The following exchange between Michael Carriere and Alex Knight occurred via email, July 2010. Alex Knight was questioned about the End of Capitalism Theory, which states that the global capitalist system is breaking down due to ecological and social limits to growth and that a paradigm shift toward a non-capitalist future is underway.

This is the third part of a four-part interview. This part is a continuation of Alex’s response to the second question. Click here for Part 2A. Scroll to the bottom for links to the other sections.

Part 2B. Social Limits and the Crisis

MC: Capitalism has faced many moments of crisis over time. Is there something different about the present crisis? What makes the end of capitalism a possibility now?

AK: As I described in the last section, the current crisis can be understood as resulting from a massive collision between capitalism’s relentless need for growth and the world’s limits in capacity to sustain that growth. These limits to growth are both ecological and social. In this section I’ll discuss the concept of social limits to growth.

The Extraordinary Power of Social Movements

Social limits to growth function alongside the ecological limits but are drawn from a different source. By social limits we mean the inability, or unwillingness, of human communities, and humankind as a whole, to support the expansion of capitalism. This broadly includes all forms of resistance to capitalism, a resistance that has arguably been increasing around the world through innumerable forms of alternative lifestyles, refusal to cooperate, protest, and outright rebellion.

As a disclaimer it’s important to recognize that not all resistance is progressive. There are right-wing, fundamentalist, and undemocratic forces that also resist capitalism, for example the Taliban, or North Korea. These are not our allies. They do not share progressive values, we cannot condone their attacks on women, or on freedom more generally, and I don’t see anything to be gained by working with them. However it is important to recognize how these forces are aligned against capitalism and U.S. imperialism, in addition to being aware of the danger they present to our own hopes and dreams.

Progressive resistance, on the other hand, has always taken its strength from grassroots social movements. Silvia Federici writes about the immense and varied peasant movements in medieval Europe that fought for religious and sexual freedom, challenging both feudal lords and emerging capitalist elites. I like to think of these rebels as my European ancestors – they were just commoners but they rose up to fight for a better world. This is the nature of social movements. Ordinary folks, daring to pursue their deepest aspirations, interests and dreams, join together with others who share those desires, and thereby create something extraordinary. The magic exists in the joining-together. Isolated individuals lack the power to accomplish what a group can achieve.

We can appreciate this extraordinary power if we look at how social movements have transformed our lives. A century ago, millions of American workers joined the labor movement and won the 8-hour day, Social Security, and workplace safety. Regular folks carried forward the Civil Rights Movement and broke Southern segregation. The feminist and LGBT movements have transformed the way gender and sexuality are viewed all over the world. It’s hard to overstate how dramatically these and other social movements have improved society. While capitalism has invented ways to co-opt social movements and redirect them into outlets that do not challenge the system on a deep level (like the “non-profit industrial complex”), movements have remained alive and vibrant by empowering people to reach towards a different world.

Have social movements limited capitalist oppression recently? To answer this we need to learn the story of the Global Justice Movement.

Demonstrators tear down a section of security fence in the Mexican resort city of Cancun to confront the World Trade Organization’s Fifth Ministerial summit on Sept. 10, 2003.

The Global Justice Movement

David Graeber, anarchist anthropologist, wrote a remarkable essay called “The Shock of Victory” in which he looks at this movement that suddenly flared up at the turn of the millennium and seemed to disappear just as quickly. Although most Americans may not remember the Global Justice Movement, and those who participated in it may feel demoralized by the fact that capitalism still exists, Graeber points out that many of the movement’s ambitious goals were accomplished.

A decade ago, capitalism was pursuing a strategy to transform the entire world into a single marketplace. It claimed this “globalization” would benefit everyone because everyone would get to share in the spoils of growth. What it really wanted was to extract maximum profit from the cheap labor of the “Global South,” by moving industry and jobs out of high-wage areas like the US, while imposing privatization and debt on the poor countries of the world. This strategy was called “neoliberalism,” because it aimed to eliminate all barriers to trade, such as worker protections or environmental regulations. Multinational corporations would have a bonanza. Like previous rounds of enclosure, the damage these policies would have on poor communities and on the planet was disregarded.

Starting from directly affected communities in places like Mexico, Brazil, India, South Korea and Africa, an enormous network of farmers, workers and educators connected with progressives and anti-capitalists in North America and Europe. They didn’t have a single leader or organization, but they came together as a Global Justice Movement to coordinate efforts and stop the spread of neoliberalism. The movement became visible to the world when it manifested at the 1999 World Trade Organization (WTO) protests in Seattle, where steelworkers, indigenous people, environmentalists, and students literally shut down the trade negotiations with creative civil disobedience.

Along with the WTO, the other main institutions responsible for pushing global neoliberalism were the International Monetary Fund (IMF) and the World Bank. The GJM moved to confront all three. “Free trade” agreements such as the hemisphere-wide Free Trade Area of the Americas (FTAA) were also challenged. Through creative protest and non-violent direct action, the movement called into question the dominant story around “free trade” and pointed towards a new world of global cooperation. And to their own surprise, they were incredibly successful.

According to David Graeber, Global South governments (like India and Brazil) were emboldened by the worldwide protest and refused to compromise on the North’s (European and American) unfair agricultural subsidies. As a result the WTO’s negotiations have totally broken down. The FTAA never came into existence at all. It was stopped in its tracks. The IMF and World Bank saw their reputations tarnished after their policies led to the meltdown of the Argentinean economy in 2002, and they are no longer welcome in some parts of the world. This is especially true in Latin America, where the political landscape has completely turned around in the last 10-15 years.

In the 1990s, most of the continent was still under the heel of military dictatorships and authoritarian states, but since then a wave of leftist governments has been swept into power by unprecedented social movements opposed to neoliberalism and U.S. imperialism. For example, in 2005 Bolivia elected their first-ever indigenous president, Evo Morales, who came directly out of the social movement that successfully stopped water privatization in Bolivia. Morales has become a spokesperson for many:

“If you want to save planet Earth, to save life and humanity, we have a duty to put an end to the capitalist system. If we do not put an end to the capitalist system, it’s impossible to imagine that there will be equality and justice on this planet Earth. This is why I believe that it is important to put an end to the exploitation of human beings, and to put an end to the pillage of natural resources; to put an end to destructive wars for raw materials and the market; to the plundering of energy, especially fossil fuels; excessive consumption of goods and the accumulation of waste.”

We can’t ignore the many difficulties facing Latin America or the Global South as a whole. The situation is still extremely dire, with over a billion people living on the brink of starvation and without access to clean water, and with the U.S. expanding military bases in places like Colombia. And of course leftist governments have their own problems and need to be held accountable just as rightist ones. Regardless, the Global Justice Movement demonstrated that by joining together across borders, opposing injustice and working towards a new world, victories can be achieved. Even victories as dramatic as discrediting the major institutions promoting neoliberal capitalism and the political transformation of an entire continent.

The GJM vanished almost as quickly as it appeared, but as David Graeber points out, this was partially because it met many of its goals so rapidly. With the widespread repudiation of the neoliberal doctrine, the Global Justice Movement provides an inspiring lesson that social movements can and do place limits on capitalism.

Social Limits and the Crisis

Social movements in many countries have been amplified by the economic crisis. Greece has seen massive rebellions in the past 2 years to stop the government from imposing austerity measures like cutting social services. In Iceland, a country not known for its political radicalism, huge protests in response to the country’s bankruptcy brought the government down and led to the election of the world’s first openly lesbian prime minister. In Nigeria there is an armed rebellion aimed at stopping oil companies from destroying the ecosystem and exporting their profits from the region. Off the coast of Somalia, pirates have plagued international shipping, and grabbed headlines last November when they hijacked an oil tanker headed for the US.

It’s clear that anger is building towards a capitalist system that is failing to meet people’s needs. But let’s dig deeper and ask: What role did social limits play in causing the economic crisis?

Perhaps the most instructive case is that of China and its rising labor movement. Supposedly a “communist” country, China has become a capitalist haven producing an absurd quantity of goods for the global market due to its very low (sweatshop) wages. The profit extracted from Chinese workers has done wonders to sustain capitalism over the last two decades. For this reason, the organization and rebellion of Chinese workers threatens not just the Chinese government, but the global capitalist system as a whole.

This explanation may require a bit of historical context. During the 1960s-early ‘70s, the capitalist order was challenged by a high tide of protest and rebellion – from Africa shaking off its colonial masters, to the end of Southern segregation in the US, to the struggle against the US genocide in Vietnam, to the new upsurges of the feminist, queer and ecology movements. This movement activity was pronounced a problem of an “excess of democracy” by the Trilateral Commission, a ruling class institution composed of bankers and corporate elites from the US, Europe and Japan. One of the strategies used to escape this “excess of democracy” (along with increased repression and co-optation of social movements), was to relocate industrial production out of places like the US, where wages were seen as too high, to places like China, where wages were minimal.

Obviously this cheap labor generated more profit in production. But it also created a problem in terms of consumption, because US wages began to decline as all those unionized industrial jobs left the country. As explained by Professor Richard Wolff in his video “Capitalism Hits the Fan,” in order to make up for this income difference and keep consumption growing, starting in the 1970s US workers were given access to an immense pool of credit, in the form of credit cards, home mortgages and financial schemes like 401(k)s. Cheap available credit allowed the US to consume more and more junk, even as wages declined. It kept its position as the world’s strip mall.

Meanwhile, China became the world’s factory, pumping out cheap products for the global market, especially for the United States. As Americans flocked to Wal-Marts for their low prices, the Chinese government was flooded with trillions of US dollars. So far, they have dutifully recycled those dollars back into US Treasury bonds, thus keeping the American economy afloat. If they didn’t invest in the US, their main trading partner would be crippled by its trade debt, which grows daily.

The US-China relationship became core to the global economy. Each behemoth kept the other afloat – one producing like crazy by exploiting its workers near exhaustion, the other consuming like crazy by sailing on a sea of cheap credit. The damage to the planet’s ecosystem was atrocious, but immense profits were made and by the 1990s the market was soaring and “the end of history” was proclaimed. It seemed all opposition to capitalism had been vanquished.

There are numerous weak points in this international division of labor. One that has not been fully appreciated is the severe turmoil in China due to the growing strength of a new militant labor movement. This movement aims to put an end to sweatshop conditions where many toil for 12+ hours a day in dangerous, polluted factories. Organizing outside the Communist Party’s official unions, Chinese workers have initiated a series of crippling strikes that repeatedly shut down factories, among other forms of rebellion. The government has been forced to accept workers’ demands for wage increases, so the Chinese average real wage has risen by 300% between 1990 and 2005 [PDF], with half of that increase between 2000 and 2005.

Workers in green uniforms stage a sit-in protest at the main entrance of the Mitsumi Electric Co factory in Tianjin on Thursday, July 1, 2010. China Daily

Although the Chinese economy continues to grow, increased wages mean a falling rate of profit for companies operating in China, whether American, Japanese, European or otherwise. Wage increases also mean increased consumption within China, and therefore less cheap exports. When Chinese workers can afford the cars and electronics they’re producing, Americans can’t demand the same low prices.

Can we draw a direct connection between Chinese wage gains and the drying up of cheap credit in the US market of 2007-8? I humbly submit this question to the reader, as I haven’t done enough research on the relationship between the two trends. But I’ll say this about the big picture: If Chinese workers continue to break free from totalitarian control and win dignity in their jobs, the loss of China as the sweatshop of the world imperils trade arrangements that have carried global capitalist growth for decades.

If we study any country in the world, we’ll find people resisting capitalism any way they can. In the fields & factories, slums & schools, homes and prisons, the desire to be free cannot be extinguished, only held back and diverted. As humanity gains awareness of its own power and begins to act for its own interest rather than the interest of profit, the system’s tenuous grip on the world can easily falter, and a new world appears just over the horizon.

With the ecological limits encroaching on one side, and the social limits looming on the other, economic growth is under increasing strain in between. It’s as if the system cannot breathe. Like the sorcerer’s apprentice, it’s too busy putting out the fires of multiplying crises, which continue to spawn and grow. The policy makers, market gurus and technocratic apologists scramble to regain control, but they are disoriented in a new arena. Circumstances have changed. They cannot come to agreement on what to do, and instead quarrel amongst themselves over diverging interests. As social and ecological forces combine and put new stresses on the system, capitalism is smothered and chokes.

Considering the ecological limits and social limits to growth side-by-side, the only conclusion I can make is that the end of capitalism is not only a possibility, but an inevitability. Neither the planet nor the world’s population appear able to support this system much longer, and something’s got to give. It may be years or even a couple decades before we can look back and say for sure that a paradigm shift has occurred and that we are living in a different, non-capitalist era. But the End of Capitalism Theory dares us to question how long a system that lives on economic growth can continue to function in a world of such profound and permanent limits.

—–

Alex Knight is a proponent of the End of Capitalism Theory, which states that the global capitalist system is breaking down due to ecological and social limits to growth and that a paradigm shift toward a non-capitalist future is underway. He is working on a book titled “The End of Capitalism” and seeks a publisher. Since 2007 he has edited the website endofcapitalism.com. He has a degree in electrical engineering and a Master’s in political science, both from Lehigh University. He lives in Philadelphia, where he is a teacher and organizer. He can be reached at alex@endofcapitalism.com

Michael Carriere is an assistant professor at the Milwaukee School of Engineering, where he teaches courses on American history, public policy, political science, and urban design. He is currently working on a book, with David Schalliol, titled “The Death and (After) Life of Great American Cities: Twenty-First Century Urbanism and the Culture of Crisis.” He holds a Ph.D. in American history from the University of Chicago.

—–

Click the links below for more of the interview:

1. The current financial crisis is clearly a moment of peril for both individuals and the broader system of capitalism. But would it also make sense to see it as a moment of opportunity?
Part 1. Crisis and Opportunity

2. Capitalism has faced many moments of crisis over time. Is there something different about the present crisis? What makes the end of capitalism a possibility now?
Part 2A. Capitalism and Ecological Limits
Part 2B. Social Limits and the Crisis

3. Moving forward, how would you ideally envision a post-capitalist world? And if capitalism manages to survive (as it has in the past), is there still room for real change?
Part 3. Life After Capitalism

For example, this article (“Jeff Rubin: Oil Prices Caused the Current Recession”) explains that Europe and Japan (which are both more vulnerable to oil prices because they produce less oil than the US but consume plenty) entered recession before the financial subprime crisis hit global markets.

Quote: “Higher oil prices started four of the last five world recessions; we shouldn’t be too surprised if they started this one also.”

Keep in mind the unprecedented nature of this recent oil price spike, where the price of oil went to all-time record levels of nearly $150/barrel. This chart suggests that the economic effects of past price rises will likely pale in comparison to this much greater recent spike, at the end of the day.

Finally, we have this telling quote from Gail the Actuary: “It seems to me that the problem with non-availability of credit, particularly long-term debt, is ultimately tied in with peak oil. It is difficult to have more than a tiny amount of long term debt once an economy is no longer growing.”

My book, The End of Capitalism, will explore this theme in more depth, but it’s worth conjecturing:  If the global economy literally cannot grow any more, because of real and unavoidable limits on vital resources such as oil, how can we anticipate the multi-layered global consequences?

We have arguably begun witnessing the first wave of financial consequences, but this is just the tip of the iceberg.  How might the economy as a whole system have to transform, and if growth as the paradigm of industrial capitalism is literally behind us, what kind of economy will the paradigm shift towards? Will we see a new sustainability rooted in democracy and freedom, or an even greater tyranny than what capitalism has wrought?
[alex]

Some Economic Implications of Peak Oil

World oil production probably peaked in 2008. Liquid fuel production, including oil, is indicated by the OPEC data [1] to have reached a peak in July 2008 at about 86 million barrels per day, with its price peaking at about the same time. ASPO International agrees, as indicated on the chart page of their recent newsletters [2].

Peak oil has profound economic implications, most of which are unwelcome. There is good evidence indicating that peak oil triggered the global economic crisis; that oil price was the limiting factor that broke the momentum as the global economy tried to keep expanding. [3,4].

Predictably some factor like the end of cheap oil must limit the ability of global investments to expand exponentially, while paying interest on the global debt bubble. The risk was evenly spread by instruments like credit default swaps, so the collapse was global.There is scholarly confirmation of the role of the 2008 oil shock on the global economy should see the April 2009 Brookings paper “Causes of the Oil Shock of 2007-08″, by UC San Diego economist Dr. James Hamilton: [5,6].

“…Whether we would have avoided those events had the economy not gone into recession, or instead would have merely postponed them, is a matter of conjecture. Regardless of how we answer that question, the evidence to me is persuasive that, had there been no oil shock, we would have described the U.S. economy in 2007:Q4-2008:Q3 as growing slowly, but not in a recession.”

A hugely overextended bubble of unregulated, interlinked, securitized global debt and speculation set the stage for a collapse, as described in Charles Morris’ early 2008 book Trillion Dollar Meltdown. Kevin Phillips’ book Bad Money supplements the picture.

One subtle but important economic effect of rising oil prices is cost-push inflation, seen as stagflation during the energy crisis of the 1970s. This is a type of multiplier effect caused by the embedded cost of oil in goods slowly spreading price increases throughout the economy, seeming like a universal increasing tax.

The current relative collapse in oil prices, even if caused by peak oil, leads to the political problem of convincing the general public that oil dependence should remain a central concern when its price decreases.

The natural tendency of politicians in an economic crisis is to focus on unemployment. There is probably nothing politicians like to do more by their nature than spend public money. Keynesian economic stimulation is thus almost guaranteed to be popular, especially since it promises fast results. Popular belief is that FDR treated the depression with Keynesian-style deficit spending, although his remedy actually owed more to Irving Fisher [8].The Keynesian spending advocates, who prevail in the Obama administration and Congress, seek to use government spending to reverse the current deflationary spiral and restore US economic activity to its previous “normal” condition. Keynesian stimulus spending may be the theory, but far more public money is being committed to the banks, with no clear diagnosis or plan, along with a smaller amount of classic Keynesian stimulus. Most politicians prefer spending to reform. Meanwhile there are dominant political interests seeking to preserve the friendly old financial system [9,10,11].

There are at least three important problems with the current federal intervention strategy, which is a consensus action by the Administration, Congress, the U.S. Treasury and the Federal Reserve.

1. The politically possible stimulus funds are not in scale with a global crisis. The biggest investment banks are on federal life support; “So far, $12 trillion has been pumped into the financial system while less than $450 billion fiscal stimulus has gone to the “real” economy where workers are struggling just to keep food on the table.” [12].

2. The US economic remedy is national in character whereas the trade collapse is global. A central contradiction is that while new dollars are massively created to try to revive the domestic economy, the same dollars try to serve their traditional but conflicting role as the standard reserve currency basis for global trade, preferably remaining stable enough to maintain trade hegemony [13].

3. Not many economists seem to have a good grasp of peak oil and its economic implications. If current government economic policy succeeds in stimulating a renewed economic expansion, falling production will lead to another oil price shock. Reflating the global economy is almost certain to revive a bidding war for whatever oil remains accessible to the open market. See “US elections”, #1101 [14].

Newly issued federal credit along with existing obligations are becoming an alarming percentage of the total economy. Sooner or later, the massive amounts of easy federal credit now being injected into the system will cause money to circulate more freely and raise prices.

As spending revives, smart investors are likely to focus on those parts of the economy guaranteed to survive no matter what, largely involving food and energy. The sectors of the U.S. economy tied to cheap energy and discretionary spending, like distant vacations, have a bad investment outlook.

Even if traditional Keynesian techniques were perfectly employed on smart sustainable energy projects, we now lack the time for proper preparation as the Hirsch Report warned [15], all assuming our institutions were appropriate [16]. Another oil price shock to the global economy seems unavoidable whenever rising global demand recreates a tight world market. This is likely to cause cost-push inflation to spread from fuel costs while leaving other sectors depressed.

The threat of inflation is partly hidden early on because there is not a strong link between the amount of money in general circulation and the public willingness to spend it. How much money there seems to be around depends on how freely other people who have it spend it.

However much economics strives to be a science, it is really based on a foundation of psychology and politics [17]. An increasing velocity of money circulation can overcome the ability of the government to control runaway inflation when public behavior shifts.

Financial Sense [18], quoting an excellent historical analysis by Jens O. Parsons, explains the apparently favorable early effects of deficit spending. This contrasts to the unpleasant effects of inflation later on when the circulation of money speeds up and starts chasing limited goods.

Whether the feds will have the political ability to cool down inflation when the urge to spend it revives is an important issue. If those in charge are reluctant to take bold action such as regulating the banks now, why would they be any bolder when the time comes to raise interest rates; when it comes time to take away the proverbial economic punchbowl as Paul Volker once did? [19].

“…Meltzer says political pressure will prevent Bernanke, 55, and fellow policy makers from withdrawing liquidity quickly enough as the economy recovers….” John Ryding, founder of RDQ Economics LLC in New York and a former Fed economist, agrees that the central bank will be slow to soak up all the cash it has injected into the financial system, in part because policy makers will be fixated on still-high unemployment.”

What we need to do now, in terms of better public policy, is in many cases reasonably clear to experts and scientists. Awareness is increasing through the work of ASPO, the Post Carbon Institute, Worldwatch, the Oil Drum, etc., along with countless such efforts seen on the Internet. The public may not know the details, but they are aware that we could do a lot better.

One approach, suggested by economists at the Levy Institute, proposes a new governmental regulation and banking approach; “It’s That “Vision” Thing: Why the Bailouts Aren’t Working, and Why a New Financial System Is Needed” [8, 20].

Adding things up, the evidence indicates we need a new government regulated banking system or government bank that will consciously focus on new public spending goals, perhaps initially focused on preparing for the next oil shock and avoiding hyper-inflation, and then on providing for longer-term social needs.

Roger Baker is a member of the ASPO-USA Advisory Board, also a Founding Member, and is a scientific instrument designer, investor, writer, and transportation reform activist living in Austin (TX). Recently he has been writing commentaries on economics for the Austin-based Rag Blog.

LINKS:

[1]  http://www.theoildrum.com/node/5230

[2]  http://www.aspo-ireland.org/index.cfm/page/newsletter

[3]  http://endofcapitalism.com/2009/02/20/peak-oil-root-of-the-economic-crisis/

[4]  http://www.peakoil.net/headline-news/oil-price-and-economic-crash

[5]  http://blogs.wsj.com/economics/2009/04/03/did-the-oil-price-boom-of-2008-cause-crisis/

[6]  http://www.econbrowser.com/archives/2009/04/consequences_of.html

[8] http://www.levy.org/vtype.aspx?doctype=9

[9]  http://www.newsweek.com/id/193360/page/1

[10] http://www.theatlantic.com/doc/200905/imf-advice

[11] http://online.barrons.com/article/SB123940701204709985.html?page=sp

[12] http://www.counterpunch.org/whitney04162009.html

[13] http://www.atimes.com/atimes/Global_Economy/KD15Dj04.html

[14] http://www.aspo-ireland.org/contentFiles/newsletterPDFs/newsletter96_200812.pdf

[15] http://en.wikipedia.org/wiki/Hirsch_report

[16] http://www.energybulletin.net/node/48449

[17] http://www.washingtonpost.com/wpdyn/content/article/2009/04/15/AR2009041503791.html?hpid=topnews

[18] http://www.financialsense.com/fsu/editorials/2008/1230b.html

[19] http://www.bloomberg.com/apps/news?pid=20601109&sid=a8tjEzB.d.kU&refer=home

[19]http://74.125.47.132/custom?q=cache:SUBRO0IuTFYJ:www.levy.org/pubs/pn_09_03.pdf+an+assessment+of&cd=1&hl=en&ct=clnk&gl=us&client=google-coop-np

How about for Americans? Is the collapse of the US better for people who live here?  Orlov’s conclusion actually indicates that it may be, especially in terms of rebuilding the social fabric that has been worn away by individualism and consumerism.  But he also overlooks the reality of social oppression in the US. Not everyone lives the same “middle class” lifestyle he seems to be taking for granted.  There are already millions of Americans on the brink of poverty, or deep in poverty, who don’t worry about losing their SUVs.

The best outcome is for not just a collapse, but a transformation, so that nobody has to go hungry or work their life away just so that the wealthy can take cruises or visit the spa.  The current Bailouts are the most striking example of the government having the exactly opposite priorities.  Instead of bailing out homeowners, or the poor who lack access to public transportation, they are dumping money into the hands of the real estate and automaking profiteers!  We must continue to oppose this nonsense, from Obama or anyone, and make sure that our money is used for the benefit of the majority, not the wealthy few.  In a world of shrinking wealth, there should be no rich, and there doesn’t have to be any poor either.  [alex]

The Five Stages of Collapse

1.
Hello, everyone! [...] My specialty is in thinking about and, unfortunately, predicting collapse. My method is based on comparison: I watched the Soviet Union collapse, and, since I am also familiar with the details of the situation in the United States, I can make comparisons between these two failed superpowers.

I was born and grew up in Russia, and I traveled back to Russia repeatedly between the late 80s and mid-90s. This allowed me to gain a solid understanding of the dynamics of the collapse process as it unfolded there. By the mid-90s it was quite clear to me that the US was headed in the same general direction. But I couldn’t yet tell how long the process would take, so I sat back and watched.

I am an engineer, and so I naturally tended to look for physical explanations for this process, as opposed to economic, political, or cultural ones. It turns out that one could come up with a very good explanation for the Soviet collapse by following energy flows. What happened in the late 80s is that Russian oil production hit an all-time peak. This coincided with new oil provinces coming on stream in the West – the North Sea in the UK and Norway, and Prudhoe Bay in Alaska – and this suddenly made oil very cheap on the world markets. Soviet revenues plummeted, but their appetite for imported goods remained unchanged, and so they sank deeper and deeper into debt. What doomed them in the end was not even so much the level of debt, but their inability to take on further debt even faster. Once international lenders balked at making further loans, it was game over.

What is happening to the United States now is broadly similar, with certain polarities reversed. The US is an oil importer, burning up 25% of the world’s production, and importing over two-thirds of that. Back in mid-90s, when I first started trying to guess the timing of the US collapse, the arrival of the global peak in oil production was scheduled for around the turn of the century. It turned out that the estimate was off by almost a decade, but that is actually fairly accurate as far as such big predictions go. So here it is the high price of oil that is putting the brakes on further debt expansion. As higher oil prices trigger a recession, the economy starts shrinking, and a shrinking economy cannot sustain an ever-expanding level of debt. At some point the ability to finance oil imports will be lost, and that will be the tipping point, after which nothing will ever be the same.

This is not to say that I am a believer in some sort of energy determinism. If the US were to cut its energy consumption by an order of magnitude, it would still be consuming a staggeringly huge amount, but an energy crisis would be averted. But then this country, as we are used to thinking of it, would no longer exist. Oil is what powers this economy. In turn, it is this oil-based economy that makes it possible to maintain and expand an extravagant level of debt. So, a drastic cut in oil consumption would cause a financial collapse (as opposed to the other way around). A few more stages of collapse would follow, which we will discuss next.[...]

I don’t mean to imply that every part of the country will suddenly undergo a spontaneous existence failure, reverting to an uninhabited wilderness. I agree with John-Michael Greer that the myth of the Apocalypse is not the least bit helpful in coming to terms with the situation. The Soviet experience is very helpful here, because it shows us not only that life goes on, but exactly how it goes on. But I am quite certain that no amount of cultural transformation will help us save various key aspects of this culture: car society, suburban living, big box stores, corporate-run government, global empire, or runaway finance.

On the other hand, I am quite convinced that nothing short of a profound cultural transformation will allow any significant number of us to keep roofs over our heads, and food on our tables. I also believe that the sooner we start letting go of our maladaptive cultural baggage, the more of a chance we will stand. A few years ago, my attitude was to just keep watching events unfold, and keep this collapse thing as some sort of macabre hobby. But the course of events is certainly speeding up, and now my feeling is that the worst we can do is pretend that everything will be fine and simply run out the clock on our current living arrangement, with nothing to replace it once it all starts shutting down.

[...]

I’ve been asked the same question, repeatedly: “When? When is the collapse going to occur?” Being a little bit clever, I always decline to give a specific answer, because, you see, as soon as you get one specific prediction wrong, there goes your entire reputation. One reasonable way of thinking about the timing is to say that collapse can occur at different times for different people. You may never quite know that collapse has happened, but you will know that it has happened to you personally, or to your family, or to your town. The big picture may not come together until much later, thanks to the efforts of historians. Individually, we may never know what hit us, and, as a group, we may never agree on any one answer. Look at the collapse of the USSR: some people are still arguing over why exactly it happened.

But sometimes the picture is clearer than we would like. In January of 2008, I published an article on “The Five Stages of Collapse,” in which I defined the five stages, and then bravely stated that we are in the midst of a financial collapse. And ten months later it doesn’t seem that I went too far out on a limb this time. If the US government has to lend banks over 200 billion dollars a day just to keep the whole system from imploding, then the term “crisis” probably doesn’t do justice to the situation. To keep this game going, the US government has to be able to sell the debt it is taking on, and what do you think the chances are that the world at large will be snapping up trillions of dollars of new debt, knowing that it is being used to prop up a shrinking economy? And if the debt can’t be sold, then it has to be monetized, by printing money. And that will trigger hyperinflation. So, let’s not quibble, and let us call what’s happening what it looks like: “financial collapse”.

2.
So here are the five stages as I defined them almost a year ago. The little check-mark next to “financial collapse” is there to remind us that we are not here to quibble or equivocate, because Stage 1 is pretty far along. Stages 2 and 3 – commercial and political collapse, are driven by financial collapse, and will overlap each other. Right now, it is unclear which one is farther along. On the one hand, there are signs that global shipping is grinding to a halt, and that big box retailers are in for a very bad time, with many stores likely to close following a disastrous Christmas season. On the other hand, states are already experiencing massive budget shortfalls, laying off state workers, cutting back on programs, and are starting to beg the federal government for bail-out money.

[...]

3.
There is nothing particularly deep or magical about the five stages I chose, except that they seem convenient. They correspond to the commonly distinguished aspects of everyday reality. Each stage of collapse also corresponds to a certain set of beliefs in the status quo, that is about to go by the wayside.

It is always an impressive thing to observe when reality shifts. One moment, a certain idea is seen as preposterous, and the next moment it’s being treated as conventional wisdom. There seems to be a psychological mechanism involved, where nobody wants to be seen as the last fool to finally get the picture. [...]

The most compelling example of lots of minds suddenly going “snap” is, to my mind, the sudden demise of the USSR. It happened with Boris Yeltsin standing atop a tank, and being asked the question: “But what will become of the Soviet Union?” And his answer, pronounced with maximum gravitas was: “Henceforth I shall only refer to it as the FORMER Soviet Union.” And that was that. After that, whoever still believed in the Soviet Union appeared as not just foolish, but actually crazy. For a while, there were a lot of crazy old people parading around with portraits of Lenin and Stalin. Their minds were too old to go “snap”.

Here in the US, we are yet to experience any of the really major, earth-shattering realizations, the ones that look preposterous immediately before and completely obvious immediately after they occur. We have had minor tremors, mostly relating to financial assumptions. Is real estate a good investment. Will private retirement allow you to retire? Will the government bail us all out? All the major realizations are yet to come, or, as my die-hard Yuppie friends keep telling me, “Nothing’s happened yet.”

But by the time something does happen, it will have been too late for us to start planning for it happening. It doesn’t seem all that worthwhile for us to sit around waiting for the happy event of everybody else feeling foolish all at the same time. Arrogant though that may seem, we may be better off accepting their foolishness before they do, and keeping a safe distance ahead of the prevailing opinion.

Because if we do that, we may yet succeed in finding ways to cope. We may learn to dodge financial collapse by learning to live without needing much money. We may create alternative living arrangements and informal production and distribution networks for all the necessities before commercial collapse occurs. We may organize into self-governing communities that can provide for their own security during political collapse. And all of these steps put together may put us in a position to safeguard society and culture.

Or we can just wait until everyone starts agreeing with us, because we wouldn’t want them to look foolish.

4.
The important dynamic, when it comes to financial collapse, is obvious by now. It’s the collapse of credit pyramids, “the whole house of cards” as President Bush put it. The technical term is “deleveraging,” and the response is the bailout. The federal government will be bailing out the banks and the insurance companies, the auto companies, and state governments. Call it the bail-out treadmill: we are borrowing faster and faster just to keep from falling down. The treadmill is actually a good metaphor. Imagine what would happen if you went to a gym, got on a treadmill machine, and just kept punching up the speed, as high as it will go. What happens is you trip and fall, and find yourself flying backwards.

It is instructive to ask the question, Who are we borrowing this bail-out money from? People will tell you that we are borrowing it from “the taxpayer.” But it’s not as if federal tax receipts have automatically shot up by a few trillion over the past couple of months, and so this begs the question, Who is “the taxpayer” going to borrow this money from in the meantime? From other Americans? No, because our savings rate has been abysmally low for quite some time now, and what little we have saved is in housing equity, which is dwindling, and in stocks and bonds, through mutual funds and 401ks and such, which are down by a third or so. The value of these investments is crashing, and if we dumped these investments to raise the cash to fund this new debt, that would just make them crash even faster. In effect, we’d only be moving money from one pocket to another. So, really, the bailouts have to be financed by foreigners. And what if these foreigners decide not to trust us with any more of their savings? Then our only recourse is to “monetize” the debt: to print money.

And so the next question is, how much money would we have to print? The purpose of the bailouts is to provide liquidity to insolvent companies, to avoid deleveraging. To understand what that means, we have to understand that for every actual dollar within the economy, in the sense of it not being borrowed, there are over 13 dollars of borrowed money, which only exists while the debt can be rolled over. If our credit is maxed out while the economy is growing, that’s bad enough, but the US economy is shrinking because of the recent oil shock. A smaller economy cannot carry as much debt, and this is part of the reason why we have deleveraging. Once the process of debt going sour gets started, it is hard to stop, and if deleveraging were to run its course, we would be down over 1300%. To monetize that much debt would require over 1300% inflation. And once that gets started, it becomes very hard to stop.

And, that, believe it or not, is actually the good news. Because most of our debt is denominated in our own currency – the US dollar – the US will not have to declare sovereign default, like Russia was forced to do in the 1990s. Instead, we can inflate our way out of national bankruptcy, by printing a lot of dollars. We will repay our national debt, but we will do so in worthless paper money, bankrupting our international creditors in the process. There is sure to be plenty of pain for everyone, especially everyone who is used to having plenty of money, because their money will no longer make the world go around. Once the US has to start earning foreign currency in order to pay for imports, you can be sure that imports will become quite scarce.

[...]

6.
Commercial collapse, when it arrives, will again cause much more of a psychological crack-up than you’d expect from a purely organizational problem. The quantities of immediately available goods and services right before and right after the collapse would remain about the same, but because market psychology is so ingrained in the population, no other ways of coping would be considered. Hoarding would become widespread, with looting as the obvious antidote. There would be an instant, huge black market for all sorts of necessities, from shampoo to vials of insulin.

The market mechanism works well in some cases, but it doesn’t work at all when key commodities become scarce. It leads to profiteering, hoarding, looting, and other pernicious effects. [...]

If by the time commercial collapse is upon us, there is still enough of the political system left intact to implement rationing and price controls and emergency distribution schemes, then we should count these among our blessings. Such heavy-handed governance is certainly not a crowd-pleaser during times of plenty, when it’s also unnecessary, but it can be quite a life-saver during times of scarcity. The Soviet food distribution system, which was plagued with chronic underperformance during normal times, proved to be paradoxically resilient during collapse, allowing people to survive the transition.

7.
If prior to commercial collapse the challenge is finding enough money to afford the necessities, afterward the challenge is getting people to accept money as payment for these same necessities. Many of the would-be sellers will prefer to be paid in something more valuable than mere cash. Customer service comes to mean that customers must provide a service. Given that most people won’t have much to offer, other than their now worthless money, should they still have any, most purveyors of goods and services decide to take a holiday.

With the disappearance of the free and open market, even the items that still are available for sale come to be offered in a way that is neither free nor open, but only at certain times and to certain people. Whatever wealth still exists is hidden, because flaunting it or exposing it just increases the security risk, and the amount of effort required to guard it.

In an economy where the vast majority of manufactured items is imported, and designed with planned obsolescence in mind, it will be difficult to keep things running as imports dry up, especially imports of spare parts for foreign-made machinery. The pool of available equipment will shrink over time, as more and more pieces of equipment become used as “organ donors.” In an effort to keep things running, entire cottage industries devoted to refurbishing old stuff might suddenly come together.

8.
It is sometimes hard to discern political collapse, because politicians tend to be quite good at maintaining the pretense of power and authority even as it dwindles. But there are some telltale signs of political collapse. One is when politicians start moonlighting because their day job is no longer sufficiently gainful. Another is when regional politicians start to openly defy orders from the political center. Russia experienced plenty of each of these symptoms.

One thing that makes political collapse particularly hard to spot is that the worse things get, the more noise the politicians emit. The substance to noise ratio in political discourse is pretty low even in good times, making it hard to spot the transition when it actually drops to zero. The variable that’s easier to monitor is the level of political embarrassment. For instance, when Mr. Nazdratenko, the governor of the far-east Russian region of Primorye, stole large amounts of coal, made strides in the direction of establishing an independent foreign policy toward China, and yet Moscow could do nothing to reign him in, you could be sure that Russia’s political system was pretty much defunct.

Another telltale sign of political collapse is actual disintegration, where regions declare independence. In Russia, that was the case with Chechnya, and it led to a prolonged bloody conflict. Here, we might have a “Reconquista” where former Mexican territories become ever more Mexican, the South might rise again. New England, California, and the Pacific Northwest might decide to go their separate ways. Once the interstate highway system is no longer viable and the remaining domestic airlines are extinct, there is not much to keep the two coasts together. What once united the country was the construction of the continental railroad, but railroads have been too neglected to hold it together now. A country consisting of two halves tied together via Panama Canal is de facto at least two countries.

Yet another thing to watch for is foreign incursions into domestic politics. When foreign political consultants start stage-managing elections, as happened with Yeltsin’s reelection campaign, you can be sure that the country is no longer in charge of its own political system. In the US, there is a gradual surrender of sovereignty, as sovereign wealth funds buy up more and more US assets. That sort of thing used to be considered akin to an act of war, but these are desperate times, and they are allowed to do so without so much as a nasty comment. Eventually, they may start making political demands, to extract the most value out of their investments. For instance, they could start vetting candidates for public office, to make sure that we remain friendly to their interests.

Lastly, the power vacuum created by the collapse of legitimate authority tends to be more or less automatically filled by criminal syndicates. These often try to commandeer the political establishment by getting their heads elected or appointed to political offices. Examples include Russian oligarchs, such as Boris Berezovsky, who got himself elected to Duma, the Russian parliament, and Mikhail Khodorkovsky, who thought he could use his oil wealth to buy his way into the political establishment. Luckily for Russia, Berezovsky is in exile in England, and Khodorkovsky is in jail.

9.
A great many people in the US insist that they do not need government help, and that they would do just fine if only the government would leave them alone. But this is really just a pose; there is a great deal that that government does to make their lives possible. In the United States, the federal government keeps many people alive through programs such as Medicaid, Social Security, and food stamps. Local governments provide for trash removal and water and sewer line maintenance, road and bridge repair, and so on. [...]

When all of that starts to unravel, it is likely to do so from the bottom, not from the top. Local officials are more accessible than remote Washington bureaucrats, and so they will be the first to be overwhelmed by the anger and confusion of their constituents, while Washington remains unresponsive. One likely exception may have to do with the use of federal troops. It seems almost a given that troops repatriated from the more than 1000 foreign military bases will see action right here at home. They will be reassigned to domestic peacekeeping duties.

10.
Aside from the big government programs, there is little available in the US to help those in need. Again, Americans make a big show of their philanthropy, but, compared to other developed countries, they are in fact quite stingy when it comes to helping those in need. There is even a streak of political sadism, which, for example, shows up in people’s attitudes toward welfare recipients. This sadism can be seen in the so-called welfare reform, which has forced single mothers to work jobs that barely cover the cost of daycare, which is often substandard.

[...]

Since neither government largesse nor charity is likely to provide for those who cannot provide for themselves, we should look for other options. One promising direction is a revival of mutual help societies, which take membership contributions and then use them to help those in need. At least in theory, such organizations are vastly better than either government aid or charities. Those who are helped by them do not have to surrender their dignity, and can survive difficult times without being stigmatized.

To make it intact through times of great need, the only reasonable approach, it seems to me, is to form communities that are strong and cohesive enough to provide for the well-being of all of their members, that are large enough to be resourceful, yet small enough so that people can relate to each other directly, and to take direct responsibility for each other’s well-being.

[...]

11.
If this effort fails, then the outlook becomes dire indeed. I would like to emphasize, once again, that we must do all we can to avoid this stage of collapse. We can allow the financial system, and the commercial sector, and most of the government institutions to collapse, but not this.

What makes this particularly challenging is that the existence of finance and credit, of consumer society, and of government-imposed law and order has allowed society, in the sense of direct, mutual help and of freely accepting responsibility for each others’ welfare, to atrophy. This process of social decay may be less advanced in groups that have survived recent adversity: immigrant and minority groups, or people who served together in the armed forces. The instincts that underlie this behavior are strong, and they are what helped us survive as a species, but they need to be reactivated in time to create groups that are cohesive enough to be viable.

12.
Culture can mean a great many things to people, but what I mean here is a specific very important element of culture: how people relate to each other face to face. Take honesty, for instance: do people demand it of themselves and others, or do they feel that it is acceptable to lie to get what you want? Do they take pride in how much they have or in how much they can give? I took this list of virtues from Colin Turnbull, who wrote a book about a tribe in which most of these virtues were almost entirely missing. Turnbull’s point was that these personal virtues are also all but destroyed in Western society, but that for the time being their absence is being masked by the impersonal institutions of finance, commerce, and government.

I believe that Turnbull has a point. Ours is a cold world, in which the citizens are theoretically expected to fend for themselves, but in reality can only survive thanks to the impersonal services of finance, commerce, and government. It only allows us to practice these warm virtues among family and friends. But that is a start, and from there we can expand this circle of warmth to encompass more and more of the people who matter to us and we to them.

[...]

13.
In his amazing book about the legacy of European colonialism, Exterminate all the Brutes, Sven Lindqvist makes the stunning observation that violence renders one unrecognizable. The aggressor, whether active or passive, becomes a stranger.

The violence does not have to be physical. One subtle type of mental violence that abounds in our world is the act of refusing to acknowledge someone’s existence. We may believe that it makes us safer to walk past people without making eye contact. That is certainly true if our look is blank and indifferent, and it is then better to avert one’s gaze than to look, and in effect to say: “I do not recognize you.” That definitely does not make you any safer. But if your look says “I see you, you are OK,” or even “I recognize you,” then the effect is quite the opposite. Dogs understand this principle perfectly well, and so should people.

14.
When I was doing a radio tour to promote my book, a lot of the AM radio motor-mouths who interviewed me would sum up the interview with something like “So this is all doom and gloom, isn’t it.” And then I would have maybe 15 seconds for a rebuttal. So here is my standard 15 second rebuttal: “No, my message is actually quite hopeful. I want to let people know that they can find ways to lead happy, fulfilling lives even as this doomed system crumbles all around them.” Here, I can give you a longer answer.

[...]

Commercial collapse need not be final. It is quite possible that a new economy will arise spontaneously, one without all the frills and the waste, but able to provide for most of the basic needs. In the places that are socially and culturally intact, this is almost inevitable, as people take charge and start doing what’s necessary without waiting for official sanction.

[...]

15.

If we know what’s coming, we can start ignoring the things that we will not be able to rely on. If we do enough of this, we may find ourselves in a different world, quite possibly a better one, rather quickly. Here is a personal example. Some years ago, I decided to give up the car, finding it quite impractical, and started bicycling instead. It wasn’t that easy at first, but once I got used to it, a strange thing happened to my perception: I started seeing cars quite differently. On the way to work in the morning, I would ride along a stretch of highway, which was always packed with cars. When you are driver, you see it as normal, because you are part of this herd of mechanized insects. But what I saw was sheet metal boxes with people imprisoned inside them, strapped down to a chair inside a tiny padded cell, and most of these poor crazies were just pictures of misery: an angry, desperate, lonely mob, condemned to move about in circles. And then I would happily pedal away, through a park and around a pond, and leave that horrible, dying world behind.

And so it is with a great many things. We can wait until the lifestyle that is killing the planet and is making us crazy and sick is no longer physically possible, or we can opt out of it ahead of time. And what we replace it with can be difficult at first, but quite a lot better for us in the end.

16.
So let us summarize our findings. Financial collapse is already quite far along, and is guaranteed to run its course. Bailouts can make insolvent institutions look solvent for a time by providing liquidity, but one thing they cannot provide is solvency. For instance, no matter how much we bail out the auto companies, making any more cars will still be a bad idea. Similarly, no matter how much money we give to banks, their loan portfolios, loaded down with houses built in places that are inaccessible except by car, will still end up being worthless. By continuously nationalizing bad debt, the country will make itself into a bad credit risk, and foreign lenders will walk away. Hyperinflation and loss of imports will follow.

17.
Commercial collapse is likewise guaranteed to happen. One key import is oil, and here the loss of imports will cause much of the economy to shut down, because in this country nothing moves without oil. But it should be possible to come up with new, far less energy-intensive ways to provide for the basic needs.

18.
Political collapse is guaranteed as well. As tax receipts dwindle, municipalities and states will no longer be able to meet the minimal maintenance requirements for existing infrastructure: roads, bridges, water and sewer mains, and so forth. Municipal services, including police, fire departments, snow removal and garbage collection, will also be curtailed or eliminated. The better-organized communities may be able to find ways to compensate, but many communities will become impassable and uninhabitable, generating a flood of internal refugees.

Currently, the political class couldn’t be farther from understanding what is about to happen. I listened in on one of the recent presidential debates (I don’t have a television set, but I caught a chunk of it on NPR). It struck me that the two candidates spent most of the time arguing over ways of spending money that they don’t have. For me, listening to them was a waste of time that I didn’t have. I suspect that my book, would sell better if McCain got elected; nevertheless, I choose to remain selflessly apolitical. National politics is a distraction and a waste of time.

Actually, I should be gratified. A while ago I proposed a whimsical Collapse Party. The Collapse Party platform featured planks such as the freeing of prisoners to whittle down the prison population before a general amnesty becomes necessary due to lack of funds, a jubilee – forgiveness of all debts – to wipe the slate clean of all these bad loans, and a few others. Elsewhere, I proposed that it is a good idea to stop making new cars – just run down the ones we already have, and we’ll run out of cars just as we run out of gas. I am happy to report that this has been banner year for the Collapse Party. Without fielding a single candidate, we managed to push through much of our agenda: many states are releasing prisoners due to the fiscal crisis, the federal government is now involved in avoiding foreclosures, a huge credit card debt write-off is in the works (not quite a jubilee, but still…) and now automakers are ready to consolidate or declare bankruptcy. Next year, perhaps we will repatriate troops and shut down overseas military bases, also in line with the Collapse Party platform.

19.
Continuing with our recap, I see social collapse as avoidable, but not in all places. In many places, the task is to reconstitute society before the first three stages run their course, and it may already be too late. But this is where we need to make a stand, if only to be remembered for something more than the sum total of our mistakes.

20.
Lastly, cultural collapse is something that’s almost too horrible to contemplate, except that in some places it seems to have already happened, and is being masked by the various institutions that still exist, for the time being. But I believe that a lot of people will come around and remember their humanity, the better parts of their natures, when dire circumstances force them to rise to the occasion.

Also, there are some intact pockets of culture here and there that can be used as a sort of cultural seed stock. These are communities and groups that have seen some adversity in recent times, and have some social cohesion left over from the experience. They may also be those who made certain conscious decisions, to simplify their living arrangements in order to lead saner, more fulfilling lives. We must do all we can to avert this final stage of collapse, because what is at stake is nothing less than our humanity.

21.
I hope that, if you have been following along, by this point this slide is self-explanatory. Collapse is not one monolithic thing. Each kind of collapse requires a response, be it jumping clear ahead of time, sitting it out, or opposing it with all you got. At this point, if anyone in this room got up and tried to tell us what to do to avoid financial collapse, we would probably find that quite funny. On the other hand, if we stand by and let social and cultural collapse unfold, then what’s the point of any of this?

That’s all. Thank you for listening.

Oil prices and the dollar

C. P. Chandrasekhar
Jayati Ghosh

Originally published by Business Line, February 26, 2008.

The relationship between oil and the US dollar has been at the heart of the way international economic relations have been organised for more than half a century.

International capitalism has relied on the US dollar as the basic reserve currency, and has therefore granted it an essential degree of stability for several decades despite the large external deficits run by the US and the periodic swings in its valuation in currency markets.

More than half of aggregate world exports are denominated in dollars; more than 80 per cent of all international currency transactions similarly involve dollars.

Loans made by the IMF and other multilateral institutions are denominated in dollars. More than 60 per cent of the foreign exchange reserves held by central banks of all countries are in dollar assets.

This has obviously meant huge advantages for the US. It has allowed the US economy to benefit from access to imports that can effectively be paid for simply by printing dollars, and has therefore allowed the US to run enormous current account deficits for prolonged periods. It has encouraged the rest of the world to finance these deficits by providing its savings to be held in US or dollar-denominated financial assets, to the point that all the developing regions of the world are also building dollar reserves that directly or indirectly find their way to the US economy.

Dollarisation of oil markets

A key feature of this entire process has been the dollarisation of world oil markets. Oil is the central commodity of industrial capitalism, absolutely essential for the production of essential and widely used goods. All industrial economies, and most developing ones, would grind to a halt with even a moderate disruption of oil supplies.

Most of the world oil trade has operated and continues to operate in dollars, even when the US is not the trade partner. Oil prices are defined in dollars for most oil exporters. As a result, oil importing countries also pay in dollars. The oil-exporting countries accumulate dollar reserves, which have been preferentially invested back in the US because of the zero currency risk involved in this.

Indeed, this recycling of petrodollars has been very significant as a source of finance for US trade deficits in several periods, including in recent times. Other countries also hold dollars for future oil purchase.

The dramatic increase in the price of oil in the past few years could be argued to have accentuated this tendency. As Chart 1 indicates, oil prices have increased dramatically in dollar terms especially from 2003, going up by nearly 2.5 times between 2003 and 2007.

This has obviously contributed very significantly to the wealth of oil exporters, and allowed them to generate balance of payments surpluses and build foreign exchange reserves, which have then been invested dominantly in dollar assets in US markets.

However, this is also the period that the US dollar has been depreciating, especially with respect to some of the other major currencies such as the euro and the Japanese yen. As a result, the change in oil prices has been less striking in terms of these currencies than in terms of the dollar.

The currency factor

Chart 2 shows this with a comparison of oil price indices denominated in dollars and euros. The start of 2004 appears to mark the significant shift in this case, from when increases in dollar price of oil have been more rapid than the euro price, compared to the earlier period. This reveals some interesting aspects of the oil prices up to 2005. For example, between early 2001 and early 2005, the oil price in dollar terms increased by 46 per cent. However, in euro terms it went up by only 8 per cent, a negligible increase.

Even the most recent oil price increase has been less dramatic in euro terms than when considered in dollar prices. In the two years between January 2006 and January 2008, dollar oil prices rose by 46 per cent but in euro terms they increased by only 17 per cent.

This suggests that a significant part of the sharp increase in oil prices actually reflects the dollar depreciation, rather than pure increases in the commodity’s price. This is not to deny that the most recent period has witnessed very sharp increases in oil prices — as Chart 3 shows, oil prices even in SDR terms have gone up quite sharply, even if not as much as they have in dollar terms.

However, the fact that the change has been much more marked in dollar prices because of dollar devaluation has significance for both the present and future of the world oil market. This is because dollar devaluation can affect both world oil supply and demand.

A 2004 article by Coilin Nunan argued that, other things being equal, “dollar devaluation reduces drilling activities in areas where most of the costs are denominated in non-dollar appreciating currencies such as the North Sea.

It also reduces drilling activities in the oil producing countries. Dollar depreciation reduces these countries’ purchasing power and increases domestic inflation levels, all other things being equal.

Dollar devaluation increases demand for oil in countries with non-dollar appreciating currencies. It also increases demand for gasoline in the US as thousands of Americans spend their vacations at home instead of travelling.”

Nunan had therefore argued that, regardless of other factors such as OPEC decisions on production or other events, dollar devaluation on its own can have the effect of tightening supplies, increasing demand and thereby keeping oil prices high.

This is what makes the recent rather sharp fall of the dollar, especially vis-À-vis the euro, notable. Chart 4 shows that between January 2006 and January 2008, the dollar has depreciated by 24 per cent against the euro. Of course, it could be argued that there are other more structural reasons for the high oil prices.

Worldwide, oil production has been greater than annual discoveries of new reserves since 1980, and many experts suggest that global production is currently at or near its maximum. If the arguments about global oil production reaching its peak within the near future are correct, then oil exporters will continue to benefit at least as long as their reserves last.

Switch to euro

Nevertheless, it is true that the depreciating dollar in effect means a reduction (compared to potential) in real income of oil exporters, especially those that import substantially from other non-dollar areas (such as the European Union and increasingly China). It is obviously possible for such oil-exporting countries to consider seriously the option of shifting towards denominating oil trade in euros.

It is also easy to see why the US would resist such attempts with all the strategic and military means it can command. It would force the US to generate a trade surplus to pay for its oil imports, involving a huge and painful shift from trade deficit to surplus. And this would be required at a time when the US economy is already imploding because of the continuing fallout of the sub-prime mortgage-induced financial crisis.

It is worth noting that the only OPEC country that had dared to make the switch to using the euro in oil transactions in the early part of the decade was Iraq, which formally made the change in November 2000 but paid the price of the US invasion in 2003 and subsequent destruction of the economy and polity. Since then, Iran has also openly considered such a possibility for its own oil exports, and has also aroused US wrath and thinly veiled threats of aggression. More recently, Venezuela has also proposed such a switch within OPEC and is already engaging in non-dollar barter deals for oil within the Latin American region.

Even less blatant policies, such as simply changing the composition of foreign currency reserve holdings away from the dollar, are viewed with hostility not only by Washington but by international finance. Just a few months ago in mid-November 2007 there was a sudden spurt in global oil prices as markets responded to the news reports of OPEC members openly discussing the potential gains of converting their cash reserves to the euro and away from the US dollar.

There is a problem in all this, however — the problem of finding an alternative engine for the global economy, and source of demand for world exports, if the US economy stops playing this role. The problem may not be so severe for oil-exporting countries, since they are likely to face increasing world demand and rising prices for some time in future.

But for other countries, especially oil-importing developing countries, this combination of high oil prices and slowing US demand may well be economically devastating. This may explain why there has been only a marginal shift out of holding US dollar reserves. Between the first quarter of 2004 and the last quarter of 2007, the share of global foreign exchange reserves fell slightly from 67.5 per cent to 63.7 per cent, and this is probably substantially due to the effect of the dollar devaluation itself.

That is because most other countries, including developing countries, continue to see the US economy as the main source of hope for generating demand for their own future expansion, despite the current woes of the US. But this is overoptimistic, and it is also foolish to think the adverse denouement can be avoided by somehow propping up the distressed US banks that irresponsibly caused the sub-prime crisis through cash infusions. Instead, developing countries must look for other diversified patterns of both import and export.

[Kevin Phillips, author of "Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism", surveys the economic crisis facing U.S.-dominated global capitalism - including peak oil, the collapse of the Dollar, rising food costs, and the growing dominance of the banking and credit industries. This is fairly radical stuff coming from a former GOP strategist.]

AMY GOODMAN: What do you think is one of the most serious signs of this overall global crisis of American capitalism?

KEVIN PHILLIPS: Well, not to single out just one, I have an approach I use to say that normally when a country is—United States is—heading into a recession, there are one or two, sometimes three, factors that you worry about. But at this point in time, the American economy, you can think of it as being kind of in a shark tank, and there are like six or seven sharks, and you don’t usually see anything like that number.

And just to skim the list quickly, we have a financialized economy in which we don’t make much anymore, and finance is up to 20 to 21 percent of the US GDP, and manufacturing down to 12. Finance dominates the US economy.

The second problem is that we have massive debt, both public and private. It’s gone up about 700 percent since the early 1980s, staggering numbers where there—we basically have $50 trillion worth of credit market debt, which is tradable debt. And people just have no idea of this. It’s not government debts that’s the problem, it’s private sector debt, both financial and corporate and then in the consumer sector with credit cards and then mortgage debt. We just have this extraordinary level of it. 340 percent of the gross domestic product, that’s how big debt is. And the last time something was close to this—and it was less—was in the late 1920s and early 1930s. So it’s enormously a vulnerable, dangerous thing.

Third shark in the tank is the collapse of home prices. They continue to follow the scary trajectory that has people predicting that there’s going to be a 15 to 20 percent decline in home prices, which would be the sharpest since the Great Depression.

Then you can go to shark number four, that’s global commodity inflation. Oil and food, people are as worried now about the price of milk as they are about the price of a gallon of gasoline. That’s a global problem, but it makes a mockery of the administration’s pretense that there’s no inflation.

Now, the next shark in the tank is obviously the price of oil. And it’s not just global commodity inflation, it’s the problem that we see of oil production peaking in the world sometime in the next ten to twenty years. And the advance signs of this are scarcity in peaking in certain countries. And the prediction just came out of Goldman Sachs a couple of days ago that within a fairly short period of time, probably this year, you’re going to see $150 or $200 oil.

And that’s because, partly at least, of the scarcity, but the US dollar has been tied historically since the 1970s to oil, because of a deal worked out when OPEC wanted a price increase. Henry Kissinger and others were involved in getting OPEC to commit that they would sell and buy oil only in dollars and that they would invest their petrodollars in the US, in Treasury debt. So we have a currency that’s profited from the connection to oil, which sustained it in many ways. But now oil has boomeranged on the United States.

We have to spend $400 billion a year to import the oil we need. We don’t have the basis for controlling oil anymore, after the idiocy in Iraq, which was partly put in motion to solve the oil problem, and instead you’ve got oil prices going up 500 percent in five years. So the dollar is on the ropes, and that’s the other shark in the tank.

There has never been a period in anybody’s memory, except very old people who remember the late ’20s and ’30s, where you had so many things converging. And that’s what makes it frightening. And every time the administration says it looks like it’s under control or it’s half-over, you start to get evidence that, no, it’s not under control, and maybe it’s not even a third over.

AMY GOODMAN: Our guest is Kevin Phillips, his latest book, Bad Money: Reckless Finance, Failed Politics, and the Global Crisis of American Capitalism. I want to ask you about how commodity speculation has affected world food prices. We’re seeing food riots now around the world.

KEVIN PHILLIPS: Well, there’s a degree of commodity speculation going on, because a lot of the hedge funds in the United States have a major allocation to commodities, and they see commodities as a particularly attractive play with some of the major currencies losing their respect. And that’s particularly true of the dollar. American hedge funds think it may make more sense to be in commodities than to be in dollars or in American stocks.

But I would not say that the principal driver of global food prices is speculation. A lot of it has to do with climate change. Some of it has to do with energy. Grains that used to be used for food are now possible sources of energy. So is sugar in Brazil. So you’re getting an overlap of what’s food and what’s energy, and the whole commodity sector is being pushed up by that, especially as more and more people move into the lower middle class or middle class in China, in India, in Brazil, and the demand for food and for energy keeps climbing. So this is more than speculation, but they do play a role.

AMY GOODMAN: Kevin Phillips, you also write about peak oil. What do you mean? And how does this fit into the global crisis of American capitalism?

KEVIN PHILLIPS: Well, it’s a very unfortunate circumstance. The United States used to be the big oil power. We had the big oil resources in the twentieth century, and oil powered our success in two world wars, it made our industry the strongest in the world, and it built our transportation and residential infrastructure, which is now something of a threat because it consumes so much oil. But the United States at this point only produces a third of the oil it needs.

The peak oil question has to do with whether or not global production isn’t either about to peak within the next five, ten, fifteen years—some people believe that it’s peaked already. And if that’s the case, you can expect that, given the demand for oil that can’t be replaced by other things too quickly, certainly not in five to ten years, you’re going to see oil prices just keep climbing. And if people can assume they keep climbing, then they become a speculative vehicle, if you want to get your money out of dollars, which then makes oil prices rising or a huge negative for the dollar, which means that we have this currency which is weakening in ways that raise all kinds of other questions.

So peak oil is one of those things you just won’t see on the front pages of the newspapers, but I wish they would deal with it, because there are lots of things going wrong with the economy that the media, as well as the politicians, really don’t want to put on page one, and page one is where they ought to be. This is serious stuff.

AMY GOODMAN: Kevin Phillips, what could you see as the global crisis at its worst?

KEVIN PHILLIPS: Well, the global crisis has several dimensions. One of the dimensions, obviously, is that if the economy goes sour and if we have a run on the dollar and the value of American dollars declines in a severe way, you’re going to have foreigners buying up a lot more of our industry, and people would want to sell it to them. America’s role as a global debtor would just mushroom. We’d be at the beck and call of other countries. The dollar would be subject to being abandoned by the oil producers. You can have a major league recession in the United States, which of course then would be compounded by all this huge amount of debt beginning to fall in.

But I think there’s another dimension that people tend to forget here. If you have the rise of finance, as we’ve seen it in this country, to be the largest part of the private economy, you have on one hand the growth of the Federal Reserve Board in regulating more and more of the American economy, and they’re partly controlled by the banking sector. They’re not elected by anybody. So you’re missing a democratic ingredient in that respect.

It’s also very true that the growth of finance has involved the growth of a debt and credit industry. And part of what finance has brought as it grows is that more and more people are in more and more debt, and the amount of debt that individuals have and that they have to service is increasingly a burden. And people get into debt to maintain either a living standard they can’t afford or one that’s been nurtured by consumerism and advertising to get people to spend money they don’t have. So you’ve got an element that the public is losing control of its own economic future when you have an economy that’s full of debt and credit industries, which are a mainstay of finance.

The implications of all of this for who controls what within the United States are huge, and that will be especially true if a lot of the debt we’ve built up starts imploding because of higher inflation and higher interest rates.

Video available at Democracy Now!

Update April 30, 2008: Iran dumps U.S. dollar for oil trades – “Iran, OPEC’s second-largest producer, has stopped conducting oil transactions in U.S. dollars.”

In the last eight years implementing the plans for the Project for the New American Century (PNAC) designed “to promote American global leadership” has backfired.

To accomplish PNAC’s goals, all threats needed to be eliminated. From the onset, the United Sates earmarked two countries as mortal enemies: Venezuela and Iran. With Venezuela, it is well documented that the CIA attempted to overthrow the democratically elected government of Chavez. And with Iran, the United States continues to use it as a scapegoat for its failures in Iraq. These cold war tactics however are proving to be US’s undoing.

The United States is hemorrhaging from every orifice, and oil prices can be used to measure the rapidity of its demise.

In April 2006, Venezuelan president Hugo Chávez launched “a bid to transform the global politics of oil by seeking a deal with consumer countries which would lock in a price of $50 a barrel.” At the time, this proposed price was $15 a barrel below global market levels, and what must surely seems to be a steal at the current $118 a barrel.

How critical was the decision not to take Chavez’s proposal seriously? Just two short years later, in April 2008, President Mahmoud Ahmadinejad of Iran is stating that oil at current levels is too cheap. That’s calling a 136% increase in price not enough, and most analysis and the market seem to agree. So what has changed in that time? The perceived value of the US dollar of course.

US dollar versus euro

In 1999 the euro was introduced as an accounting currency (travelers’ checks, electronic transfers, banking, etc.) and then launched as physical coins and banknotes on 1 January 2002. The euro replaced the former European Currency Unit (ECU) at a ratio of 1:1. However its value quickly began to drop, reaching a low of 0.8252 relative to the US dollar on 26 October 2000. This proved to be a solid support level for the next two years, and in 2002 the euro began its appreciation reaching a high of 1.60 as of 23 April 2008.

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Aside from consolidating power for the new European Union, the euro added liquidity and flexibility to the financial markets which in time has made the euro a very attractive and safe investment as a major global reserve currency.

As of the beginning of 2007, within five short years, euro notes in circulation have exceeded the value of circulating US dollar notes. Considering that the dollar has been devalued by approximately 50% since reaching its high relative to the euro in 2000 (the euro has gained approximately 100%), we can only assume that according to global markets, the US dollar is losing its perceived value.

Price of oil in US dollars and euros

Oil prices had a recent low point in January 1999 at $8 per barrel, after “increased oil production from Iraq coincided with the Asian financial crisis, which reduced demand. The prices then rapidly increased, more than tripling by September 2000 (35 dollars per barrel), then fell until the end of 2001 before steadily increasing.”

1999 is the same year that the euro was introduced as an accounting currency. By the time that the euro was launched as physical coins and banknotes in January 2002, oil was trading at approximately $20 a barrel, and at present, on 23 April 2008, oil is trading at $118 a barrel.

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Let’s compare the rise in the price of oil relative to the two currencies.

If we take Autumn of 2000 as our base point when the euro was trading at its low of 0.8252 relative to the US dollar and oil was trading at $35 dollars per barrel, we get the following results: The increase in price of oil in euros has been 74% since 2000, while it has been a 237% increase in US dollars.

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Now let’s take a look at what the increase in price of oil in euros and US dollars has been since April 2006 when Hugo Chávez wanted to lock the price at $50 per barrel. (Note: in April 2006 the euro was trading at approximately 1.22 relative to the US dollar).

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Taking into account that the euro had a dramatic increase in value from 2002 to 2005, and then began a retraction period through to 2006, the above numbers confirm what Ahmadinejad has been stating, that “the dollar is not money any longer but a handful of paper distributed in the world without commodity support,” and that oil is undervalued at present levels when priced in US petrodollars.

http://www.chycho.com/?q=oil_us_dol…

Originally published in the Wall Street Journal.

Boom Cuts U.S. Clout,

Revives Middle East;

Dark Days for Detroit

By NEIL KING JR. , CHIP CUMMINS and RUSSELL GOLD

The surging price of oil, from just over $10 a barrel a decade ago to $100 yesterday, is altering the wealth and influence of nations and industries around the world.

These power shifts will only widen if prices keep climbing, as many analysts predict. Costly oil already is forcing sweeping changes in the airline and auto sectors. It is intensifying the politics of climate change and adding urgency to the search both for fresh sources of crude and for oil alternatives once deemed fringe.

The long oil-price boom is posing wrenching challenges for the world’s poorest nations, while enriching and emboldening producers in the Middle East, Russia and Venezuela. Their increasing muscle has a flip side: a decline of U.S. clout in many parts of the world.

Steep gasoline prices also threaten America’s long love affair with the automobile, while putting strains on many lower-income people outside big cities, who must spend an increasing share of their budgets just on fuel to get to work.

No one can say for sure whether sky-high oil — part of a price boom in a wide range of commodities, from gold to wheat — is here to stay. But most in the industry agree that a 20-year stretch in which oil was consistently cheap is long gone. The global thirst for oil shows little sign of retreating, and large new discoveries are few. Some in the industry say prices could go far higher; others suspect that speculators — or an economic slump in the U.S. or China — could send prices falling in the near term.

Yesterday, with a single trade, crude-oil futures hit an intraday high of $100 a barrel, a record for the U.S. benchmark. For the day, they rose $3.64 to a record close of $99.62 a barrel. Crude is still shy of the inflation-adjusted peak of $102.81 a barrel set in April 1980, amid political turmoil in Iran and unrest elsewhere in the Middle East. The 1980 peak in nominal terms was $39.50 a barrel.

The arrival of $100-a-barrel oil adds to the pressure on the U.S. economy, which has sustained a big blow from a drop in housing prices and a wave of foreclosures. Even at today’s prices, though, the oil spike alone isn’t enough to push the world into recession, economists say.

When crude oil hit its 1980 high, drivers squealed and the economy slumped. So far there is no comparable pain, and America, which consumes a quarter of the world’s crude, retains its taste for big cars and energy-devouring homes. That’s largely because the U.S. economy is more efficient and most Americans spend less of their disposable income — about 4% — on gasoline than in 1980, when they spent about 6%.

The robust economies of Asia, especially China, have so far swallowed the price surges with relative ease. That’s because the price spurt this time is itself largely caused by surging demand within the developing world, not by politically induced supply shocks as in the 1970s and early 1980s.

But there are signs of strain. China, in a bid to limit demand and the huge fuel subsidies it gives consumers, announced in October that it would impose an almost 10% increase in domestic prices for gasoline and diesel fuel. Other countries that heavily subsidize domestic fuel use, which include the oil-rich states Iran and Venezuela, are feeling the pinch as prices climb.

Impact on Middle East

Oil’s run-up is bringing the most startling changes of all to the Middle East. Big producers like Saudi Arabia and the United Arab Emirates are using their billions in profits to build their economies with roads, schools, airports and entire new cities. The value of hydrocarbon exports from the Middle East and Central Asia is expected to approach $750 billion this year, almost four times the level in 2001, according to the International Monetary Fund.

The region’s new wealth has triggered a bout of deal making that has bankers rushing to the petrostates of the Persian Gulf. McKinsey & Co. estimates that the world’s biggest investors of petrodollars — including state-owned vehicles known as sovereign-wealth funds — now manage as much as $3.8 trillion in assets. The Abu Dhabi Investment Authority, which McKinsey estimates manages $900 billion in assets, is today among the world’s largest financial-market participants — about the same size as the Bank of Japan.

Underscoring the region’s new global financial heft, Abu Dhabi recently swooped to the rescue of Citigroup Inc. with a $7.5 billion cash infusion as it struggled with write-downs from this year’s credit crisis.

Even before that deal, Bahrain, Kuwait, Oman, Saudi Arabia, Qatar and the United Arab Emirates, which includes Abu Dhabi, spent about $124.3 billion in the past three years buying up foreign companies, real estate and other assets, according to London-based Dealogic. One transaction underscores the region’s financial-markets ambitions. Dubai, also part of the UAE, agreed to a complex deal with Nasdaq Stock Market Inc. that essentially gives Dubai major stakes in Nasdaq, the London Stock Exchange and Nordic exchange OMX AB.

This wave of oil wealth is blunting America’s influence. Oil money has galvanized the might of Russia under President Vladimir Putin. He has overseen a dramatic consolidation of power and rollback of democracy in Moscow, while sticking a thumb in the West’s eye on issues ranging from independence for Kosovo to the U.S. bid to build an anti-Iran missile-defense system in Europe.

Surging oil prices have also weakened the Bush administration’s efforts to use financial pressure to get Iran to back off its nuclear program. China, eager to secure all possible access to energy, increasingly is turning to Iran as a trading partner, with oil going east and Chinese technology heading the other way. High oil revenue, meanwhile, has kept the otherwise rickety Iranian economy humming and Iran’s current government firmly in power.

In Khartoum, the once-drowsy capital of Sudan, glimmering skyscrapers are rising along the Nile as oil riches attract investors from Asia and the Persian Gulf. Sudan, accused by Washington of supporting terror groups and killing civilians in Darfur, had been hobbled for years by U.S. economic sanctions. Those restrictions are having less effect now, with the desire for oil resources high and with both know-how and capital pouring in from the Gulf and Asia.

Venezuela will continue to use its oil prod, perhaps more aggressively than any other country. In 2005, in one of a series of jabs at the U.S., Venezuelan President Hugo Chávez began offering cut-rate heating oil to poor neighborhoods of the Northeastern U.S. He also has used favorably priced fuel to prop up Fidel Castro and win friends in South America, while shouldering aside U.S. efforts to champion regional trade deals.

Full-Blown Oil Shock

For poor nations that don’t produce oil, the past several years have been a full-blown oil shock. The price rise adds another obstacle to providing modern energy to the estimated 1.6 billion people who have no access to electricity and the 2.4 billion who cook with traditional sources like wood, coal or dung. A recent World Bank study concluded that a sustained $10 increase in the price of a barrel of oil translates roughly into a 1.5% knock to the gross domestic product of the world’s poorest countries.

Few places have been harder hit than Malawi, a small southern Africa country with annual per capita gross domestic product of just $179. According to the World Bank report, a $10 oil-price increase is expected to translate into a 2.2% fall in the GDP of Malawi, where tobacco is the dominant cash drop.

Malawi subsidizes the price of gasoline and paraffin, a petroleum-derived fuel its people use for lighting and cooking. But according to an IMF study, the government is now passing along to the population all fresh increases in energy costs, and then some. Pump prices in Lilongwe, the capital, climbed about 19% in October, to the equivalent of $5.16 a gallon.

“When gasoline goes up, everything goes up, so we really have to struggle to earn a living,” said James Mdachi, 43 years old, an assistant accountant for the government. He and his wife, a teacher, bring in about $200 a month, to support three children and five other dependents.

A world away, U.S. industry has so far managed to take the oil surge in stride, although economists fret that this may not last long. Auto makers, for instance, may have even more reason to fear high oil prices today than they did in the late 1970s, when price shocks and gas lines tipped Detroit’s auto giants into crisis. Then and now, surging petroleum prices caught U.S. auto makers with model lineups full of powerful rear-wheel-drive vehicles designed for an era of cheap gas.

Auto makers have more things to fret about now. Surging oil prices embolden political leaders to call for tougher fuel-efficiency standards and other moves to discourage car use, such as fees that London and some other big cities levy on commuters who drive into congested districts. These ideas are gaining traction because of concern that petroleum-fueled cars and trucks exacerbate climate change. Groups worried about global warming are finding allies in more-conservative circles whose main concern is to enhance security by reducing reliance on oil from unstable nations.

After 20 years of largely leaving fuel-economy standards alone, the U.S. in December enacted an energy bill that requires auto makers to boost the average efficiency of their new-vehicle fleets to 35 miles a gallon from 27.5 by 2020. Auto makers got some important concessions, such as credits for building vehicles designed to burn ethanol and a new classification system that will make it easier for them to continue to sell larger vehicles. But the bill marks the end of an age in which the industry was able to make vehicles heavier and more powerful without making significant gains in fuel efficiency.

Moreover, the 2007 energy bill may not be the last auto makers hear from Washington. As part of her presidential campaign program, Sen. Hillary Clinton has proposed a target of 55 miles per gallon for cars and trucks by 2030.

These proposals threaten a fundamental automotive marketing strategy: Bigger is better. Industry executives, particularly in Detroit, worry that without the freedom to market large, powerful vehicles, their businesses will be decimated.

The fall of the Ford Explorer is emblematic of how $3-a-gallon gasoline has undermined Detroit’s profit model. In 1999, Ford sold more than 428,000 of the midsize sport-utility vehicles, at an estimated $4,000 in profit each, and earned record profits of $7.2 billion. In 2007, through November, Ford sold just 126,930 Explorers.

Costly fuel gives a further edge to Japanese makers like Toyota Motor Corp. and Honda Motor Co. because of their expertise in small-vehicle and small-engine design. And if more markets tilt toward small, efficient diesel engines, as Western Europe already has, that’s a plus for European companies such as Volkswagen AG or Renault SA.

General Motors Corp., the biggest U.S. car maker, is gambling that it can develop its own technology for plug-in hybrids and fuel-cell vehicles fast enough to stay in the game. GM is heavily promoting its plug-in hybrid Chevrolet Volt model, even though it isn’t due to hit the market until 2010.

Raising Air Fares

In the global airline industry, meanwhile, pessimists just a few years ago were predicting that some carriers would fail if crude hit $45. The industry has proved adaptable, with airlines grounding their oldest and thirstiest planes, raising fares and drastically reducing labor and operating expenses.

But if oil’s ascent keeps pushing up jet fuel prices, travelers are sure to feel a squeeze. John Heimlich, an economist for the Air Transport Association, predicts that if oil stays where it is or goes higher, airlines will identify their worst-performing routes and then cut the number of flights assigned to them, substitute smaller planes or cancel the routes.

Oil’s rising cost is sure to put a sharper focus on calls to promote alternative fuels and curb burning of carbon-based fuels. The record there so far is decidedly mixed.

Pricey oil and a quest for “energy independence” have led to an ethanol boom, but higher corn prices now pinch that industry’s profits. Historically, ethanol sold at a premium to gasoline; today there’s so much ethanol available that it’s selling at a discount.

Even in abundance, ethanol is a tiny factor in the U.S. fuel market, displacing a little more than 200 million barrels of crude oil annually, according to the Renewable Fuels Association. The blend of 85% ethanol and 15% gasoline called E85 is available at only bout 1,400 of the roughly 170,000 U.S. fuel stations. And though ethanol is blended into most U.S. gasoline, at up to 10%, calls to dial up that percentage have sparked controversy because of concern this might increase certain forms of air pollution.

Paradoxically, the high oil price in some ways hinders the quest to curb greenhouse-gas emissions. The oil price makes it economic to develop unconventional deposits such as Canada’s oil sands. But the gummy substance is mined, and turning it into usable products takes extensive refining. Gallon for gallon, producing gasoline from oil sands emits far more carbon dioxide than making it from conventional crude.

The price rise has a similarly dirty impact at power plants. In the 1990s, when natural gas was cheap, many countries pushed to use more of that, in place of coal, to make electricity. This was good for the environment, because per unit of energy generated, natural gas emits about half as much CO2. But natural-gas prices roughly track oil prices, and they’ve been rising too. Their rise has prompted a resurgence in coal use, one reason greenhouse-gas emissions are going up faster than many expected. China, the second-largest oil user after the U.S., still meets the bulk of its energy needs with coal.

Oil’s price run-up is fanning support for a revival of clean but controversial nuclear energy. The International Energy Agency, an energy watchdog for the U.S. and 25 other wealthy nations, has become a big promoter of nuclear power. Still, its latest annual outlook predicted the use of nuclear energy would grow by less than 1% annually world-wide between now and 2030, while coal usage would rise three times as fast.

The great oil boom of the 2000s has also wrought dramatic changes within the oil industry itself, which high prices will only intensify.

Oil-rich nations, seeking to take greater command of their resources, are marginalizing the once-mighty Western oil companies. For the first time since World War II, the future of oil and gas production isn’t in the hands of Texas-educated engineers working for U.S. companies but of executives at companies like Qatar Petroleum and Russian behemoth OAO Gazprom.

Gone are the days when companies such as Exxon Mobil Corp. and Royal Dutch Shell PLC had an unmatchable combination of financial clout and technological know-how. Thanks to several years of high prices, government-controlled oil companies have the financial muscle to bankroll their own projects.

And they have access to the latest tools for finding oil and drilling holes. During the last downturn, in the 1990s, big oil companies outsourced many of these tasks to oil-field-service companies. Now the national oil companies can hire these service companies directly, bypassing integrated Western oil giants.

Schlumberger Ltd., the largest oilfield-service company by market value, has said its revenue from national oil companies tripled from 2002 through 2006, while its work for Western oil companies rose just 60%. “The growing influence of national oil and gas companies on the world energy market is abundantly evident even to the casual observer,” ConocoPhillips Chief Executive James Mulva said in March.

Competing for Resources

As the state-owned giants grow more confident and self-sufficient, they have begun to compete aggressively for resources beyond their borders. Last year, Libya put some potentially oil-rich acreage out for bids. While Exxon Mobil won some of it, so too did state-controlled oil companies from Russia, India and China.

More than from their bank accounts, national oil companies’ strength stems from their control of resources. Exxon Mobil, with a market capitalization of around $500 billion, is one of the largest and most successful publicly traded companies ever. But there are 12 state-controlled oil companies, such as Saudi Aramco and PetroChina Co., that control more oil reserves.

Driving this power shift is geology. Major new finds in North America and Europe have been rare for two decades. Western oil companies now control only about one in 10 barrels of the world’s proven reserves. As the Western giants struggle to find fresh oil, the Aramcos of the world are only likely to rise in importance in the years ahead.

– Joseph B. White, Sarah Childress, Lauren Etter, Timothy Aeppel, Jeffrey Ball and Susan Carey contributed to this article.

Write to Neil King Jr. at neil.king@wsj.com, Chip Cummins at chip.cummins@wsj.com and Russell Gold at russell.gold@wsj.com

13 September, 2007
Countercurrents

The planetary elite are compelled to continue on their path of growth leading toward planetary domination. The international bankers through their control of the industrial world’s privately owned central banks maintain a tether on the money system through their control of the U.S. dollar as the currency of international trade. One important mechanism that allows this is that the largest item in international trade – oil – is sold in dollars. In order to insure the continuance of the dollar economy, they must be able to choose which currency oil is sold for or control the oil – or both. The center of the empire, the U.S., is maintained by debt as the petrodollars and other dollars come into the U.S. at the rate of at least two and a half billion per day (purchasing U.S. government bonds) in order to continue the cycle, which keeps the empire and its military power expanding As the elite carry out their strategies of domination they are racing against time. The monster trends of Peak Oil and energy exhaustion, climate change which will severely disrupt the seasons of growth in the food supply system, the weakness of the dollar and ecological collapse are pursuing them. An exponentially growing world population with growing material consumption based on dwindling resources and a dying planet won’t work, but they have no other option to maintain their power and profit.

Seeds of Change

As the industrial system spins toward exhaustion, seeds of change are sprouting at the base. The people at the base are not revolting in order to take the power that the elite have but are revolting to take power over their own lives. In Argentina, after the Neoliberal apparatchniks collapsed the economy and devastated the middle class leaving massive unemployment, the workers began to take over the factories and run them themselves, with all employees receiving the same wage. The great documentary, The Take, details the story of one factory take-over by the employees against a background of over two hundred factory take-overs. Earlier, the people at the base had begun to move when the courageous “The Mothers of the Plaza de Mayo” began to organize and demonstrate. These were women who had family members disappeared and were demonstrating in the face of a vicious fascist military dictatorship which is estimated to have murdered at least thirty thousand people. The courage of the mothers was an important factor in bringing down the fascists and spreading courage and inspiration to the working people.

The economy had crashed under the military dictatorship and then after electoral politics was reorganized, the economy revived to some extent and then it crashed again under the auspices of the Neolibs in the IMF and World Bank. President Carlos Menem who had acquiesced to them was tagged as the culprit.

In the final scenes of the documentary, The Take, Menem had gone down in disgrace and a new election was being prepared. Suddenly, the new factory worker/owners saw that the political class had gone down to central casting and thrown up a slate of the same tired old political characters. Even Menem ran again, though Nestor Kirchner won.

When the film makers questioned the worker/owners about this they symbolically shrugged their shoulders. The machinations of electoral politics preformed by the political/financial class had become only marginally relevant to them. They had taken power in their neighborhoods, on the factory floor and in the head office.

The Mondragon Cooperatives

The Basque people exist in Northern Spain, centered in the Pyrenees mountains. Their culture and population exist partly in France and partly in Spain. They are an ancient people and one of only several peoples of Europe who have a language that is not Indo-European, the grain eating patriarch herders who invaded Europe from Central Asia thousands of years ago. The Basque culture, centered in the mountains, is land – based in small, fertile, productive farms and hamlets. Though cities and towns have grown up in some areas, the cultural roots exist in a system in which each small farm was inherited within the family and the surname of each member of the family was the same as the ancient name of the farm. This and the manner of farming and interaction were inherited from the ancient past.

In addition to the land – based culture, the Basque in the Twentieth Century had become significant industrialists with their iron mines, industries and international trade. This was mixed with the chaos of the Spanish Civil War and the establishment of Francisco Franco as the head of the Spanish fascist state. The economic environment was not welcoming to innovation during the Franco regime as the fascist state was lead by financiers and politicians who had a foot in both realms much like in the present United States. Nonetheless the Mondragon cooperative movement grew out of this soil. As described in the classic study, We Build The Road As W e Travel, by Roy Morrison, eleven young people purchased a small bankrupt factory that produced paraffin cooking stoves. The year was 1954. Since that time the Mondragon cooperative movement has grown to tens of thousands of workers and dozens of enterprises networked together and anchored by their own bank the Caja Lboral Popular, owned by the enterprises.

Growing out of this context, the individuals are not simply farm cooperative workers, industrial workers or even bank workers but the movement has a wider and deeper reach. One of the guiding principles of the movement is equilibrio. Morrison says,

“The Mondragon cooperative system is informed by an essentially ecological consciousness. Ecology, conventionally defined as the relationship of living things to their environment, is understood here to encompass social as well as biological reality and their interaction. Today, Mondragon’s ecological consciousness is manifested not primarily through environmentalism, but through the practice of a social ecology: the pursuit of equilibrio is fundamentally connected to the basic ecological principle of diversity and unity, or, in social terms, freedom and community. Its promise is basic change that will harmonize both social life and the relationship between the social and natural worlds.”

Writer Steven Curtis Jackobs says, “Basque leadership styles are unauthoritarian, involve consensual processes, and are aimed at harmonizing the group’s feeling for collective ends with possible suspicion and lack of trust. A neighborhood’s elected representative does not simply wield power, but builds consensus for group projects. This process often encounters problems of suspicion arising from individual and class differences. These are reflected in the relative difficulty of establishing agricultural cooperatives and point to the nonutopian nature of the Basque situation.”

Ten percent of the cash flow of the network is invested in the communities and in charitable institutions, while another principle is to maintain as little spread between the bottom wage and the top as possible. In this amazing movement from the base, coming out from under a fascist political/financial class as it did, the Mondragon cooperatives show a way to build resilient community social institutions. This social health will be valuable as we head into the future of the exhaustion of industrial society and its fragmentation.

These areas are only a portion of the movement of people at the base who are acting to protect and enhance their communities even under the trampling impact of raw industrial capitalism. India especially, has a number of home – grown movements attempting to protect and strengthen their local social fabric. One would be remiss not to mention the cooperatives of the state of Kerala in India and of the many grassroots movements that the amazing eco/feminist Vandana Shiva was been associated with and has publicized.

Beyond Oil

In 2003, Richard Heinberg published his seminal book, The Party’s Over: Oil, War and the Fate of Industrial Societies. His study concerns the observation that the production of crude oil will peak and then begin to decline to its end. At this point most of the oil producing countries of the world have declining production. Heinberg, who is a faculty member at New College of California, Santa Rosa campus, projects that we are now at the peak of world production of crude oil. This, as he suggests, will have immeasurable impact on the exponentially exploding world population living on oil. He also suggests that this will collapse the capitalist economies which must have growth in order to survive.

Following the publication of his book, he and others who were also following these trends have swung into action to notify the world’s populations of the impending apocalypse. Many are now involved. The flagship organization of this effort is the Post Carbon Institute, www.postcarbon.org led by Julian Darley. Under the umbrella of this organization a Relocalization network has been organized, www.relocalize.net . The effort of these local groups is to examine and take action concerning the local community life support systems with the obvious view that soon the outside energy supports will decrease or stop.

With amazing speed this network has mushroomed. There are now one hundred and thirty eight community groups in twelve countries. The relocalization group in Willits, California, www.willitseconomiclocalization.org is one of the cutting edge points. Their project teams are assessing and taking action on all points of the community’s survival support areas. Their teams are focused on eight areas; business, culture/education, energy, food, health, shelter, transportation and water.

Each of their project team’s focus is quite comprehensive. For example the Business project team’s focus is, “…a Sustainable Mix of Businesses in our area, Business Financing, Small Business Incubation, Finding productive uses of Waste Streams from Business (preferably as raw material for another businesses), Employment, Vocational Training, Local Market Structures, Local Currency, and Bartering Systems.”

Their Food project team at this point has three areas that they work on, the Mainstreet Community Garden, the Gleaners and Brookside Farm www.energyfarms.net/willits . This year the Gleaners have collected tons of food from the local area and donated it to local charities and food banks. Their Brookside farm is in full production and a salient point there is the installation of a micro-hydro system.

We all know the numbers of the percentage of the population in the old days who were agrarian and produced food and the small percentage now who produce the food for industrial citizens. We are members of the industrial society. We purchase our survival systems with money. We do not go out to the back forty and cut some wood for our wood cookstove and heater. We are a population who’s survival systems are huge organizations that stretch to ethereal heights which we cannot see and only vaguely understand and over which we have little control. But the base is moving to protect itself and the relocalization effort offers great encouragement.

The Earth Speaks

We who can read these words are civilized people who have been mentally conditioned by the culture of civilization and the industrial society from birth. We have precepts loaded into our subconscious minds which cause us to see reality in a certain way. To a native Maya person in the State of Chiapas, Mexico, the earth speaks through them. They live integrated with the earth in their everyday energy systems and in their mental attitudes. To them the fact that the earthlife has manifest these living things around us, and us, means that we are children of the Mother Earth and we speak as one of the voices of the earth. To the Maya this is obvious on a deep level. To us it is an interesting intellectual proposition only, because we have been conditioned by a cultural upbringing that filters out this deep understanding and we do not mentally link our life with the life of the living earth.

To the Maya security is the earth and its care. The Maya live with the earth and feed from its natural bounty. Historically for a million years our species has been very successful. We have been adapted to the earth life. We lived within the ecological web and energy flows of the earth. Our traditional migratory patterns carried us over our gathering areas. In the season when the game were fat in one place we went there, when the berries were ripe in another we went there. Our success was adaptation to the life of the earth. We also had a culture that respected the earth and living things. The proposition is simple. We are alive, we live because of the other living things which feed us, we are obligated to respect and encourage those other living things so that we too can live.

Though this simple logic escapes civilization, it is obvious that we must begin to fashion a culture that has these values at the center, if our species is to survive. Our culture teaches us that wealth is the central value of human life and that wealth is our security. When we left our forager/hunter life and began agriculture, civilization and empire, we began a way of life that was not integrated with the life around us but ran a net ecological deficit of the earth’s fertility. The earth’s flesh; the topsoils, the forests, the fish stocks and the other species began to decline and recede. Thousands of years ago the effects of this culture were displayed in the early empires of Sumeria and Babylon in the Tigris-Euphrates valley. With irrigated agriculture they managed to exhaust and salinize the soils to the extent that today one third of the possible arable land in Iraq still cannot be used because of salinization caused by the early empires. With agriculture, overgrazing and deforestation, they so destroyed the land that the river borne erosion material has filled in the gulf for one hundred and eighty five miles! Now the mouth of the river enters the ocean that far from where it did before the culture of civilization began.

The culture of the Maya of Chiapas is not like that of civilization. They are survival remnants of a culture impacted by imperial colonization. In order to protect themselves, their culture and their living world, they have risen up in resistance. In many parts of the Southern Hemisphere the indigenous at the base are arising but the EZLN, the Zapatista Army of National Liberation, were the lead. The Zapatistas are anti-capitalist but no propagandist could get away with calling a Native American an industrial communist. They are more properly termed anti-civilization, Against civilization in its present form.

Chiapas is one of the richest states in Mexico in terms of industrial resources and has the poorest people. The Maya know well the effects of “civilization” – empire, war, colonization and exploitation by the elites. Against this backdrop they have begun to change some of the forms of governance of their own communities such as the role of women and the position of the elders. Women are now occupying positions of authority and the elders authority is being relegated to the sphere of traditions and culture rather than clan power in all the aspects of life.

They are creating a new kind of culture out from under the burden of colonialism www.ezln.org . They have a culture of sharing, cooperation and care of the earth. This is being made the cultural basis of governance. They scorn the political class along with the electoral politics which is their control mechanism. The Zapatistas control from the base through community meetings. Theirs is a culture of human community rather than social isolates in mass industrial society who vote periodically for a list of names. They have power over the way of life of their community rather than voting on someone in a far-off parliament.

In their areas they have created parallel governments quite unlike the colonial government they are shouldering aside. One of the strong moves has been to take back the power to educate their youth. In mass industrial society the education of the youth is conducted by educational institutions governed by the elites who make sure that this is tailored to the needs of those elites and the industrial society that they control. By having control of the minds of the youth they are able to inculcate the reality view of industrial society with all it purposes, values and meanings. Nearly all of the artifacts of industrial culture are purchased from industry. The transportation, housing, food, water, and then the cultural world view provided electronically provides a near seamless reality that has little to do with life and living things but with power, profit and violence. The violence of three killings per hour on television is reflected in the violence to the earth and the violence of imperial wars of conquest to feed the maw of the machine that runs a net deficit of the earths’ fertility in order to insure its survival.

To the Zapatistas, transferring to the young the tremendously valuable fund of information that the species has amassed is certainly possible without also placing it in the context of the values of industrial civilization. They even have plans for a Zapatista university. But the manner of teaching is different. In their view the teacher comes to class to learn just like the students. It is a combined inquiry and the contribution of each participant is valuable. An important ingredient in their culture is respect; respect for the elders, respect for the earth and respect for each other. Life is valuable. They do not perpetuate a hierarchal command system.

Eco Villages and the New Aborigines

The immediate world problem is the net deficit of the earths’ fertility. This is solved by self-sufficient communities. The eco villages which are being formed around the world are pointed toward self-sufficiency. Eco villages grew, in part, out of the intentional community movement that began to swell in the late nineteen sixties. As the global recognition of the plight of the earth’s life grew, so did the eco village movement.

The “live in balance with nature” phrase does not necessarily mean adopting a loin cloth and eating roots and berries. The fact is that there are far too few roots and berries left. We can although, create ways of living that are self-sufficient and that do pay obeisance to the successful million year history of our species.

Of course there are many “eco villages” in various cultures around the world that are still near self-sufficiency but the new eco village movement within the machine of industrial society is significant. We in industrial civilization are culturally conditioned to associate power with wealth. In reality, from top to bottom, our daily lives are governed by huge mass institutions over which we have little or no control. All our survival systems are controlled by mass institutions. We have little fundamental control of our lives. Our picture of “freedom” is to have enough money to do “whatever we want”. But this is not real power on the planet earth. Being able to create one’s habitation, feed oneself through one’s own efforts and live in a real human community that serves the developmental needs of each individual and the community is real power.

The eco village movement is a follow-on to the resources developed by the “alternative community” activists. These resources are many. They involve alternative medicine as an alternative to industrial medicine. Herbalism, aromatherapy, chiropractic, body work ,which is often called energy medicine, acupuncture, nutrition and many others are resources that are popular. Gender equality is a very strong theme. Grassroots, consensus government is seen as real democracy. In the realm of habitation local materials such as straw bale, cob, adobe and other alternatives to industrial construction are emphasized. This is usually combined with passive or active solar advantages in addition to water harvesting systems. Various alternative energy systems have been perfected.

The pleasure of providing one’s food has gone beyond the European row crop system to the far more sophisticated Permaculture www.permacultureactivist.net . The practice of permacultue has spread world-wide. In some aspects Permaculture is a way of designing (or planting) one’s area and watershed with a high diversity of human and ecologically useful species that all fit together into plant communities. It is based in perennial plants, does not turn the soil on the broadscale and through its diversity provides a healthy, balanced diet. Permaculture can restore soil fertility while providing more food per acre than can industrial agriculture. This comparison is somewhat unfair to the industrial system which grows monocrops on vast areas with the purpose of sucking up soil fertility by the use of annual plants for profit. Its purpose is not to feed people, but to force surpluses from the earth for profit. Permaculture on the other hand does not produce massive surpluses of monocrops, its purpose is to feed people. It can although, produce specialty crops for the local famers markets or village barter centers.

People leaving the disintegrating human culture of industrial society have experimented with many social forms. Celibacy, monogamy and group marriage are possibilities. Ritual and the creation of traditions are important. The content of our daily lives are important. How we relate to each other and how we relate to the youth are important. In community there are mentors for the youth, uncles, aunts, elders. In the impoverished human culture of industrial society the young are deposited in front of a television and then when they are a little older they are stuffed into a mass educational institution preparing them to become another industrial cipher.

In traditional cultures of our species, the youth were taught how to be human. This is artfully shown in the book, Seven Arrows, by Hyemeyohsts Storm from the Cheyenne culture of the North American Great Plains. An African couple, both who came from a small, traditional village in Ghana have been valuable resources for the intentional community movement. Sobonfu E. Some www.sobonfu.com and her husband Malidoma Patrice Some www.malidoma.com help us understand what life-centered, human village life is like.

People are returning to the land and community in many forms. The direction is set and there are many paths. One unique path is a method using traditional capitalist techniques to reach that goal. Globalecovillage www.globalecovillage.com led by Biosphere II architect Phil Hawes has created a stock company listed on Wall Street to reach that goal of designed eco villages.

The elephant in the room is the Global Ecovillage Network http://gen.ecovillage.org/ that involves tens of thousands of villages. This is a world-wide network of eco villages that shows that rather than having to adopt a loin cloth, the ancient human values of our species can be established at the next higher turn of the spiral with eco villages all over the world connected and communicating over the internet like a global mind. A small solar panel or a micro hydro, a telephone connected to a satellite and there you have it. The eco village is not a retreat backwards into some kind of insignificance.

The burgeoning movement is shown by a statement from the Global Ecovillage Network (GEN). “Network members include large networks like Sarvodaya (11,000 sustainable villages in Sri Lanka); EcoYoff and Colufifa (350 villages in Senegal); the Ladakh project on the Tibetian plateau; ecotowns like Auroville in South India, the Federation of Damanhur in Italy and Nimbin in Australia; small rural ecovillages like Gaia Asociación in Argentina and Huehuecoyotl, Mexico; urban rejuvenation projects like Los Angeles EcoVillage and Christiania in Copenhagen; permaculture design sites such as Crystal Waters, Australia, Cochabamba, Bolivia and Barus, Brazil; and educational centres such as Findhorn in Scotland, Centre for Alternative Technology in Wales, Earthlands in Massachusetts, and many more.” In the U.S. there are presently eighty-three villages affiliated with the network. One can imagine the creative ideas that flow between all of these villages!

GEN is divided into three areas: GEN – Europe and Africa http://www.gen-europe.org/ , GEN – Oceania and Asia http://genoa.ecovillage.org/ , and the Eco Village Network of the Americas http://gen.ecovillage.org .

The worm has turned. In former decades revolutionaries vied to grab the industrial power of the elites in order to redistribute wealth. Now we have seen what the “wealth” of the industrialist/banker has done to the earth and our future. Now we in the culturally poor but “wealthy” societies are looking to the “richness” of a new kind of human culture that cannot be directed but can only grow out of the base.
The base is in motion. The earth is speaking. Those involved with infinite demands upon finite resources will not survive but the earth will survive along with those children embedded within her.

William H. Kötke, author of Garden Planet: The Present Phase Change of the Human Species, available at www.gardenplanetbook.com Amazon, Barnes and Noble and retail bookstores. He is also the author of the out-of-print, underground classic, The Final Empire: The Collapse of Civilization and the Seed of the Future, which may be downloaded for free at www.rainbowbody.net/Finalempire/index.html