creatures are seen thrashing in the mud, while the skeletons of historic wrecks are exposed to view, and a great stench of organic decay wafts toward the strand. Then comes the second stage, the tidal wave itself -- which in this case will be horrific monetary inflation -- roaring back over the mud flats toward the land mass, crashing over the beach, and ripping apart all the hotels and houses and infrastructure there while it drowns the poor curious monkey-humans who were too enthralled by the weird spectacle to make for higher ground. The killer tidal wave washes away all the things they have labored to build for decades, all their poignant little effects and chattels, and the survivors are left keening amidst the wreckage as the sea once again returns to normal in its eternal cradle.
So, that's what I think we will get: an interval of deflationary depression followed by a destructive wave of inflation that will wipe out both constructed debt and constructed savings, scraping the financial landscape clean. There's no question that stage one is underway. But we can be sure the giant wave of money recklessly loaned into existence in just a few weeks time will wash back through the global economy leaving a swath of destruction.
And then what? The societies of the world will be faced with the task of rebuilding systems of fruitful activity, i.e., real economies based on productive behavior rather than the smoke-and-mirrors of Frankenstein-finance con games. In fact, excuse me while I switch metaphors again, because the Frankenstein story -- the New Prometheus -- is yet another apt narrative to inform us what we have done. We have "played" with financial fire and brought to life a monster now bent on killing us. One question that this metaphor-narrative raises is: when will the angry peasant mob storm the castle with their flaming brands and cries for blood from the makers of this monster? Rather soon, I think. Perhaps, in some countries (maybe the USA, if we're lucky), this will take the more orderly form of systematic prosecutions, bringing to justice persons who perpetrated swindles involving the alphabet soup of investment "products" that have gone bad in so many accounts (and ruined so many individuals, institutions, and governments). I think it has already begun with the inquisitors summoning the shifty Dick Fuld of Lehman Brothers -- but there are hundreds of other characters like him out there, who scored untold millions of dollars in activities that were simply grand swindles. I wouldn't be surprised if, eventually, Treasury Secretary Hank Paulson found himself in the dock to answer how come, when he ran Goldman Sachs, there was a special unit in the company dedicated to short-selling the very mortgage-backed securities that another unit in the company was so busy pawning off to every pension fund on God's green earth.
Apart from orderly prosecutions (which can certainly turn harsh and cruel), there is the possibility of sociopolitical upheaval -- revolution, violence, civil war, war between nations, the whole menu of monkey-human mischief that afflicts mankind. We are not necessarily immune to it here in the USA, despite our cherished notion of exceptionalism, which would have us inoculated against all the common vicissitudes of history.
Anyway, prosecution through the courts, while perhaps satisfying the hunger for justice (or, more particularly, revenge), is not a productive economic activity. So, the question begs itself again: what will we do? Under the best circumstances we will reorganize our society and economy at a lower level of energy use (and probably a lower scale of governance, too). The catch is, it will have to be a whole lot lower. I think we'll be very lucky fifty years from now to have a few hours a day of electricity to do things with.
The energy story and its hand-maiden, the climate change situation, are both lurking out there beyond the immediate spectacle of the financial fiasco. Both these things imply pretty strongly that the economic relations currently unraveling will not be rebuilt -- not the way they were before, or even close to it. The best outcome will be societies that can practice small-scale "process-intensive" organic agriculture and equally small-scale process-intensive modes of manufacture in the context of very local sociopolitical networks. An accompanying hope is that we can remain civilized in the process. Personally, while I recognize the appeal (to others, not me) of the "singularity" narrative, which has the human race making a sudden evolutionary leap into some kind of cyborg-nirvana, I regard it as an utter bullshit fantasy that has zero chance of occurring, given our stark predicament.
But returning to the short term, or "the present," shall we say, there is the matter of how the US gets through the election and then the first months of a new government, even while the larger fiasco continues. I'm voting for Mr. Obama. While I believe he will make a much better president than the addled old mad dog Mr. McCain has become, I feel sorry for anyone who is placed nominally "in charge" of things this coming year. The best a President Obama can do is offer some reassurance to a public that is totally unprepared for the convulsion now upon us. Mr. Obama will certainly not have "money" to "spend" on any of the promised social support programs that have been endlessly debated. But he could clearly articulate the reality we're facing, and ask not necessarily for "sacrifice," as the common plea goes, but for something more and better: for bravery and resolute spirit, for intelligence and resilience, for kindness and generosity -- among a people long unused to consorting with the better angels of their nature. He's already begun to set the example by appearing in public with his sleeves rolled up. The change that has been in the air all year -- that Mr. Obama has talked so much about -- is coming in a bigger dose than anyone expected. I hope we're ready to get with the program.
The G-7 world, the club of "developed" western nations plus Japan, has commenced an ordeal of suddenly waking up much poorer. All the desperate work-arounds being engineered by governments and central banks on an al fresco basis are intended to overcome this stunning basic fact, and none of them will. The benchmarks of everything are in flux -- stocks, bond values and yields, commodity prices, most especially currencies -- but these tend to disguise the basic fact of growing and spreading impoverishment. Is oil priced at $80 a barrel this morning? That's nice. Except if the company that employs you is about to fold up and you face a holiday season of driving frantically around Atlanta in search of another job, which the odds are against you find finding. Or if you're living on a retirement fund that's just lost 37 percent of its value and it's time to fill the heating oil tank.
Iceland is the poster-child du jour for this. The little island nation of about 320,000 souls (roughly half of Vermont's population) lately grew a banking sector that thrived on something-for-nothing finance. In little more than a month, its banks have imploded like mini-death stars, leaving Iceland with a pariah currency. Since it has to import just about everything, and it suddenly finds itself unable to pay for imports, the people are stripping the grocery markets of whatever remains there now. You wonder what they will do in two weeks. Ten years from now there may be 32,000 of them left, subsisting on blubber sandwiches.
I exaggerate perhaps a little, but who really knows where all this leads? Here in the USA, the Treasury, enjoying new and seemingly limitless powers of discretionary spending, has begun shoveling dollars into every truck that backs up to the loading dock. The numbers are staggering. In ten days it's reached into the trillions in loans and handouts. Most of this money is getting sucked directly into the black hole of debt and margin calls of one kind or another. This is previously-presumed wealth that is now un-presumed. It's leaving the system, never to be seen again. One useful way of thinking about it is to regard it as our society's previous borrowings against our own future. Thus, we are seeing our future vanish into a black hole -- our future comfort, health, and basic nourishment.
This is the kind of fiasco that brings down governments, propels societies into revolutions, and starts wars. In a few months, America will be full of angry economic losers. We're not the same nation that crowded around the old radio consoles for Franklin Roosevelt's fireside chats. Back then, we were mostly a highly-disciplined, regimented, industrial society full of citizens who mostly did what they were told to do, and mostly trusted in authority. Today we're a nation of tattooed barbarian "consumers" with no impulse control, a swollen sense of entitlement, ruled by a set of authorities ranging from one G.W. Bush to the grifter-billionaire pantheon of Wall Street CEOs -- now heading into secret bunkers with their stashes of krugerrands, freeze-dried veal Milanese, and private security squads armed with XM-8 carbines.
I go along with Nassim Nicholas Taleb's idea -- read "The Black Swan" -- that nobody really knows anything. We construct our narratives to try and explain circumstances that are unraveling non-linearly before us, and some narratives are more plausible than others, depending on your vantage point. There are infinite narratives. This is nothing more than my narrative. The circumstances we're entering appear, for the moment, to take the shape of a compressive deflationary depression with the cherry-on-top add-on of a hyper-inflation further down the road -- meaning initially that jobs, incomes, and pensions are lost, but that later on even the little money that people manage to get -- perhaps mostly from government hand-outs of one kind or another -- steadily loses its value. Every way you jigger things, it just ends up meaning the same thing: a much poorer society. It certainly won't be a society of recreational shoppers plying the Target store aisles for scented candles and home accents. Hyper-inflation could make old debts meaningless, but it would also make credit meaningless and spending absurd.
Given the way our society has evolved to operate -- as an endless upward spiral of borrowings -- you can see an awful lot of things not working anymore, and an awful lot of people not working in them or at them. Maybe the governments of the G-7 will get lending unstuck at the upper levels, but who, exactly, is able to borrow now besides companies on the verge of bankruptcy -- and why continue to lend to them? (Except to maintain the pretense that "something is being done.") Besides, there's much too much previously borrowed money that won't ever paid back, and the "work-out" of all that debt only implies the continued distress sale of any-and-all assets -- so that the USA in effect becomes yard-sale nation.
Personally, I think all the rejiggering in the world of numbers and indexes will not solve anything, and really only represents a kind obsessive-compulsive neurosis related to numerology that will do nothing to readjust our daily activities toward the production of things that have real and enduring value. In my narrative, the fate of industrial nations really depends on energy resources. The price of oil may be going down for the moment -- perhaps due to the deleveraging of hedge funds, banks, and invested individuals, perhaps combined with a perception of "demand destruction" -- but the geology and geopolitics of oil have not changed since June of this year when oil was at $147. Let's say US oil consumption is down one million barrels of oil a day. Within the next two years, we're liable to lose more than that in import declines from Mexico and Venezuela alone. The International Energy Agency's latest estimate is for only slightly less of an increase in worldwide oil demand than was previously posted. It's still a net demand increase. World oil consumption still exceeds world production now, perhaps permanently so. Finally, the current plunge of oil prices has suddenly halted the very capital ventures in exploration and development that were hoped to increase the worldwide supply of oil. All this portends an aggravation of oil supply and allocation problems in the five years ahead, and ultimately much more expensive, harder-to-get oil.
What we can't face is the prospect that we might become something other than an industrial "consumer" society. My narrative includes the conviction that we will have trouble producing food for ourselves as petro-agriculture fails, and since society can't go on without food production, I see this activity coming back much closer to the center of our daily lives. We're not ready to think about that. The downside of our unreadiness may be that a lot of Americans will go hungry in the decade ahead.
None of this is an argument for despair, by the way, but it certainly invokes the need for steeply revised expectations and serious attention to a national "to-do" list. We're on our way to becoming another nation, whether we like it or not. No amount of numerological augury or even hand-wringing will change that. The big question for, say, the 24 months ahead is: how disorderly will we allow this transition to be?
God knows what manner of deals went down this past weekend in the Hamptons wine cellars and below-decks among the Chesapeake Bay sailboat fleet. All these hidey-holes must have been dank and fetid with the sweat of mortal fear. Will the US Government declare itself a subsidiary of General Electric? Will Vlad Putin be roped in to save Goldman Sachs? Meanwhile, the whole noisome rat maze of international counter-party deals was taking on sewer water and rodents of every nationality were seen leaping for daylight all over the fusty old motherlands of Europe. A cascading collapse of international finance is underway. While many fixers may jump heroically into the tumbling wreckage hoping to rescue this-and-that, the outcome by Friday is liable to be an unrecognizable smoldering landscape of the G-7's hopes and dreams.
Some big questions for the week: will the Euro survive as a currency? Will the rush into the US dollar continue even as the US financial system dematerializes in a Fibonacci fever of accelerating de-leveraged infinitude? Will the remaining Big Boyz, Goldman Sachs and JP Morgan succumb to the counter-party hemorrhagic fever? Will great rows of lesser banking dominoes now start clacking onto their faces? Will all fifty states follow the leads of California and Massachusetts and line up at the US Treasury's hand-out window. Will the entity that calls itself the civilized world be left at week's end with anything resembling money?
Your guess is as good as mine. We've entered the realm of phase change, where everything is slipping and nothing has settled. The final result, when the dust settles -- and that may not be for weeks to come -- will certainly be a poorer western world. Will it be so poor that it can no longer afford to import anything? Including oil from the land of the date palm? If so, we are really in for a rough ride, poised as we are at the edge of the heating season here in the temperate regions. Notice, by the way, that the $700 billion just approved by congress to bail out Wall Street is exactly the same sum of money that we send to the oil exporting nations this year.
Will millions stop receiving paychecks due to the turmoil in banking? It's certainly possible, starting with the poor drones in Mr. Schwarzenegger's motor vehicle bureau and eventually ranging to every payroll office in the land. Will Sarah Palin's fellow Six-packers line up around the parking lagoons of the suburban banks trying desperately to withdraw the last seventy bucks in their checking accounts? (And will their thoughts in the event be: this economy is fundamentally sound....) Will the supermarket shelves of chipoltle-flavored crunchy snacks and power drinks go empty as truckers refuse to deliver their loads without up-front payment? And how long does it take a hungry public to turn mean?
We could see a parallel problem in the motor fuel supply sector. So far, gasoline shortages have only appeared in parts of the Southeast USA, due to interruptions caused by two hurricanes. If the oil tankers quit offloading now for lack of credible payment, then the whole nation will get an interesting lesson in the shortcomings of the suburban development pattern.
The candidates' debate Tuesday night should be interesting. I don't expect too much give-and-take on the subject of East Ossetia this time around.
Even at this point, the current crack-up in world finance makes the 1929 crash and the events of the 1930s look in comparison like an orderly small town auction of somebody's grandmother's effects. Back in that sepia day, America had plenty of everything except ready cash. We had, especially, plenty of our own oil, and -- you're not going to believe this but it's true -- the stuff was selling for as little as ten cents a barrel, it was so abundant. And yet still, America in the 1930s plunged into a dark depression of inactivity, loss of confidence, and impoverishment.
This time around, things could get more disorderly. Personally, I think we may be beyond the reach even of fascist authoritarianism, because unlike the programmed industrial masses of the 1930s, we are unused to regimentation, to lining up at the factory gates and the movie theaters. Back then, society was so regimented that everybody wore uniforms in-and-out of the military. Look at movies from the 1930s. Every man-jack wore either a necktie and hat or overalls. The industrial masses behaved like termites. Once unemployment hit, they were waiting to be told what to do, to line up for something. It worked fabulously for Hitler, who took every advantage of this mentality. Luckily, the US went for Roosevelt (both FDR and Hitler entered office the same winter of 1933, by the way). FDR was more like everybody's kindly Uncle Frank, and his reassuring persona enabled Americans to suck up their bad luck and altered circumstances. Many of them retreated to the family farm (which still existed then) and waited things out -- and, anyway, the melodrama of the Great Depression soon resolved in the Second World War when Hitler's love of regimentation led him into military misadventure. He shouldn't have picked a fight with someone who had so much petroleum -- end-of-story.
Okay, what happens here and now? To this point (9:am Monday October 6, 2008) events have been proceeding under a veneer of still-just-barely-credible authority. We (as represented by congress) have allowed Mr. Paulson to advance and activate his remedies. As things unspool further, he will be out of credibility, perhaps in a few days, and it's unlikely that his successor will have any either. Mr. Bernanke has simply gone AWOL. Notice, he has vanished from the media landscape. We may soon be hearing the declaration of various "emergency" measures involving the allocation of food and the rationing of oil products. The Big Bailout of last week may be partially rescinded as it becomes obvious that it has had no effect -- I believe about half the $700 billion has already been allocated, which is to say: lost. I realize these things sound pretty extreme. But forces have been set in motion and momentum rules. One thing for sure: the American public is about to undergo a severe mood adjustment. There will be fewer American Idol fans and worshippers of Donald Trump by the close of business on Friday.
To paraphrase the late and great old war-horse of the senate, Everett Dirkson of Illinois (1896 - 1969), a trillion here, a trillion there, sooner or later you're talking about real money. Except in the case of the Great Bail-out of 2008, maybe it's more like... sooner or later your money is no longer real.
What we're seeing in this fiasco, among other things, is a lesson in the diminishing returns of technology. This is a train wreck of investment vehicles so complex that they could only be created with the aid of computers. The result is that hardly anyone -- perhaps even nobody in or out of Wall Street -- really understands what they represent. In fact, this alphabet soup of engineered securities -- CDOs, CDSs, MBSs, SIVs, etc -- was cooked up from a recipe of Ponzi algorithms. They were designed to be mathematically indecipherable, except by computers, in an alternative universe of model-making that bore only a superficial relation to the real world. That was their dirty secret. And the dirty secret of the Great Bail-out is that, in the real world, we will never be able to discover the actual trading value of these things at any number above zero. This is why they are called "toxic."
The big effort of Mr. Paulson and his working group has been to ram through legislation that at all costs avoids any attempt to place a reality-based value on this bad debt. He managed it by holding a gun to Congress's collective head, telling them in plain English that a genuine "work-out" of these "toxic" investments would set in motion a fatal cascade of credit default swaps which would leave the entire banking landscape a smoldering wasteland -- with the result that virtually every retirement account and pension fund would go up in a vapor, the Federal Reserve and the FDIC would melt away to twin piles of goo, scores of millions of lives would be ruined, and the USA would be left a basket case among nations, making us envy even the fate of Haiti and Zimbabwe. Talk like that might prompt a congress-person to do any fool thing.
The question, of course, is what happens now, after this morning's scheduled vote on the Great Bail-out package. Last night, I would have predicted a brief bounce in the stock markets of a week-or-so duration. This morning, at eight o'clock, I'm not so sure of that anymore, but I suppose we shall see. Beyond a week-or-so, I expect the Great Bail-out to fail rather quickly in its main mission: to stabilize the banking system and calm the markets. The process of negotiating the package has given off an odor something like medieval scholasticism -- a method much like the creation of Ponzi finance itself, in which layers of tortured interpolation rendered theological concepts so abstruse that all the prayer of all the monks and nuns ever conceived within the walls of the Vatican would not avail to reveal their mysteries. The object, of course, was to reinforce the essential mystery of religion, just as the object in Ponzi finance was to reinforce the mystery of engineered securities.
What the mainstream is truly missing here en masse is that another tsunami is building right behind the finance fiasco, and that it will render moot the whole reeking cargo of schemes and wishes that comprises the Great Bail-out. I am speaking of the global oil problem. In fact, the problems in banking and money currently roaring in the center ring of the world circus, can be described categorically as a product of the oil problem -- since oil is the primary resource of industrial economies and therefore the motive force behind our ability to generate "wealth." Without reliable and ever-growing supplies of oil, there is no industrial growth, and without industrial growth things like capital investment instruments lose their legitimacy. That is why the Frankenstein family of Ponzi securities was invented in the first place -- to compensate for the demise of industrial growth by creating wealth out of... nothing!
The looming oil problem entails a swirl of factors that will aggravate and accelerate our social, economic, and political struggles. These factors will mutually reinforce the instabilities that they set into motion. For instance, the new oil nationalism is undermining the traditional operation of oil markets as we've known them since the mid-20th century. In turn, oil nationalism will aggravate the oil export crisis, which will starve the oil importers -- the USA being the chief victim. Finally, there is the remorseless base-line condition of Peak Oil itself, meaning that we are at point where world oil demand permanently outstrips world oil supply no matter if the USA falls on its ass economically or not. What remains beyond this is a desperate contest among the oil importers -- America, Europe, China, Japan, India -- for control of the world's remaining oil resources.
The fantasies about alternative energy currently wafting across the American media-scape will not "solve" this problem, much as we wish they might. We'll try everything in a quixotic effort to sustain the unsustainable (that is, the happy motoring consumer society), but we will be disappointed by the results. I try to remind readers that the very concept of "solutions" does not apply in this situation, since it implies that we can keep running things in America just the way we are running them now, only by means other than oil. The truth, in my view, is that we have to run things very differently now, at different scales than the ones we're used to -- but we are too invested in our behavior of the past to move forward. This is certainly unfortunate, because we have everything to gain by letting go of our old habits and obsolete wishes.
It's odd to watch the talking heads on CNBC this morning, parsing endlessly over the latest minutiae of the latest deal for CitiGroup to land on Wachovia like a giant amoeba and begin the gruesome process of digesting its innards. The TV heads are just like the medieval monks trying to explicate the labanotation of x-number of angels dancing on the head of the pin. Religion really is the only metaphor left to discuss the epochal disaster underway right now, because God alone knows where this will take us.
So many shoes are poised to drop this week that the American scene might be confused for the world's greatest-ever clog dancing festival, but a closer look will reveal a circle of cavorting skeletons.
Last week's ripe moment turned out to be the Thursday night Washington photo op when Treasury Secretary Paulson and Fed Chief Bernanke emerged from a huddle with House Speaker Nancy Pelosi and just about every other legislative eminentissimo in an attempt to reassure the nation that its financial system had not turned into something like unto a truckload of stinking dead carp. I don't know about you, but I got two distinct vibes from the faces in that particular tableau: 1.) abject fear, and 2.) a total lack of conviction that they knew what they were doing.
The product of that huddle was a cockamamie scheme for the US treasury to absorb all the losses from a twenty-year binge in which Wall Street created and retailed the most complex set of swindles ever seen on this planet Earth. The background music to the tableau was the whoosh of a several trillion dollars exiting the US financial system never to be seen again.
The next day (Friday) many particulars of that scheme began to emerge -- such as the complete lack of oversight and review mechanisms for Treasury's new power to monetize private business failures and frauds -- and the stock market soared in response. Other new features of the reformed capital landscape also resolved later that day, like a new experiment aimed at eliminating the short sale as a way of guaranteeing that henceforth market bets could only be placed on the upside of the table. It will be interesting to see how that reform works out in the days ahead.
Over the weekend, all these various playerz retreated into their gilded bunkers to negotiate the details, and by Sunday night, among other things, Goldman Sachs and Morgan Stanley -- the two remaining investment giants left standing -- announced that they would metamorphose into regular banks in order to qualify for additional truckloads of government loans in exchange for any leftover fraudulant securities still lurking in their vaults. Another new provision had the Treasury rescuing swindled foreign companies, too -- in effect, saving the world, which seemed at least, how you say, pretty ambitious.
By this morning, many new arguments had been raised by a suddenly de-zombified congress as to whether the proposed grand bail-out might reward recent Wall Street turpitudes and incentivize future mis-deeds and it looks like enough objections may be lodged to gum-up the process before it even goes into effect -- which, of course, would tend to revert the whole reeking cargo of trouble to its original train-wreck trajectory. I guess we'll see what happens now.
Any way you paint this grotesque panorama, it looks like a very new chapter of history for life in the USA. Basically, we are a much poorer nation than we were even a couple of years ago, and we have a much-reduced ability to project our will around the world, or even among our own floundering sectors and regions. Most troubling to me is the question of legitimacy that now hangs over the proscenium like a guillotine blade. Factoring in the old saw that history doesn't repeat but it rhymes, I think the situation emerging is rather like the crisis of legitimacy that preceded the Civil War. Then, in the 1850s, the nation's two symbiotic political parties, Whig and Democrat, entered a zone of fatal discredit. The White House had been occupied by a sequence of empty cravats named Fillmore, Pierce, and Buchanan, and so much pent-up mistrust roiled the centers of power that the nation entered a convulsion.
At issue then was the great festering unresolved polity of slavery. The Whig party, in its oafish, craven fecklessness, disappeared so quickly from the scene that an embarrassed God Almighty seemed to have hooked it off-stage in a nanosecond. Into the vacuum stepped an awkward lawyer from Illinois -- widely mocked by the coarser elements of what was then called the press as a figure resembling an ape in a stovepipe hat. He accomplished one crucial thing in the process of his emergence: he deployed a potent rhetoric that captured the essence of the crisis and clarified it for all to understand what was at stake -- and then the convulsion commenced in earnest.
The Republican Party amounts to today's Whigs. Their candidate for president, John McCain, is trying to run away from his own party -- as one might shrink away from a colony of importuning lepers. I am actually not kidding when I label the Republicans "the party that wrecked America," because I believe that is truly how the popular strain of history will regard them when (maybe if) the wreckage of their ministrations ever clears. But history doesn't repeat exactly. The current figure from Illinois, Barrack Obama, has yet to offer a truly crisis-clarfying rhetoric, though he labors under the expectation of being able to do so. Like his long-ago predecessor, he is mocked by the coarser elements of what we call "the media" these days -- Fox News and the moron-rousers of talk radio.
Some of the issues yet-to-be-clarified concern the behavior of the American public in the broad sense. We have obdurately resisted the reality of the energy crisis that hangs over everything we do (as slavery hung over the 1850s), from the way we inhabit the landscape to the way we do daily business in our 240-million-plus fleet of cars and trucks that ply the ribbons of asphalt and the lagoons of parking that now run from sea to shining sea where the fruited plain was replaced by the Wal Marts.
Mr. Obama isn't kidding either when he alludes to the change America faces, though history has not yet rhymed enough for his rhetoric to really set forth the terms of this change in its stark particulars. And even if he is able to articulate these things, he won't forestall the convulsion anymore than Lincoln held back a war between the states. That prior crisis was when America learned good and hard how tragic life could be, and it colored our national character for a century -- until we chucked it all to become a society of overfed clowns, with God Almighty replaced by Ronald McDonald. That pageant of happy idiocy is now ending. Like everyone else in this fraught and nervous land, I'm standing by to see what transpires in the days just ahead.
It turns out the real hurricane blew through Wall Street last week, not Galveston. This morning, Manhattan is strewn chest-deep with the debris of banking and at this hour (seven a.m.) nobody knows how far, deep, and wide the damage will spread. The fear, of course, is that we are witnessing a classic "house-of-cards" or "dominos-in-a-row," situation, and that the death of Lehman Brothers and Merrill Lynch will cascade into a generalized collapse of the entire consensus of value that supports mediums of exchange.
At least one thing ought to be clear: this has happened due to the negligence and misfeasance of the regulating authorities, namely the Republican Party, and that now all the hoopla surrounding Sarah Palin can be swept away revealing that group to be what they actually are: the party that wrecked America. I hope one or two Barack Obama campaign officials are reading this blog. You must commence the re-branding of the opposition right now. The Republicans must be clearly identified as, the party that wrecked America.
Many things happening this week will be interesting to see and hear, but just now an outstanding question is how on earth can the Bank of America buy Merrill Lynch for $50 billion after assuming the liabilities of the tarbaby known as Countrywide? But that little detail may be lost in the din as other banks and bank-like organizations start crashing like sequoia trees in a national forest.
I wish I knew whether this extravaganza of ruin might settle the question as to whether America goes into hyperinflation or implacable deflation, but the net effect is that money is leaving the system in big gobs. And if not money per se, then the idea of money as represented in certificates, contracts, counter-party positions, and gentlemen's agreements. This is the day that America finds itself a much poorer nation. The capital we thought was there, is gone.
A lot of it was actually translated over the years into Hamptons villas, Gulfstream jets, and other playthings that will now go up on Ebay or some equivalent as we turn into Yard Sale Nation in a general liquidation of remaining assets. Of course, the trouble in a situation like this, where absolutely everybody is trying to pawn off assets, is that there are very few buyers on the scene, so the prices of all these things go down down down. Everything is for sale and nobody has any money.
This was essentially the state of things in the Great Depression of the 1930s, and the only escape from that turned out to be the mobilization for war. And in the aftermath of that terrible war, we were the only industrial nation that hadn't been bombed to rubble. What's more, we had a very handsome supply of industrial world's primary resource, oil, at our disposal. So we spent the next thirty years making oodles of things and selling them to people in other lands (lending them the money to buy), until these nations were back on their own feet and solvent. And after 1975, the industrial club picked up a bunch of new members and they all began to clean our clock.
So, as our industrial base waned, and our factories got old and brittle, and our labor force was steeply under-bid by cheaper labor forces, we embarked on a quest for "the new economy." This was represented in successive turns as the information economy, the consumer economy, the high-tech economy, et cetera. They were all ruses, aimed at concealing the truth -- which was that we had become a society no longer producing things of value, no longer generating real wealth. The final act of this farce has been the so-called "financial industry."
That "industry" turned out to be most earnestly devoted to the production of complex swindles. They were so finely engineered that it took twenty years for the swindles to stand revealed, and they were cleverly hitched to the primary thing that the American public vested its identity in: house-and-home. Thus, much of the public finds itself in very real danger of becoming homeless and broke.
We generally recognize that some wicked-massive transfer of wealth occurred in the process of the mortgage fiasco, but it remains to be seen whether any residue of this wealth can actually be retained, as represented by currencies, contracts, and supposed securities. The wholesale settling of debt now underway may leave an awful lot of this stuff with no value.
We should be frightened by the political implications of this Great Implosion of presumed wealth. Some group of somebodies will have to clean up this mess. Moving toward a major election, it is hard to imagine the American people giving the clean-up task to the very group that created the mess -- no matter how many cute little faces Sarah Palin can make on TV. Both parties have so far managed to ignore the gathering crisis of banking and money, but they can't ignore the sequoia trees crashing down around their ankles and shaking the earth they stand on.
At issue now will be the question of legitimacy in all its human social dimensions. Is our money legitimate? Is the authority of our elected officials legitimate? Are our values and ideas legitimate? These are the things that will determine what kind of future we find ourselves in.
So, to begin this process, and to clarify the situation, I urge readers of this blog to identify the Republican Party by its new brand-name: the party that wrecked America. At least, then, we can reinstate one cardinal value into the juddering structure of what we claim to believe: that actions have consequences, that you can't just swindle and loot a society and walk away with the swag.
Spread the word, change the tone of this campaign, and keep posted. This will be a momentous week.
Why do the big deals always happen over the weekends? So the big boyz in government and finance can take off their neckties when they bargain with each other? So the markets will be closed and unable to register a response one way or another? So the shrinking fraction of the US public that pays attention to anything besides Nascar and pornography won't catch the news Saturday evening?
This weekend's big deal was the US government taking over the "government sponsored enterprises" (GSEs) Fannie Mae and Freddie Mac that guarantee trillions of dollars in mortgages. The "guarantee" is supposedly accomplished by converting bundles of mortgages from the banks and loan companies that originate them (that make the contracts with the buyers of houses) into bonds that can be sold downstream. Risk was theoretically dispersed among the holders of these bonds. This all seemed to work during the long stable period when our cheap oil economy was chugging along, and house prices maintained a consistent relationship with incomes, and people paid their mortgages dependably. The whole system ran like a reliable machine -- like a Chrysler slant-six engine!
Until the cheap oil age came to an end. Then, all parts of the system shook apart. It was the end of cheap oil that catalyzed the housing collapse and, by extension, the current huge financial crisis. But the run up to it was like a bounce off a high diving board into an empty pool. The bounce came around 2001 when it became apparent that the US standard-of-living could not be maintained on incomes in a post-cheap-oil economy. The trauma of 9/11 prompted a new and utterly insane consensus to form that the US standard of living could be switched over from income to massive debt. All the normal brakes against irresponsible lending and borrowing came off -- embodied in Alan Greenspan's absurd statement that it was a good time to assume an adjustable rate mortgage when interest rates were at a historic low -- meaning they could only be adjusted upwards. Why hold Greenspan responsible? Because he was at the apex of the authority vested with establishing norms, and he shoved our behavior into the realm of the recklessly abnormal, and he should have known better.
The public went along with it because "free money" and high living are fun. Their behavior was reinforced by other authorities -- for instance, President Bush, who told Americans to go shopping after the 9/11 attacks. (They went shopping with credit cards.) Things really wobbled in 2005 -- which was, coincidentally, the year of all-time world-wide peak conventional oil production -- with hurricanes Katrina and Rita ripping through the Gulf of Mexico oil rigs as a dramatic highlight. (It was also the year that The Long Emergency was published.)
Since then, the US economy and the financial part of it that became a nine hundred pound tail wagging a thirty-pound dog, has been held together with baling wire, duct tape, and band-aids. All the debt run up by all parties -- home-owners, credit-card holders, business, banks, hedge funds, government -- is not being paid back reliably, and all the leveraged arrangements that depend on it being paid back are coming apart. Thus, capital disappears. The wealth of a nation disappears. All that remains is the pretense that we are still a wealthy society
Fannie and Freddie are near the center of this black hole of debt. So far, the black hole has been "papered over" by the old stage magician's trick of diverting the audience's attention. The systemic wound that Bear Stearns represented, was covered up with a band-aid applied by the Federal Reserve's exchange of loans for worthless securities. In fact, the capital of Bear Stearns actually did disappear -- a mere residue of it, a few cents on the dollar, was shifted to JP Morgan as payment for taking the wrapper off the band-aid. But, basically, the money is gone.
Now, the same thing has happened with Fannie and Freddie, except that the scale is an order of magnitude greater. This time, the US Treasury Department is assuming worthless paper and paying out much larger loans to enterprises that are functionally bankrupt. The exact nature of the government's chartered "sponsorship" has always been ambiguous. Professional opinion has generally held that government backing was implied rather than explicit -- but that's a ridiculous internal contradiction that went unchallenged for decades as Fannie and Freddie's Ponzi-style operation lumbered on (and their executives made off with obscene payouts). Now the government's role has suddenly been made explicit. It will probably only make things worse, since the enterprises are too big and over-scaled to work under any circumstances, let alone insolvency.
One thing this points to is a truth that is uniformly overlooked by kibitzers: that what we developed over the past decade in America was not an "information economy" or a "consumer economy" but a suburban sprawl building economy, meaning an economy dedicated to building a living arrangement with no future. The climax of the sprawl building economy occurred in absolute lockstep with the climax of peak oil. You can date it virtually to the month -- May, 2005. After that, the future asserted itself and all the financial expectations bound up with sprawl-building went up in a vapor -- including the value of mortgages on suburban houses. Everything that followed has been an attempt to cover up this basic reality: that the way we live in America can't continue.
The reason our energy debate is so hollow and idiotic is because we can't face this basic reality. The fantasy-du-jour among both political parties is that we can become "energy independent." By this they mean we can keep on living the way we do by means other than oil. This is just not true. We have to make profound changes in everything we do from the way we inhabit the landscape to the way we produce our food. Lately, the only change we've shown any interest in is changing what our cars run on. But that is not going to rescue us, not even a little. Our inability to talk about anything else except the cars will drag us down into poverty and turmoil.
The housing market is not coming back. Ever. In the form that we knew it. The suburban project is over. That version of the American Dream is over. We'll be a lot better off if we put aside dreaming altogether for a while and start focusing on reality instead -- that part of the day when we're awake and capable of actually doing things. We've got a lot to face and a lot to do.
The government takeover of Fannie and Freddie is just another papering-over of our fundamental problem -- that until we embark on new ways of being a nation, of living differently and working differently on different things, the other nations of the world will not have confidence in us, or the paper we issue, and we will not really have confidence in ourselves.
I have believed all along -- and said as much in The Long Emergency -- that we would not get through this crisis without passing through a period of hardship. We're entering it now. Even if the stock markets shoot up five hundred points today on the basis of the Fannie-Freddie deal (and the mistaken belief that our troubles are over), we are only at the beginning of a very painful workout. Personally, I think we're in for financial carnage before the election. The Fannie-Freddie deal may be the place where the wheels really come off.
Update on Gustave Damage
Thurs, Sept 4
The state's power grid sustained massive damage from Hurricane Gustave, officials say, and it could be weeks before all of it is repaired. Frustrated motorists poured back into the state hoping to return home, only to be turned back at checkpoints on all the major highways. Many grew frustrated as they roamed the state like gypsies or sat in motels they could scarcely afford, their cash running low and no way to get more.
Across the state, more than 1 million people were without electricity, which meant gas stations were unable to pump fuel, ATMs could not dispense money and restaurants could not open to feed people still unable to return home. Communication was made difficult by spotty cellular and Internet service.
(Bloomberg) -- About 96 percent of crude-oil production in the Gulf of Mexico and 92 percent of natural-gas output remains halted because of Hurricane Gustav, the U.S. government said.
Energy producers reported that 91 rigs and 599 production platforms still are evacuated due to the storm, the Minerals Management Service said today in a statement on its Web site. About 1.2 million barrels of daily oil production remain shut-in, along with 6.7 billion cubic feet of gas.
For additional info, go to TheOilDrum.com
As I write at 6:30 Eastern Daylight Time, Hurricane Gustave grinds out of the Gulf of Mexico to make landfall on the Louisiana Coast at Port Fourchon, the marshalling yard for the oil and gas industry -- where the oil companies move people and equipment to the rig zone offshore. The storm spent the wee hours of the morning chewing through a wad of offshore drilling platforms and, perhaps more importantly, the Louisiana Offshore Oil Port (or LOOP), where all the oil supertanker ships from Middle East come to offload their cargos. It will probably be days before we know what was chewed up out there -- not to mention the spaghetti-like network of pipelines that run all over the shallow bottom to carry the oil and gas from the platforms to the refineries just up the Mississippi corridor between New Orleans and Baton Rouge.
So, at this hour nobody knows yet what the outcome will be, either for the city of New Orleans and its suburbs, or for the oil and gas industry. My guess is that enough oil and gas will come off-line, be shut-in, or get disrupted to severely affect the normal operations of America for a couple of weeks. At the least, our just-in-time gasoline and diesel supply system will take a forced time-out. Those refineries on-shore are in the path to get hit. If they are damaged then we'll probably see shortages of motor fuels all over the eastern US.
If we see a shortage of motor fuels, we may also get a disruption of trucking for the just-in-time food delivery system that keeps the supermarkets stocked. So, there is a possibility that Americans will experience both fuel and food shortages this back-to-school week -- and in some places it may be the not-back-to-school week if there is any trouble getting fuel for the yellow bus fleets. There has also been chatter about possible far-reaching damage to the old-and-fragile electric grid if this storm trips just the right switches, but that's in the category of idle talk for now.
All the above is unknown so far, and I won't even venture to guess what may happen in the city of New Orleans itself -- except that the morale of its citizens must be badly strained as three years of re-building gets undone and the long-term future becomes an even more dubious proposition.
Projected damage estimates on CNN early this morning ran into about the $30-billion range. This hit, and the potential disruptions to the everyday economy, could be the shot that finally pushes the long-teetering banking system over the edge. Surely the insurance industry, which is tied to banking and its worthless alphabet securities, will not be in position to cover all its billions of dollars in payouts. This may be what finally stops the game of musical chairs in which insolvent banks pretend to be capitalized by showing up for loans at the Federal Reserve's teller cages. For instance, when last seen before the Labor Day hiatus, Lehman Brothers was desperately scrambling for life-support from anybody and anything with a few billion spare bucks. As the hiatus ends and real-life reasserts itself, Lehman may finally find itself free-falling into the abyss, and the chain of mutual obligations, cross-collateralizations, and Ponzi plays connecting it to the other banks could break, bringing on a domino fall of insolvent banks and institutions.
All the hurricane action has come at a bad time for the Republican Party. The roll-out of John McCain's ridiculous and cynical choice of a running mate, complete with pompom pumping cheerleaders, will remain front and center in the public's consciousness now while the party delegates go through a few procedural motions in Minneapolis -- taking it light on the funny hats, and the other usual festive hijinks, which would only seem indecent against the background of a profound natural disaster. Despite the poll numbers currently showing a fairly close race between Obama and McCain, the Republicans are well on-track to being regarded as "the party that wrecked America." So it's fitting that their quadrennial meeting should be solemn and restrained.
This official last day of summer, Labor Day Monday, with roughly twenty percent of America's oil production getting chewed up, and the financial markets shut down, and the public in other places than the Gulf states kicking back with weenies and burgers, or watching the hurricane on TV, may be the last day of seeming normality in this country for quite a while to come.
I will come back to this week's blog later this afternoon or evening when more is known about the outcome of Hurricane Gustave.
Update, 7:30 p.m. Eastern Daylight Time, Sept 1:
Hurricane Gustave has now moved away from New Orleans and is stumbling northwest through the backwaters of louisiana toward Texas. Damage to the city of NOLA seems to be minimal at this time. But there is something very strange about coverage coming across on the cable news networks. While trumpeting the "dodged bullet" story-line, and the triumph of post-Katrina government bureaucracy, there have been absolutely no reports of what's happened to the oil-and-gas platforms offshore, the Louisiana Offshore Oil Port (LOOP), or the tangle of pipelines running along the sea floor from these things to the onshore terminals and refineries. I'm quite sure we will not get any comprehensive news about these things for days, because it will require a huge effort of up-close inspection. Gustave roared over that area as a category three storm. It is possible that a great deal of damage has been sustained and that we may still look forward to trouble with gasoline, diesel, and methane gas supplies in the weeks ahead. Playerz on the oil-and-gas futures markets must have been watching CNN and MSNBC all day -- and have no idea whether we actually have a problem out in the rig zone.
As the political conventions descend like the soggy forces of nature they have become -- the tropical depressions of politics -- the Republican party will be seen, with growing clarity, as the party that wrecked America. So many shoes are about to drop, and so many dominoes lined up to fall 'out there' on the financial landscape that the thump and clatter of crashing institutions will sound like the percussion section of the renowned USC marching band as the nation tramps toward the general election.
In a classic calm-before-the-storm moment, last week's momentous Jackson Hole monetary conference played out like Sherlock Holmes's "dog that didn't bark in the night." The poobahs of global banking turned out in the Grand Tetons to compare Gulfstream jets and show off their concho belts, and that was about it. For all the massive turmoil in the banking system, almost no real news leaked out of the conference, and one was inclined to come to the unsettling conclusion that nothing came out because absolutely nothing happened there -- because absolutely nothing can be done about the gathering calamity of capital.
At the moment, two of the biggest elephants in the room, so to speak, are going tits-up with X's where their eyes used to be. These would be the "affordable housing" enablers Fannie and Freddie, who managed during the past decade to make housing virtually unaffordable for any normal, responsible person unwilling to game the system -- with the additional consequence that not only the housing market but the general credit-and-lending apparatus of the US has entered a state of morbid failure. These two corporations are now dead, incurring a legacy of obligation that will add five trillion dollars to the national debt at one stroke. Nobody knows what the exact results of this debacle may be -- and the current silence about it is deafening -- but odds are the effect will range somewhere between destroying the currency and bankrupting the United States altogether.
Meanwhile, the list of giant banks on life support runs to at least ten, with an unknown number of less giant banks that will be squashed when the big ones go down. The sound you hear in the background -- even beyond the sound of John McCain's carping, snotty campaign commercials -- is the whoosh of capital leaving the system. By capital I mean assumed accumulated wealth ready to be put-to-work by this society. We won't have any. The president-elect will wake up November 5th as leader of a poor nation, and all the grand plans laid out during the campaign will have to take a back seat to a severe revision of hopes and expectations.
Now the Democratic party has assembled in Denver to anoint its candidate. The big question for me is whether this will occur in a dignified manner, or whether Hillary Clinton's supporters will turn this into yet another fiasco-du-jour. Forgive me as I begin to wonder what's up. Mr. Obama has graciously yielded to the Florida and Michigan delegations that their morally-compromised primary votes be allowed to count. And Obama has yielded to the ceremony of placing Mrs. Clinton's name in nomination. And a flock of disgruntled harpies has landed in Denver to advance Mrs. Clinton's claims at all costs -- and, well, I fear that there may be some room for mischief here, like an arrant hijacking of the convention by the forces of Hillary.
This would be an almost unbelievable debacle, and yet we are in a season of debacles so anything can happen, really. I am generally allergic to paranoia, but Hillary's recent going-through-the-motions lip service to the Obama campaign does not convince me that she is truly on-board. Rather, I think she is egotistical enough -- in the Greek tragedy sense -- to just kick back now in her Denver hotel suite and see whether her troops can seize the arithmetic of the convention and jam her down the party's throat. I know this sounds like a paranoid fantasy, and I offer it up as little more than that, but, there you have it, like so much brisket on the butcher block....
Meanwhile, reports coming out of Denver that Hillary's Harpies say they would rather vote for John McCain than Barack Obama simply boggle the mind. How fucking crazy are these women? And what have they made of their movement to advance political equality -- a mere campaign of revenge? Is that what their country needs right now?
Speaking of John McCain, my friends, we can return to the general theme of this essay, which is that his party will come to be regarded as the party that wrecked America, and therefore, despite the poll numbers zinging around the news-o-sphere lately, he really doesn't have snowball's chance in hell of winning this election -- assuming it will go ahead as a contest between himself and Obama. Returning also to the theme of impotence among the leaders in the finance sector -- Mr. Bernanke, Mr. Paulson, et al, as displayed in Jackson Hole -- I'm rather convinced that the carnage on the money scene will be so extreme this fall that the nation will seem to have been transformed from a superpower to a basketcase before November 4th, and that the blame for this state of affairs will be blindingly obvious: the people in charge for the past eight years looted the treasury, destroyed the currency, and left the machinery of capital a smoking wreckage.
And so, with the fucking nonsense of the Beijing olympics being over, let the real games begin.
The feeble American response to Russia's assertion of power in the Caucasus of Central Asia was appropriate, since our claims of influence in that part of the world are laughable. The US had taken advantage of temporary confusion in Russia, during the ten-year-long post-Soviet-collapse interval, and set up a client government in Georgia, complete with military advisors, sales of weapons, and even the promise of club membership in the western alliance known as NATO. These blandishments were all in the service of the Baku-to-Ceyhan oil pipeline, which was designed specifically to drain the oil region around the Caspian Basin with an outlet on the Mediterranean, avoiding unfriendly nations all along the way.
At the time this gambit was first set up, in the early 1990s, there was some notion (or wish, really) among the so-called western powers that the Caspian would provide an end-run around OPEC and the Arabs, as well as the Persians, and deliver all the oil that the US and Europe would ever need -- a foolish wish and a dumb gambit, as things have turned out.
For one thing, the latterly explorations of this very old oil region -- first opened to drilling in the 19th century -- proved somewhat disappointing. US officials had been touting it as like unto "another Saudi Arabia" but the oil actually produced from the new drilling areas of Kazakhstan, Turkmenistan, and the other Stans turned out to be preponderantly heavy-and-sour crudes, in smaller quantities than previously dreamed-of, and harder to transport across the extremely challenging terrain to even get to the pipeline head in Baku.
Meanwhile, Russia got its house in order under the non-senile, non-alcoholic Vladimir Putin, and woke up along about 2007 to find itself the leading oil and natural gas producer in the world. Among the various consequences of this was Russia's reemergence as a new kind of world power -- an energy resource power, with the energy destiny of Europe pretty much in its hands. Also, meanwhile, the USA had set up other client states in the ring of former Soviet republics along Russia's southern underbelly, complete with US military bases, while fighting active engagements in Iraq and Afghanistan. Now, if this wasn't the dumbest, vainest move in modern geopolitical history!
It's one thing that US foreign policy wonks imagined that Russia would remain in a coma forever, but the idea that we could encircle Russia strategically with defensible bases in landlocked mountainous countries halfway around the world...? You have to ask what were they smoking over at the Pentagon and the CIA and the NSC?
So, this asinine policy has now come to grief. Not only does Russia stand to gain control over the Baku-to-Ceyhan pipeline, but we now have every indication that they will bring the states on its southern flank back into an active sphere of influence, and there is really not a damn thing that the US can pretend to do about it.
We could have spent the past ten years getting our own house in order -- waking up to the obsolescence of our suburban life-style, scaling back on the Happy Motoring, reconnecting our cities with world-class passenger rail, creating wealth by producing things of value (instead of resorting to financial racketeering), protecting our borders, and taking the necessary measures to defend and update our own industries. Instead, we pissed our time and resources away. Nations do make tragic errors of the collective will. The cluelessness of George Bush is nothing less than a perfect metaphor for the failure of a whole generation. The Boomers will be identified as the generation that wrecked America.
So, as the vacation season winds down, this country greets a new reality. We miscalculated in Western and Central Asia. Russia still "owns" that part of the world. Are we going to extend our current land wars there into the even more distant and landlocked Stan-nations? At some point, as we face financial and military exhaustion, we have to ask ourselves if we can even successfully evacuate our personnel from the far-flung bases in Uzbekistan and Kyrgyzstan.
This must be an equally sobering moment for Europe, and an additional reason for the recent plunge in the relative value of the Euro, for Europe is now at the mercy of Russia in terms of staying warm in the winter, running their kitchen stoves, and keeping the lights on. Russia also exerts substantial financial leverage over the US in all the dollars and securitized US debt paper it holds. In effect, Russia can shake the US banking system at will now by threatening to dump its dollar holdings.
The American banking system may not need a shove from Russia to fall on its face. It's effectively dead now, just lurching around zombie-like from one loan "window" to the next pretending to "borrow" capital -- while handing over shreds of its moldy clothing as "collateral" to the Federal Reserve. The entire US, beyond the banks, is becoming a land of the walking dead. Business is dying, home-ownership has become a death dance, whole regions are turning into wastelands of "for sale" signs, empty parking lots, vacant buildings, and dashed hopes. And all this beats a path directly to a failure of collective national imagination. We really don't know what's going on.
The fantasy that we can sustain our influence nine thousand miles away, when we can't even get our act together in Ohio is just a dark joke. One might state categorically that it would be a salubrious thing for America to knock off all its vaunted "dreaming" and just wake the fuck up.
America is on vacation from its financial, fiscal, and economic problems, having left the centers of power in Wall Street and Washington for a Nantucket-of-the-mind, where, in a haze of artisanal vodka and bong smoke, it's out in the cool dune grass watching imaginary whalefishes blow, leaving only the TV Bubbleheads behind back home. Larry Kudlow of CNBC was practically drooling into his cufflinks on screen last week when the dollar popped against the Euro, and crude oil slumped, and the equity markets climbed up a flagpole.
This sort of euphoria is actually an alarming pre-crash symptom, in this case of a patient (the US) entering the terminal phase of sclerosis. Our society and all its playerz -- especially the appointed communicators -- just can't fathom the reality of the threats we face, which are 1.) the loss of primary energy resources, 2.) the loss of technological potency, and 3.) the loss of a comfortable standard of living.
As the boys over at the Financial Sense News Hour podcast have been saying for months, we're caught in a paradigm shift and we're trying desperately to prove (to ourselves) that we can get back to the way things used to be. This is a broad cultural phenomenon and helps to explain why even the greenest captains of environmentalism strive to find groovy new ways to run all our cars, while their counterparts on Wall Street strive desperately to salvage a set of "innovative" financial rackets based on getting something for nothing. It also explains the foolishness of the "drill drill drill" crowd, which believes we could be back to 99-cent gasoline if only Exxon-Mobil were allowed to prospect offshore where the codfish used to swim. (By the way, I'm in in full favor of granting them permission to do so, if only to put an end to this foolish debate.)
Reality, meanwhile, strives to take us in another direction. Our destination is a far less complex society in a larger, rounder, and less economically-integrated world. We will be leaving a lot of our technological comforts behind, staying closer to home, living in smaller cities and reactivated small towns, working the land more intensively to produce the food we need, and possibly organizing our governance at something less than the continental scale our dwindling riches used to afford. That is, if we're lucky enough to avoid the real possibility of social disorder and violence that would attend a fullblown economic collapse scenario.
August is historically a quiet time for oil, the so-called "shoulder season" when vacationing climaxes, but before deliveries of heating oil get underway in earnest. We have no real prospects of overcoming any of the structural problems now built-in to our oil supply, starting with the grim central fact that we import at least 70 percent of the oil we use. Add to this the fact that world production of conventional crude has not exceeded the 2005 rates; that export rates from our Number 3 and 4 sources of oil, Mexico and Venezuela, are down a combined 30 percent this year; that discoveries of new oil are meager to the degree that they fail by a long shot to offset current world-wide depletion; that the oil available on global markets is proportionately more sour and heavy crude than the light and sweet our refineries are designed for. And so on....
These geological matters form the base on which the geopolitical issues work their hoodoo. For instance, the war currently underway in former Soviet Georgia (I say this in case the folks in Atlanta wonder why Stone Mountain is not being bombed) will at least end up with Russia in control of the major oil pipeline that runs from the Caspian region across Georgia, through Turkey, to Europe -- even while parts of that pipeline get blown up. The net effect will be of Russia will taking control of even more of the oil now flowing to Europe. The whole point of building that pipeline was to bypass Russia, which was crippled by its own paradigm shift in the years when the pipeline was built.
The US might talk tough about this threat to the status quo, but what is it going to do? Pull troops out of Iraq and Afghanistan to mount a land war against Russia in a landlocked region of its own neighborhood? Fuggeddabowdit. Notice, the Europeans are not making so much as a peep -- because when the time comes that Russia does control that pipeline, the Europeans will do anything to keep the contents flowing toward them. Europe may be organized as a trade-and-currency confederation, but not as a military power. NATO is strictly a US auxiliary, not a power unto itself. The result of all this will be that Russia, already the world's leading oil producer, even as it has entered depletion, will now possess a potent geopolitical-and-financial weapon with control of that pipeline. A collateral effect will be Europe's inclination to bid more desperately for Middle East oil -- the oil that comes via the Suez Canal -- which can't help but boost the price-per-barrel that the US is forced to pay.
One part of the oil equation we haven't seen yet this year -- the prelude to the heating season which could be just as spectacular as the opening of the Beijing Olympics -- is the hurricane season. This will be an interesting week for that, as two tropical depressions have now formed off West Africa and begun their grinding progress into our part of the world. Stay tuned to that (National Hurricane Center).
With Wall Street on vacation at its various beaches, the idea has taken hold that the so-called credit crisis is mostly over. In fact, we're still in the first quarter of that classic. The big move before the investment bankers packed their snorkels and baggies was Merrill Lynch selling off a batch of its fraudulent securitized debt bundles for roughly five cents on the dollar. That pretty much marked-to-market the similar garbage that every other big bank or pension fund or hedge fund has hidden in its closet. My guess is that some of them will just declare "game over" without even bothering to haul their garbage out and hang a "for sale" sign on it. Fannie Mae and Freddie Mac are essentially there now.
The Federal Reserve will be in the awkward position of having to make more loans (that will never be paid back) to many of these companies and entities, and in the process will fork over their remaining treasuries in exchange for garbage collateral that they will never get rid of. I don't see how the Federal Reserve survives this process. It will not have any reserves left. The collapse of the Federal Reserve would take America into an outer space version of uncharted territory, really into a whole other dimension of distress.
While Europe faces its problems on Russia and energy and its own economic performance, it has more probability of staying afloat than the US in this upcoming period. I would look for the dollar to make a new big "leg" down against the Euro.
It was fascinating to watch a CNBC report Sunday night about the progress of General Motors and McDonalds Hamburgers in China. It sure makes one wonder about the current mood of Sino-triumphalism -- the favorite car of the Chinese elite is... the Buick, a product that even demented old ladies in Columbus, Ohio, will not touch with a stick. It appears that China has succeeded in turning Peking and Shanghai into simulacrums of Atlanta and Dallas, complete with glass office towers and all the on-and-off-ramps they'll ever need -- a pretty stupid project when you consider how little oil of its own China actually has. One can only say, with a shudder, that they got into the Happy Motoring game a bit late, and wish them "good luck."
The Mickey-D phenomenon appears to be a mere fad, a toy that Chinese trade officials tossed to its people in the euphoria of ramping up the world's last manufacturing economy. For starters, China doesn't have enough groundwater or grain to feed the necessary steers (and hogs) that McDonald's uses for its "meat products" there.
The most amusing part of the CNBC segment was the deportment of the smarmy American executives representing those companies: Rick Waggoner of GM, who was depicted in the full flower of a campaign to hose his Chinese "partners," blowing smoke up their asses as if he were some kind of a human walking-talking bong, and the two necktied creeps from McDonalds' Asian office scheming on camera about opening tens of thousands of so-called "restaurants" across the ancient kingdom. These were all perfect representatives of people stuck in a paradigm already bygone. When the Olympic mania ends, China will find itself in a new reality, too. Its single advantage, as far as I can see, is that it holds a lot of US dollars in various formats, and I don't know that this is much of an advantage given the imminent tanking of American finance. Yes, China has become the world's factory. But if the world's leading shopper is shopped-out and busted, this might not be much of an advantage. Beyond that, as suggested above, they face huge problems with oil, water, and food, not to mention over-population and environmental degradation at a scale we can barely imagine here.
The slide toward Labor Day will remain interesting, even with all the Boyz off at the beach. Notice we haven't even touched on the upcoming political theater of presidential politics, a show that I'm inclined to call "The Party That Wrecked America."
Note: Posting early this week on account of weekend road trip.
The most striking thing about the new Batman movie, now smashing the all-time box office records, is its emphasis on sado-masochism as the animating element in American culture these days. It must appeal to the many angry people in our land who want to hurt others, even while they themselves feel deserving of the grossest punishments. In other words, the picture reflects the extreme depravity of the current American sensibility. Seeing it all laid out there must be very validating to the emotionally confused audience, and hence pleasurable, in all its painfulness.
The rich symbolism in this spectacle represents the tenor of contemporary America as something a few notches worse than whatever the Nazis were heading toward around 1933. We like nothing better than to see people suffer and watch things get broken. The more slowly people are tortured (including the movie audience) the more exquisite the pleasure derived from the act. Civilization offers no consolation. In fact, its a mug's game. Thus, civilization is composed only of torturers and their mug victims.
Gotham City, the setting for all these sadomasochistic vignettes, is a place devoid of comfort. (The suburbs are missing completely.) Even the personal haunts of "the Batman," a.k.a. zillionaire Bruce Wayne, are hard-edged non-spaces. His workplace (cleverly accessed via a dumpster) is an underground bunker the size of about three football fields with a claustrophobic drop ceiling and a single furnishing: the megalomaniacal computer console that is supposed to afford him "control" of the city, but which appears to be, in fact, a completely impotent sham piece of techno-junk, since it can't even outperform a $300 GPS unit in locating things. By the way, Hitler had a brighter sense of decor in the final days of the bunker. Bruce Wayne's personal apartment is one of those horrid glass-walled tower condos beloved of the starchitects, which, in its florid exposure to everything external practically screams "no shelter here!"
At the center of all this is the character called "The Joker." Judging by the reams of reviews and reportage about this movie elsewhere in the media, the death of actor Heath Ledger, who played the role, adds another layer of juicy sadomasochistic deliciousness to the proceedings -- we get to reflect that the monster on screen may have gotten away, but the anxiety-ridden young actor who played him was carted off to the bone orchard before the film even officially wrapped, (and therefore deserves extra special consideration for America's greatest honor, the Oscar award, while the audience deserves its own award for recognizing the lovely ironies embroidered in this cultural phenomenon.)
The Joker is not so much as person as a force of nature, a "black swan" in clown white. He has no fingerprints, no ID, no labels in his clothing. All he has is the memory of an evil father who performed a symbolic sadomasochistic oral rape on him, and so he is now programmed to go about similarly mutilating folks, blowing things up, and wrecking everyone's hopes and dreams because he has nothing better to do. He represents himself simply as an agent of "chaos." Taken at face value, he would seem to symbolize the deadly forces of entropy that now threatens to unravel real American life in the real world -- a combination of our foolish over- investments in complexity and the frightening capriciousness of both nature and history, which do not reveal their motivations to us.
By the way, forget about God here or anything that even remotely smacks of an oppositional notion to evil. All that's back on the cutting room floor somewhere (if it even got that far). And I say this as a non-religious person. But the absence of any possible idea of redemption for the human spirit is impressive. In the world of "the Batman," humanity at its very best is capable only of being confused about itself. This is perhaps an interesting new form of dramaturgy -- instead of good-versus-evil you only get befuddlement-versus-evil. Goodness has lost its way in the dark night of the American psyche, as might be understandable considering the nation of louts, liars, grifters, bullies, meth freaks, harpies, and tattooed creeps we have become. The best we can bring to this predicament is the low-grade pop therapy that passes for thinking nowadays in educated circles. Any consideration of the heroic is off the menu here. We can't ask that much of ourselves. It's too difficult to imagine. Meanwhile, The People -- that is, the citizens of Gotham City -- literally banish even the possibility of heroism from town at the end of the movie -- they take an axe to it! -- perhaps indicating that they deserve whatever befalls them or, shall I say, "us."
A few other striking elements of this spectacle deserve attention. One is the grandiosity that saturates the story elements, and the remarkable impotence of it all. The Batman possesses every high-tech weapon and survival implement ever dreamed up, yet they avail him nothing -- except a lot off sickening leaps off skyscrapers and futile hard landings on car roofs, shipping containers, sidewalks, and other human carcasses. I doubt the writers/director Chris and Jonathan Nolan consciously aimed to depict good old American ingenuity as utterly valueless in the face of chaos, but that's the effect. Otherwise, everything in the Batman's world is overscaled and out-of-whack from the size of Bruce Wayne's fortune (what an executive package his Daddy must have made off with, and from which investment bank?!), to the energy expended in so many car chases and explosions, to the super-sized doom-worthy towers of the gigantic, soulless city.
Finally there is the derivation of all this sadomasochistic nihilism out of a comic book. How appropriate, since we have become a cartoon of a society living on a cartoon of a North American landscape, that the deepest source of our mythos comes from cartoons. We're so far gone that real human emotion is beyond us. We're too far gone -- and even without shame -- to care how this odious movie portrays us to the rest of the world. It is already making a fortune out there.
Everywhere you turn in this nation, you see a society primed for implosion. We seem unaware how extraordinary the American experience has been, especially in the last hundred years. By this, I don't mean that we are a better people than any other society -- these days, ordinary people in the USA make an effort to appear thuggish and act surly, as though we were a nation of convicts -- but for decade-upon-decade, we were very fortunate. Even the Great Depression of the 1930s may seem like a relatively peaceful and gentle "time out" from a frantic era of hypertrophic growth, compared to the storm we're sailing into now.
We were fortunate to inhabit a New World filled with productive land, lots of minerals, and plenty of coal, oil, and gas; and the land itself was insulated physically from the great theaters of 20th century conflict, though we fought in wars "over there." That experience itself, especially our victory over manifest evil in the Second World War, left us with a dangerous mentality of triumphal exceptionalism. Even now, we think we are immune to the epochal hazards of history. The notion that nothing really bad can happen to us is reflected in the blind cluelessness of our current news media and their simple failure to report what is now happening.
I drove up along an obscure stretch of the upper Hudson river on Sunday, starting in the old factory town of Cohoes, north of Albany, where the Mohawk River runs into the Hudson. There is a powerful waterfall there, and along the high bank the massive old red-brick Harmony Mill still stands with its Victorian towers and mansard roofs, like a vision from an Alfred Hitchcock movie. Behind them are streets of red-brick, three-story worker row-housing from the same period. Today they are inhabited by a different kind of poor people, not necessarily working, and probably suffering from a sheer lack of structure in their lives as well as plain poverty of means. These are people who probably don't follow the Bloomberg financial bulletins, and their experience of a cratering economy may only be the rising cost of cigarettes and beer.
The tattoo quotient among both men and women there is impressive. In the days when the Harmony Mill was built, only South Seas cannibals and sailors wore tattoos. You wonder: are tattoos now the only way left for this class of Americans to assert their selfhood? And what exactly are they proclaiming? I am a warrior. Or is it: I am a television (I display pictures, too) !? The expanding class of the poor-and-idle has been remarkably passive in the face of their dwindling prospects. Perhaps they passed the point years ago (a generation or two ago!) when there was any sense of sequential improvement for the family's station-in-life. The destiny of their everyday lives must seem totally beyond their control. They are subject to the fate of distant corporations who sell the staple corn-syrup byproducts and gasoline on which daily life is based. Where government is concerned, they are all potential victims of Katrina-ism, awaiting their own personal disaster.
North of the junction of the Mohawk and Hudson was the old town of Waterford, where the Erie Canal began its journey west -- bypassing those powerful waterfalls. The locks are still there and still in operation for the infrequent tanker ships and ore barges that come and go to the Great Lakes. But the operation of the canal system is automated to the extent that it requires only a handful of people to run the locks now, and the town around them has deteriorated into slum and semi-slum garnished with a few convenience stores and pizza shops. There is no other commerce there. No matter how poor, the denizens are required to drive a car to a giant chain store for groceries or hardware or clothing.
As you leave Waterford, the river road becomes a suburban corridor of 1960s-vintage ranch houses and stand-alone small retail business buildings which, if used at all now, are mostly hair salons, chiropractic studios, and other services not generally rendered by the chain stores. All this stuff was deployed along the road with the expectation that Americans would be driving cars cheaply forever. Now that this is distinctly no longer the case, corridors like this are entering their death throes. The awfulness of the design and construction of these buildings is now especially vivid as the plywood de-laminates, and the vinyl soffits fall off, and the dinge of neglect forms a patina over it all. Hopelessness infects this landscape like a miasma. Whatever young adults remain in these places are not thinking about a plausible future, only looking to complete their full array of tattoos and lose themselves in raptures of sex, methedrine, and video aggression.
Eventually, after running through the disintegrating towns of Mechanicville (once a place of earnest labor, just like it sounds, now a morass of sinking car dealerships and Quik-stops), and Stillwater (smaller version of the same), the road turned completely rural and few other cars ventured up there. The decisive Revolutionary battle of Saratoga was fought near there on the bluffs and hills overlooking the Hudson in 1777. You wonder what the heroes of that battle would think of what we have become. What would they make of the word "consumer" that we use to describe our relation to the world? What would they think of excellent river bottom-land that is now barely used for farming -- or, where it is still farmed (dairying if anything), of farmers who will not even put in a kitchen garden for themselves because it might detract from their hours of TV viewing?
The sclerosis of American life is shocking. If you go further north up the Hudson River, to Fort Edward and Hudson Falls, you'll see a nation that seems ready to crawl off and die. There, it appears too far gone to even put up a proxy fight on a video screen. Frankly, I don't want that version of America to survive -- the America of chain stores, and muscle cars, and grown men obsessed with video games, drugs, and pornography, and women decorated like cannibals, and the vast, crushing purposelessness of it all. I have no doubt we're heading into a convulsion that will wring much of this junk and dross into the backwaters of history. We're capable of being something better than this, of putting our time on earth to better use, including a more respectful treatment of the land we inhabit. This year and the next will be the years of letting go, and out of that we'll commence a re-becoming.
Apology to readers: after being hassled by Canadian immigration officials at the Edmonton, Alberta, airport on Sunday afternoon, and in a rush to make my connecting flight to Grand Prairie, I stupidly left my Mac notebook in a plastic tub at the security gate. Luckily, they'd checked it into the security lost-and-found and gave me clear instructions for retrieving it when I called to inquire. I picked it up today (Tuesday) on my way back through Edmonton en route to Vancouver.
Written on Sunday July 20
The comprehensive bankruptcy of the United States, at every level, in all corners, atop each hill and mole-hill, and down not a few rat-holes, is preceding like some kind of hideous multi-media, inter-dimensional cosmic grand opera as produced and directed by the Devil. Every week, some bizarre new subplot is introduced by the stage managers, each turn and twist geared to produce maximum pain and carnage in the US economy, as if to foreclose any possibility of redemption on the way down. Well, the absence of hope is, after all, the essential nature of Hell (setting aside, for the moment, J.P. Sartre's quaint notion that Hell is other people).
Among the many developments in the story last week was the solidifying consensus that the nation is in really serious trouble, and the noticeable slippage of legitimacy among those pretending to run financial affairs. The howler of the week was the Securities and Exchange Commission's edict that Wall Street sportsters would be prohibited from trafficking in so-called "naked short" sales against a cherry-picked bunch of 19 banks and financial companies for the next two weeks. A cute trick, naked shorting is done by pretending to borrow a bunch of stocks, pretending to sell them high just before the share-price falls, pretending to buy them back at a lower price when the share price has fallen, and then pretending to return exactly the same number of lower-priced shares to the lender, pocketing the difference. Real shorting is cute enough, and involves "clearing" the sales -- i.e. proving that real stocks were really lent and really returned. Shorting is helped along by generating rumors that a given company is in trouble, thus nudging share prices down. This works really well when a company already is known to be struggling, as many now are. In fact, it usually works best when a struggle turns into a feeding-frenzy -- as when a bleeding mullet attracts the swarming sharks. When this scam is run using odd-lots of millions and tens-of-millions of shares sharked up at many dollars each, the profits to be made in this sport is obviously huge.
With naked shorting, however, the stocks being shorted are basically non-existent, imaginary, made-up, fictional, registered only as pixels in a program. It's a racket, pure and simple, run by both the supposed borrower of the stocks and the supposed lender and, more to the point, was wholly and absolutely against the law before the SEC declared a selective holiday from it last week. So, what the SEC action really demonstrates is the utter lawlessness reigning on Wall Street, and the SEC's singular unfitness as an enforcer of the laws, not to mention the criminal irresponsibility of the clearing authorities who only pretend to go through the motions of certifying the sales. What's more, the companies cherry-picked for immunity against shorting were some of the very companies believed to be most active in profiting off naked short sales against other companies.
Thus, the credibility of all the authorities in American finance, including the Secretary of the Treasury, Mr. Paulson, the head of the Federal Reserve, Mr. Bernanke, the director of the SEC, Mr. Cox, takes on the aroma of week-old dead carp, while the affairs of American banking and business as a general proposition look to the rest of the world like a simple looting operation, reflecting poorly on the paper certificates that we use as "money" in the land of the free. The odor of blood and desperation around these activities must be sending a strong signal to those offshore who hold American dollars in some form or other. It must make them rather itchy to dump them while the dumping is good -- before some clever American B-School Boyz figure out a way to short their own country (if they haven't already done that). Finally, Mr. Bush presides at a remove from all this, sitting just offstage in his own special velveteen loge of Hell, watching this opera-to-end-all-operas, and waiting for his reputation to be sealed as the historical equivalent of something found in a colostomy bag.
The sub-plot of Fannie Mae and Freddie Mac just lends a romantic edge to the show. You could spin it off as a sitcom called "The Fucked and the Feckless." This would include all the poor shlubs who signed $XXX-K mortgage contracts, for houses now worth $XXX-K-minus-XX-K (and still sinking), as well as the shareholders, who saw their share prices approach penny stock range (especially the pensioners whose fund managers gorged on Fannie and Freddie paper) and not least the sovereign wealth funds of China and Russia. Those responsible for fucking everybody, the investment bankers who engineered the tranches of securitized bundled non-performing mortgages, and pocketed huge fees for doing so, are now conniving to off-load the liability of all this worthless paper on the taxpayers, led by chief conniver, Secretary Paulson.
Meanwhile, the runs on the banks are just beginning with Indymac last week and Whachovia warming up to catch the baton this week, with more banks waiting to enter the relay race to insolvency. It's becoming obvious that the Federal Deposit Insurance Corporation will choke and croak on this wad of losses, and its liabilities will also be fobbed onto the taxpayers. In the meantime, though, it will be obvious that the full faith backing of the United States is an empty promise. That may be the near-term endgame for all this pretending. When American depositors get screwed out of their deposits and the deposit insurance doesn't come through, the full force of the fiasco will drag the dollar underwater like the legendary Kraken of old preying on a babe thrown overboard.
Then the forces of darkness will really be loosed.
Things may get so chaotic that Mr. Bush and his circle may actually be removed from the scene before his term in office expires. He could go out of office much the way he came in: by means unconventional. Mrs. Pelosi will keep the seat in the oval office warm for a few months. Then the prosecutions will begin.
There's a particular moment known to all Baby Boomers when Wile E. Coyote, in a rapture of over-reaching, has run past the edge of the mesa and, still licking his chops and rubbing his front paws in anticipation of fricasseed roadrunner, discovers that he is suspended in thin air by nothing more than momentum. Grin becomes chagrin. He turns a nauseating shade of green, and drops, whistling, back to earth thousands of feet below, with a distant, dismal, barely audible thud at the end of his journey. We are Wile E. Coyote Nation.
Is there anyone in the known universe who thinks that the US financial system is not fifty feet beyond the edge of the mesa of credibility?
Nothing will avail now. Not even if Sirhan Sirhan were paroled at noon today and transported directly to the West Wing with a .44 magnum in each hand (and a taxi driven by the Devil waiting outside to take him to the US Treasury and the offices of the Federal Reserve).
It's hard to imagine what kind of melodramas were unspooling on the Hamptons lawns this weekend, while everybody else in America was watching Nascar, or plying the aisles of BJs Discount Warehouse for next week's supply of mesquite-and-guacamole flavored Doritos, or having flames and chains tattooed on their necks, or lost in a haze of valium and methedrine.
With the death of the IndyMac Bank last week, and the GSEs Fannie Mae and Freddie Mac laying side-by-side in the EMT van on IV drips, headed for the Federal Reserve's ever more crowded intensive care unit, there was a sense of the American Dream having passed through the event horizon that denotes the opening of a black hole.
What would happen if the US Government acted to bail out these feckless enterprises (and what if they don't)? Either way, it's not a pretty picture. If Mr. Bernanke does start shoveling loans into the GSE black hole, he'll further undermine the soundness of his own outfit and do nothing, really, to repair Fannie and Freddie's structural problem of having securitized too many loans that will never be paid back. If instead Fannie and Freddie are flat-out taken over entirely by the US government (and remember the Federal Reserve is not the government), then the national debt will roughly double overnight -- which will pound the US dollar down a rat-hole.
Meanwhile, the foreign holders of those decrepitating dollars might not rush to the redemption window, but they certainly would use them to buy up every oil futures contract on God's not-so-green Earth as fast as possible -- they'd be dumb not to -- which would leave American Happy Motorists with gasoline prices north of $5 a gallon, and possibly north of $10. (In that case, say goodbye to the airlines. In fact, say goodbye to what passes for the rest of the US economy, including especially the vaunted retail sector that supposedly counts for 70 percent of the action.)
If Fannie and Freddie are left to die out on the desert floor, say goodbye to the housing market, the major investment banks, countless regional banks, the retirement accounts of virtually everyone in America, the viability of all fifty states' governments, and the day-to-day operating ability of all their municipalities -- and very likely the current incarnation of the world banking system.
This process is really out of control now. The bottom line is the comprehensive bankruptcy of the United States. The Republican Party under George Bush will be known as the party that wrecked America (release 2.0). Painful as it is, Americans had better get a new "Dream" and fast. It better be a dream based on the way the universe actually works, which is to say an operating procedure run on earnest effort and truthfulness rather than merely trying to get something for nothing and wishing on stars. We might begin symbolically by evacuating Las Vegas and calling in an air strike on the loathsome place -- to register our new reality-based attitude adjustment.
After that, we've got to get to work re-tooling all the everyday activities of life, including the way we grow our food, the way we raise and deploy capital, the way we do trade and manufacturing, the way we go from point A to point B, the way we educate children, the way we stay healthy, and the way we occupy the landscape. I know, it sounds like a lot, maybe too much. But grok this: we don't have any choice if we want a plausible future on this portion of the North American continent.
Of course, none of that is likely to happen. Instead, and under the worst imaginable economic conditions, we'll probably embark on a campaign to prop up the un-prop-up-able and sustain the unsustainable -- that is, defend every status quo habit and behavior that we're used to, whether it can be salvaged or not. Of course, this would be a fatal squandering of our dwindling resources, but it it tends, historically, to be the last act of the melodrama in any faltering empire.
The result, pretty soon into that process, will be social breakdown and political upheaval. Every tattoo freak out there who has been prepping for his own starring role in some kind of comic book armageddon will finally get his chance to shine. Lots of people will get hurt and starve. Property will change hands in a disorderly way. And at the end of this process an American corn-pone Hitler may be waiting to set everything and everyone straight.
The markets open in about an hour. Good luck everybody.
Every time I saw a car towing a motorboat this holiday weekend, I wondered what was going through the head of the towee. Did they have a sense that darkness was falling on their careers in motor sports? Did they have an inkling that an oil-and-gas crisis is upon us and just not give a shit? Or were they just going through the motions, following some implacable rote programming induced by, say, forty-odd years of TV addiction and a diet based on corn-syrup byproducts?
The holiday to me was a creepy hiatus from an ever more desperate reality overtaking the nation like a miasma. Meanwhile, the mainstream media's ongoing narrative has gotten stuck in the moronic groove of "drill drill drill." The belief of people like Larry Kudlow of CNBC and uber-mega-idiot John Stossel of ABC-News is that we could go back to $1.50 gasoline if only congress would open the offshore exploration areas and the Arctic National Wildlife Refuge. This view is just plain erroneous. Nothing we get out of these regions will come close to offsetting the ongoing depletion of worldwide oil resources, or even arresting our own losses.
Larry King had a particularly dreary debate Sunday night between Robert F. Kennedy, Jr., and a grab bag of "drill drill drill" advocates. Kennedy took the position that the US could achieve a sort of energy independence by massive deployments of wind and solar equipment. It's an understandable wish, I suppose, but not something I view as consistent with reality. The unfortunate part of the Larry King presentation is that it gives the public an idea that these two fantasies are the only possible responses to our predicament. No one is interested in changing our current behavior.
In the background of these energy conundrums is the sickening spectacle of the nation's fatal insolvency, which remains partially disguised by the machinations of the Federal Reserve, using the various new loan "windows" to maintain the illusion that the major banks have not swindled themselves out of existence -- and in doing so, caused at least $3 trillion (so far) in capital to vanish in a black hole. This three-card-monte game has gone on for a whole year now, and the consequences are hitting home. No more money can be lent into existence now.
One consequence is that other nations sitting on our exported dollars (from our massive trade deficit) have apparently decided to spend off those dollars rather than wait for the fullblown financial collapse of the nation issuing them. My guess is that they are spending those dollars on oil, the primary resource of industrial economies, and that they are prepared to outbid other contestants (including the USA) no matter what -- because they know the dollar is losing value, and that those losses are apt to accelerate over time, and what else would they spend them on? I suspect this is behind the rising price of oil more than anything else -- certainly more than the phantom "speculators" the right wing is yelling about -- and that behind the spending off of those exported dollars are the geological facts of oil being a finite resource inequitably distributed around the world.
But to get back to my prior point, things are hitting home anyway, and with force. The US economy is crumbling because the way we conduct the activities of daily life is insane relative to our circumstances. We've spent sixty years ramping up a suburban living arrangement that has suddenly entered a state of failure, and all its accessories and furnishings are failing in concert. The far-flung McHouse tracts are becoming both useless and worthless in the face of gasoline prices that will never be cheap again. The strip malls and office "parks" are following the residential real estate off a cliff. The retail tenants of all those places are hemorrhaging customers who have maxed out every last credit card. The lack of business is now leading to substantial layoffs. The airline industry is dying and will probably cease to exist in its familiar form in 24 months. The trucking industry is dying, threatening the entire just-in-time distribution system of things that even people with little money to spend still need, like food.
These conditions will now get a lot worse, no matter whether the banks continue to conceal their problems. All of it leads to an inflection point that coincides with the November election. By then, I expect that quite a few banks will be toast, job layoffs will rise spectacularly, foreclosures and bankruptcies will be raging across the land, and homeowners north of the magnolia belt will be shattered by the cost of staying warm this winter.
All this hardship and woe will be blamed on the Republican party. It may actually kill off the party. Political parties do go out-of-business in American history, and this one deserves to die -- with its aggressive no-nothingism, its avaricious, punitive religious extremism (the religious part often being fake), its stunning inattention to financial malfeasance in areas under its direct supervision, and its gross incompetent mismanagement of the nation's strategic interests.
That said, I will feel a little sorry for Mr. Obama if he gets to the White House. He'll have to find a gentle way to tell the truth to the people who elected him, people who will be suffering mightily, and who will be very sore about their losses. He'll have to tell them that the previous "release" of the American Dream software is obsolete, and the new version will require a whole lot more of them in the way of earnest effort, delayed gratification, and revised expectations.
There's a whole lot we can do to greet the new circumstances awaiting us, but the one thing we can't afford to do is put all our efforts into keeping the current system running as is. Reality simply won't permit it. We would squander our dwindling remaining resources trying to keep it all going. The next president is going to have to lead us through the awful process of cutting our losses. So far, the debate has been about how to avoid that.
This isn't so funny anymore. Intimations of a July banking collapse rumbled though the Internet this weekend while mainstream news orgs like The New York Times and CNN pulled their puds over swift boats and Amy Winehouse's performance technique. Something is happening, and you don't know what it is, do you Mr. Jones...? to quote the master.
What's happening is that American society is sliding into a greater depression than the one Grandma lived through. On the technical side, there has been unending controversy as to whether we're gripped by inflation or deflation. It's certainly deceptive. Food and gasoline prices are rising faster than the rivers of Iowa. But the prices of assets, like houses, stocks, jet-skis, GMC Yukons and pre-owned Hummel figurines are cratering as America turns into Yard Sale Nation.
We're a very different country than we were in 1932. In that earlier crisis of capital, few people had any money but our society still possessed fantastic resources. We had plenty of everything that our land could provide: a treasure trove of mineral ores and the equipment to refine it all, a wealth of oil and gas still in the ground, and all the rigs needed to get at it, manpower galore (and of a highly disciplined, regimented kind), with fine-tuned factories waiting for orders. We had a railroad system that was the envy of the world and millions of family farms (even despite the dust bowl) owned by people who retained age-old skills not yet degraded by agribusiness. We had fully-functional cities with operating waterfronts and ten thousand small towns with local economies, local newspapers, and local culture.
We had a crisis of capital in the 1930s for reasons that are still debated today. My own guess is a combination of a bad debt workout that sucked "money" into a black hole (since money is loaned into existence, but vanishes if the loans are not systematically paid back) plus a gross saturation of markets, meaning that every American who had wanted to buy a car or an electric toaster had done so and there was no one left to sell to. (The first round of globalism -- 1870 - 1914 -- had shut down after the fiasco of World War One.)
Our debt problems today are of a magnitude so extreme that astronomers would be hard pressed to calculate them. By any rational measure our society is comprehensively bankrupt. From the federal treasury down to the suburban cul-de-sacs so much loaned money is either not being paid back, or is at risk of never being paid back, that the suckage of presumed wealth has passed through an event horizon out of the known universe into some other realm of space-time, never to be seen again in this realm. This would seem to be the very essence of monetary deflation -- money defaulted out-of-existence.
This condition is partly disguised by both the loss of credibility of US currency and real-world scarcities of oil and food, but the upshot will be something at least twice as bad as the Great Depression of the 1930s: people with no money in a land with no resources (with manpower that has no discipline), hardly any family farms left, cities that are basket-cases of bottomless need, comatose small towns stripped of their assets and social capital, an aviation industry on the verge of death, and a railroad system that is the laughingstock of the world. Not to mention the mind-boggling liabilities of suburbia and the motoring infrastructure that services it.
The banks have been doing their death dance for an entire year now, pretending that their problems are those of mere "liquidity" (i.e. cash-on-hand) rather than insolvency (no cash either on hand or in the vault and nothing else to sell to raise cash except worthless "creative" securities that nobody would ever buy). But the destruction of money (resulting from loans not paid back) is now so intense that the game of pretend has reached its terminal point. The question for the moment is exactly who and what will be crushed as these institutions roll over and die.
Complicating matters is a global oil predicament that is really not hard to understand, but which the organs of news and opinion have obdurately failed to explicate for an anxious public. Call it Peak Oil. There are only a few elements of it you need to know. 1.) that demand has now permanently outstripped supply; 2.) that new discoveries are too meager to offset consumption; 3.) That under under the circumstances, the systems we rely on for daily life are crumbling. I've called this situation The Long Emergency.
Our chances of mitigating this, and of continuing our current way-of-life is about zero. I've tried to promote the idea that rather than waste remaining resources in the futile attempt to sustain the unsustainable (i.e. come up with "solutions" to keep suburbia running), that we should begin immediately making other arrangements for daily life -- mainly by downscaling and re-scaling everything from farming to commerce to the way we inhabit the landscape -- but my suggestions have proven unpopular even among the "environmental" elites, who are too busy being entranced by new-and-groovy ways to keep all the cars running.
So where we are at now is the equivalent of standing in the slop by the ocean shore under a gathering hundred-foot-high wave that is about to come crashing down on our heads. Since I sure don't know everything, I can't say how this will all play out in the months ahead, especially with the presidential election coming at the exact moment that voters will be turning on their furnaces for the cold and dark winter beyond. I would venture to say that so far our society as a whole has done a piss-poor job of comprehending the situation. But there is still the possibility, with four months of politicking left, that the nature of our predicament can be articulated in a way that few can fail to understand, the way Mr, Lincoln articulated the terms of the Civil War on the eve of its fateful outbreak.
The telling moment last week was Robert Hirsch's appearance on the CNBC morning "Squawkbox" financial show in which he proposed the probability of $500-a-barrel oil within "a three-to-five-year time-frame." Squawkhead Becky Quick was clearly nonplussed by the stolid Mr. Hirsch, author of a (then)-startling 2005 US Dept of Energy report (since referred to as the Hirsch Report and buried by the Secretary of Energy) that warned of dire effects on the American way of life as the Peak Oil predicament gained traction.
Perhaps more reality-challenged was the uber-idiot Larry Kudlow on CNBC's night-time money show, who kept repeating the mantra "drill, drill drill" when presented with signs that something other than "oil speculators" was driving up the price and creating global scarcity. These idiots always return to the shibboleth that "there's plenty of oil out there." What they don't get is that even while the world is enjoying the all time peak of production (somewhere around 85-million barrels-a-day), that same world is demanding at least 86-million barrels -- so even though there's more oil than ever, there's not enough. And the gap is only bound to get bigger.
The difference between what's available and what's demanded is being felt by poor countries and poor people in richer countries. Third world nations lacking their own oil are simply dropping out of the bidding, and the lower classes in the US are having to choose between buying gasoline and velveeta. The floods in the corn belt will surely aggravate the problem here in the USA. Lunch breaks may soon be a thing of the past for WalMart Associates. Maybe they'll just play video games on their cell phones in the parking lot to allay their hunger.
Meanwhile the notion that drilling drilling drilling offshore the US and up in Alaska will solve this problem shows how incredibly misinformed the news media itself is. The probability is next to zero that anything found off California or Florida would even fractionally offset ongoing depletion in the handful of old, established super-giant fields that the world gets most of it oil from. By the way, I support the idea of drilling in Alaska's ANWAR reserve because I think it can be done in a sanitary way and, more importantly, it would get the idiot cornucopian right-wing assholes to finally shut up about it -- before they discover that it contains less than half a year's oil supply for the US at current rates of use.
Also on the "meanwhile" front, the OPEC meeting Sunday at Jeddah, Saudi Arabia, was simply a desperate dodge, a mummery, a kabuki theater of powerlessness. Once again, the Saudis are pretending that they can increase their production -- in essence, pretending that they actually have some power in the game. As Jeffrey Brown has pointed out on TheOilDrum.com, the Kingdom will still show a steady three-year decline over their 2005 production rates even if they're able to goose current output as much as they say they will in 2008.
All this reality content is beginning to penetrate the collective consciousness in the US, but the result is mostly panic or paralyzed disbelief rather than any set of intelligent responses. For example, I got a call from one of Katie Couric's producers at CBS news on Friday. Somehow, they had noticed that oil prices were becoming a problem in America. They called me for a comment. The scary part was they were clearly treating the issue as a "lifestyle" story. Did I think more suburbanites would move downtown? And would that be a good thing...? They have no fucking clue how broadly and deeply these dynamics will affect the life of this nation, or even our ability to remain a nation. Also, by the way, this demonstrates how the nightly network news has become the equivalent of the old "women's pages" of the daily newspapers.
The parallel universe of the financial world is showing the strain of all this oil anxiety -- since, after all, oil is the primary resource for running industrial economies. It has been some time since the banker boyz embarked on their fateful venture to alchemize a new mutant strain of investment instruments to replace the tired old stocks and bonds which represented the hope for production of surplus wealth from industrial activity -- now mooted by the oil story. The idea of the mutant investments was to produce wealth with no real wealth-producing activity. This old trick, formerly known as Ponzi finance or a "pyramid scheme," was naturally self-limiting, and in a way that would prove ultimately very destructive to society as a whole. In fact, it has fatally undermined the legitimacy of the entire financial system, and a state of comprehensive nausea has set in as we all witness the dissolving foundation of the US economy under a tsunami of debt that will never be repaid.
The markets seem to know this, the more vocal playerz are squawking more about it, some banks are issuing frightening "duck-and-cover" warnings, using horror movie phrases such as "...worse than the Great Depression of the 1930s..." and the general public is sinking into the quicksand of bankruptcy, repossession, and ruin. I haven't been to any lawn parties in the Hamptons this year, but I imagine that eczematous anxiety rashes are competing with suntans and Versace separates out there this year. Really, we're right back where we were last year about this time, only worse. Oil has doubled, food is outasight, the levees have broken, the people who run things are shitting their pants, and everybody is waiting for a whole lotta other shoes to drop.
A catastrophe for Iowa farmers will not be just a catastrophe for Midwestern Americans. In the Iowa floods, we'll see more evidence of how the problems of weird weather (climate change) combine and ramify the problems associated with peak oil. In this particular case they lead to an inflection point sometime around the 2008 harvest season, which will also be our time of political harvest.
These are not your daddy's or granddaddy's floods. These are 500-year floods, events not seen before non-Indian people starting living out on that stretch of the North American prairie. The vast majority of home-owners in Eastern Iowa did not have flood insurance because the likelihood of being affected above the 500-year-line was so miniscule -- their insurance agents actually advised them against getting it. The personal ruin out there will be comprehensive and profound, a wet version of the 1930s Dust Bowl, with families facing total loss and perhaps migrating elsewhere in the nation because they have no home to go back to.
Iowa in 2008 will be an even slower-motion disaster than Hurricane Katrina in 2005. Beyond the troubles of 25,000 people who have lost all their material possessions is a world whose grain reserves stand at record lows. The crop losses in Iowa will aggravate what is already a pretty dire situation. So far, the US Public has experienced the world grain situation mainly in higher supermarket prices. Cheap corn is behind the magic of the American processed food industry -- all those pizza pockets and juicy-juice boxes that frantic Americans resort to because they have no time between two jobs and family-chauffeur duties to actually cook (note: reheating is not cooking).
Behind that magic is an agribusiness model of farming cranked up on the steroids of cheap oil and cheap natural-gas-based fertilizer. Both of these "inputs" have recently entered the realm of the non-cheap. Oil-and-gas-based farming had already reached a crisis stage before the flood of Iowa. Diesel fuel is a dollar-a-gallon higher than gasoline. Natural gas prices have doubled over the past year, sending fertilizer prices way up. American farmers are poorly positioned to reform their practices. All that cheap fossil fuel masks a tremendous decay of skill in husbandry. The farming of the decades ahead will be a lot more complicated than just buying x-amount of "inputs" (on credit) to be dumped on a sterile soil growth medium and spread around with giant diesel-powered machines.
Like a lot of other activities in American life these days, agribusiness is unreformable along its current lines. It will take a convulsion to change it, and in that convulsion it will be dragged kicking-and-screaming into a new reality. As that occurs, the US public will have to contend with more than just higher taco chip prices. We're heading into the Vale of Malthus -- Thomas Robert Malthus, the British economist-philosopher who introduced the notion that eventually world population would overtake world food production capacity. Malthus has been scorned and ridiculed in recent decades, as fossil fuel-cranked farming allowed the global population to go vertical. Techno-triumphalist observers who should have known better attributed this to the "green revolution" of bio-engineering. Malthus is back now, along with his outriders: famine, pestilence, and war.
We're headed, it seems, toward a fall "crunch time," and that crunching sound will not be of cheez doodles and taco chips consumed on the sofas of America. I think we're heading into a season of hoarding. As the presidential campaign moves into its final round, Americans may be hard-up for both food and gasoline. On the oil scene, the next event on the horizon is not just higher prices but shortages. Chances are, they will occur first in the Southeast states because oil exports from Mexico and Venezuela feeding the Gulf of Mexico refineries are down more than 30 percent over 2007.
Perhaps more ominous is the discontent on the trucking scene. Truckers are going broke in droves, unable to carry on their business while getting paid $2000 for loads that cost them $3000 to deliver. In Europe last week, enraged truckers paralyzed the food distribution networks of Spain and Portugal. The passivity of US truckers so far has been a striking feature of the general zombification of American life. They might continue to just crawl off one-by-one and die. But it's also possible that, at some point, they'll mount a Night-of-the-Living-Dead offensive and take their vengeance out on "the system" that has brought them to ruin. America has only about a three-day supply of food in any of its supermarkets.
The yet-more-ominous thing here is that shortages of food and oil are two fiascos that are pretty clearly predictable for the second half of the year. That's bad enough without figuring in the "unknowns" that could kick up American hardship a few more notches.The hurricane season just got underway -- obscured for the moment by the bigger weather story in Iowa. The fate of the banks is a train wreck still waiting to happen. As it occurs -- also heading into the high political and hurricane seasons -- we could find ourselves not only a nation wet, hungry, and out-of-gas, but also completely broke. I'm sorry that Tim Russert will not be here to talk us through it all.
The banking “industry” slept like a dog through the climax of the political primary season. Meanwhile, the banks sucked in scores of billions in cheap loans from the Federal Reserve, using bundles of devalued-to-worthless “innovative” securities as collateral. This dodge has worked for about three months, allowing them to pay their employees and cover their electric bills, and is now collapsing because American society can’t maintain the flow of repayment on current debts and can’t take on any additional debt – meaning both the regular “churn” of revenue flowing to the banks is impaired at the same time that fees for originating new loans cannot be generated. Uh Oh.
Out there in the cul-de-sacs and the strip malls, people are months behind in their mortgage payments, maxed out on their plastic, handing over their car keys to the lien-holders, and feeding their kids Spam filets. Truckers get paid less for their loads than the cost of transporting the load. The airlines have financial cancer and will be dead in eighteen months. Container ship costs are heading out-of-sight. Municipalities are going broke. A weekend flood just destroyed part of the Midwest corn crop. And, of course, oil prices took a jagged turn upward last Friday en route to their next stop: $150-a-barrel.
The New York Times reported Monday that rural Americans are being hit hardest by the rise in gasoline prices. Duh. It's worst, naturally, in the big southern states where wages are low and the distances are vast. There's a reason why Nascar is the second-biggest religion down there: the automobile rescued southerners from the tyranny of geography. Cheap gas allowed them to build a "new " economy based mainly on the construction of suburban sprawl. In the process it deified the pickup truck. Guess what? The rural South made a big mistake. The Dukes of Hazard show is now drawing to a close. They are about to take a turn back to being what they were before the Second World War: an agricultural backwater. God knows what will happen to the asteroid belts of "production housing" and big box shopping outside the relatively tiny pre-automobile cores of places like Houston and Atlanta.
The New York Times made a particularly inane point in their lead business section story today (Rural U.S. Takes Worst Hit as Gas Tops $4 Average) saying:
...Sociologists and economists who study rural poverty say the gasoline crisis in the rural South, if it persists, could accelerate population loss and decrease the tax base in some areas as more people move closer to urban manufacturing jobs.
Is it possible, nobody informed the reporters (and editors!) that A.) America has already hemorrhaged manufacturing jobs; and B.) That much of the little manufacturing that remains is not located in any cities per se?
So we now head into the general election. One thing the pundits of the mainstream media seem to miss is how much more room for economic carnage there is in the months remaining. They seem to be laying their current odds on the idea that McCain and Obama are starting on a "level playing field." In fact, McCain is already up to his hips in trouble from his sheer association with the Republican establishment, which will be so badly discredited by the shattered economy that it may actually go the same route as the 19th century whig party and dissolve in a putrid vapor of fecklessness. By November, the Republicans will be viewed as the party that wrecked the nation, and McCain will be in a hole so deep (still on the 20-yard-line by the way) that nobody will be able to see his lips move.
It was a relief, at long last, to see the odious Hillary step aside on Saturday -- though she could not have engineered a more self-glorifying exit. There is talk, all of a sudden, about a President Obama perhaps stashing Hillary in the Supreme Court seat currently occupied by Ruth Badar Ginsburg, whose health is failing. I'd like to see Hillary packed off there. It would get her out of the senate. You can't really grandstand on the Supreme Court. The nation -- if it remains a nation -- could forget about her.
Well, here we are about twenty minutes from Wall Street's Monday open. I imagine it's going to be quite a day. Over 90-degrees and oil cutting its overnight losses. Praise the lord and pass the Xanax.
This meme, which has been the mantra among supposed political "progressives" for years now, was reignited over the weekend with the publication of a memoir by former Bush press secretary Scott McLellan claiming that President Bush and his cronies wove a spell of lies to get a war in Iraq underway. This is the narrative that Americans tell themselves to prove that, if it weren't for bad leaders, we would be a morally upright nation.
I don't think so. And, remember, I write the following as a registered Democrat (and an Obama voter in my primary state). Warning: many readers are not going to like this.
The chanters of this mantra seem to forget what the 9/11/01 attack on US targets represented: a grievous act which in any other moment of history and any other place on earth would have been construed as an act of war. Roughly three thousand people were killed, many choosing to jump out the windows of skyscrapers to avoid roasting to death.
Setting aside the crank theories (which I've always regarded as utter paranoid nonsense) that the attacks were somehow orchestrated by the US government itself, it became clear quickly that the nineteen airplane hijackers were Arab nationals, mostly from Saudi Arabia. It also became clear that their acts were not directly sponsored by any legitimate Arab government, but rather by a trans-national Islamic extremist network. So the question for the US, after the morning of 9/11/01, was: what to do about this act?
Well, the first response, weeks later, was a US attack on the supposed headquarters of the the trans-national Islamic extremist network (which came to be known as al Qaeda, "The base") in Afghanistan. The rather robust campaign necessitated the occupation of this threadbare nation, but it failed to accomplish its chief aim, which was to capture the charismatic leader and financial sponsor of the 9/11 attack, the Saudi Arabian rogue millionaire fanatic Osama bin Laden. It did accomplish its other chief aim: to evict the extremist Taliban government from control of the capital, Kabul.
What happened after that is what has provoked the now-familiar mantra: it became evident that evicting the Taliban and occupying Afghanistan was not enough. It was not a sufficient response to the grievous injury of 9/11. Why? The Afghans were not Arabs.
From a strategic point-of-view, 9/11 required a severe punitive response against the people responsible (casualties were higher than the attack on Pearl Harbor, 1941). That meant against an Arab people. Since the act was not perpetrated by any Arab nation per se, this left the US in a quandary. And of course, it begs the question: why was such a response even required?
Because 9/11 was the most recent of a spate of attacks, occurring over a period of years, by the same group of people, and the one to most severely damage important targets within sovereign US territory itself. It is important to emphasize the significance of this. The other acts in the series included the first World Trade Center bombing in 1993 which killed six people and injured over a thousand. The next was the 1996 bombing of the Khobar Towers in Saudi Arabia, which killed nineteen Americans. This was followed in 1998 by the simultaneous bombing of two US embassies in Kenya and Tanzania, which killed 223 people (mostly African employees) and injured over 4000 others. The next, in October, 2000, was the suicide bombing of the USS Cole in the port of Aden, Yemen, which killed seventeen American sailors. The US response to all these acts was little more than hand-wringing which, in retrospect, was thought to have emboldened the further and far more traumatic injury of 9/11.
Now, it might be argued that even if 9/11 was an act of war by any normal definition, it was an act of what is called these days "Fourth Generation War," the new decentralized warfare carried on by small units symptomatic of the breakdown of nation-states and enabled by high tech weaponry in which a very few individuals can create tremendous carnage. For good or for ill, the US military still operates on the basis of the previous generation of warfare, involving large massed units on land, sea, and air. Our response was geared to that manner of warfare.
And the response was determined to be a grievous strike against an Arab nation. Why? To demonstrate that acts of any generation-type warfare against sovereign US territory perpetrated by Arab people would be answered by the type of warfare still practiced by the US. So the next question was: which Arab Nation?
The answer was Iraq, for a number of strategic reasons. Iraq had the largest untapped oil reserves outside Saudi Arabia and it would benefit the oil-guzzling US to have something to say about its disposition. Iraq was geographically positioned between two of the most troublesome nations in the Middle East, Iran and Saudi Arabia and a US military presence between them would influence their behavior. Iraq was ethnically Arab. Iraq's leader, Saddam Hussein, had a long record of mischief-making in that unstable region and it was believed that getting rid of him would be beneficial (hindsight, at that point, was not yet operational).
I believe that the decision to punish an Arab nation for 9/11 was probably made very soon after the event. Whether Iraq specifically had anything to do with 9/11 was not part of the equation. It didn't matter one way or the other anymore than it would have mattered if the 9/11 hijackers had decided to strike the Empire State Building and the US Capitol instead of the WTC and the Pentagon. And arguments made on the basis of Iraq's involvement or non-involvement are therefore specious. As a strategic matter, it was necessary to make the "statement" that attacks on US territory would provoke a response that Islamic extremists could not fail to understand -- something along the lines of "an eye for an eye...." In short, we set out to kick the ass of an Arab nation. Iraq was by far the best candidate.
Being Americans, however, we also decided to finesse it, to provide a theoretically ideal outcome, which in this case would be the ouster of the dictator Saddam Hussein and his replacement with a sleek democratic government for which the Iraqi masses would be eternally grateful -- thus allowing us to kick their ass and then pick them up off the ground, dust them off, give them some pocket money, and teach them the benefits of government of-by-and-for the people.
The run-up to this project involved some dissembling. It was preceded by an elaborate ceremonial dance with a UN weapons inspection team to ascertain whether Saddam Hussein possessed any weapons of mass destruction, WMDs. Their efforts were inconclusive. Remember this. It is a key point. A lot of people remember it differently. They mis-remember that the UN team reported that Saddam Hussein had no WMDs for certain. This was not the case. Among other things, the Iraqi leader had designated all kinds of installations as "presidential palaces," and placed them off-limits to inspectors. There he could easily have hidden a cache of fissionable material in a bathroom-sized space, not to mention stores of other exotic weapon-grade materials such as smallpox viruses, anthrax spores, etc. You didn't need a whole lot of storage space for these things. And the collapse a few years earlier of the Soviet Union had, it was widely suspected, loosed an orgy of kleptomania in Russia commencing a black market trade in everything from bomb-grade uranium to weapons-grade bio-organisms.
In any case, the UN search was a frustrating and basically inconclusive exercise, and the bottom line of it all was this: in order to find out if anything was there, we had to search the place ourselves, including the "off-limits" areas. So, the argument was made by the Bush administration that this would be the basis of an ultimatum to Iraq. A lot of intelligence (spywork) was gathered from many sources -- Europe, Israel, Russia -- and not all of it was verifiably truthful. Some of it, such as rumors of a transfer of yellowcake uranium ore from Africa to Iraq, proved to be erroneous, even though it was used as the basis for our ultimatum. This is the kernel of the argument that "we were lied to."
War is an inexact art. In the history of nations, lies and exaggerations are almost universally employed by heads-of-state to engage in wars even when causes are righteous. In all wars, the contestants believe that God is on their side, and that acts justifying war are justified by God. Anyway, the search for WMDs was used as the justification for America's invasion of Iraq in 2003. Another important point uniformly ignored by the "we were lied to" faction is that just because no WMDs were found, does not prove that we didn't have to look. The truth is, nobody knew for certain what was there or not there, and to this day nobody knows if anything was moved out of Iraq to some to some other nation (Syria being the usual choice) in the long interim of the UN search.
However, the true objectives of the action were still as stated above: to punish an Arab nation for 9/11, to establish a military presence between Iran and Saudi Arabia, and to "secure" a large reserve of oil (not to steal it, but to assure access to buying it). This was an extremely ambitious program in which an awful lot of things could go wrong.
And they certainly did. The Iraqis were not grateful for the American occupation. They proved uneducable in the ways of American-style democratic governance. They reverted to a persistent diet of religious-ethnic-and territorial warfare within their own artificially-drawn borders. They regarded their American teacher-protectors as detestable interlopers and blew them up whenever possible. They ran what was left of their economy into the ground, including their oil industry. The incompetence of the US military occupation, its reliance on mercenary security thugs, it's "out-sourcing" important tasks to venal corporations such as KBR, its ineptitude in carrying out the mission of restoring basic electric and water services -- all contributed to the disastrous quagmire that Iraq turned into.
But all the backward-looking crybaby complaints that "we were lied to" still doesn't answer the basic question: what should have been the appropriate response to the extreme injury of 9/11? A diplomatic protest? Another investigation by the UN? The surreptitious assassination of Arab troublemakers all around the world? I don't think the "we were lied to" contingent has a credible answer to this question.
There's another hugely important realm of inquiry that the "we were lied to" folks have never addressed: who lied to us about the way we live in this country? About the amount of oil we consume in the service of all our comforts and conveniences? About our extreme car dependence and what is required in our relations with the rest of the world to sustain it. All these years, Frank Rich and all his whining colleagues at the New York Times barely acknowledged the domestic fiasco of the suburban sprawl economy that placed us in such jeopardy to begin with. Even now, with the airlines disintegrating and gasoline over $4 (diesel over $5) I haven't heard any of these crybabies even raise the issue of restoring the US railroad system. How many of these crybabies live suburban lives themselves, in places like Louden County, Virginia, or Westchester, or Long Island, or the San Fernando Valley? Who lied to us about that?
For my money, the "we were lied to" chorus only represents the obdurately self-righteous cluelessness in every band of the American political spectrum. We lied to ourselves. We continue to lie to ourselves every day. The US public barely understands the first thing about the energy predicament we're in, and what it means for how we live in this country -- or how we get along with the rest of the world -- and the news media tragically reflects that ignorance. We fantasize about being "energy independent" and still being able to drive to the mall three times a day to eat caesar salads grown on the other side of North America. Get this: we deserve exactly what is happening to us. We might as well keep on lying to ourselves to pretend that we are not descending into a dark phase of our own history. After all, the true basis of American life these days is to feel good about yourself no matter what you do.
Loveliness was everywhere this holiday weekend in upstate New York, and it was probably hard for many to believe that the wayward nation would return to the dread uncertainty of life in the crash lane when the barbeques were over. There was even a wan overtone to the late-night sports news about the Indy 500 race -- as though the spectacle of cars droning round and round a speed oval epitomized the futility of American life in this moment of our history.
I had a discussion with one guy at a Sunday night party about the prospects for hydrogen-powered cars. We rehearsed the usual reasons why such a system was unlikely to get up-and-running -- and then he said, "...but what if we took all the money from the war and put it into something like the space program and... they came up with some way to make it happen...!"
This is certainly the golden heart of the great wish out there, as the empire of Happy Motoring begins to run down on $4 gasoline. It seems inconceivable that a society so bold as to put men on the moon (fer crissake) can't overcome such a prosaic problem as finding something other than oil byproducts to run our cars on.
From this holy font all cognitive dissonance flows.
It seems inconceivable, but it begins to look like that's the way it really is, and we just can't accept it.
Of course, one of the reasons that Americans are so anxious to get away on a holiday weekend from the places where they live is because we did such a perfect job the past fifty years turning our home-places into utterly unrewarding, graceless nowheres, where the private realm of the beige houses is saturated in monotony, and the public realm has been reduced to the berm between the WalMart and the strip mall. Now, we barely have the gasoline to run all this stuff, let alone escape from it for a weekend.
We're at a dead end with all this and a lot of Americans are paralyzed with fear about what's next. This may actually be a deeper fear than the anxiety about money and banking in 1933, when Franklin Roosevelt was sworn in and tried to reassure the nation. Back then, despite the grave problems of capital, we still had plenty of everything: plenty of good productive land, plenty of manpower earnestly eager for hard work, plenty of ore in the ground, shining cities equipped with excellent streetcar systems, a railroad network that was the envy of the world, sturdy small towns and small cities fully equipped with locally-owned business, and a vast number of small family farms that could re-absorb family members unable to get wages in the cities. Most of all, we had plenty of oil in the ground, and the world's biggest industry for getting it out and selling it. What we didn't have in 1933 was cash money.
The crisis at hand now goes way beyond a crisis of capital -- though that is certainly part of it. Notice how many of the things we had in 1933 are gone now. Our cities, with a few exceptions, are imploded husks. Our small towns and small cities (Schenectady, home of G.E.!) are gutted, especially in terms of locally-owned business. Our passenger rail system is worse than anything a Soviet ministry might produce (while the airline industry that replaced it is dying of a kind of financial hemorrhagic fever). Our local transit hardly exists anymore. Family farms have all but disappeared. We have plenty of manpower earnestly eager to become American Idols (but certainly not for heavy labor). Our oil industry now supplies only a fraction of the world's daily supply (and not even enough for half of our own needs).
What happens now? We face not just change but convulsive change. The public senses the rapid unraveling of our car-centric arrangements. In the week before the holiday, gasoline prices went up several cents each day -- in upstate New York, it crossed the $4 mark and kept going up. The trucking system faces collapse as diesel fuel price-rises exceed even the rise in gasoline, and the vast number of independent truckers who make up the system confront the individual calamity of a personal business failure. American Airlines last week announced severe measures to keep operating through the fall of 2008. but none of the airlines can feasibly carry on as usual with oil prices above $120-a-barrel -- and the ominous message is of a business model that has no conceivable way to adapt to the new reality. Most likely, in a very few years air travel will no longer be a "consumer" enterprise.
In the background of these practical problems -- "off screen" during the holiday of car races and ball games -- is a crisis of capital orders of magnitude worse than the one faced by Franklin Roosevelt in 1933. For behind the "liquidity" (i.e. insolvency) issues faced by the big institutions lurks the Godzilla of the derivatives trade, which has evolved into a black hole capable of sucking all notional "money" into oblivion. That "money," which represents the aggregate value of our society, also amounts to the emperor's new clothes of an empire in serious trouble. As the black hole of derivatives sucks away these "new clothes," America will stand naked against the elements of fate.
Those were the words that Fed chairman Ben Bernanke used to describe the financial markets (and by extension the economy) these heady spring days when everybody else with a rostrum, it seems, has pronounced the so-called liquidity crisis contained. There's a great wish for American finance to return to business-as-usual -- raking in fantastic fees for innovating new modes of tradable paper, and engineering mergers and buy-outs that generate huge fees plus $100 million kiss-offs for corporate CEOs in the noble struggle to dismantle America's productive capacity -- but apparently events are still out of hand.
The Federal Reserve itself has been instrumental in promoting abnormality by doing everything possible to prevent the work-out of bad debts in the system. Since money is loaned into existence, and loans are debts, the work-out of bad debt suggests the discovery that a lot of money has disappeared -- which is exactly the case. The Fed has postponed the work-out by sucking up truckloads of impaired, untradable securities in exchange for loans to giant banks who don't have enough cash on hand to pay their janitors.
Personally, my theory has been that the specter of peak oil pretty clearly implies the inability of industrial economies to continue producing real wealth in the customary way. In the face of this, either consciously or at a more mystical level, the worker bees in banking recognize that, in order to maintain their villas in the Hamptons, money has to be loaned into existence some other way (than in the service of industrial productivity).
We've tried just about everything else. There was the so-called service economy, an attempt to replace manufacturing with hamburger sales. Then there was the information economy, in which work would be replaced with knowing about stuff. Then there was the tech thing, which was about bringing internet companies that existed only on the back of cocktail napkins to the initial public offering stage of capitalization -- which allowed a few-hundred-or-so thirty-year-old smoothies to retire to vineyards in the Napa Valley, while hundreds of thousands of retirees lost half the value of their investment portfolios. Then there was the housing boom, which was all about the creation of more suburban sprawl under the theory that houses (or "homes" in the jargon of the realtors) represent an obvious sort of wealth, and therefore that using houses as collateral would allow humongous sums of money to be loaned into existence -- along with massive fees for structuring the loans into bundles of bond-like thingies.
This has all failed now because the racket went too far. Every possible candidate for a snookering got snookered. Too much collateral for which there were no takers went into the ground. The insane run-up in house values made a downward price movement inevitable, and as soon as the turnaround happened, it fell into the remorseless algebra of a deflationary death spiral. More importantly, however, this society ran out of tricks for loaning money into existence and instead began to experience the pain of money thought-to-be-in-existence being defaulted into a vapor -- and worse, these defaults led to logarithmic chains of money destruction in its places of origin, the investment banks that had created the racket.
The important part of this is that the money is gone. What makes matters truly eerie is that the "bubble" in suburban houses has occurred at exactly the moment in history when the chief enabling resource for suburban life -- oil -- has entered its scarcity stage.
The logical conclusion of all this is not what the American public wants to hear: we have become a much poorer society and are now faced with the unavoidable task of making major changes in how we live. All the three-card-monte moves at the highest level of finance lately amount to an effort to avoid the unavoidable, acknowledging our losses. Certainly the political fallout of all this will be awesome. But it's not about politics, really. It's about the entire society's inability to form a workable new consensus of reality.
It's hard to predict how long these institutions at the heart of our economic system can linger in the "far from normal" limbo of pretending that money has not been defaulted out of existence. Since the same process is underway in Great Britain and Spain, places beyond the control of Bernanke, Secretary Paulson, and the Boyz on Wall Street, and since actions and reactions there will affect the destiny of money here, its hard to escape the conclusion that we're at most months away from the brutal recognition that Wall Street has managed to bankrupt itself (and, by extension, the United States). This is dark heart of the matter of which no one dares speak.
Meantime, on the ground, every mook and minion in the land sees the gas pumps levitate beyond the $4 hash mark, and notes with bugged-out eyes the double-digit price stickers on common supermarket items, and feels the rush of blood from the extremities when some check-out clerk at the WalMart declares that a certain proffered credit card is maxed out, and some strangers in overalls -- the neighbors say -- managed to hot-wire the GMC Sierra in the driveway, and took it away....
The candidates for president will have a lot to talk about. I wonder if they'll dare to.
I was pretty disturbed eight years ago when Hillary Clinton up and announced she was running for a New York seat in the US Senate. Say what? She didn't even live here after she quit Arkansas. Why didn't she run for the single non-voting District of Columbia House of Representatives seat (in a primary against Eleanor Holmes Norton)? Why? Because Hillary is a monster of ambition.
So, Hillary and Bill bought a piece of real estate in Westchester County, NY, and that theoretically qualified her to run for that senate seat. Of course, her move was a huge slap in the face to the 15 million or so adult native New York staters who were also theoretically entitled to run for that office -- including especially the smaller but still substantial number of New Yorkers with serious qualifications. They all rolled over for Hillary, allowing the Clintons to maintain a major power base in American government when the Big Show of Bill's White House tenure was up.
Her run for president took off on schedule with a disturbing sense of inevitability. It was clear that she had internalized the arc of the women's movement to the degree that the nation owed her a turn in the White House, since this was the logical symbolic destination of the Boomer political ethos: absolute equality above all other considerations -- Hillary gets to play, too! The American public seemed willing to go along with this national psychodrama. It satisfied a certain school days sense of morality. Then Barack Obama had to come along and spoil it all. The nerve of that... uppity Negro!
Or so, apparently, Hillary would have us believe, now that her campaign has run off the rails. In awful desperation she has so much as said that the Democratic party has to nominate her because non-white people are unelectable -- forgetting for a moment that Barack Obama is as much white as he is black.
The spectacle of Hillary's un-making has been pretty horrible to witness, the efforts to stage her as a lumpenprole Nascar mom drinking boilermakers while celebrating her latest hunting exploits. (How worried is Hillary about making her mortgage payments, or filling her gas tank?) Naturally, the final act of this nauseating play takes place in Hillbilly Heaven, the states of West Virginia and Kentucky, where Hillary expects to make a big "statement" about exactly whom voters will go for. She'll win big and the effort will symbolically disgrace her.
She's carrying on now like William Jennings Bryan at the Scopes Trial -- an obvious, gibbering loser unwilling to shut up and go home, even after every measure of consensus from the bailing super delegates to the cover of Time Magazine has made it clear who the preferred party nominee will be.
I hope New York voters will not fail to remember this ghastly final act of the 2008 primary season. I hope a bona fide New Yorker will step up and challenge Mrs Clinton for the senate seat she will return to for the next several years. I hope the Clintons will move offstage and do something else -- enjoy their millions... make even more money... use it to "go green" or something....
Back around the year 2000, I used to joke with my friends that Bill Clinton would return (despite the two-term limit) as Emperor Bill the 1st. He almost made it. I voted for him twice in the 1990s, but the new script addition wasn't so appetizing. It would have been one of the stranger occurrences in all of modern world history. The political "death" of Hillary and Bill is a story of Shakespearean dimensions. It seems to be ending as farce, though. Who knows, before the day is over, Hillary may yet put on a pair of overalls with one suspender and have her picture taken sucking on a jug of moonshine likker. Of course, irony has been the Boomer's intellectual stock-in-trade.
Whatever America's fate may be in these very trying times of peak oil and climate change, a consensus seems to have formed that we can't afford to leave the same old cast of characters running things.
As the West's industrial regime sputters toward a cheap-energy-crackup conclusion, there have been attempts to recast what our economy is actually about, how to account for whatever wealth we manage to produce, and project what our society will actually be organized to do in the years ahead.
For a while in the 1990s, the idea was a "service economy," kind of like the old fable of the town whose inhabitants made a living by taking in each other's laundry -- only in our case it was selling hamburgers to tourists on vacation from their jobs making hamburgers elsewhere, or something like that.
Then came the idea of the "information economy" in which making things of value would no longer matter, only the processing and deployment of information (sometimes misidentified as "knowledge"). This model seemed to suggest a yin-yang of software engineers who made up games like "Grand Theft Auto" serving the opposite cohort of people who bought and played the game. If nothing else, it certainly explained how lifetimes could be frittered away on stupid activities.
That illusion yielded to the housing bubble economy, which actually did produce a lot of things, but not necessarily of value -- for instance, houses made of particle board and vinyl 38 miles outside of Sacramento. It was a tragic and manifold waste of resources, as well as an insult to the landscape. But the darker side of the housing bubble lay in the world of finance, where a vast empire of swindles was constructed to support the Potemkin facade of production homebuilding.
Now we are in a strange period when those swindles are unwinding. The people who run the finance sector -- the Wall Street investment banks, hedge funds and ratings agencies, the Federal Reserve, and the US Dept of the Treasury -- in desperately trying to prevent the unwind, have rapidly ramped up another new economy based entirely on the buying and selling of risk. Risk, as a pure abstraction unconnected to any real capital activity, is all that's left to buy and sell after all other plausibly practical vehicles for finance have failed.
While a lack of transparency in the individual risk vehicles has been an object of complaint over the past year, the system as whole is transparently absurd. The system is also abstruse enough to prevent most mortals (including many employed in the system) from understanding its operations. But the general public and the news media are virtually helpless to intervene in this last gasp racket, so the probability increases that it will do tremendous damage to whatever remains of the US economy.
One feature of the risk economy is the Federal Reserve's new willingness to absorb any sort of crap collateral in exchange for massive cheap loans to insolvent companies and institutions. The Fed has, in effect, made itself the world's largest financial shit-magnet. It has already taken in a few hundred billion in securities based on non-performing real estate loans, and has now opened the window to securities based on non-performing credit card debt, car loans, and other miscellaneous IOUs still drifting un-hedged in the banking ether.
It's a mark of our collective desperation to avoid the consequences of so much reckless behavior that no credible authorities have stepped up to denounce this racket -- no Fed governor, no politician of standing (including the candidates for president), no newspaper-of-record. The Attorney-general of New York, Andrew Cuomo, may be quietly cooking up some cases in the deep background, but the SEC and the federal banking regulators hung up their "out-to-lunch" signs on this long ago.
Meanwhile, the basic situation is this: the world is awash with bad investment paper. The standard of living in the US can't be supported on debt anymore. The people of the US don't produce enough real value to service their debts. Institutions can no longer be supported on debt gone bad. Something's got to give -- meaning something has to bring the US standard of living down to a level consistent with our declining actual wealth.
Everything else going on right now is a dodge. The Fed maneuvers, the "coordinated actions" of the western central banks, the postponements of default, the non-disclosure of contents in bank portfolios, the pretense that risk alone is a kind of fungible resource that can be endlessly traded to generate fees -- all this fucking nonsense will only make the eventual unwinding much worse.
Personally, I doubt that it can go on more than a few more months. The velocity of everything is going up past the "red line" where things really fly apart. The increased velocity of non-performing mortgages and deadbeat credit card accounts is one thing that can't be hidden or escaped. America will feel and see very vividly when the repossession teams rush families from their homes, when the pickup truck is taken away, and when the pink slip appears in the pay envelope. Meanwhile all the higher-end banking shenanigans will only debase the dollar and make it more difficult for people already in distress to buy gasoline and food.
If the bankers and treasury officials collude to prop up one more failing big bank a la Bear Stearns, the political fallout for Wall Street could be lethal. In any case, I think we will have a way different sense of ourselves as a society by the time the election comes.