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December 25, 2006
Plum Puddings
The latest staggering atrocity from the cloaca of business-and-finance as reported by AP at the end of last week:
Pfizer Inc.'s former chief executive, Henry A. McKinnell, who was forced into early retirement in part because of investor anger about his rich retirement benefits, will get a retirement package totaling more than $180 million, a new regulatory filing shows.
McKinnell's package, which the company disclosed in a filing with the Securities and Exchange Commission on Thursday, included an estimated $82.3 million in pension benefits, $77.9 million in deferred compensation and cash and stock totaling more than $20.7 million.
In other words, McKinnell was forced into early retirement with the very groaning cargo of swag that irate "investors" (i.e. shareholders) fired him for lining up for himself. His punishment is that he gets to enjoy the booty 19 months earlier than if he'd worked to the end of his contract.
During McKinnell's tenure, 1999 to 2006, Pfizer's per share price went from roughly $50 to $30 (adjusted for stock splits). With about seven billion shares in existence, this reflects a loss in value for Pfizer of $140 billion under McKinnell's leadership.
A board of directors exists to look after the interests of these shareholders. But gosh, what do you know -- a glance at the Pfizer board shows that the chairman was. . . Henry A. McKinnell!
The Pfizer board of directors is made up of 15 members. It includes such luminaries as Ruth Simmons, president of Brown University; Stanley Ikenberry, former president of the University of Illinois; Nobel Prize winner (medicine) Michael S. Brown; Dennis A. Ausiello, former head of Massachusetts General Hospital; Constance Horner, former head of the US Civil Rights commission; Dana G. Mead, chairman of the board of directors of the company that runs the Massachusetts Institute of Technology. -- plus seven venal corporate hacks from the nation's business sector (not including McKinnell himself): M. Anthony Burns (Ryder Trucks); Robert Burt (FMC Chemicals); W. Don Cornwell (Granite Broadcasting and Avon Products); Jeffrey Kindler (Pfizer); George A. Lorch (Armstrong Floors); William C. Steere (Pfizer), and William Howell (JC Penny).
Now, at some point, the Executive Compensation Committee of this board (composed of four directors) recommended McKinnell's pay package, including terms of severance, in case things didn't work out. Presumably, the committee then presented their recommendations to the full board for a vote. Aside from the massive clumps of deferred compensation ($77.9 million) and pension benefits ($82.3 million), the package included $12 million in pure severance pay, vested stock grants ($5.8 million), and a plain vanilla annual bonus of $2.15 million.
It is amusing that a CEO who made $140 billion worth of stock value evaporate during his tenure would be regarded as worthy of a performance bonus. But the sweetest little sugar plums in the stocking are the $576,573 worth of medical and dental coverage (so Hank doesn't have to wait in some emergency room with a bunch of illegal Mexican sheet-rockers), and finally the $305,644 that McKinnell will get for paid vacation days he didn't take.
What I'd like to know is how come Pfizer's directors are not sitting down right now with investigators from the Securities and Exchange commission, or the US Attorney's office, or the New York state Attorney General's office and answering some questions as to how they acquiesced in the looting of this corporation. Surely, there are only two ways that the directors' behavior can be explained: as either the wildest sort of fiduciary failure or flat out venality -- which would naturally lead to either civil trials or criminal prosecutions.
The case of Ruth Simmons is especially interesting. The President of Brown University has been campaigning tirelessly for reparations for the descendants of American slaves. Perhaps before long she will meet up with somebody campaigning for reparations for Pfizer shareholders, and for American citizens who are charged unconscionable prices for pharmaceutical products.
Somewhere in this nation, perhaps on a midwestern university campus, or toiling on the receiving dock of a Best Buy store, there are sharp young people who are not failing to notice the stupendous economic injustice that saturates the system as it is currently running. These young people may emerge as the Dantons, Robespierres, and Saint-Justs of the 21st century. It's not a happy prospect.
Today, the New York Times reported that a new hyper-exclusive resort for the "ultra-rich" called Unlimited Speed is being developed in Georgia (where else?) featuring a private Nascar-quality race track where Goldman Sachs bonus boys and other such grandees can get their rocks off. They'd better fortify the place well. They'd better put a wall around it with an electrified fence and a death strip, because otherwise, sooner or later, if the regulatory authorities do not act, some very pissed off and energetic young Americans are going to steal into places like this and deal out some rough justice.
Merry Christmas everybody.
December 18, 2006
Not So Wonderful
It's a Wonderful Life, Frank Capra's 1946 Christmas card to America, is full of strange and bitter lessons about who we were and who we have become. It also illustrates the perversity of history -- the fact that things sometimes end up the opposite of the way we expect.
The movie concerns the life and career of one George Bailey (Jimmy Stewart) and his neighbors in the prototypical main street town of Bedford Falls. The story's arc runs roughly from about 1910 to the 1946 "present." By the 1920s, young George yearns to break free of the "crummy little town" (as he calls it), but circumstances keep him bound to it through the years, and to the family business, a little local "building and loan" bank of the kind that also used to be called "thrifts" and later "savings and loans," now extinct institutions.
Bailey Building and Loan gets whipsawed by the boom of the 1920s and then the Great Depression. World War Two comes and goes. Over the decades, George is bedeviled by the town villain, scheming rival banker Mr. (no first name) Potter (Lionel Barrymore), who is always trying to shut down or take over Bailey Building and Loan.
Eventually, Mr. Potter gets the better of George, who attempts suicide, but is saved by an avuncular guardian angel named Clarence, who shows George how much worse off his town (and, by extension, the world) would be if George had never been born. The rest is George coming to his senses on Christmas Eve, amid caroling and bell ringing, realizing how wonderful all the vicissitudes of small town life, and family, and banking really have been.
It's a splendid, heartwarming movie in many ways (and I am not being facetious). It was released a year after the awful ordeal of World War Two ended -- which itself had followed the decade-long tribulation of the Great Depression. America was weary but victorious. Democracy and decency had triumphed over manifest evil -- but the memory of all that hardship lingered on. In 1946, we were a chastened, earnest, prudent, generous, and quietly confident nation of heroes who had managed to lick hard times and Hitler.The Jimmy Stewart portrayal of George Bailey was supposed to embody all the home front virtues in our national character that made victory possible.
Here's the weird part though. The main business of Bailey Building and Loan was financing the first new suburban subdivisions of the automobile age. In one of the movie's major set pieces, George Bailey opens Bailey Park, a tract of car-dependent cookie-cutter bungalows, and turns over the keys to the first house to the Italian immigrant Martini family. Had the story continued beyond 1946 into, say, the 1980s, (with George Bailey now a doddering Florida golfer), we would have seen the American landscape ravaged by suburban development, and the main street towns like Bedford Falls gutted and left for dead. That was the perverse outcome of George Bailey's good intentions. We also would have witnessed the Savings and Loan Crisis of the late 1980s, when changes in federal regulation opened the door to an orgy of looting and grift (acted out largely in suburban development scams) so extravagant that a quarter-trillion dollar federal bail-out was eventually required to cauterize the economic infection.
At a crucial point in the story, Clarence the guardian angel takes George Bailey on a tour of Bedford Falls as-if-George-had-never-been-born. Only the town is named Pottersville now. Main Street is lined with gin mills, strip clubs, and dance halls instead of wholesome banks, groceries, and pharmacies. (Oddly, casinos are absent, because in 1946 we lacked the vision to see how truly demoralized our nation could get.) Prostitutes ply the busy sidewalks. Now the weirdest thing is that Pottersville is depicted as a busy, bustling, lively place -- the exact opposite of what main streets all over America really became, thanks to George Bailey's efforts -- a wilderness of surface parking, from sea to shining sea, with WalMart waiting on the edge of every town like Moloch poised to inhale the last remaining vapors of America's morale. Frank Capra could imagine vibrant small towns turning their vibrancy in the direction of vice -- but he couldn't imagine them forsaken and abandoned, with the shop fronts boarded up and the sidewalks empty, which was the true tragic destiny of all the Bedford Falls in our nation.
Most ironically, today America's favorite main street town, Las Vegas, is Pottersville writ large, and most Americans see absolutely nothing wrong with it. How wonderful is that?
December 11, 2006
Wretched Excess
Since the financial "industry" decoupled from the US economy sometime in the past decade, it has been hard to tell, from a chicken-and-egg point-of-view what comes first -- obscenely huge year-end bonuses for Wall Street playas, or jacked up market indices. I mean, do these paper-shufflers get paid extra millions because the Dow goes over 12,000, or do they game the Dow over 12,000 to justify the extra millions? (Or game other sub-systems such as the commodities markets, the derivatives sector, the mortgage rackets, mergers-and-acquisitions, et cetera.) Echo answers. . . .
CNBC reports that fifty executives at Goldman Sachs will each receive bonuses of $25 million or more. Yes, you read correctly. $25 million each. And the reason, according to CNBC is that these sharpies would otherwise jump ship for hedge fund nirvana if not lavishly tipped. Morgan Stanley and Merrill Lynch also will each smack twelve employees over the head with golden stockings full of $25 million. Note, Goldman Sachs was rumored to have driven the price of oil down for the election season by applying huge sums of money to twiddle the futures market, and note, too, that the Secretary of the Treasury, Hank Paulson, was CEO of Goldman Sachs until the middle of last summer. But, of course, I am fond of saying that I am allergic to conspiracy theories.
I do have another theory, though. I admit, it's just a hunch, a wild-ass guess, a twinge in the gut. It's that come 2007 New York's new governor, Elliot Spitzer, and the new state attorney general, Andrew Cuomo, will go after these grifters like a couple of mastiffs in a basement full of rats -- just like Spitzer went after Dick Grasso, the CEO of the New York Stock Exchange, who, in 2003, received a "deferred compensation" package of $140-million, awarded by a hand-picked NYSE compensation committee composed of executives from the very listed companies Grasso was supposed to regulate. His venality unbound, Grasso then arranged to receive an additional $48-million when the embarrassed NYSE board made him step down from his job.
Of course, this whole sordid tale raises some ineffable questions, such as, how exactly does one's standard of living improve after, say, the first $140 million? How many private jet planes does it take to summon up that certain glow of contentment achieved among the testosterone-for-lunch-bunch? Anyway, the Grasso case is currently awaiting trial. So far, the New York State Supreme Court issued a summary decision ordering him to repay "a significant amount" of the gazillions he walked away with. The cheeky Grasso countersued the NYSE for "besmirching his name." Well he can sue me, too, because I am here to tell you that Dick Grasso's behavior as fiduciary for a non-profit corporation should be heralded from sea to shining sea as the most disgraceful species of money-grubbing turpitude conceivable in a sentient creature above the level of a howler monkey. I hope he spends the rest of his life doing Chinese fire drills in the civil courts and finally dies by getting sucked into the air intake of the starboard engine of his private jet five minutes after the re-po man shows up with a warrant for chattel surrender.
Excuse me. I am momentarily afflicted with the vapors. Let's just say that the inauguration of Messers Spitzer and Cuomo is but weeks away now, and leave it at that. Stay tuned.
I have another, slightly different idea, though, in a another vein. Casual observers like myself have described the US economy as being in a hideous state of unbalance. On the one hand, we have the aforementioned Wall Street smoothies raking in unbelievable bonus fortunes, while the rest of the nation sinks into home equity quicksand wearing lead-lined suits manufactured in ARM mortgage reset hell. The afflicted house owners can't even sell their houses because the market is glutted with houses just like theirs, now worth less than the mortgages owed on them and, guess what, the supply of Greater Fools has finally dried up.
Why doesn't the Wall Street bonus crowd, as a public service, step in and invest all their supernaturally-acquired dough in the suburban house market? To sort of even things out and prop things up. Since so much of their bonus dough was probably generated through the magic of mortgage-backed securities translated into hedges, carry plays, leveraged derivatives gambits, commodity shorts, credit default swaps, and other acts of financial legerdemain, then perhaps they owe it to salt-of-the-earth America -- the distressed home-owner middle class (not to mention the home-builders choking on oversupply of their "product") -- to step into the breach and pony up for some of those houses -- to prove that you really can base a post-industrial economy on real estate sales.
The Moral High Ground
No, this blog is not about Iraq or the new Democratic congress. It's about Kramer, Cosmo Kramer, or the actor, Michael Richards, who played him on TV's Seinfeld series. By now the whole world has heard about Richards' outburst onstage at the Laugh Factory. Forgive me if this now seems like hopelessly old news. But I have been reflecting on the incident.
My girlfriend said this morning that she thought it might have been part of an act that just backfired horribly, a riff gone wrong. I disagreed. Based on the rough digital recording I saw -- the same one everybody else saw -- Richards definitely lost it. He was seriously angry. He unloaded. He fell into the swamp of the moral low ground and sank up to his lips in quicksand. Supposedly, he was being heckled by some black audience members. As far as I know, next to nothing has been reported about the content or manner of their heckling, except that Richards wasn't being funny enough for them.
Richards responded by shrieking "Niggers! Niggers!" at them and added (I paraphrase) that if it were fifty years ago they would have been lynched with forks stuck up their asses. It was a pretty harsh retort to heckling. Within the context of America's beleaguered recent history, advocating lynching and torture on account of race is about as incorrect as it gets. In any case, Richards then suffered media crucifixion for his transgression, followed by the now ritual public apologies and promises to go have his head examined.
Late last night, I was surfing around the cable channels when I chanced upon an HBO show called P Diddy's Bad Boys of Comedy, or something like that. I stuck around and checked it out. One comic (sorry, I forget his name) must have used the word "nigger" thirty times in the course of his act. He referred to the (mostly black) audience as "niggers" and his riffs were generally centered around the amusing things that (his word) "niggers" do, especially in sexual situations. The comic's exertions seemed warmly appreciated by the audience.
The foregoing has prompted me to arrive at some conclusions about what is happening in our country. There used to be a region of the collective spirit called the moral high ground. It was the place where the best intentions came to consort with the possibilities for sociopolitical progress, where honesty frolicked with bravery. It was the place where goodness and righteousness resided, a sunny, well-watered Arcadian glade within the larger low ground wilderness of human failing and sin. The high moral ground was fully racially integrated.
The social justice campaign of the 1960s was very much a drama enacted out of the moral high ground, with all the vicious monsters of the low ground wilderness prowling the margins. Up on the moral high ground was Martin Luther King, Lyndon B. Johnson, Rosa Parks, James Meredith, the Kennedy brothers, and literally a holy host of others. Malcolm X started out down in the low ground and journeyed up onto the high ground. The monsters out in the low ground were the various southern racists who opposed racial integration, the KKK crackers who killed Goodman, Cheney, and Schwerner in Mississippi, the obstructionist elected law-makers like James Eastland and Strom Thurmond, and so on.
Where race issues are concerned in America, white people have had to remain officially up on the moral high ground. White people are not off the hook for slavery and Jim Crow serfdom and never will be. There's no going back to these things and no excuse for them. White America cannot afford to abandon the moral high ground, or even the pretense that they occupy it.
But a curious thing has happened to black America. It has largely vacated the moral high ground, especially in the personae and behaviors represented in popular culture. What would Martin Luther King make of Snoop Dog and Fitty Cent? Indeed, what would he make of a whole pop culture dedicated to portraying young black people as violent criminals and prostitutes? It's significant, by the way, that these performers characterize their antics as "representing." Representing what?
As for political leadership, what would Martin Luther King make of Al Sharpton, engineer of the disgraceful and mendacious Tawana Brawley scandal, who has been unofficially pardoned by the media (and by extension, the public). What would Martin Luther King make of P Diddy's Bad Boys of Comedy?
White people are so frightened of appearing to step beyond the moral high ground that even academic discussions of "the N-word" employ this laughably craven euphemism. It's interesting to note that at the same time the talking heads on CNN are palavering over "the N-word," P Diddy's and Russell Simmons' employees are over on HBO calling each other "niggers" with abandon. Is it really okay for us to be two separate societies with two separate standards of behavior?
I'm not convinced, either, that it is enough for some black comedians to declare that they will stop brandishing the word "nigger" in their acts. A character in William Faulkner's novel, The Sound and the Fury says, “a nigger is not a person so much as a form of behavior; a sort of obverse reflection of the white people he lives among.” Isn't this what Snoop Dog and Fitty Cent are all about? And isn't it to some degree behavior engineered to make white people uncomfortable?
White America has for many years dedicated itself to sucking up its own discomfort. When someone like Michael Richards blunders beyond the moral high ground and reveals the anger and resentment underneath this stoical mask of tolerance for "diversity," white America freaks out and rushes to anathemize it. White America does not want its discomfort to show, so it sucks up everything from the Tawana Brawley affair to the OJ Simpson verdict to the televised daily doings of Snoop and Fitty (which white children emulate as fun behavior).
White America does not want racial conflict -- and understandably so -- and will humble itself to any extent to avoid it. To some degree, Hip-Hop is black America's reminder to white America that there are a lot of heavily armed and vicious young men out there who might call off their incessant partying and kick off a national scale gang war. This is white America's worst nightmare, much worse than Iraq, or global warming, or peak oil. This is also, by the way, the reason that white America idolizes Barack Obama. He is the first figure on the scene in thirty years who offers the promise of leading all of America back to the moral high ground.
November 27, 2006
Last week, I had one of those clarifying moments when the enormity of the American fiasco stirred my livers and lights again. I was riding in a car at sundown between St. Cloud and Minneapolis on I-94 through a fifty-mile-plus corridor of bargain shopping infrastructure on each side of the highway. The largest automobile dealerships I have ever seen lay across the edge of the prairie like so many UFO landing strips, with eerie forests of sodium-vapor lamps shining down on the inventory. The brightly colored signs of the national chain fried food parlors vied for supremacy of the horizon with the big box logos. The opposite lane was a blinding river of light as the cars plied north from the Twin Cities to these distant suburbs in the pre-Thanksgiving rush hour.
All that tragic stuff deployed out on the prairie was but the visible part of the storm now being perfected for us. On the radio, Iraq was coming completely apart and with it the illusion of America being able to control a larger set of global events -- with dire implications for all the glowing plastic crap along the interstates, and the real-live people behind the headlights in those rivers of cars.
The main fresh impression I had amidst all this is how over it is. The glowing smear of auto-oriented commerce along I-94 (visible from space, no doubt) had the look of being finished twenty minutes ago. Beyond the glowing logos lay the brand new residential subdivisions full of houses that now may never be sold, put up by a home-building industry in such awful trouble that it may soon cease to exist. If suburbia was the Great Work of the American ethos, then our work is done. We perfected it, we completed it, and, like a brand new car five minutes after delivery, it has already lost much of its value.
The chief failure in American politics lately has been the inability to appreciate the relationship between how we live here and how other people in other lands support us with their resources -- oil from the Middle East, human labor and money saved from the fruits of human labor from the Far East. The oil obviously runs all the cars and the money from China and Japan supports our debt (and incidentally pays for building ever more big box stores and fried food emporia). The Middle East is now so close to exploding that we may not get so much oil from them in the years ahead. China and Japan have stepped back from buying American debt in the form of US Treasury certificates.
Even if there were no exogenous forces operating, the proverbial Man-From-Mars casual observer would have to conclude that America has built all the shopping venues it will ever need (and far beyond), and certainly more single-family housing subdivisions useful only in a happy motoring meta-system. But the exogenous events are out there and they are going to assert their power to make us uncomfortable and to alienate us from the very stuff that we have poured all of our wealth and spirit into.
The New York Times headlined yesterday that the US government might try to start negotiations with Iran and Syria over the fate of Iraq -- an idea so preposterous that it might have been a wire-story from The Onion. Iran and Syria have no interest in the matter whatsoever except in the failure of America to control events, and the humiliation entailed by that failure, which is happening on its own. So the story is a clear signal of our desperation that we are even pretending to make overtures.
For the US military this is a tragedy of classical Greek dimensions, a playing out of implacable forces despite its heroism or even good intentions. But for the American public, back home, enjoying the bright lights of the WalMarts and the steaming heaps of baby back ribs, and the comfort of the ride home with the latte plugged into the cup holder and Jay-Z's inspirational thoughts playing on the car stereo -- it's really the end of the road.
I've been saying for a long time that as our illusions dropped away, the US economy would fall on its face. I think the process is underway, especially with last week's movement of the dollar against the Euro. All the elements are now set for a full-throttle depression in which currency loses value while credit dries up and incomes are lost. You get a fire-sale of assets that behaves like a deflation while the dollar itself inflates. The Federal reserve can't possibly drop interest rates if foreigners will not buy our bonds.
Losing your house to the re-po man is a major illusion-breaker. The housing bubble has popped and entered a downward self-reinforcing feedback loop that will be understood as a death-spiral of valuation. Even if nominal house prices stayed close to where they are, dollar inflation would signify a real drop in value. The jobs associated with the bubble -- everything from the legions of house-framers to the realtors to the creative mortgage hawkers to the Crate-and-Barrel furniture elves -- will drop into a black hole. Mortgage obligations will not be met, credit card payments will stop, house refinancings will no longer be possible as equity dissolves, the WalMart associates will get their pink slips, the vacancy signs will go up in the strip malls, and a mighty sob will be heard above the prairie wind.
This is really a tight spot. Wider war in the Middle East is hardly out of the question, with Iran and a broad array of jihadistas emboldened by America's flounderings in Iraq. A year from now, perhaps, or less, we will lose our access to a substantial portion of the imported oil that we run all our stuff on. The sodium vapor lamps will flicker out. The last taco will be served. The US public will have to start paying attention and making other arrangements. I believe what Garrison Keilor says about the people in Minnesota. Scratch below the surface, you'll find a thoughtful, practical mentality. I believe that when they can't do anymore of what they're doing now, they'll turn around and do something else.
November 20, 2006,
Last week, Cambridge Energy Research Associates (CERA) released a report saying that there was no imminent global oil problem and that enough new oil would come on-line to permit current levels of consumption -- and beyond! -- for more than a hundred years into the future. CERA's stunningly disingenuous report flies in the face of everything that is known about the current world oil situation.
CERA is fronted by Daniel Yergin, author of the Pulitzer Prize-winning history of the oil industry, The Prize. Apparently, Yergin has parlayed his legitimacy as an historian into running a disinformation service wholly owned by the IHS Corporation, a lobbying and public relations firm serving the defense, oil, and automotive industries. Apart from making a lot of money as executive vice-president of a company with about $300 million in net annual profits over about $500 million in gross revenues, it is a little hard to discern what Yergin's motives might be in shoveling so much bad information into the public arena.
Much of CERA's "story" hinges on the supposition that snazzy technology will allow the recovery of "oil" (liquid hydrocarbons) from solids that require costly mining and processing operations to covert them to liquids. In effect, CERA says that tar sands, kerogen shales, coal-to-liquids, plus super-deep ocean drilling will not only make up for currently depleting fields of easily-acessed liquid sweet crudes, but actually surpass current total production. This would seem, on the face of it, to violate everything that is known about Energy Returns on Energy Invested (ERoEI). And, in fact, the very companies working the tar sands in Alberta, Canada, have just this year steeply raised their dollar estimates of what it will take to convert that stuff into usable liquids -- it ain't a pretty story.
CERA does not acknowledge some of the fundamental facts of the current situation, for instance that the world's four super-giant fields responsible for at least 15 percent of total global production since 1980 (Ghawar in Saudi Arabia, Burgan in Kuwait, Daqing in China, and Cantarell in Mexico) have all passed peak and turned down into depletion. CERA doesn't acknowledge that discovery of new oil peaked worldwide in the 1960s with more than 40 years of steady decline since then. Or that there has been almost no provable meaningful discovery the past several years (and Chevron's as yet unproved deepwater "Jack" claim of 3 to 15 billion barrels total is not significant in the context of a world that now burns through 30 billion barrels a year.) CERA doesn't acknowledge that the predicted US peak of 1970 was absolutely on target and that our domestic production of regular crude has fallen from around 10 million-barrels-a-day in 1970 to under 5 m/b/d now (still declining yearly, including the Alaska North Slope fields). CERA doesn't acknowledge that current total global oil production through 2006 is at least absolutely flat and more likely falling (depending on whose numbers you look at), which would tend to indicate that the world has bumped up against the ceiling of its all-time total capacity. CERA doesn't acknowledge that exports are down nine percent this year because the nations with export capacity have growing populations and economies that require more and more of their own oil.
The CERA story also tragically gives aid and comfort to those who deny that climate change needs to be taken seriously, since it is saying, in essence, that we can easily continue pumping carbon dioxide into the atmosphere -- by burning as much coal as we can. The CERA report amounts to "don't worry, be happy."
Perhaps most tragically, there is no corrective for this mendacious PR. It's not against the law to spread lies about a business venture -- which is what the oil industry is -- even if its truthful condition is critical to the functioning of our society. There's no oversight committee or agency authorized to investigate public relations activity. It's a basic case of buyer beware. Unfortunately, the buyers in this case are America's political leaders and the news media responsible for informing the public.
The mainstream media last week swallowed CERA's PR hook, line, and sinker, without a single reflective burp. It even drove the prices on oil futures markets down a few dollars a barrel -- though the price was back up by Friday. The only cogent analysis of the CERA report took place on the Internet, and for the most part on a single site: TheOilDrum.com, which is the best-informed forum of debate on these issues operating in the United States.You can go directly to their initial response, composed by Dave Cohen by clicking on this link. It's worth taking the trouble to read.
November 13, 2006
The day after the impressive Democratic election victory, Senate Majority Leader-to-Be Harry Reid declared that a top priority for the new congress would be policy leading to "energy independence" for America. The time of jubilee will certainly come, but not in the way Harry Reid thinks it will -- nor in the way the rest of the country imagines this idea.
When politicians flog the term around -- "energy independence" -- they invariably mean that we will continue enjoying the happy motoring utopia by other means than imported oil (which makes up 70 percent of all the oil we burn). Get this: the day is not far off when, for one reason or another, the flow of imported oil to the US will cease. But when that day comes, we will not be running our shit the way we have been running it. That day will be the end of the interstate highways, Walt Disney World, and WalMart -- in short, the way of life we are fond of calling "non-negotiable."
We are not going to run that shit on coal liquids or tar sand byproducts or oil shale distillates or ethanol or biodiesel, or second-hand french-fry oil. Nor on solar, wind, nuclear, or hydrogen. You can run things on that stuff, but not the biggies we run at their current scale. If the Democrats really want to get serious and act responsibly, they'd better not squander whatever is left of our credit and collective confidence in a futile campaign to keep this racket going. They'd better prepare the public to start living differently.
Where to begin? They can start by recognizing that massive long-haul trucking of goods has to end and be replaced by improved, electrified rail plus water transport -- with trucks used only for the final, local leg of the journey. To reach this point of recognition, the Democrats will have to overcome the entrenched interests of the trucking industry -- but, by now, most of the truck drivers in this country have been successfully converted into right-wing Republican zombies, so it might not be so difficult to overcome them. They will also have to overcome WalMart and its "warehouse on wheels" composed of thousands of 18-wheelers full of discount goodies incessantly in motion for "just-in-time" delivery to the big box outlets. And, of course, by "WalMart" I mean not only the company itself but the millions of Americans who think they can't live without it.
Do the Democrats have the guts to go against this tide? My guess is probably not. But, get this, too: sooner rather than later, whether we like it or not, we're going to have to replace WalMart with an entirely different system for retail trade -- probably resembling the system of multi-layered local trade networks that were destroyed by WalMart. And the further off we put this task, the more difficult it's going to be. So, real political leadership will have to inform the public that the time has come to start making other arrangements.
Instead of supporting the fiction that happy motoring can continue forever, the Democrats should create an "Apollo Project" to restore the US passenger rail system, too. (We hear a lot about an "Apollo Project" to develop a miracle fuel for our cars, but that ain't gonna happen and we'd be much better off devoting that investment to public transit.) This will baffle and piss off a lot of the public, but it is necessary if we are going to survive as an advanced civilization. Please notice, by the way, that I am not suggesting we deprive anyone of the right to drive a car, only give them the option of getting somewhere by train instead. And don't worry, the politicians will not have to do a thing to restrict automobile use -- circumstances will do it for them as the world plunges into a permanent oil crisis that does not go away.
Another thing the Democrats can do with their new power is reorient the activities of the US Department of Agriculture -- and especially legislated cash subsidies -- away from the "agribusiness" Big Boys to small-scale, local farmers. We are silently and stealthily approaching a crisis situation with the American food supply. Most localities now only have a two or three-day food supply, and any number of crisis events in the offing could disrupt the three-thousand mile chains of frozen pizzas and Cheez Doodles that the public depends on for basic sustenance. We desperately need to reactivate what's left of the productive land around our towns and cities, and to repopulate it with people who can grow real food.
The Democrats will have to contend with the imminent cratering of suburbia whether they like it or not. The "housing bubble" is the first leg down for a development pattern that has no future. What's out there now is a vast over-supply of exactly the kind of houses in the kinds of places that will not have value in an energy-scarcer world. The overbuilding of tract houses is a tragedy caused by reckless and irresponsible behavior in the lending industry and in the government officials who regulate interest rates and the credit supply. The investments are already lost, and the individual carnage is going to be extreme, but the depth of the problem will reveal itself slowly for two reasons: 1.) both homeowners and realtors will desperately try to maintain the fiction that these properties still have high value, and 2.) individuals who are in trouble with their mortgage payments will never reveal their dire situation to their friends and neighbors because it is too humiliating. The news about default and re-po will only arrive with the moving vans (if the individuals can afford to hire them).
The collapse of suburbia will be the Democrats chief inheritance from the "free-market" economically neo-liberal Republicans who were too busy money grubbing at all levels to notice that there was such a thing as the future. The tragedy of suburbia will finish off whatever is left of Reagan-Bush1-Bush2 Republicanism -- although the truth is that Bill Clinton did as much to promote this way of life, indeed, to turn suburban development into a new basis for the US economy when manufacturing crapped out.
The nation as a whole -- however it reconfigures itself politically in the aftermath of this fiasco -- is going to have to come to grips with a lot of hard truths. One will be that "energy independence" means a whole different scale and system for daily life, not just "new and innovative" fuels for cars. As long as we are stuck in a foolish national wish-fest aimed at keeping all the cars running and propping up all the trappings of car-dependency, we will remain lost in a wilderness of our own making. And whoever the next president of the US turns out to be, whether a Democrat or the leader of a party that has not yet coalesced, will have all that he-or-she can do to keep this nation from completely falling to pieces.
November 6, 2006
If an American political party was ever in for an ass-kicking, it's the current incarnation of the Republicans. Everyone has finally turned on them, even their neo-con war strategists -- Richard Perle and Company -- who told a Vanity Fair reporter last week that George Bush didn't know how to run a war that seemed like a good idea before they handed it over to him.
Meanwhile, just days before the election, televangelist Republican cheerleader Ted Haggard gets nailed for consorting with a male prostitute while on crystal meth -- taking up the baton in the GOP relay-race of grifters and pervert-hypocrits, Tom Delay, Jack Abramoff, Duke Cunningham, Bob Ney, Mark Foley, David Safavian, et al -- and the mid-term vote begins to look a little gnarly for the family values crowd.
Let's say the Democrats win control of at least one house of congress and possibly two. Are they going to shut down the project in Iraq? I doubt it. Badly as it has worked out, the alternative of withdrawing the US military presence there may be worse. Anyway, we'd still be sticking around the Middle East -- in Qatar and Kuwait and a few other places -- and we'd have to stand on the sidelines and watch Iran gobble up the substantial oil resources around the Tigris / Euphrates delta region. What would be the remedy for that? Invade Iraq all over again?
I confess, what bugs me about my Democrats is that they seem to think we can just duck out of the contest for Middle East oil and keep enjoying the happy motoring fiesta -- which, by the way, is not just the way we live in this country but also the basis of our economy, when you sweep aside all the bullshit. Contrary to what a lot of utopian Democrats wish, it will never be prime-time for ethanol, bio-diesel, hydrogen, or twenty other nominees as replacements for gasoline -- at least not the way we run things now. Driving a Prius might induce raptures of eco-moral superiority, but changing the zoning laws would produce a better outcome -- and that's just too hard.
It would be nice if the Democrats put forward some concrete policy ideas for moving this society away from extreme car dependence and continued suburban sprawl-building -- for instance, a federal project to repair the passenger rail system that was once the envy of the world and is now so fucked up that the Bolivians would be ashamed of it -- but the Democrats have been too brain-dead, too chicken, and too distracted by sex-and-race politics to actually lead the American public. The only change they have really beat the drum for is gay marriage, which more than a few people of sound mind regard as something that will not necessarily make the USA a better place.
The big fear about a Democratic-controlled congress is that, in the absence of any good ideas for transitioning the nation for a post-oil existence, they will put all their new power behind a grand inquisition against their defeated rivals. Ever since the Watergate hearings, we've gotten into the habit of thinking that all tragic political events can be corrected or compensated for by holding investigations. This is based on the seemingly logical idea that if we could only find out what went wrong with some affair -- Iran-contra, Nine-Eleven, WMDs in Iraq -- then we wouldn't repeat the mistake. But history doesn't really repeat (though it sometimes rhymes, thank you Mark Twain). And so our investigation mania had become as self-defeating and addictive as our behavior around automobiles.
Reality never did get much traction among the candidates in this election season. Neither party truly recognizes the implications of our energy predicament, or wants to talk about it. It will take a shock to the system, and there are several in the offing. The complex arrangements we depend on these days will eventually respond to reality even if we don't. I nominate the financial system as the one most likely to seize up first, since it is burdened with extraordinary perversities producing unprecedented distortions in the basic matter of what constitutes value. The oil markets have enjoyed a season of supernatural stability, but the home furnaces are now running and the inventory sedulously built up before election day is starting to draw down again. There are still nearly two months of 2006 left and a lot can still happen.
The fate of George W. Bush in the twilight of his tenure might invoke spasms of nausea in the casual observer. His own party will use him as a dumpster for their recriminations and regrets. He's sure to face some additional horrific crises in the more than two years left. The economic wreckage that he's leaving behind will become manifest to everybody as a maelstrom of bad credit sucks houses and family futures into an abyss of insolvency. His previously loyal minions will begin to inform the magazine reporters -- a la Richard Perle and David Frum -- of all his odd little personality deficiencies, like an inability to pay attention. If he's lucky, he'll get a blow-job in the vicinity of the oval office and nobody will ever hear about it.
But remember this: history is not going to stop because Nancy Pelosi is having a bad hair day.
October 30, 2006
My travels last week took me to small college town in Georgia and into the heart of Vermont, and the contrasts were instructive. To protect some sensibilities, I call the Georgia town "Peachville." There are lots of places like it down in Dixie, and they all suffer from similar problems.
Peachville's surrender to the tyranny of the automobile is total. For a region whose people like to yap about "defending freedom," their own capitulation to the car is complete. Practically every street in this town of 40,000 has been turned into a multi-lane mini-freeway. If you wanted to walk, or needed to walk -- and a number of faculty members at the college where I spoke said they did -- then your experience would be frightening and miserable because there are so few sidewalks, and the distances between things is scaled to cars, not people.
The quality of the buildings was another striking thing. The remnants of Peachville's little main street downtown was composed mostly of one-story buildings so ugly that they seemed to be missing some essential DNA. They were mean little brick boxes lacking any ornament, denoting an utter disregard for the public realm of the street. Along a couple of blocks, the town officials had recently carried out a "street upgrade program," meaning they added a center median with trees in a few places, but the buildings themselves are so weak and homely that no amount of tarting up the streetscape will make much difference.
All the town's recent wealth had gone into the construction of a franchise strip along the street connecting Peachville with a nearby interstate. Here were all the anonymous chain restaurants and familiar chain stores, and the four-laner was unencumbered with any frivolous decor like medians or sidewalks. This was the stuff they were really proud of. Of course, it is an infrastructure for daily living that has no future in an energy-scarcer world -- along with all the new McHouse subdivisions outside of town -- and yet this is the stuff that they identify with "freedom" and "progress." It will be hard for them to let go of it.
I had dinner that night in a little independent "authentic down-home" eatery across the street from an abandoned 1970s-vintage drive-in bank. Everything inside was made of plastic, and of absolutely the cheapest kind. The walls were adorned with signs or discolored cardboard prints in warped frames. There were two fluorescent light fixtures over our table that made the food look yellowish-purple. The food was like something you might be served in a state penitentiary.
I have some theories about southern culture -- I'm entitled to have them, and even express them, whether you like it or not. This is a region that was miserably poor until very recently. All the material progress, the new wealth of the Sunbelt, has been acquired rapidly over the last thirty years or so, and it has been delivered in the form of corporate products: tilt-up buildings, hamburgers, Ford pickup trucks, manufactured "homes," and cornucopia chain stores overflowing with plastic goodies. Building all this stuff and hitching employment rides with these ventures has dragged the cracker class out of the extremest poverty. Nearly universal air conditioning has also changed the picture, giving folks a reason to make an effort to do anything after the sun rises above the windowsills.
The reason their authentic down-home eateries are so bad is because for two hundred years they had a miserable diet of cornmeal, sugar, and pork fat, and a miserable concept of cuisine for presenting it. The reason the decor is so bad is because until fairly recently they lined the walls of their houses with newspapers and sat on benches. Electricity from the TVA also arrived relatively late in the game, and the finer points of interior illumination have not yet developed there. A restaurant dining room in Georgia is lighted the same way as a used car lot.
The sad fact is that the final blowout of the cheap oil age has been the foundation of the Sunbelt's prosperity. The whole nation is afflicted with the cancer of suburban sprawl, but down there it is invested with the highest values. It is their truth and beauty. To a certain extent, their former poverty embarrasses them and they want to forget about it, not celebrate it.
They seem to have no plans for coping with a daily life that is not based on cheap oil. They even resent the suggestion that they might have to. They will keep sending a disproportionate number of their young people into the military to help with the current project of securing future oil supplies by attempting to pacify the Middle East. Sooner or later that project will come to grief and the people of Georgia will have to make other arrangements like everybody else. But the process may be extremely traumatic for a people who have not allowed themselves to imagine a future different from the present.
I was in Vermont, two days later. I had dinner in the Bobcat Cafe on Main Street in Bristol. The place was full, the lighting was mellow, the furnishings were wood, the napkins were cloth, and the menu was composed of things other than cornmeal, sugar, and pork. Vermont, by the way, is also a mostly rural place that had been relatively poor for a hundred years before the 1960s. The customers in the Bobcat Cafe seemed to include all ranks of local society. I noticed one particular man sitting at the bar eating dinner on his own.
He was wearing work clothes. The back bar he faced while eating, where all the bottles stood, was a magnificent piece of 19th century carving. It represented an effort to create some beauty. It was lighted softly and carefully. It gave the guy something to look at while he ate his dinner and drank his beer, some beautiful forms to contemplate while his mind wandered among perhaps more mundane concerns. In Peachville Georgia, nobody would have ever thought of creating such a thing in the first place.
October 23, 2006,
History doesn't repeat itself, but it rhymes, Mark Twain famously observed. A hundred and fifty years (roughly) after the civil war, the United States faces another possible political convulsion. The earlier one was over slavery, a moral contradiction so stark and awful that an emerging modern industrial polity could no longer ignore it. The coming convulsion we face in the 21st century is not so much moral but no less stark: the collapse of a faltering industrial polity in the face of depleting energy supplies. Like the earlier dilemma of slavery, our national leaders refuse to face it.
The years just preceding the Civil War, the late 1850s, have some resemblance to our politics today. They were highly polarized. They produced outcomes in politics (the Kansas Nebraska Act, the Dred Scott decision) which allowed a vicious pro-slavery minority to impose their will on the rest of the nation -- just as a fundamentalist Christian minority imposes its will on the public today.
The 1850s were also a time of disarray in the political parties. The Whig party, which had more-or-less run things since the time of Andrew Jackson, dried up and blew away because it ceased to stand for anything. The opposing Democrats of that day had sold their souls to the pro-slavery interests. In this vacuum of cravenness, the Republican Party formed and nominated a failed one-term congressman turned railroad lawyer from Illinois named Abraham Lincoln to run for president.
Now, in 2006, we have two political parties in disarray. The Republicans are hemorrhaging legitimacy in an unsuccessful military adventure and a sewer spill of scandal. The Democrats are going Whiggish -- sinking in a bog of equivocation. And now along comes a first-term senator from Illinois, Barack Obama, as the most appealing figure of authority in a looming presidential contest.
Like Lincoln, Obama is not completely formed politically. His lean face, like Lincoln's face pre-beard, needs filling out, as do his ideas and prescriptions for leadership. What he has in common with Lincoln is a gift for plain and convincing rhetoric. After decades of spin, PC euphemizing, neocon proxy speech, and similar bullshit, the public sees Obama as capable of straight talk. He told the last Democratic convention that there were no Blue or Red states but only a United States -- and after the crowd heard that they wanted to trade in John Kerry like a bad wedding present.
Obama, who is not up for re-election this fall, has cut a swath through the heartland to boost other candidates and has generated huge admiring crowds. Time Magazine columnist Joe Klein said on NBC's Meet the Press show this week that the crowds of mainly Midwestern white people seem to feel tremendous gratitude to Obama for not being Al Sharpton or Jesse Jackson -- a seemingly odd point worth examining.
Obama's father was from Kenya and his mother from Kansas. He grew up mostly in Hawaii, with a four-year side-trip in Indonesia. He had a distinguished academic career at Columbia and Harvard. Though he is half-African he carries none of the baggage of stereotypical American black culture. He doesn't speak in the patois of the ghetto (or pretend to), and he appears not to possess a sense of implacable grievance for being who he is.
Since the 1960s Civil Rights project climaxed in the federal legislation of 1964-65, and then dissolved after the murder of Martin Luther King into a kind of voluntary apartheid of grievance, there have been no African-American leaders who represent unequivocally the prospect of real assimilation into mainstream American culture. Among the lies we tell ourselves is that America has become a happy multicultural kindergarten. In fact, black culture has never been so overtly and self-consciously separate -- and that separation has tragically been promoted by the white yuppie progressive establishment pandering to implacable black grievance. Below the uppermost classes of both races, there has probably never been so much mistrust seething below the surface.
The convulsion that a President Obama might be elected into would be one first of economics. Our industrial economy is going to fall on its knees when global energy scarcities gets traction. There is going to be a scramble for resources world-wide and here in North America, and we are all set up to fracture along ethnic and regional lines as that occurs. The presence of a suddenly overwhelming, non-assimilated Hispanic population will only make things more difficult.
A President Obama would also very probably face a geopolitical crisis as the US, China, Russia, Japan, Europe, and the Islamic nations jockey desperately over energy resources while their own populations grow restive, desperate, angry, and possibly aggressive. In other words, a President Obama would possibly face a world war, a civil war, and a great depression all at once. This is not a happy fate for any leader, and so perhaps in the public perception of Barack Obama, in the rising of his star, so to speak, the public apprehends the outlines of tragedy, just as the historical Lincoln is an incomplete picture without the tragedy of his murder a few days after the resolution of the terrible war he presided over.
Remember, history rhymes but does not necessarily repeat itself. I am not saying that a President Barack Obama would be assassinated. But he would certainly have a rough passage through a sea of troubles. This nation, and the familiar patterns of everyday life in it, might not survive the kind of convulsion I describe. Whatever happens, an Obama presidency would probably have to be improvisational, on-the-fly, as Lincoln's had to be amid the uncertainties of war. Someone on Meet the Press said Obama's wife would pressure him not to run. Well, Mary Lincoln was nervous, too, and with good reason, it turned out. But Abe did not shrink from his call. Destiny is a stranger mistress. And maybe more compelling.
October 16, 2006,
I got an email from a reader in the banking sector who said that he generally likes this blog but I that I was "way off" in last week's observations about the US economy. I called him on the phone to entertain his complaints in more detail. His main complaint was that I failed to appreciate the fantastic resilience of American can-do enterprise, and what it means in the larger economic scheme of things. He said that massive amounts of capital were moving into investments for alternative energy and into new technology associated with the pursuit of alt.energy. These capital flows, he said, would keep the US economy humming as far ahead as anyone can see.
He was a thoughtful and articulate fellow, but I still disagree. I still view the US economy as chronically diseased. It must be in the nature of a stock market melt-up, of the type we've seen the past month, to exert a hypnotic effect on herd expectations -- generating any number of rationalizations to make the melt-up seem a healthy and natural occurrence when it is actually something like an aggressive cancer feeding on the organs of our society and sucking the life out of them.
There may be money flowing into alt.energy ventures, but that is no guarantee that these ventures will produce significantly more petroleum or viable substitutes for petroleum -- or anything that will permit us to keep running WalMart, Disney World, and the interstate highway system. We could sink a trillion dollars into research and development for perpetual motion machines, too, but the venture would probably end in tears.
It seems to me that as long as our overall goal is to keep a lot of cars running by other means, at all costs, then we are going to be horribly disappointed, and our investments will amount to a Chinese fire drill performed like a game of musical chairs with overtones of Ponzi. Whatever else the future may be about, it is unlikely to be a continuation of mass democratic happy motoring in the service of mass consumption. So an investment campaign to save that mode of human existence is a waste of investment. It is just the financial facet of what may turn out to be an even more comprehensive, and utterly futile, effort to save the entitlements and previous investments connected with American suburbia.
A recognition of this would at least allow us to get on with other things and make better investments in a reality-based future.
Personally, I doubt that the putative investments in alt.energy and related tech amount to more than a tiny fraction of the total capital surging into the markets these days. The big oil companies are spending more of their considerable profits buying back their own stock and crafting farewell compensation packages for retiring executives than on exploration and discovery. In one place they have put up some E & P money, far eastern Russia, they just got their asses kicked by the host government, so they won't even be sticking around there. Excuse me for saying that Chevron's "Jack" experiment in the deep water Gulf of of Mexico will prove to be a public relations stunt. The money going into biodiesel, ethanol, and shale oil combined is probably less than the capital being directed into the next generation of MP3 players.
To me, the Fall 2006 Euphoria only underscores how divorced the financial sector is from real life. Day by day, thousands of grifters are making huge digital dollar profits on abstract financial plays in a global virtual casino. None of these plays has much to do with anything of real and enduring value. They're just scoring points on consolidations of ailing industries, on turns of the interest and currency differentials wheel-of-fortune, abstruse shorting strategies, and similar non-productive shenanigans. While these thousands of playas party hearty, millions of non-playa middle-American shlubs are underwater with their mortgage payments or real estate taxes, going bankrupt from their child's emergency appendectomy, or desperately seeking parking places where the re-po man won't find their Ford Expedition on which they failed to make payments numbers thirty-eight through forty-four after being laid off by the Uniwanker Corporation.
The sentiment now in the financial press is -- like that expressed by my banker correspondent -- that the US economy is indestructible. It's like Jason, the protean stalker-slasher of countless Friday the Thirteenth movie reels: an implacable monster on a mysterious mission. Nothing can stop it or kill it. Not the tanking real estate sector, not military misadventures in the Middle East, not a ball-and-chain of unimaginable debt. Like Jason, the US economy is fueled now by sheer entropy -- the force that drives everything toward death.
October 9, 2006
Against the background of everything else happening in the financial markets is the apparent circumstance of peak oil. Even The New York Times joined the chorus in a Sunday editorial, saying:
Our demand for petroleum products strains the limits of the global capacity to supply them. In past decades, if a pipeline broke in Nigeria, Saudi Arabia might compensate by setting workers to pumping more oil. Now, with little additional capacity, rising prices are necessary to balance out supply and demand.
No more increasing capacity = peak oil.
It's as simple as that. We now have nine and a half months of "rearview mirror" action to look back and see that world oil production has retreated from its all-time high of just over 85 million barrels a day (m/b/d) achieved in December 2005 (just as geologist Kenneth Deffeyes of Princeton had predicted). For 2006, production has remained in the 84 m/b/d range every month reported so far, while demand has exceeded that.
Texas oil man Jeffrey Brown, a commentator at TheOilDrum.com, the outstanding oil discussion group on the Internet, makes the point that Saudi Arabia is at the same point statistically (in terms of ultimate recoverable reserves) that Texas was at in 1972 when production there peaked. The world's four greatest oil fields are in depletion (Burgan [Kuwait], Daqing [China], Cantarell [Mexico], and Ghawar [Saudi Arabia]) and these have accounted for over 14 percent of the world's oil production. (Ghawar alone accounts for over 60 percent of Saudi Arabia's production.) The North Sea has peaked and production there is "crashing." Venezuela has peaked and its oil is shitty heavy crude. Indonesia (an OPEC member) has peaked and is now a net oil importer. Nigeria's political chaos is making production increasingly difficult-to-impossible. Production in the Canadian tar sands is not making up for losses elsewhere. The US is down to about a four-year supply of conventional crude and condensates while we import 70 percent of the oil we consume. Discovery of new oil (including Chevron's largely hypothetical deepwater "Jack" finds) is barely covering a fraction of the world's consumption. So it goes....
Where finance is concerned, the basic implication of peak oil is pretty stark: an end to industrial expansion (i.e. "growth"). All the alternatives to oil will not keep the industrial economies expanding -- they can only slow down a contraction, and only marginally so. The trouble with this picture is that finance is a system that uses paper markers to represent the hope and expectation for the expansion of wealth. These markers are currencies, stocks, bonds, option contracts, derivatives plays, and other certificates that are traded in open markets. If there is no longer any hope of increased wealth in the world, then all those tradable paper markers become losers. Their value unwinds and imagined piles of wealth evaporate into thin air.
The unwinding process depends on the psychology of the people who own these certificates. If they do not understand the global oil situation and its implications, then they will continue to hope for and expect expanded wealth, and thus continue to regard their paper certificates as credible markers of value. And that is largely the case at the moment, since most of the playas in the financial markets are not paying attention to the peak oil story, or don't believe it is for real.
Two special and transient circumstances are now propping up the financial markets. One is that for practical purposes the world is virtually at peak, meaning this is an extra-special time of strange behavior (like the point in the apogee of a steep sub orbital flight in which passengers become momentarily weightless). Supply and demand for oil are only beginning to go out of whack (that is, demand just barely exceeding supply). Even at this early stage, the oil markets themselves are showing stress, as hoarding behavior sets in and induces wider swings of price volatility. But these swings in oil prices -- such as the one we're in right now, where prices have crashed 20 percent since the panic buying (hoarding) of June and July -- send false signals to the financial playas. The main false signal is that all is well on the global oil scene...there's no real supply problem...and hence no threat to the continuing expansion of industrial production and its associated wealth-generating activities. This signal just tells the playas to buy more paper markers. Thus, the stock market goes up.
The second special and transient circumstance is that so much wealth has already accumulated along the way to peak, that financial markets take on a life of their own -- as existing wealth "invests" itself in more paper markers hoping and expecting to "grow" into even more wealth. The problem here is that existing wealth is actually being squandered, since the paper markers will only lose value as the hopes and expectations vested in them dissolve in disappointment. But we haven't quite reached that point yet.
In simply bidding the markets up, the system has spun off even more gobs of presumed wealth. Some of this "liquidity" -- say, in the checking accounts of people who work for Goldman Sachs -- has found its way into Manhattan condominiums, or Aspen McMansions, and filtered through the system to everyone from the lawyers who write up the pre-nuptial agreements to the guys who sell the furniture to the people who drive the delivery trucks that bring it to the door, to the men laying tiles in the new bathrooms.
The basic insanity of a system that presumes vastly increased wealth where none will occur, has led to further distortions in finance. The most obvious one is the so-called housing bubble. The misplaced extreme expectation in the ever-increasing value of paper wealth, led to the hijacking of mortgages by financial playas who bundled them into odd lots of tradable debt (promises to pay) and used them to leverage abstruse bets (hedges) on the behavior of other kinds of paper markers (currencies, interest rate differentials, commodity prices) -- very profitably as long as all playas believed that industrial societies that run all oil would continue to grow, to produce more wealth. The level of abstraction in these rackets -- their distance from the reality of productive activity --is self-evident.
But they were so successful that the profligate creation of ever more mortgages became an increasingly reckless and irresponsible enterprise. Contracts were made with house-buyers who had no record of credit worthiness and often no real proof of income. Contracts were made on terms (interest payments) that were deceptive, even ruinously false, for the house-buyers. The reckless reassignment of lending risk into ever more abstract layers of deferred obligation, and the ease of credit that ensued, allowed millions of ordinary people to acquire real property on unrealistic terms, which had the affect of bidding up the price of houses that these owners will eventually have to surrender for nonpayment.
That process is now underway. The reckless creation of mortgages had the further effect of stealing demand for house-building from the future. So many new houses were built and then sold to people who will probably have to surrender them, and then so many more beyond that were built in the expectation and hope that reckless mortgage creation would continue forever, that there is now a massive over-supply of total existing houses while the pool of suckers for new ruinous mortgages has shrunk to zero.
Similar excesses in all the other lending and debt sectors, including "non-performing" credit card obligations and government deficits, will also unwind and thunder through the system.
Meanwhile, the false signal from the oil markets that has been broadcasting for eight weeks will come offline and a new signal will come on as prices go back up. The pause in bidding for future oil induced by the panic over-buying of the summer will end. The heating season is here. It's 40 degrees out in upstate New York this morning and the furnace is cranking. The Chinese and the Indians and even the people in France have not stopped using oil, even if Americans have put their Winnebagos up on blocks for the season.
As the price of oil goes back up, the financial markets will get a new signal that running industrial societies has just gotten more expensive again. That will dampen hopes and expectations for increased wealth from these societies. Meanwhile, the air will be coming out of millions of mortgages, and the loss of value will spread among playas holding these bundles of mortgage debt (i.e. promises that money spent on houses is being paid back, which it won't be). At the same time the houses themselves will lose value as the pool of potential buyers shrinks to nothing. That is, the inflated value (high price) of these assets will deflate.
As this occurs, there will be far fewer wage-earners putting up additional houses, fewer furniture sales, fewer trips by delivery truck drivers and fewer tile-jobs in the McBathrooms.
This is why I view the fall melt-up of the stock markets as a swan dive. We're at the apogee now, just as the world is at the apogee of its oil production. I confess, I thought the reality of our economic predicament would be recognized by the playas and their markets sooner than it has. It turns out the the chief luxury of the final cheap oil blowout has been the artificial support of unrealistic hopes and expectations.
October 2, 2006
I don't think it's accurate to call it a "war" anymore. It was one briefly back in 2003, and it may become a wider one again in the region. But for now the American situation in Iraq has degenerated into a dangerous, half-assed policing operation. We're not really fighting anyone, just getting in the way of factions fighting each other. A large part of our failure in this project has been our inability to get the electricity and water running properly. Any group of Americans might be equally pissed off and crazy after three years of that.
President Bush has done a bad job of articulating the strategic purpose of our presence there. It's certainly not about "freedom." It is in human nature to prefer simple order to some abstract notion of freedom, and the Iraqis had simple order under Saddam. Anyway, the kind of trashy freedoms that Americans enjoy -- freedom to gamble in Las Vegas, freedom to buy pornography, freedom to enter into ruinous mortgage contracts -- might not seem so appealing to people in an Islamic society.
The purpose of our Iraq project was to stabilize the Middle East by creating a successful buffer state between Iran and Pakistan to the east and the nations west of Iraq, especially Saudi Arabia. Why? To preserve the status quo in our oil deliveries from the region.
Ironically, this last item is the only thing that we have succeeded in -- so far. And one of the reasons the Democratic opposition to Bush has been so unsuccessful is precisely because for all our failure over there, America has not yet experienced a cut-off of Middle East oil -- while anti-war media stars on the Left like Al Franken and Harry Shearer still get to hop in their cars and drive wherever they like without a second thought.
The sentiment among the American public runs increasingly against our adventure in Iraq. But just as no politician has articulated our reason for being there, no one has expressed any coherent idea of what might happen if we had no military presence in the Middle East. I will try to outline a picture of this now.
Possession of the largest reserve of the world's crucial resource, oil, has no doubt driven the people of the Middle East crazy. It has fed the resurgence of a militant Islam that seeks to punish and antagonize the Judeo-Christian West (and, call it whatever else you will, the 9/11 attack was certainly an act of antagonism). It has also caused populations to swell far beyond the carrying capacity of the region, with predictable results. But with most of the Middle East nations now at or past peak oil production -- including Iran and Saudi Arabia --we can expect only more dangerous behavior.
Whatever else might motivate Iran, control of the adjoining southern Iraq oil fields centered around Basra, and the oil facilities offshore in the Persian Gulf, must be high on the list. And a US withdrawal from Iraq would certainly lead to that outcome. Next on Iran's list is the wish to drive a Shiite wedge westward across Iraq to Saudi Arabia, which contains a large Shia population of its own, conveniently occupying the Persian Gulf coastal region where most of Saudi Arabia's oil comes from. The purpose of this "Shiite wedge" would be to bring down the ruling Al Saud family and replace it with an Islamic fundamentalist government. All of these moves are predicated on Iran assuming nominal leadership among the Islamic nations of the region. And all of it would bode ill for American oil supplies.
An American withdrawal from Iraq would leave US bases marooned in the landlocked backwaters of Asia -- with outposts in Afghanistan, Uzbekistan and Kyrgyzstan. The purpose of these bases so far has been for staging operations from Afghanistan westward toward Iran, Iraq, and the Arabian peninsula. These bases happen to be next door to China, to the east. Would these tiny bases in Asia be used to stage operations against China in some future conflict? Good luck. They would last about five minutes.
Pakistan has been off the radar screen of the American media for years. It is arguably the most dangerous state in the region. It has a thousand recent years of Muslim experience on top of perhaps 100,000 previous years of other influences. The people of Pakistan are not ethnically Arabs or Persians, yet they are even more violently anti-western. Pakistan is overpopulated to the extreme. It has no oil but owns at least twenty nuclear bombs. Very little stands between the current government of General Pervez Musharraf and either complete chaos or an Islamic fundamentalist government. If Musharraf fell, would the US try to insert itself in a meltdown of Pakistan? Good luck on that one. For the moment, only fear of a nuclear exchange with its neighbor, India, stands to modify or influence Pakistan's behavior.
Let's say the US did withdraw from Iraq. This would leave us with bases in Oman, Qatar, Kuwait, the United Arab Emirates and Turkey. These present a full frontal opposition to Iran, but would have meaning only if we went to war with that country. Such a war would probably leave the oil infrastructure of the Persian Gulf in utter ruin. Which is to say it would do nothing to advance America's strategic interest in maintaining the oil lifeline from the Middle East.
Sooner or later America will lose its ability to influence the people and events in the Middle East, and at the same time we will probably lose access to the oil of the region. Yes, oil is a "fungible" resource that finds its way through markets. But the markets themselves will be badly destabilized by the economics of post-peak production. Do not expect on-time delivery.
The US will withdraw back into the Western hemisphere. We have about 25 billion barrels of conventional crude left of our own. We currently use seven billion a year. Canada has been our largest source of oil imports. They will be left with little besides the tar sands of Alberta. Whatever else might be said of them, the tar sands will make for very expensive oil products. (Ditto the oil shale of the Rockies.) We will not be able to maintain our current living arrangements on these things, nor on coal liquefaction.
The Canadian producers have substantial contracts with China for the products of the tar sands. I have no doubt the US will invoke the Monroe Doctrine to cancel those contracts. Expect a pissed off China. The same goes for Venezuela. Anyway, that nation is way past its production peak and the oil it has left is low quality heavy crude. Mexico is on the verge of an especially steep oil production decline. The low-hanging fruit of the Western hemisphere is gone. Colombia and Ecuador are not going to save American Happy Motoring. Don't get too excited about Chevron's "Jack" discovery in the deep waters of the Gulf of Mexico. Even at its most fantastical extrapolation, it would represent about two years of US oil consumption, and it would be expensive to a laughable extreme.
The bottom line is that the only meaningful project for the US now is to turn its attention and remaining resources to the job of preparing for civilized life without oil. This is the topic that is absent from our political discourse on all sides and at all levels. The anti-war community is itself either lost in raptures of Bush-hatred or preoccupied with fantasies for running the interstate highways on used french-fry oil. We have to talk about things beyond just running our cars by other means.
We are a profoundly unserious nation, for all our pretensions.