Sunday, October 31, 2004

It was always about China,

Bob writes in a comment:

"China can slow economic growth, but not by a great deal."

In my weirder moments, I think Iraq was really about China.

Posted by bob mcmanus at October 31, 2004 01:37 PM

Iraq was about China. It's obvious. Just like Japan pre-WWII the one thing that China needs but doesn't have is oil. The only way we can keep our economic viability as a super-power under the current model is to get away with printing a lot of dollars - a reality only made possible by bringing a lot of oil on the world market. As Stirling has pointed out, nobody wanted to trust Saddam to be the delivery man.

In addition, whether or not Saddam would have cooperated by occupying Iraq we could prevent Chinese encroachment on the middle-east sphere. It's been reported and is fairly well known in circles that it was Chinese electronics and fiber-optics that Saddam was attempting to rebuild his anti-aircraft defense system with - the one we kept degrading by bombing it under Clinton.

If you look at Afghanistan you'll also see that China is involved. Afghanistan is a nice regional buffer against China and operations against Taliban and Alqueda from bases in Kazakstan or Georgia or Turkemnstein also make a geostrategic hedge against China.

Bush or rather should I say Condi and Rummy were trying to checkmate China before it ever got to super-power status by putting a strangle-hold on the one commodity that could bring it to its knees given a conflict over Taiwan or North Korea, etc. Oil.

This of course all goes without saying, sine non qua.

That's why we all, myself and others, were taking a rather considerable risk by failing to support the Iraq venture. The USA is already committed to a oil blockade against Chinese hostilities. Failure to complete the gambit will be disasterous - ten years hence when China attempts to seize Taiwan or let's North Korea off the leash.

That's why Kerry can't be allowed to just bring the troops home whatever he is promising. It would effectively guarentee the loss of South Korea and Taiwan within a decade. And then worse as China displaces the USA as preminent superpower and locks up the middle-east by allying with Russia and negotiating with Europe.

One way or another Iraq will have to be made to work ... I feel this is true even if I have to go there myself. There is no other option that doesn't cede Taiwan, South Korea, and the South China Seas oil fields to China. However first Bush and his power-base have got to be reined in one way or another.

Anyone under the illusion that the world would be safer under a "multi-polar" world hasn't been paying much attention. "Multi-polar" is a recipe for a new Warring period.

China has two choices in the medium term. It can continue expanding or it can undergo revolution. It could also reform but every sign is that they aren't becoming efficient enough fast enough (unwinding the tangled ingrained social power relationships of corruption) widely enough enough to provide sufficient social justice and stability in order to obtain popular legitimacy. Therefore they must expand or undergo revolution when the pent up pressures are feedback into the system by the limits of expansion. For expansion they need oil and cheap oil and the strategic freedom implied by a guarenteed oil supply to accomplish geostrategic advances.

The logic is inevitable.

Social Justice: Gunsmoke Tribute,

With a President who consciously invokes comparisons to the myth of the West in American culture it seems appropriate to revisit the modern incarnation of the uber-western "Gunsmoke". For those unfamiliar with American culture, Gunsmoke ran for twenty seasons on TV. Here is the TV-land summary:

Premiering on CBS in September 1955 and completing its network run September 1975, Gunsmoke is the longest running dramatic series in the history of television. Two of its stars, James Arness and Milburn Stone, remained all 20 seasons, with Amanda Blake a close second, departing after 19 years.
The series started out as a half-hour show, and expanded to an hour in its seventh season. Prior to Gunsmoke (and The Life and Legend of Wyatt Earp which premiered the same week), western shows generally focused on fantasy characters such as the Lone Ranger and Hopalong Cassidy, holdovers from movie and radio serials. Gunsmoke was one of the earliest "adult westerns," centering around the exploits of Marshal Matt Dillon (James Arness) in the frontier town of Dodge City, Kansas in 1873. His kindly companion was Doc Adams (Milburn Stone), the town physician who spent many hours chugging beers at the Long Branch Saloon, owned and operated by the shapely Kitty Russell.

Over the years there were several changes in the supporting cast, most notably the replacement of Matt's loyal deputy, Chester Goode (Dennis Weaver), with hillbilly deputy Festus Haggen (Ken Curtis).

Gunsmoke started a longtime trend for TV westerns. At one point there were 30 of them on the air at the same time. But Gunsmoke outlasted the others and at the time of its cancellation in 1975, it was the only show of its kind still on the air.

A testimony of the enduring popularity of the Gunsmoke series is that nearly thirty years after its final episode when I try to visit the official site it gives me back "bandwidth exceeded".

The Gunsmoke series isn't the only indicator of the popularity and defining nature of the Western in American culture. The most popular American author of the post-modern era has been Stephen King, and his defining franchise has been the Dark Tower series. The Dark Tower series is based upon the premise of the trans-dimensional traveler Roland, The Gunfighter, and his companions in search of the cross-temporal nexus known as the Dark Tower. Roland is by King's own admission in his newly issued preface consciously modeled after the infamous Spaghetti Westerns (They derived their name from being filmed in of all places Italy) starring Clint Eastwood (The model for Roland) and directed by Sergio Leone. These movies where in turn modeled upon the work of Akira Kurosawa a Japanese filmmaker most famous for his depictions of samurai swordsmen bringing social justice in difficult and adult situations such as The Seven Samurai (later to be Americanized into the Magnificient Seven). Eastwood would later become famous for playing many different versions of the tough guy and "sheriff" figure including the vigilannte policeman Dirty Harry.

The arisal of Kurosawa movies effectively paralleled in a different culture the same theme that became predominant in the myths of the west, the figure of the "sheriff" or altruistic strong-man. It arose for similar reasons in America as in Japan, namely that economic and political oligarchies (the West was the same age as the Trusts and Robber Barons and post-bellum Carpetbaggers) were by coopting the public trust and appealing to public prejudice essentially looting the common good and producing atrocities.

The mythic figure of the Sheriff, embodied in actual Western history by the legend of Wyatt Earp, is interesting because it reflects the fundmantel flaw in the American culture and social scene. In actuality, President GWB reflects the reality of actual law-enforcement and political leadership in the era of the West. GWB has much in common with the Presidents of that era and other more regional political or military leaders and how they became participants and colluders in exploitation and colonization of illegally seized territory driven by economic and political oligarchies. In that aspect GWB can rightfully claim the mantle of the historical sheriffs who as often as not were "in on the deal" so to speak. However the enduring power of the myth reflects that whatever the historical truth of the American culture there has been an enduring desire for the "white knight" or altruistic strong-man who will save Americans ultimately from their own worst instincts.

All of this is fundamentally interesting because it posits a problem and in artistic terms proposes a solution to the enduring flaw in the public psyche. The drama of a small western town and the various criminals and oligarchs who attempt to exploit others and how they are stopped has lessons for our modern understanding of the present socioeconomic condition.

The people of the western town are concerned with their everyday lives. In a general sense they have a sentiment of social justice that can be outraged, but in practice their prejudices, parochialism, greed, or fear can be exploited to obtain consent (coerced or otherwise) to unjust outcomes. Without a "sheriff" therefore the people of the town are easy prey to the agendas of the powerful.

As a side note, I would point out that the defining space opera of the modern film age, The Star Wars franchise, essentially plays out the same dynamic by positing altruistic figures capable of using discretionary vigillente force to bring social justice - better known as Jedis. As Eastwood himself would comment "It's not possible that The Outlaw Josey Wales could be the last Western to have been a commercial success. Anyway, aren't the Star Wars movies Westerns transposed into space?" Finally even the Star Trek movies are essentially patterned upon the same premise. A close inspection of the original series and all successful spin-offs shows a basic pattern of the ship captain as altruistic law-enforcement, usually accompanied by a side-kick doctor for socialization in the exact same mold as Gunsmoke. Kirk or Picard are just updated Matt Dillons, while Eastwood is just a more cynical version.

This isn't merely art criticism however as clearly Stirling's monographs on the present political, international, and economic situations shows that we haven't moved far from the resource exploitation and economic oligarchy issues of the late 1800's. In the later comment, we see a very interesting comment by Simon:
Has anyone seen "3 days of the Condor"? Made I think in the 1970s? At the end of the movie, Robert Redford has figured out the huge CIA plot -- it is a secret plan to INVADE THE MIDDLE EAST FOR OIL.

And now the CIA wants to kill him. However, Redford gets one last meeting with the secret CIA people, and he gets them to be like "yes, we are going to invade the middle east to get oil." And then, Redford turns and points upwards. Look, he says, IT'S THE NEW YORK TIMES BUILDING! I HAVE BEEN WEARING A WIRE! IT'S ALL ON TAPE, AND THE TIMES IS GOING TO BLOW YOUR COVER.

Well, it turns out that if you do have secret information about government conspiracies to invade the middle east under false pretences, the New York Times is not going to help you very much.

3 days of the Condor because it reveals the problem of the theme of the "sheriff" rescuing us from ourselves. The problem is that it is both necessary and impossible. We posit these fictional hero figures because we are incapable of helping ourselves.

The most interesting part of the film is the dialogue between Redford's character and the CIA spymaster who said that people just wanted stuff and didn't care where it came from so long as they go it. Unfortunately, he was correct. You see the real joke of the film, which couldn't be shown because people really don't want to think this of themselves, is that the spymaster knew that he was in front of the Times and didn't care that he was being taped.

Because as the run-up to Iraq showed, verifiable evidence that you were invading for oil wouldn't be printed by the Times in a serious way.

So if you cut off the "exposure" moment and take the spymaster's revelation of the venality of man as true then the film is absolutely correct.

Because the spymaster was right. People really will give up power to a military caste system and elite rich people who pander to their pride and identity politics in return for giving up all responsibility for making tough choices about basic resource distributions.

To be fair before the war a bare majority of Americans indicated that it probably wasn't a good idea. But then again a majority of Americans also will say that they wish the debt was paid down with any surplus.

The lesson isn't that people are bad but that they're weak. Perhaps naughty is a better word though it triviliazes the enormity of the collective irresponsibility of a 100 million persons. They know what the right thing is generally, and most will even admit it, but they would rather talk themselves out of it or ignore the right thing if it panders to their psychological weaknesses.

This is a crucial social problem and also culturally it has a fantasy solution. The fantasy solution is embodied in the Wyatt Earp and Gunsmoke myth. The reason why it is fantasy is that in historical fact Wyatt Earp had to flee local "justice" for his vigilennte action at the OK Corral. Wyatt Earp as a fugitive from justice for the chrage of murder isn't a comfortable thought for most Americans but that's the history. What it reveals is that even though people long for a "Sheriff" figure that in practice they will allow themselves to be dominated by their parochial and personal interests so that they will discourage or marginalize or attempt to destroy any figure that emerges.

Consider how the establishment effectively manipulated the public in order to reject both McCain and Dean.

But the myth underneath the microscope is Gunsmoke. In the mythical town, the sheriff Matt Dillon performs an important social function. Essentially he destroys the power-base of oligarchal exploiters or criminals. There is a lesson here that resonates with the real lesson of "3 days of the Condor".

Once you expose the bad guys then somebody has to take them down. Without an analogous Colt (God may not have made all men equal, but Colt did is the old saying) revolver and someone willing and able to use it, the bad guys just thumb their noses at you and walk away. Social opprobium has never been enough unless someone has already had their power-base destroyed. Then social opprobrium prevents them from recapitalizing themselves.

But even if they had, without a Matt Dillon'esque sheriff figure to destroy the power-base of the bad guys the good folks of the West wouldn't be able to stand up to bad guys. Public exposure is insufficient unless the power-base is already shattered because the public can always be coopted by appealing to its weaknesses and addictions. Public opprobrium is necessary to the system, because it prevents the reformation of capital for offenders. However it cannot destroy the power-base of "bad guys". The quintessential "sheriff" or "good guy" is someone who is strong enough to destroy the power base of the "bad guys" but won't acquire their capital exclusively for himself. His willingness to limit his acquisitiveness and redistribute resources is what makes him "good".

You could argue that FDR was such a "sheriff" figure. This is not to excuse the man as perfect. The liberal welfare state he built was essential in destroying the economic viability of modern America. Undoubtedly he expected that sooner or later it would have to be revised accomodate changing circumstances. The problem was that there was no political will for change.

The problem is that even after you expose the bad guys, for instance people misleading the public in order to justify a neocolonial war, if they are powerful enough and have enough supporters then nothing happens. The truth may set you free but it certainly doesn't give you justice. Without a powerful enough figure to rein in extremists and to destroy their power-base, public opprobrium simply isn't disciplined enough in order to restrain and disenfranchise powerful rogue individuals.

Napoleon cannot be stopped unless The Duke of Wellington has a showdown at Waterloo with him. Hitler couldn't be stopped except with the combined efforts of FDR, Churchill, and Stalin. Stalin himself lived to a ripe old age unchallenged in his sovereignty principally because of the deal he cut with FDR and Churchill. Without them to overthrow him, his rule was secure.

This was the logic I'm sure that led many Iraqis to endorse an American invasion. They thought they were getting the "white knight" and the "sheriff". Many Iraqis had become convinced that they would never be able to overthrow Saddam and his sons on their own. They thought they were getting Matt Dillon. Instead they got Polk, as in President Polk, him of Manifest Destiny and colonial expansion, territorial annexation, and indigenous ethnocide.

It is testimony to the enduring power of American ideals that they actually thought we would do the right thing by overthrowing Saddam, quickly restore democracy and economic health to them, and quietly leave.

Of course to describe American interests in Iraq as "looting oil" would be wrong. America has never derived its prosperity from direct control of oil receipts. It has derived its power from supporting repressive client state governments that ensure a steady market supply of oil to keep the price low in return for the lion's share of the oil receipts. However even this solution far short from ideal reality would likely have been tolerated by the Iraqis, if only we could have delivered. There is much to be said about the ability to deliver.

As the references to different cultures should have demonstrated - Japan, Iraq, Europe, etc. - the lesson of Gunsmoke isn't limited to American culture.

Ian mentioned in a comment below that he was investigating how could this have happened to America. The answer is that the same thing happened that always happened, with the caveat that this time GWB wasn't up to snuff to become either a Napoleon or Hitler or Stalin. Napoleon whatever else you want to say about him was an exemplary military man and conquered most of Europe. GWB wasn't able to conquer effectively a third world country. So we are at a very awkward point in history.

We have someone who tried to consolidate an oligarchy of social and political power. The faction attempting this came close, but they made a terrible mistake. They chose the wrong man for the job. They preferred a weak-minded figurehead that they could manipulate, rather than risking a strong man who would have become their master, but he couldn't get the job done. So now the world and America pauses.

The faction supporting GWB doesn't want to lose and they have the power to make life miserable for everyone, up to and including escalating to a civil war. However he can't get the job done right. On the other hand there is no one, and by no one I mean to include Clinton, strong enough to stand against him and play the role of the Sheriff - a role doubly dangerous because such a sheriff figure would have to not only withstand Bush but be strong enough to withstand the full force of the public turned against him.

One of the lessons of this campaign election year is to compare the flap over GWB's national guard service and the Swift Boats veteran controversy. The former happened when the media attempted to get on board an attempt to bring down Bush by exposing him. Because they were sloppy and because Bush had a power-base capable of effectively defending him, it failed. That is what happens in the real world when you tape the spymaster confessing in front of the Times. The Times doesn't print it or if it does it buries it in page A-12. This is the reason why the Times goes along with lies. It understands that it cannot destroy GWB and in not destroying him would be humbled by any attempt to do so. If we compare that to the legs that the flip-flopper and Swift Boats controversy had on Kerry, then the media was taught an effective lesson. It was taught that it could not Gore Bush, but that it could Gore Kerry.

So much for the hopes of the press bringing down the President ala Watergate. Nixon's mistake is that he hadn't consolidated his power-base and this is what allowed the press to destroy him. It was able to undermine his core support constituencies. It was only that that allowed a Republican Senator to ask "What did the President know and when did he know it?" and the Supreme Court to rule that Nixon had to turn over the tapes. If Nixon had consolidated his power-base the Post wouldn't have been able to touch him. Bush and the right wing are already beyond that point. There will be no intrepid Deep-throat capable of deep-sixing this movement. Bush started out with the Senate and the Supreme Court in his pocket. Republican Senators have already run cover for him on the 911 commission investigation and the Supreme Court started out his term by ruling 5-4 in his favor.

In the next seventy two hours Americans will choose a President. It is possible that Kerry will be elected and that he will be allowed to take power. That is the hope of many. However there is every possibility that it is not going to happen. Even if it happens the lesson that the right-wing will learn is not that they have chosen the wrong path but that they choose an insufficiently strong leader. The next time there is every possibility that extremists will nominate a Napoleon, someone strong to take it "all the way" even at the risk of them losing control of him and him taking over just the same way that Hitler turned around and put the leash on the Thule group that supported him.

I think McCain's and Christine Todd Whitman's throwing in with this effort is foolish. Understandable but foolish, since they neither believe how far this could go. In a way the best hope for stopping this movement is for Bush to be elected. Bush has proved patently incapable of carrying out successfully the agenda of the movement and his lieutenants have also proven incapable. Four more years of Bush might be utterly disasterous, but American democracy would survive because four more years of Bush would utterly discredit the movement and shatter its broad-based support.

However if he should resort to extreme measures or if he should fall but later be replaced by a more dreadful leader, it will likely take a Duke of Wellington or FDR or Lincoln or Washington, archetypal Matt Dillons, to take the movement down. Only a great man, which is not to say imperfect, could derive the breadth of support and discipline necessary to destroy the power-base from which Bush derives his power.

Every tyrant that comes to power whether Saddam or Mugabe or numerous others is but the leader of a power-base, a clique or Hunta or oligarchy of powerful social and economic establishment actors that benefit from policies that are to the detriment of the public weal and commonwealth. Strong ones like Saddam or Stalin own their power-bases. Weak leaders like GWB are captive to their power-bases.

By all accounts one to one GWB is a likeable guy and frank about his past short-comings and failures. He once described his own business ventures as "floundering" to a ghost-writer. However he is a weak leader unable to handle the burdens and agendas of the various power-brokers and barons in his own cabinet much less his power-base.

However he persists because of the lack of a true sheriff. Dean tried to be that sheriff but he forgot the collary of the sheriff. The movie most honest about this is probably "High Noon" starring Gary Cooper and Grace Kelley.
Will Kane (Gary Cooper)is the marshal of a small town on his last day in charge. He is marrying a Quaker (Grace Kelly) and is leaving office for her. But then he hears the news that Ben Miller, a murderer, has been released from jail. Three gunslingers (Sheb Wooley, Bob Wilke and Lee Van Cleef) are at the train depot, waiting for the train carrying Miller, which is due to arrive at high noon.

Kane's junior deputy, Harvey Pell (Lloyd Bridges) refuses to fight by his side because Will didn't recommend him for sheriff to the town leaders. Will seeks help from everyone, but he is turned down, over and over again. So Kane will have to confront his fears and prove his courage as he goes alone against Frank and his men.

The first test that anyone attempting to become the Sheriff must overcome is desertion by the public. Because the people want a champion to fight for them, not to fight for their champion. This is what McCain and Dean learned the hard way. It is also the reason that there is no one who can oppose GWB much less his power-base which if temporarily defeated will only come back ten times more potent later. It is the reason why in the real facts of history after the OK Corrall that Wyatt Earp had to flee from charges of murder.

The people's champion must first be the people's enemy. It is in a Neitzchean sense of the hero as a criminal that we must conceive of this phenomena. Essentially this is society's manner, however crude, of differentiating between rebels and socioopaths. A sociopath is someone who ignores social conventions in order to abuse the public trust by harming or exploiting others. If you turn on a sociopath or abandon them, they will be undone. A rebel is someone attempting to overthrow a previous social order and institute a new one. Note that this judgement isn't moral, it's simply one of coherence.

In a practical sense the townspeople will neither help Miller or Kane. It is interesting to note that there is a Gunsmoke episode that essentially deals with the same theme of the strong man being abandoned by others. In it, Matt Dillon faces not just one criminal but one coming for vengeance with a gang. He sends back his townfolk posse in order to face them alone and challenges the leader of the gang to single combat. The gang leader accepts but indicates that his lieutenant should shoot Matt Dillon if the gang leader loses.

The way the episode is resolved is the townfolk posse sneaks up and shoots the lieutenant about to kill Dillon after Dillon defeats the gang leader in single combat. This is a theme repeated in the Clint Eastwood movie called Pale Rider. "Pale Ride" features a scene where the "Preacher" - a moralistic gunfighter figure - has destroyed the hired guns and goons of the local economic oligarch and then the "ordinary guy" who he has befriended then shoots the oligarch who is about to shoot "Preacher" in the back.

The lesson here is that the limitation upon any such Sheriff figure arising is that he himself must be strong enough to survive the full force of public opprobium and desertion after he arises, and only after he has proven he can triumph without public aid will others rally to him. The public has got your "back" if you can face down the bad guys - all by yourself. The Rebel fleet will mop up the Imperial fleet if you can defeat Vader in single combat, destroy the Emperor, and blow up the Death Star. The colonies will rally to you against the Redcoats - if you can survive Valley Forge.

The surprising thing is that we actually have had a number of hero-figures step foward in both American and British history. The names have been ennumerated before, peoples' champions who stepped forward and defeated the forces of extremism and oddly enough did not for whatever reason seize tyrannical power for themselves but took a benign attitude. I am not sure where such a figure could arise from now but if we are talking about the mythological arc that society is playing out then this is the standard solution.

Hope you find this helpful with your project there Ian.

Saturday, October 30, 2004

Memos from Wonderland pt 1,

I confess that of late the world has seemed to me somewhat surreal. Or rather the world has been in crystal clear sharp focus but the social world overlaying it of human perceptions and relationships has been particularly out-of-touch. It is operating under what one poster to BOP-news called "bizarro world rules".

This is world were four years after the media and conventional wisdom mantra was that "there wasn't that much difference" between the two major candidates, once again the media and conventional wisdom mantra is once again that there isn't that much difference between the two major candidates or what they will do. However on margins both sides have become obsessed about the deficiences of the other side's candidate.

So it's more like a story of the flanks against the middle.

Barry is pretty representative of such a middle.

The election of your lifetime.

That's what the vote on November 2nd vote has been called. It's probably a fair description in many, many policy areas. The two major party nominees for President differ on a host of issues, ranging from international affairs to economic strategy to tax policy. Even on basic issues of science – stem cell research (biology), global warming (chemistry), missile-defense (physics) – there are huge distinctions between the Republican and Democratic candidates.

When it comes to the capital markets, conventional wisdom assumes that the outcome of this election will matter a great deal.

I disagree.

Actually I would disagree with Barry. I think that the conventional wisdom is the opposite - that one candidate is only just more preferable than the other and that neither candidate is very preferable. At least if by conventional wisdom we mean mainstream opinion that swims in the "middle". As a moderate technocratic centrist Barry would fit in nicely with that category.

On the right wing side though, I hear a lot of Republicans justifying their vote by saying well "Kerry would be worse" or in the words of one friend "I can't let that ass-clown in,". Completely erased is the notion that their candidate might have any flaws or if there is an acknowledgement there is a rationalization that Kerry would do even wose. It's gotten so bad that Bush public outings now have ceremonial loyalty oaths. While not illegal this is unConstitutional. As put to me by someone in the military, one of the defining differences of our system of government is that there are no loyalty oaths of individuals but only to the Constitution as the framing document of our system of governance.

Just as have many before me, I too have sworn to protect and defend the Constitution of the United States of America against all enemies, foreign and domestic.

While not strictly illegal, the oaths that the Bush camp are trotting out are highly disturbing. Oaths such as these are not mere spectacle, but by ritualistically tying loyalty to Bush personally above and beyond the office of the Presidency and the system of governance which gives him legitimacy and by binding it to the emotional ties that form people's way of life Bush is essentially building his own private armies. That's a classic ploy in building a personal army - one of the first step is to get them to identify their way of life with loyalty to you and then swear an oath of allegiance to you personally.

Representative of the middle, Slate put out well a slate of endorsements for Kerry that were at best luke-warm. This is symbolic of the conventional and mainstream wisdom that either candidate will be constrained by reality. As Barry writes:
Why? There are simply far too many structural factors that will hamstring whoever assumes the Office of Presidency on January 20, 2005. The post-bubble environment has problems that will likely be cured only by the passage of time. Large budget deficits will continue, as will the ongoing weakness of the dollar. The economy is likely to grow, albeit at only a very modest pace, for the foreseeable future.

The point of view seems to be that any rational person would limit their activities given the restrictions ennumerated and others not mentioned regarding military resources. Of course the great flaw in rational individuals is that they generally fail to understand that irrational people will accept extreme penalties and setbacks in the pursuit of unrealistic ambitions. So the fact that reality constrains us is in fact no bar to the attempt to overextend to reach impossible goals by either the irrational extremism of right or left.

Of course we know that the ABB crowd has long been driven into shrill hysterics about how "Anyone But Bush". What hasn't been widely acknowledged by the center left however is the inner corruption and weakness of the Democratic party makes it a poor champion for reality. The far left in the forms of progressives and Greens have long accused Democrats of being no different from the Republicans. That isn't true as the past four years has shown, but the argument resonates that they are almost as bad.

This is acknowledged by the middle and mainstream center however and this is what makes the middle consider Kerry as evaluated by the luke-warm endorsements as preferable but only just to the guarenteed insanity of 'four more years'.

So given the whole mess, it's no wonder that I have a somewhat surreal perception of things since the world as people consider priorities important is extremely distorted as if seen through, well to be frank, a looking glass.

As for the weakness in the dollar, it isn't a "limitation" - it's part of their plan. As in the Estbalishment's plan embodied in the persons of the FOMC. As far as I can tell the Fed is opting to push through it's own economic program irregardless of who get's into the Oval office. Right now economic policy is being made by the Fed and not the WH, exihibit the futility of Snow Treasury Secretary.

The plan of the Fed is to try to make us an exporter to Europe the same way that Japan and Asia were curency pegged exporters to us. The plan of the Fed is to force a revaluation of the currency pegs from Japan and China to the USA and so renegotiate our debt. The plan of the Fed might have worked if we had in fact brought more oil supply to the market so that the Fed Funds rate would stay linked to the inflation adjusted bbl oil price.

As it is the Fed's plan will almost work and then result in the loss of America's reserve and petro-commodity currency status - within possibly as soon as two years. Right now the Fed is forcing money into the stock market and the real estate market to reinflate them by it's policy of letting the dollar drop against the euro, since from the spread on corporate bonds and the drop in the ten year note we can see that the bond market is super-saturated and simply cannot absorb any more money supply meaningfully.

That means we will experience a bubble which will give us pseudo-prosperity for about a year and then it will all start coming apart. Look for a strong january effect rally (beginning in December of course) and then a turbulent sidewise trading market in summer '05 and then a potential bear market in late fall '05.

But unless more oil comes on the market it will all start coming apart. The Fed has just bet "the farm" on the proposition that availble world oil supplies will grow faster than demand (adjusted by economic slow-down) by this time next year. This is a very interesting proposition to bet everything on, seeing as Iraq continues to deteriorate and the tighter oil supplies are the more incentive individuals in the producer chain have to destabilize it as political or economic leverage.

However the industrialization of China will not slow-down. People have forgotten what happens when an industrializing country is starved of commodities or has a growth slowdown. Energy consumption doesn't decline, what declines is everything else as the economy is cannibalized in order to feed the driving energy consumption of industrialization. This is why the neo-cons in their idiocy can't understand why North Korea hasn't fallen apart yet even though history shows how long it took for the Soviet economic machine to wind down - and even then at the end it was a political failure of will rather than an outright economic failure. If it had been pure economics driving the situation the Soviets could have kept on cannibnalizing their own economy until they too were reduced to North Korean levels of austerity.

No the oil consumption from China will not moderate. If their economy is slowed by the central bank, it will get taken out of the hide of small commodity producers like farmers and labor wage improvements - not the best thing for stability. The Machine as always will roll on, because it will go last because everything else will be sacrificed to keep it going.

Why should we expect it to be any different for them then history has shown it for others or in fact ourselves? Has American made any politically inconvenient initiatives to lessen oil use or increase efficiency? Or has America simply diverted resources and cannibalized other parts of its economy to continue its pattern of oil consumption? It is ridiculous to presume the Chinese will act any different.

If anyone believes that China's growth in oil demand will substantially decrease contact me personally because I have some swampland in Florida that I want to offer you at a very reasonable price.

So what we have is an unrealistic plan by the Federal Reserve to shift the export base of our economy to Europe in order to renogitate our debt and balance the current accounts deficit betting everything on oil-supply outpacing demand growth, a completely schizophrenic political system not of right against left but of the wings against the middle, what we can call euphemistically deteriorating standards of democracy worldwide, and in the meantime our world is about to get cooked by global warming and experience drastic commodity shortages.

Oh and if you include food, energy, substitute in real housing costs into the CPI and then subtract real inflation from GDP and then subtract the hedonically enhaned components then we're "growing" at about negative three percent yearly.

That's a headline you won't see soon: Real GDP "growing" at -2% to -3% yearly.

If you're a big rich country, and the USA was a big rich country, then you can endure 2% deterioration for a long time. Things just keep on getting tighter and tighter ever more gradually. The reason why it's not readily apparent of course is that we have borrowed to maintain consumption. That is why consumer buying this past quarter was a robust 4.6%. All of it essentially borrowed against tomorrow in the form of personal debt, national debt, deteriorating asset values, or reduced future growth prospects ... but it was 4.6% so we enjoy the illusion now that we are not just not deteriorating but are growing...

I've already voted for Kerry in the form of absentee ballot because I believe that the chances for a better future are better under him and further more I believe that the responsibility for such a better future lies not on Kerry's shoulders but on ours.

I am not voting for Kerry because I think he will do a better job, but because I know that under Bush my every attempt to do something positive has been frustrated.

As I take up posting again, I want to concentrate on what I perceive are the real issues of this country and the world. I think I am finally ready, psychologically speaking, to discuss the full extent of the fraudulent GDP numbers. Combining that with the real adjusted CPI calculation and we can discuss the real rate of deterioration in American finances. We can also discuss the necessity of switching to a more economically profitable energy infrastructure (alternative energy). My argument is that if you look at the baseline costs of alternative energy against fossil fuels yes currently and for the near future fossil fuels are cheaper. However fossil fuels will become more expensive, as we invest capital into research and economies of scale alternative energy costs will drop, and if the fundamental argument is that alternative fuels are more expensive nominally then that has to be matched that the fossil fuel economy is nationally net unprofitable.

Even a small positive profit margin is better than a negative one. It is more economically rational to switch to alternative fuels now (and not in the future) not because the per unit cost is cheaper (it will be soon) but because the overall economic model of one is profitable and the other is not.

Tuesday, October 26, 2004

Economic Warfare via Currency

Our Cuba policy is once again reaching idiotic heights.

The dollar was legalized in Cuba in 1993 after the fall of the Soviet Union plunged the island into deep economic crisis and forced it to open up to tourism and foreign investment.

Dollars became the dominant currency and are used to buy most consumer goods in stores that will now only accept the local currency.

The decision will effect cash remittances from the United States, a major support for the cash-strapped Cuban economy that amount to an estimated $1 billion a year, unless they are sent in other currencies.

The government encouraged Cubans living abroad to send remittances to their relatives in Cuba in euros, British pounds, Swiss francs or Canadian dollars, to avoid exchange costs.

Castro, wearing his trademark military uniform, said his communist government was not banning possession of dollars, just their use in the economy.

"We are not restoring the penalization of holding dollars; it will not be a crime," he said.

The move to eliminate use of the greenback was prompted by U.S. moves to squeeze Cuba financially, the decree said.

A four-decades-old U.S. trade embargo against his government prohibits the use of dollars in transactions with Cuba unless they are licensed by the U.S. Treasury.

Foreign banks were put on guard in May when the Federal Reserve fined UBS, Switzerland's largest bank, $100 million for illegally transferring freshly printed dollar notes to Cuba and three other countries subject to U.S. sanctions, Libya, Iran and Yugoslavia.

Foreign bankers in Havana said this had created serious problems for Cuba to deposit its dollars abroad and renew bills in circulation.

Existing dollar accounts will be "totally guaranteed" and their funds can be withdrawn in the U.S. or local currency at any date with no charge, the decree said. Dollar bank transfers will also be accepted, but not cash deposits.

Foreign companies operating in Cuba, as well as Cuban state enterprises, will no longer be able to make dollar bank deposits in cash.

Cuba's tourism is based on the dollar, though euros are accepted as currency in some resorts. Tourists will have to exchange their currency into convertible pesos, though the 10 percent charge will only apply to dollars, the decree said.

The commission will not affect credit card payments. Cards issued by U.S.-based banks are not valid in Cuba.

Cuba took the first step to curb dollar circulation last year when it banned state corporations from using the U.S. currency in their domestic operations.

President Bush launched a strategy in May to undermine Castro's government by tightening restrictions on travel from the United States and the amount of dollars that licensed visitors could spend on the island.

If we wanted to economically destroy Cuba what we would do is drop all trade restrictions and flood Cuba using our "free market" and "international capital investment" system. In no time the economy of Cuba would be in shambles, its agricultural products undercut by subsidized goods, and unemployment would skyrocket while its workers were converted to starvation wages to make goods for Walmart. Hey, it's worked in every other country it's been tried in right? With the exception of those that catch on and insist on massive subsidies, dollar pegging, and convert their economy to a parasitic export based petroconsumption economy of course.

In the meanwhile Bush's brilliant policy is actually driving Cuba into the arms of the euro. I swear that man is dumb as a post. Back in the days when the US was the only international trading currency around, restricting dollar flows into or out of Cuba would cause a liquidity crunch hobbling Cuba's economy.

Now all Cuba has to do is switch to the euro, further accellerating the dollar's fall:
Spreads on junk bonds have actually fallen lately. They now yield about four percentage points or so over Treasuries. In October 2002 the spread was over ten points, not that the numbers meant much, given the panic in the markets at that time. Perhaps all the issuers of such bonds are indeed much healthier now than they were then. Perhaps, on the other hand, they are simply the beneficiaries of ultra-loose monetary policy and a huge appetite for risk among investors. After a panic in May, emerging-market debt recouped most of its losses. In recent days this market, too, has wobbled but it still looks horribly expensive by historical standards.

The dollar has also been falling out of favour in recent days. This week, it reached its lowest level in eight months on a trade-weighted basis, according to the Fed, and is within a whisker of an all-time low against the euro. Foreign-exchange traders seem to have discovered what everyone else already knew: that America’s huge and growing current-account deficit is unsustainable, and that two things are required to correct it. First, Americans must save more (which will slow growth, perhaps sharply); and second, the dollar needs to fall more than it has done already—perhaps a lot more.

Alan Greenspan, the Fed’s chairman, and a man with a somewhat Panglossian view of the world, thinks that all these fears are overdone. His message is: don’t fret about America’s current-account deficit, consumers’ huge debts or the surging oil price; none of them matters, or at least not much. But your columnist does worry about such things, not least because the financial markets seem to be frighteningly sanguine about them: fears in the markets look about as overdone as a steak haché.

The dollar looks in danger of plunging, the price of oil continues to surge, gold is going up and world growth is slowing. Oh, and America is about to hold an election that could create as much uncertainty as it removes. Small wonder that there are a few growls from financial markets. Buttonwood has a nasty feeling that something worse is in store.

Unless we change fiscal and monetary policy, quickly, the dollar is danger of breaking through a technical support level in trading with the euro. If it does that it may free fall to the next sustainable level. Oil would rise even higher in price and we would take one more irreversible step toward oil being dedollarized and then denominated in euros. We never had much time to begin with but steps like this eat up what little time we have left.

Now is not the historical moment to try squeezing economies off the dollar standard. Cuba's economy by itself isn't a big deal but if it dedollarizes and then eurosizes its economy and others realize that they can too then it may start a movement toward the exit far sooner than it would have otherwise occurred.


Kevin drum writes about how the Armed Liberal has decided to vote for Bush. Armed Liberal's reasoning is as follows:

Much of my decision making and thinking comes from what are - to me, at least - illuminating parallels between the decision before me and things I know and have seen in my own life. This is no exception.

Last month I had lunch with a dear friend from grad school; he's a monstrously successful real estate developer and a staunch and senior Kerry supporter here in California. We argued about the election, and the war. He understands the war, but isn't convinced that Bush is smart enough to pull it off.

"I don't think that matters as much as you do," I told him. "I'm probably smarter than you are - in terms of IQ tests and grades in school. You're a multimillionaire, and I'm not - even though I've been in businesses parallel to you for as long as you. Why do you think that is?"

"Because I'm more determined than you are," he replied.

"Exactly," I responded.

Success in any enterprise is only partly determined by skill and intelligence. Luck plays a large part. But the largest role, I believe, is played by commitment and determination to reach a goal. My friend wanted to be successful more than I did. He was.

There are a large number of holes in Armed Liberal's thinking. Putting aside the poli-sci snark, he's making what is called Fundamental Attribution Error (Wikipedia):
In attribution theory, the fundamental attribution error (sometimes referred to as the actor-observer bias) is the tendency for people to over-emphasize dispositional, or personality-based, explanations for behaviors observed in others while under-emphasizing the role and power of situational influences on the same behavior. In other words, people tend to have a default assumption that what a person does is based more on what "kind" of person he is, rather than the social and environmental forces at work on that person. This default assumption leads to people sometimes making erroneous explanations for behavior. This general bias to over-emphasizing dispositional explanations for behavior at the expense of situational explanations is far less likely to occur when people evaluate their own behavior.

For instance, Armed Liberal's friend's success probably is due in part to his hard work and determination. It is also true that he is operating in a super-heated California real estate and development market with a historically low accomodating interest rate environment created by the central bank. This is not to diminish Armed Liberal's friends success - there are many people in California who aren't multi-millionnaires - but it is to say that attributing his success to "determination" wholly neglects the contribution that his environment provided.

It would have been probably been more difficult to become a real estate multi-millionnaire if for instance he had been living in the early eighties in the same location. Not impossible but certainly more difficult.

Our success in life comes in part from talent, in part from hard work, and in part from an nurturing environment that provides opportunities and support. There are very few truly "self-made" men who triumph over both personal inadequacy and overwhelming hardship to succeed.

It is in this manner that Armed Liberal's analogy falls apart. Iraq is not a "nurturing" environment. It is an extremely hostile and unstable environment. Mere "determination" is insufficient.

The second cognitive error that Armed Liberal engages in the Vividness error (from the CIA Psychology of Intelligence Analysis manual).
The impact of information on the human mind is only imperfectly related to its true value as evidence.91 Specifically, information that is vivid, concrete, and personal has a greater impact on our thinking than pallid, abstract information that may actually have substantially greater value as evidence. For example:
  • Information that people perceive directly, that they hear with their own ears or see with their own eyes, is likely to have greater impact than information received secondhand that may have greater evidential value.

  • Case histories and anecdotes will have greater impact than more informative but abstract aggregate or statistical data.

  • Events that people experience personally are more memorable than those they only read about. Concrete words are easier to remember than abstract words,92 and words of all types are easier to recall than numbers. In short, information having the qualities cited in the preceding paragraph is more likely to attract and hold our attention. It is more likely to be stored and remembered than abstract reasoning or statistical summaries, and therefore can be expected to have a greater immediate effect as well as a continuing impact on our thinking in the future.

    Intelligence analysts generally work with secondhand information. The information that analysts receive is mediated by the written words of others rather than perceived directly with their own eyes and ears. Partly because of limitations imposed by their open CIA employment, many intelligence analysts have spent less time in the country they are analyzing and had fewer contacts with nationals of that country than their academic and other government colleagues. Occasions when an analyst does visit the country whose affairs he or she is analyzing, or speaks directly with a national from that country, are memorable experiences. Such experiences are often a source of new insights, but they can also be deceptive.

    That concrete, sensory data do and should enjoy a certain priority when weighing evidence is well established. When an abstract theory or secondhand report is contradicted by personal observation, the latter properly prevails under most circumstances. There are a number of popular adages that advise mistrust of secondhand data: "Don't believe everything you read," "You can prove anything with statistics," "Seeing is believing," "I'm from Missouri..."

    It is curious that there are no comparable maxims to warn against being misled by our own observations. Seeing should not always be believing.

    Personal observations by intelligence analysts and agents can be as deceptive as secondhand accounts. Most individuals visiting foreign countries become familiar with only a small sample of people representing a narrow segment of the total society. Incomplete and distorted perceptions are a common result.

    A familiar form of this error is the single, vivid case that outweighs a much larger body of statistical evidence or conclusions reached by abstract reasoning.

    When Armed Liberal states that "Much of my decision making and thinking comes from what are - to me, at least - illuminating parallels between the decision before me and things I know and have seen in my own life. This is no exception." then he is openly engaging, embracing even, this error.

    Therefore I could argue all day until I am blue in the face about how GWB is not truly committed to winning the war. I could point out the failure to commit enough troops and its overwhelming corroborative evidence. I could point out the statistically increasing number and severity of attacks on Americans in Iraq. I could point out how increasing military costs in damaged vehicles and the increase in ammo usage clearly are evidence (the troops aren't using up all that extra ammo target practicing) of a active and widespread military operation rather than a steadily improving security.

    Those are numbers and they don't lie. The number of attacks. The amount of ammo used. The increases in repair requests. It isn't about good press or bad press or clever arguments by pundintry or anecdotes from Iraq. It's a simple question of logistical calculation. The logistics are speaking in evidentiary terms of a steadily worsening and not improving situation.

    Is that the picture of a war effort in which one is committed to win? Yet it is abstract while the visceral impact of GWB as being determined and confident is concrete. Armed Liberal can use his social intelligence to diagnose a defensive less aggressive posture in John Kerry's words, and he compares this to the aggressive determination in Bush's words. He chooses the later, even though the fact is that we know that there are regular shortfalls of military supplies that have been noted at the highest levels of military command. Yet because of his cognitive errors, of which he is manifestly unaware or he would not make a point of pride of them, Armed Liberal ignores the later evidence in favor of the former.

    Because of the cognitive error Armed Liberal engages in this sort of fact based and statistical evidence is useless.

    Why? Because Armed Liberal's vivid personal impressions of a determined-seeming George Bush, his confirmation and overconfidence bias. George Bush seems determined and confidence to him while John Kerry does not. However if we present abstract evidence that GWB is in fact not committed to doing what it takes - black and white troop deployment and budget allocation numbers - then he will ignore this abstract data in favor of that which is concrete which confirms his biases formed on recently available experience and attributing it to personality rather than weighting the contribution of circumstance.

    These common types of errors are why the reality-based community or the community who "believe that solutions emerge from your judicious study of discernible reality." is losing the argument in the public sphere. To be part of the reality-based community one has to accept the premise that success is determined only in part by individual choices, and must for the rest depend upon an external independent reality whose nature must be studied to optimize success. The reason of course why it must be studied is that because of cognitive biases very few people can naturally learn to come to conclusions correctly on their own. Facts are not obvious or self-evident. They must be ascertained through systematic and abstract study to determine statistical patterns. It is for this very reason that we created science - because physical reality is not self-evident.

    The consequences of our choices are relative to our environment. Our environment is not in its true nature apparent immediately to us. Therefore we must train ourselves to discern its true nature before we can understand the full impact of our choices. It seems incredibly obvious to baldly assert this, but Armed Liberal is departing from this way of thinking in an equally obvious way.

    It was in that aspect that I wrote Shaula, who ironically has accused me of metaphorically abusing my authority to analogously sexually harrass her, wrote the following:
    oldman, I was thinking about Germany (again) today. The people of Nazi Germany who were "true believers" went through the experience of watching the official Nazi myths destroyed before their eyes (which didn't cure all of them, but certainly remedied the cognitive dissonance on a national scale); and afterwards, of course, the partition and occupation of Germany was about, among other things, building a new, "reality-based" Germany.

    It got me do we return the cognitive dissonants here to the real work? Will it take a national public failure on the magnitude of the fall of Germany?

    Let me clarify that I'm not indulging in wishful thinking or schaudenfreude; I don't want to see the US destoryed (otherwise I'd be working for, not against, the Republicans). But if Hitler had not declared war on other countries and their violence had been strictly internal and discrete...would the Nazi's still be ruling Germany today?
    Shaula Evans

    For the record I have never groped a woman without her prior and later confirming assent that she wished to be in fact groped by my person.

    My response to her is that I'm afraid that something similar must happen. It is in the nature of hubris to push one's luck until in overextending one goes too far and must fall. I love my country but it seems that they are in love with their self-flattering myths (and here I include the myth of a viable progressive Democratic party) and we must fall into the darkness before people will come to their senses.

    Bush appeals to the prejudices in our way of thinking, that sheer determination and American might will infallibly carry the day. The reason why people are breaking away from Kerry is that he is the voice of caution that reminds them that we are not inexhaustible. They find comforting the notion that if we keep on pushing forward we will triumph and be vindicated.

    However in the real world we all know that no one, and I mean no one, is invincible. Germany was not invincible and neither are we. Without the ability to learn from our mistakes we are not just doomed to repeat them but to push them to the breaking point.

    For it is the definition of madness to attempt the same thing over and over again but expect a different outcome from what reality shows us.

    As the case of the Armed Liberal shows, there are a lot of people running around out there who basically don't know shit. Unfortunately they get to vote to elect someone to office to take care of matters which as mentioned before they not just merely know nothing about but are completely and disasterously wrong about. GWB is smart enough to play to these cognitive errors, which charming or harmless in the context of an ordinary citizen's life, become monstrous in the context of choosing an executive to conduct official policy.

    Damn I was supposed to stop writing for a while wasn't I?

    Under the Weather,

    I'm sorry all for the interruption in my writing. I've had the flu and then a nasty secondary respiratory system complication arising from the initial illness. I'm mostly focusing on recovering and getting some work done at home until I get better. I still hope by the end of the week to help volunteer for the big get out the vote push, since Iowa is a swing state this year. I've done all I can on other fronts for now, and for better or worse we have to let this all play out straight up.

    If the American people decide to re-elect GWB for 'four more years' in a clean and clear(even if not likely to be large) margin of victory then there's nothing to do for it but wait around to pick up the pieces. If we've done all that we can do - voted and volunteered or donated or spoken out - then we just have to trust that in the end the truth will win out.

    I have many sincere friends who are not unintelligent but whom are going to vote for Bush. I haven't tried to dissuade them since I have seen that they have already made up their minds. I do have to say that some of them most discourteously did not extend the same respect to me and I had to cut them off while they were eagerly repeating RNC talking points to me. I did not attempt to prostelyze them and I wish they had just let it drop as well.

    I think they are misguided but it is not my place to shout them down or attempt to wheedle or badger them into changing their minds.

    Clearly things are not bad enough yet to convince them that something is terribly and horribly wrong going on.

    If there are election "irregularities" that attempt to steal the election of course that should be contested. However if in an actual majority of votes the American people re-elect GWB then truly we must abide and wait for things to get so awful that it penetrates the fog of propaganda and official denial and shatters it. This doesn't mean that we should give up or that there is nothing to be done. There will be much that is needed to be done.

    Sometimes people just have to learn the hard way. People aren't voting for Bush in so much that Bush is appealing to their point of view. People are voting that they think their idea of the world is right. Unfortunately it's terribly wrong, but that won't be apparent for a few years. Sometimes people just have to hit rock bottom before they can admit that they were wrong and need to change how they think.

    I'll get back on the writing horse as soon as I can get caught up with my work.

    Sunday, October 24, 2004

    The Capitalist Philosophy of Alternative Energy

    Damn you Ian and Stirling - I'm feeling under the weather and didn't want to expend the energy to write anything - but you have practically forced me to say something with your own writing.

    Yes. Unfortunately it's a question of decentralization and marginal costs. The essential problem is that the marginal cost of petrofuels is higher - but the cost is not priced into the market because of government distortion. When people say that oil is cheaper than solar, what they mean is that it's cheaper if you don't take into account the economic cost of:

    1. The first Gulf war
    2. The second Gulf war
    3. The opportunity cost of lost growth from imposing dictators on various states
    4. The capital flight induced when the Federal Reserve manages the Fed Funds against the bbl price of oil for leverage.
    5. Pollution and global warming effects

    If we were to take all these costs and charge them to the account of our use of fossil fuels I don't think that it would be cheaper at all. We can see this by noting historically that whenever the system designed to keep oil prices low fails, it immediately spikes in price. The natural cost structure of oil - expensive technical digging and then shipping a substance halfway around the world in huge quantities and then complexly chemically treating it and then redistributing those petrochemical products - is inherently capital expensive on a commodity which should give it a low rate of return because of its higher marginal costs.

    On the other hand, the price of semiconductors has dropped massively because of general increases in technology.

    Don't you find it odd that DRAM has become commoditized because of mass production and huge advances in technology - but that solar cells haven't nearly approached this level of change?

    Of course they are not the same thing, computation is different from solar energy conversion. However it suggests a difference in capital investment and that there are economies of scale that are not being exploited.

    The reason why they are not being exploited? Subsidy and market distortion by government both regulatory and intervention such as the Fed.

    We take it for granted that the marginal cost of petrofuel consumption is lower than the marginal cost of alternative fuels. If one takes a serious look at the structural costs of either approach, I think that any sane person would have to question that assumption.

    As Holmes said, once you have eliminated the impossible then whatever left however improbable is the answer. It seems difficult to me to argue anything other that the marginal cost of petrofuel consumption, even neglecting environmental costs, is higher.

    Yet it is not in practice. Whenever you see a product being sold on a market at lower than its cost structure indicates one must always suspect subsidy and/or marketshare undercutting efforts.

    I would argue that it is already, and probably has been for at least five maybe ten years to switch much of our consumption to alternative fuels.

    The problem has been that the initial capital needed to fund investments and create economies of scale in production and distribution have not been invested. The reason why they have not been invested is that the market has been price distorted. The reason why the market has been price distorted is that A) a legacy system for maintaining low oil prices when it was necessary has become a political mandate and B) the political system had become habituated to protecting the oil industry.

    When we compare alternative energies and the petrofuel economy we are comparing babies and oldtimers. The petrofuel economy is mature, entrenched, has a political constituency, is able to pass its costs off to others in numerous ways, and has had huge amounts of capital invested to capture economies of scale. The alternative energy economy is decentralized and requires a collabortive distribution network instead of the current branching hierarchy system.

    You see the petrofuel economy starts with producers and then processors and is then distributed through hierarchial arrangements to local retailers. This system is especially prone to the centralization of profits. By controlling the energy distribution in a top-down manner, it is easy to make a lot of money in a few places with most of the rest of the network being relatively low-profit as they take small cuts of the revenue stream as a charge for passing on the commodity.

    However a diverse multi-technology alternative energy fuel economy is going to be much more flat and dispersed. In order to store energy when it is in excess there are going to have to be a lot of fuel-cell batteries sitting around owned by a lot of people to feed back into the distribution net. In order to produce energy there are going to have to be a lot individual homes and businesses that produce wind and solar energy and then feed their excess back into the net in exchange for pulling energy off the net in low-production times. In order to stabilize the system there are going to have to be next-generation nuclear power plants - which won't really be profitable given their high safety and pollution treatment costs - but will have to be subsidized by the rest of the network in order to provide peak consumption megawatts to anchor the entire system. There are going to have to be a lot of regional hydrogen producing and local fuel-cell charging centers to distribute to local retailers or drive-in customers.

    What all of this spells is a system which it is very hard to monopolize the profit stream.

    And this is one of the reasons why we haven't moved to such a system and why the capital investment is commerically and politically being disincentivized. As Ian pointed out economic activity is not just about wealth it's about domination or what most people refer to as power.

    A lot of people who have wealth but more importantly gain their wealth by dominating the present system, have a lot to lose by a switchover to a system where the profits may be greater but they will be more evenly split among many different mouths.

    Therefore I would argue that the greatest impediment to a change of our energy-basis and economic restructuring is not as most people assume "marginal cost". The conventional wisdom on the topic is such that when the price of oil rises high enough then alternative fuels become more economically viable. (CSM)

    With the price of oil hovering above $55 per barrel, demand is rising for a wide array of alternative energies - from wind turbines to cars fueled by corn oil.

    While such devices and fuels always capture attention during spikes in oil prices, the alternative-energy movement is moving well beyond the novelty phase. It is becoming more ingrained in the nation's power grid and in middle-class homes as technologies improve. Consumer demand has Toyota predicting the sale of 100,000 of its Prius hybrid cars in the United States next year.

    But this is foolish because you are comparing a mature technology with established capital investments and economies of scale and distribution networks, with a nascent technology without capital investment and lacking economies of scale or distribution networks.

    It's like comparing a local minor league player with Babe Ruth - when he was five.

    If you look at the extrapolated marginal costs of two mature industries then its clear that the alternative energy economy would have lower and not the higher marginal cost - not at some future unspecified future date of technological advancement but as of the 'state of the art' since perhaps as long ago as the early nineties.

    When you look at the real GDP numbers - declining since the mid-nineties and now flat in real adjusted terms - it's clear that once you get past the bullshit accounting that nothing whatsoever is wrong in the real world of non-academic economics. Things are just exactly where you would predict them to be if you kept on subsidizing an antiquated technology with decreasing profitability due to higher costs, kept on basing a national and international currency on it, kept on using the advantage of being the commodity trading currency for petroleum to borrow heavily against the future to maintain an unsustainable level of consumption created by the failure to shift from a energy-balance deficit.

    If you ran a business on one technology and started losing money on the trade you could A) borrow in order to maintain a while longer the present losing game B) or invest in a new more profitable technology while you still have the cash or credit to do so in order to get back in the black.

    One could argue that if we switched a alternative fuel technology that the demand for oil would drop and the price would drop and others would undercut us using cheap oil. This is false because it neglects two things. The first is that if we were no longer dependent on fossil fuels we could take the money we spend subsidizing and stabilizing the entire world network and invest it in doing something more productive with it. The second item that needs to be mentioned is that the costs of maintaining the network would fall on others and they would be made less competitive by this burden. Without the US to be the "world's policeman" or more accurately "the world's oil security officer" the price of oil would rise precipitously over time.

    More concretely imagine all the regimes that would collapse because of the withdrawal of US support and aid. Think of the Kyoto Accords - freed from the shackles of oil addiction the US could stop being the roadblock to worldwide implementation but turn around and press for more stringent standards. It would clearly be in our best interests to do so at that point, because it would make the petrofuel economy less competitive compared to our high tech one. It would be at that point in our best economic interests to see that the carbon emissions would be correctly priced into the market in order to prevent them from undercutting the alternative fuel technologies.

    All the economic signals are screaming that it is not just time to make a change, but that we are paying a heavy market penalty for not having started the switch already.

    Friday, October 22, 2004

    Dead Money Vs. Investment, Monetary Policy

    The first thing to understand is that dead money always involves speculative bubbles. Moral hazard is when regulatory or lending institutions create the danger of people not properly allocating capital. This occurs when people feel that they are protected or that the authorities will bail them out from any mistake however atrocious. There is always big money or easy money (they are not the same thing) to be made in risky speculation - most people call it gambling.

    Moral hazard creates the systematic incentive to move capital from productive investment into gambling because they think that someone else will cover their bets for them.

    Nominally Central Banks are supposed to avoid even the appearance of favortism and impropriety in order to avoid moral hazard. This is the theory of central bank neutrality and independence that you will read about in textbooks. In practice a central bank operates through dynamic equilibrium, it is always tap dancing its way through the impromptu jazz rhythms of the shifting economic landscape. Therefore while neutrality and independence often invoke detached or static connotations the practice of a central bank is to be engaged and adaptive to present circumstances.

    Every central bank however must deal with political and social realities that it must accomodate that are irrational and therefore outside the framework of economic theory. These are often cultural features that are deeply embedded and the central bank must bow to these realities. When a central bank humors or accomodates these political and social realities it is already departing from the model of the central bank as neutral and independent.

    Still the job of a central banker is in fact very hard and without a great deal of sympathy from outside critics or the beneficiaries of the work. Everybody is a critic, as someone said.

    The job of a central bank is on order to foster long term productive capital investment while in the short term managing the liquidity needs of practical socio-economic transitions. The problem is that either through complacency or through a constant 'crisis management' mode of thinking that central banks often let the latter mission - managing the liquidity needs of short term socio-economic tranisitions - interfere with their mission to promote long term productive capital investment.

    The reason is corruption but not in the venal sense of taking bribes, abuse of authority, or having close associaties form a conflict of interest. It is corruption in the sense that Lord Acton inferred, that power is its own policy and one can become so immersed in the technical details of power that one forgets the long term reason that one is exercising it for in the first place. To forget why one wields power because one becomes lost in weilding it, that is corruption.

    In the long term, the economy can not be healthy and grow unless the central bank promotes capital investment. That may seem like a no-brainer. However in the short term the path of least resistance in managing liquidity needs for the economy always lies in working on the side of issues that have political favortism - the protected industries and special interests. Whenever a central bank works with one of these it is not creating investment but it is instead creating dead money.

    A central bank fosters a more efficient market and a more productive economy when it fosters real capital investment. But the easiest and fastest way to get things done at any moment in time is not to encourage social change toward more productive investment needs - slow, fraught with setbacks, and expensive in terms of political capital - but to just go along with what the politicians want in order to do it the "quick and dirty way".

    So there can be a temptation in order not to just occasionally accomodate the reality of political favortism (protectionism) of various socioeconomic participants but to facilitate it - because its easier.

    Every central bank has a limited amount of political capital. This political capital stems from its history of institutional competence in managing both short terfrom which it can signal politicians just what it favors or will tolerate insofar as fiscal freedom and protectionism.

    A weak central bank like the BOJ is forced to almost always act in a way that favors protectionism and special interests. This vicious circle fosters a lot of dead money and poor capital investment, creating later liquidity crisis in which the temptation is once again to take the quick and easy protectionist way out rather than attempting to create an incentive for real capital investment. This is why Japan has been floated for the last two decades from one liquidity crisis to another as the BOJ is unable to promote real capital investment but forced to facilitate more protectionism to get through the present crisis only to see a failure of capital investment that creates yet another liquidity crisis.

    However the US Federal Reserve Banking system is not weak. It is instead corrupt - not in that it abuses its authority but in that its become addicted to "quick and easy" liquidity fixes favoring protected industries to get through the crisis. This is the "Dark Side" of Central Banking if you will.

    Luke stopped as he heard mention of the man, the one who'd killed his father. But, but he was his father wasn't he? He listened as his voice spoke despite his thoughts. "Vader. Is the dark side stronger?"

    Quickly his master spoke, emphatic to impress the point upon his pupil. "No! No, no.... Quicker, easier, more seductive."

    Luke thought on his words, and the dillemas they presented. "But how am I to know the good side from the bad?"

    "You will know," Yoda insisted. "When you are calm, at peace. Passive. A Jedi uses the Force for knowledge and defense, never for attack."

    Dead money is not a difficult concept. It comes from considering just four things: supply, demand, currency, and price.

    For a constant liquidity of currency, supply and demand will generate a price that reflects the momentary market consensus for that good or service. However if you start adding more currency in circulation, then if supply and demand remain the same the price will rise without anything else changing. That is called inflation.

    However in a marketplace where many things are being priced, you could avoid inflation from adding liquidity if instead of all the prices rising just one or a few prices rose very high. As long as that price didn't suddenly decline. Then the extra currency would stay "locked up" in that item. That is it is very hard for social or economic reasons to get cash for that item class. When it is very hard to convert the price of something into raw currency, it is called "illiquid".

    So that's dead money, it's just a way of soaking up extra liquidity added to a marketplace by skyrocketing the price of a handful of items far beyond what their supply-demand balance indicates. In practical terms the item being used as a liquidity sink must be illiquid or the effects won't last very long. Housing for instance is illiquid. Yes you can sell your house, but most people selling their house use that value toward buying another house. So housing is an illiquid and can be used as a liquidity sink.

    The military-industrial complex can also be used as liquidity sink. Of course when you put money into it, the labor and commodity components generate "economic activity" and so circulate. So does the labor and components of the housing market however - carpenters spend what they earn and buying wood rev's the economy. The housing market however is a good liquidity sink because the prices of the homes can be bid up by much more than the marginal cost - labor and commodities - of production. Remember: location, location, location!

    So in the same way the labor and commodities expended in the military-industrial complex also generate "economic activity" and can contribute toward inflation by recirculating liquidity. However the items produced by the military complex can be bid up very high and are illiquid. The Pentagon may be willing to pay $100 for toilet lid covers but would you give somebody a $100 for such a toilet bowl cover? In addition the capital cost structure of their industrial capital infrastructure coupled with generally low efficiency of production all contribute toward making any money you throw at the military-industrial complex "dead money" or money sunk into building big expensive things you can't really sell to anyone for cash.

    Right now Alan Greenspan is caught between not one, not two, but three liquidity crises with another on the way. The past liquidity crisis was that in order to finance the economic restructuring of the "new economy" and to smooth over millenium fears he flooded the economy with liquidity. This boosted the stock market, but the stock market was not sufficiently illiquid. The economic downturn caused a stock market correction and suddenly a lot of money started coming out of it.

    Taking the quick and easy way, Greenspan dropped interest rates to historic forty year lows. Given the protectionism of the housing market, this caused a real estate and development boom and eventually bubble. However without an economic restructuring -because the economy is in transition- this couldn't lead to an economic recovery but only a stagnation kept afloat by a liquidity injection.

    The reason why of course that the economy was in transition is that the petro-economy facing higher competition (demand) for scarce oil commodities and dealing with a moribund capital investment infrastructure in America switched to "cannibalization" mode where it is liquidating or selling off parts of the economy to sustain a bit longer an unsustainable net negative ongoing cashflow problem for the USA.

    The low savings rate, the current accounts deficit, the national debt issue, the energy-balance deficit, the capital flight issue, and the regulatory protectionism system are all therefore bound up in the same problem.

    The logical conclusion would be to attempt to create capital investment by reforming the regulatory system and removing moral hazard from the marketplace. However this would be politically difficult. Government cannot on one hand protect and openly subsidize petro-companies like Hallburton while successfully incentivizing new capitalization of energy-efficiency and alternative-energy investments. The reason why it is politically difficult is that it is always easy to buy off the public with a boondoggle for a special interest or protected industry but it is hard to convince them to restructure economic patterns even if in the long run that would be more healthy.

    However the failure to do so means that the "quick-fix" will be temporary and make the situation worse the next time around.

    Now the economy is teetering and not having been fixed and brought up to date from the first petro-correction has seen since 2003 a historic break from the Fed Funds correlation with inflation adjusted oil. What that means in practical terms is that the economy is about to go wobbly again in the coming year. This is why Greenspan is doing anything he can to favor Bush, because to get him through the next crisis he needs a forced savings program like Social Security retirement savings accounts or healthcare savings accounts so that he can make their asset values spiral upward and in so doing so inject enough liquidity into the economy (without generating general price inflation) so that it can get through the next pratfall in 2005 that it is about to undergo.

    However while he is doing this the currency value of the dollar is dropping, oil's price is rising - but not rising as much against the Yen or the euro. What that means is that we're running out of time. Over time the Yen and the euro don't see as much of a price increase in the price of oil. That means that over time their economies suffer less from the same price increases. Furthermore it means that other countries will favor putting more and more of their money obtained from exporting to us into Yen and euros.

    If this trend continues America will lose its petro-currency commodity trading status and reserve currency status within perhaps five years.

    Of course Greenspan is not an idiot. He understands that a switch to either a basket of currencies or a yen/euro standard for oil is probably not only inevitable but perhaps desirable. The globalist concept as I mentioned is to try to export to Europe and get offshoring jobs from them the way that Asia exported to us and got offshoring jobs from us (while trading being the policeman of the world in exchange for them financing our debt). The problem is that the unproductive and inefficient capital investment environment combined with the above outlined problems of debt, political will, etc. make it highly unlikely that we can make such a transition without a sharp drop in aggregate demand, higher interest rates, and super-inflation.

    In historical terms the plan isn't working and both the domestic-side application and the foreign-intervention are both going sour. Perhaps they think they can salvage it but already in proven quantities and facts the idea is starting to smell like old fish. Greenspan is however not an idiot. His plan for managing this problem is to promote a super-beyond-porn-sized "dead money" liquidity sink in the USA so that he can inject obscene amounts of liquidity into the system and finance that transition more or less smoothly.

    Are you starting to get the pattern? Without confronting the issues that make productive capital investment, the long term mandate of the Federal Reserve, then the Federal Reserve Banking system is forced to go from one liquidity-"dead money" binge/fix to the very next one generated by the waning of the previous one. It truly is a vicious circle.

    I'm starting to think that someone should have a talk with Bernacke's and Greenspan's friends and maybe stage an "internvention" because this isn't healthy.

    "Dead money" isn't the same thing as investment. As a matter of fact, it's the exact opposite. In a further post I'll explore the inflationary and deflationary aspects of the military-industrial complex, the fundamental basis of capitalism, the role of surpluses versus debt, and begin discussing how various (quite excellent) suggestions of what investments we should make to break out of this liquidity-"dead money" addiction that we've gotten hooked on.

    As my readers have astutely pointed out, the truly logical course if one needs a liquidity sink to tide one over is to just bite the bullet and make large long term capital investments. The regulatory changes and the formation of capital can then healthily allow new liquidity to enter the monetary supply without increasing inflation. The capital investment is the very opposite of "dead money". This choice to invest in productive capital rather than use "dead money" is called an "economic restructuring". However economic restructuring is politically difficult, because by definition it means that you have to stop favoring the protected industries and special interests. And the reason why those became protected in the first place was that it was easier to buy them off by favoring them then get a real electoral mandate and voter constituency for change.

    So it all comes down to tough choices.

    While I completely agree with Stirling, Barry, and my readers as to what the general task must be the reason why I've explained all of this is to outline the institutional motivations and cultural barriers which explain why the logical and rational course of action to remedy the situation has not been taken.

    If there's one over-riding economic reason to vote for Kerry over Bush it's simply that Bush stands for using "dead money" to try to prop up the old economic system while Kerry at least opens the possibility (with his proposed energy "Manhattan Project") of beginning to take the necessary steps toward restructuring the economy and productive capital investment. There's no guarentee that Kerry will be able to break the addiction, but it's highly unlikely given Bush's track record that he will even try to grapple with tough choices.

    Wednesday, October 20, 2004

    Heating Costs for This Winter,

    A friend of mine working on his Ph.D., who has a newborn and lives in a mobile trailer, asked me a few weeks back about whether or not to accept a utility company offer to "budget in" his energy costs - or lock them in at a fixed monthly rate for a year.

    I unhesitatingly told him that yes he should do so and that I already had.

    When he asked me how much I thought prices would go up I estimated at about 25% nationally on average. He seemed surprised and mentioned how he'd seen a figure of about 15-20% on the upper end. However I assured him between falling inventories and metereological reports that 25% was a modest prediction rather than an upper band.

    Since then I've seen a WaPo article that quoted estimates for price increases in the North East USA to be up potentially 28% but I thought that was low.

    Now we see this:

    Crude futures are now 81 per cent more expensive than a year ago, while the average American residential price of heating oil is $1.99 per gallon countrywide, up 60.5 cents from a year ago, according to U.S. government statistics.

    Crude would need to climb to $80 per barrel in order to reach the all-time pinnacle, in inflation-adjusted terms, set February 1981.

    Buying was triggered Wednesday by an Energy Department report showing a 1.9 million barrel drop in distillate fuel last week, bringing U.S. inventories to 119 million barrels, or 9.5 per cent below year ago levels.

    The decline came amid falling imports of distillate and in spite of increased production from U.S. refiners, meaning domestic demand growth outstripped supply growth.

    Daily distillate demand for the week ending Oct. 15 was 4.2 million barrels - a level that analysts said is more typical of the dead of winter. One explanation is that with prices high all summer many heating oil distributors delayed making their winter supply purchases, creating pent-up demand.

    "This is the time of the year when you're usually building inventories," said Tom Bentz, a trader at BNP Paribas Futures in New York. "It seems we probably peaked on inventories a month or two early. The weather is getting colder, so it's unlikely that stocks are going to be able to build from here."

    The Energy Department also reported that crude oil stocks grew by 1.2 million barrels to 279.4 million barrels, or 3.7 per cent below last year.

    So if you haven't locked in your heating costs and you still can, do so. Whatever price they charge you now, it's probably not going to be as bad as when the market fully prices in this winter - which by all signs to the weatherwise and official metereological forecasts is going to be a chilly one on the North American continent. Gonna get real cold out there.

    The Mind of Greenspan and the Coming WWIII,

    In my previous post, I mentioned how Japanification was an unlikely scenario for reasons both structural and cultural. However to give them their due, the globalist neoliberal and neoconservative movements that championed Japanification did have a plan to make it work. This plan was built upon two central concepts.

    The first was that the American tendency to save at unsustainably low rates could be reversed as a first step toward creating a liquidity sink. This would require two essential ingredients. The ingredients were the proposed privatization of Social Security and Medical Health Savings accounts. The real reason why Greenspan favors Bush over Kerry, is that Greenspan understands that only in the creation of forced savings accounts can a liquidity sink of sufficient proportion be created to absorb future injections of liquidity or drops in demand for US debt.

    The reason why this is necessary is that Greenspan has already tried once, and failed, to create a Japanification scenario. If you examine the relationship between the Fed Funds rate and the inflation adjust bbl price of oil you can see that in 2003 the historic correlation between the two was broken - a relationship that had been in place since the move off the gold standard.

    This was in essence the thinking behind Greenspan's now infamous testimony to Congress promoting ARM's or Adjust Rate Mortgages. At the time, and still presently, many observers including yours truly scratched their heads as to why a Fed Chief would suggest that people forgo fixed rate mortgages at a time when we were at historic forty year low interest rates. The reasoning behind it was that Greenspan was trying to encourage demand that would sustain a real estate inflation bubble.

    You see when you purchase a fixed rate mortgage, the bank takes the long term risk of inflation. For this reason they charge a premium in the form usually of a higher rate of interest. When you obtain an ARM it is you and not the creditor that takes the front-line risk of inflation and so you get a lower rate - at the risk of rate increases later on.

    In a Japanification scenario where Greenspan would attempt to flood the market with dollars while attempting to prevent inflation using a liquidity trap he would need an asset class to sink excess circulatory dollars into. ARM's make mortgages more affordable since if assuming interest rates remain low you pay a smaller debt service over time compared to a fixed rate mortgage. Alternatively you can afford to service the debt of a larger house payment monthly on the same income. By using his best nod, nod, wink signalling, Greenspan was attempting to signal home-buyers and the markets that it was okay to take on ARM's because it was defacto Fed Policy in order to maintain or even lower rates from the present level into the ongoing future.

    If it had worked it would have caused home prices to skyrocket from their present levels. Indeed given his comments about a lack of a distortion in the housing market and the comments as to how well Americans "manage their debt" we can see that Greenspan would like to see this approach succeed still. If we had seen a continuing escalation and sustaining of home prices Greenspan would have used it as his anchor point to reinflate the US economy.

    However it didn't work. It didn't work because you finance home-buying based upon income. Because of offshoring wages have been at best slowly increasing at far less than the rate of inflation or in fact stagnant. This meant that despite all the chicanery of the Federal Reserve that the housing market itself failed to be sufficient as a liquidity sink in order to create the Japanification scenario.

    Given that we know now in historical terms that the real estate market bubble failed to absorb enough liquidity to prevent a break from inflation-adjusted oil and the Fed Funds rate we can see why the original plan of neoconservative and neoliberal, that is to say the post-modern political movements, were doomed to failure. It is not a matter of speculation, they attempted it once and in quite direct terms it failed.

    But to give it its due we should basically state what the plan was. The plan was to smoothly transition from the US being the currency of the petro-trade to the Euro. Just as previously countries exported to the US in order to get dollars to buy oil, now the US like other countries would export to Europe in order to get Euros to buy oil - but only on more favorable terms. The more favorable terms and the reason why the postmodern political movements expected to avoid an economic shock from a drop in the demand for US debt was the US military.

    While the US had been the economic and military superpower, the first Gulf War had introduced the need to transition to a new paradigm. In the new proposed globalist paradigm the US would remain the paramount military power and its military-industrial base would be maintained by continued debt purchases of Treasuries by other countries. The new economic center of the globe would then be Europe, and Europe would see its livings standards deteriorate in exchange for financing the world's economic development. In the first Gulf War it was America that provided the muscle and other countries that provided the cash to fund it.

    This was to be the new globalist paradigm for their "new world order".

    On the domestic side in order to finance the switchover between economic regimes, between a dollar based petro-currency to a euro based one, there would have to be a large liquidity injection and that would require a liquidity sink in order to soak up otherwise inflationary and price-raising circulatory dollars. Hence Greenspan's support past and present for Bush. If it had worked the correlation between the Fed Funds rate and the price bbl of inflation-ajusted oil would not have been broken.

    What history proved was that the structural market pricing of real estate prices, interest rates, and incomes proved insufficient to absorb enough of the new money supply. In order to try again, two things would be needed. The first is as we mentioned a government mandated force savings program. The fact that there would be gross inequities to the savings program would be secondary to the consideration that it would be a vast liquidity sink.

    Right now Social Security is not a savings program. Dollars go into a revolving door and they go out the same day to pay for current entitlement benefits seniors are receiving. Currently more dollars go into Social Security than go out for entitlement payments, but these are spent elsewhere right now this moment by being added to the General Fund expenses. Ironically these are not counted against the budget deficit - as it turns out if the budget were adjusted by the amount of money drawn from the "Social Security surplus" it would be another 200 billion in the red. Later on when Social Security pays out more than it takes it, not only will this 200 billion not be available but General Funds will have to be diverted to maintain the balance.

    The important point to grasp here is that Social Security is not a savings program and therefore can not act as a liquidity sink - unless it is converted into private retirement savings accounts.

    The same logic applies essentially to healthcare savings accounts.

    In response to my previous post a reader, Ed, astutely notes another difference between the US and Japan.

    At 10/20/2004 10:39:24 AM, Ed Tayter said...
    Thanks for the post. I now understand why you don't think that Japanification is likely here, and I agree with you. What do you think that the likely scenario is?

    The only thing stopping an immediate petro-currency switch to euros is the US military. Bushco hoped that the lesson of Iraq would be allow petro-euros and your government will be otherthrown. Saddam switched to euro pricing in 2002 the US invaded in 2003. This is the point where things stopped going according to Buschco's plans.

    Iraq was not easy or cheap to occupy. However, even with the slow weakening of the American military in Iraq, I don't think that there are currently many leaders of oil exporting countries who are willing to risk the US intervention that a euro-switch would provoke. Let the military weaken more and some minds may be changed.

    The US commitment to militarism also makes a Japanification scenario considerably less likely in America. The US does not need failing businesses and opaque banking regulation to absorb excess liquidity; we have the military. The military-industrial complex can absorb any excess liquidity that American tax payers want to throw at it. I see ever increasing militarization as a much more likely outcome than Japanification, based on the cultural mores of us Americans.

    Having an enormous military makes it much more likely that we will take the military solution when it is presented. Whether the military solution works or not, is an entirely different question. The US deflating its way to more oil is alot less likely to occur than the US trying to militarily sieze the remaining oil supplies.

    Typically empires just don't fall apart though it may seem that way. What happens is that an unsustainable situation requires maintenance by some sort of expansion to refinance a net negative status quo. This expansion leads to over-reach which trades off a temporary injection of commodities in return for a deterioration of the structural economic infrastructure. At the point where the negative returns deteriorate the economic infrastructure beyond minimal cohesiveness, the economic infrastructure of the empire disintegrates and the empire or hegemon seems to suddenly and without "apparent" warning collapses within a short period of time - or fragments into smaller viable economic units.

    As the empire or hegemon attempts to maintain its past cost-structure with its attendent invested social relationship network it shifts to progressively more cannibalistic forms of economic activity that use up the capital asset and labor pool value that could be used to generate new growth. The consumption of the "seed corn" of tommorow to feed the hunger of today in order to maintain the social order of yesterday is the classic symptom of the peak of an empire or hegemon right before its decline.

    If the US finds that it cannot transition smoothly to a euro-based petro-currency while maintaining its net negative consumption it will likely go to war. The alternative or potentially complement to the forced savings liquidity sink is the destruction of value created by the military-industrial complex.

    Most people think money is pieces of paper or a bit more abstractly zeroes and ones in a computer account. However this is patently not true. Try cutting out a few pieces of paper from stock and see if anyone will give you valuable for it. Currency is legal tender only if participants are willing to trade it for tangible goods and services. This in econ-speak is called "economic activity".

    So the fact that little pieces of paper pile up in a leather billfold or the bits in a digital computer are adjusted upwarded does not actually mean that the monetary supply actually increased. This is something that is difficult for most people to grasp. If you print out dollars and people go out and spend and use them, then you run into the trouble of price inflation - because that liquidity was translated into ongoing "economic activity". You would have the problem of the same of everything else and more little pieces of paper, which just means that the pieces of paper are individually considered worth less - classic inflation.

    You can avoid this problem while still having the freedom to inject liquidity into the monetary supply - printing out and dumping new pieces of paper into the economy or adjusting some digital bits upward - if you can have a source of "dead money". The little pieces of paper are still there but as long as someone is hoarding them away or they just push up the nominal prices of a select asset class like real estate then they aren't considered "in circulation". Which means they aren't generating ongoing "economic activity". Which means you aren't generating price-inflation, just specific asset-inflation.

    So you can push out more pieces of paper, get the temporary one time hit of them hitting the street, and then see them sucked into an upward asset value spiral that takes them off the street. This has a pro side and a con side. It means that the economy is on lifesupport. By definition "dead money" that doesn't generate self-sustaining economic activity won't revive the economy of buying, selling, and trading goods and services. On the other hand you can dump more money in any time you want, and it won't destroy the underlying market pricing of most economic transactions and the purchasing power of your currency.

    One way to do this is to have a culture and regulatory sustem that acts as a money trap - continually sucking up more currency but doing nothing productive with it. This is the route of Japanification and it worked in Japan because for social reasons the Japanese were willing to tolerate a lot of permanently non-performing assets and were willing to sock away ever more money into their savings accounts that had practically zero return rates of interest - coupled with price deflation because the economy was net hemmoraging money in order to compensate for the bubble run-up in the eighties.

    Attempting to create the American version of this is what Greenspan's solution was to the end of the nineties. However he and the free trade/ neoliberal market deregulator/ globalist gang failed because the culture and economic structure of America was simply too different. I'm sure they will try again with a forced savings program but for similar reasons that is likely to be insufficient.

    So what is the last resort? Well as my reader Ed pointed out America has a large military-industrial complex. Like in the eighties, as long as we have someone willing to buy our debt this can be used to put continued fiscal stimulus into the economy to keep it on life support. It is also an excellent monetary sink and liquidity trap. By definition, most of the uses of military money meets the definition of "dead money" - that is money expended without seeing any productive return for the investment. Destructive return yes, but not productive return.

    As a matter of fact the only "productive" return that a military has is in seizing and annexing productive resources and commodities from others. A military fed a lot of liquidity that would turn it into "dead money" and use some of it to bring in new commodities to shore up the otherwise unsustainable internal consumption of the US economy is probably going to be their next solution. It is an almost certainty that at least in the short run that the military-industrial complex - responsible for over two thirds of a trillion in government spending last year alone - would provide a sufficiently large monetary sink in order to pump out and spend dollars without producing purchasing power declines associated with price-inflation.

    Of course in order to keep the money "dead" it will have to using the assets it purchases with the liquidity provided by the Fed. That means more wars. This is the ultimate reason why the Rumsfeld doctrine of lighter, faster, etc. has not been rejected for the US military. The tool of the military in economic terms requires many small frequent wars where large amounts of material are used up - so that the military can purchase more to prop up aggregate demand but at the same time act as a dead money sink.

    This was why Rumsfeld was brought on in the first place, and why he in perpetuating this theory was only carrying out the legacy of the Clinton Administration which had already come to the same conclusion and had been retooling the military toward this end. Clinton was not above using the military as an economic sink for dead money. As Al Franken noted to Wolfowitz, Rumsfeld triumphed in Afghanistan using Clinton's military.

    Rumsfeld's job however was to expand the use of the military-industrial complex as an active role in order to justify continued purchases of US debt moving toward and after a euro petro-currency transition. To justify paying the US for being the world's policeman the US was going to have to keep up a litany of continuously justified and foreign subsidized wars. The fact that we were going to hit bad men running other countries was just incidental, the superficial justification for the transition of the US to a miliary based economic engine.

    Whereas Clinton had merely prepared for this enventuality, Rumsfeld's job would to implement it. This is why the Bush Administration kept and expanded the corrupt and pointlessly ineffective by all reports "missile defense shield". The purpose was of course rhetorical but it had an additional dead money sink property - it allowed the Fed to introduce new pieces of paper or revise upward digital bit values without generating sustained economic activity. I mean can you think of anything more useless and less likely to feed back into the economy than a $100 billion boondoogle "missile shield" that by all technical tests and expert estimates probably cannot work?

    This is of course why Greenspan is supporting Bush over Kerry. It's not that he likes Bush or the Republicans, but the "ownership society" policies of the Republicans while overwhelming helping those who "have" in our society also create an opportunity for Greenspan to restore his control over monetary supply. In addition Greenspan understands that Bush is for political reasons more likely in order to engage in wars and otherwise use the military-industrial base for fiscal stimulus - generating another liquidity trap that Greenspan can use to create dead money. Greenspan needs this dead money so he can buy his way out the current economic downturn without a) having to undergo painful structural economic changes that would create social upheaval and b) destroying US purchasing power.

    Greenspan is probably aware of the neoconservative and neoliberal agenda of using the military to justify debt purchases and bring in new commodity supplies to the market place on terms favorable to the US, and considers Bush more likely to promote that end than a Kerry Administration which might possible care about stuff like "social justice" and scruple at wasting large numbers of US lives just to stimulate the economy.

    Of course this same logic leads us to conclude that the above path would be a direct step toward engaging in WWIII but hey you can't make an ommelette without breaking a few eggs right? Certainly I've broken a few eggs in my time making ommelettes so why not right? You save what you can.

    Of course the above logic is premised on an assumption of despair. The fundamental difference between me and Greenspan is not that I am more scrupulous than him but that I have still the hope and expectation of the potential for a brighter American future. The logic leading to Armageddon is the logic of the acceptance of failure, the unwillingness to change, and the calculus of hopelessness.

    I do believe that the ends justify the means. I however also believe that if you are justifying means by ends then by golly you had better deliver since you can't very well claim that you had meant well. I also think that if you are going to justify the means by the ends that you might as well play for the prize. What is the point in being ruthless and unscrupulous if you are going to just settle for a future that is ... depressing? You might as well shoot for the stars while you're at it, because nothing less than extraordinary ends can justify extreme measures.

    This post is dedicated to my late father. I disagreed with you then but I see how right you were now. I didn't know how little I esteemed you until it was too late to make ammends. The only thing now that I can do is keep the promise I made to you right before the end.