Archive for July, 2010

>Fouling All Our Futures

>by Serge Halimi

Le Monde diplomatique (July 2010)

Chinese investors and British pensioners did not think on 20 April that the black tide off the coast of Louisiana would reach them so soon. Down in the Gulf of Mexico, eleven workers on an oilrig lost their lives, fishermen in St Louis Bay lost their livelihoods and everyone lost their precious environment and their brown pelicans. Far away from the fouled areas, the Beijing authorities and British pension funds suffered damage of a different kind: 48% of the value of their BP shares was wiped out in just two months. In China – and in Kuwait and Singapore – prime investors would be wise to lose their enthusiasm for western oil companies {*}.

{*} According to Bloomberg, Norway, Kuwait, China and Singapore have lost $5 billion since the black tide hit Louisiana.

The pension funds’ plight is of particular interest when European states, under pressure from the financial markets, are “reforming” (that is, cutting) social security. The steady reduction in government spending on health and pensions predictably and purposely forced many workers to turn to private insurance or pension funds. In the UK, the pension funds were naturally tempted by the $59 billion in annual dividends offered by BP, star of the London Stock Exchange. Eventually they came to depend on BP for one sixth of their income.

The return on the pension funds was all the more attractive because BP cut costs, by neglecting security measures where costly. But the US is not a no-go area or a little country whose president must always kowtow to a foreign multinational. It can defend itself against the destruction of its flora and its shores, and insist the polluter pays – $4,300 for every barrel of oil (159 litres) spilled at sea. This oil slick, which may turn out to be seventeen times the size of the Exxon Valdez spill in Alaska, might cause BP’s shareholders to regret the minor savings their company made in order to increase its profits.

The absence of state-funded retirement means that the prosperity of UK workers in their old age is inexorably bound up with the fate of their pension funds. They are naturally dismayed by US retaliatory measures that have affected the value of BP stock and already substantially reduced the company’s credit rating. When President Barack Obama announced that the company would pay for all the damage caused by its recklessness, the former Labour minister Tom Watson expressed his concern: “This is now a serious crisis facing millions of pensioners in the UK”.

Take millions of men and women seeking security after working all their lives and turn them into greedy robots, closer to the directors of BP than the fishermen of Louisiana. That is the nature of the system, kept going by the misplaced loyalties which one crisis after another expose.


Translated by Barbara Wilson

(c) Le Monde diplomatique – all right reserved

Bill Totten

Categories: Uncategorized

>How Brokers Became Bookies

>The insidious transformation of markets into casinos

by Ellen Brown (July 12 2010)

You all are the house, you’re the bookie. [Your clients] are booking their bets with you. I don’t know why we need to dress it up. It’s a bet.

– Senator Claire McCaskill, Senate Subcommittee investigating Goldman Sachs {1}

Ever since December 2008, the Federal Reserve has held short-term interest rates near zero. This was not only to try to stimulate the housing and credit markets but also to allow the federal government to increase its debt levels without increasing the interest tab picked up by the taxpayers. The total public US debt {2} increased by nearly fifty percent from 2006 to the end of 2009 (from about $8.5 trillion to $12.3 trillion), but the interest bill {3} on the debt actually dropped (from $406 billion to $383 billion), because of this reduction in interest rates.

One of the dire unintended consequences of that maneuver, however, was that municipal governments across the country have been saddled with very costly bad derivatives bets {4}. They were persuaded by their Wall Street advisers to buy municipal swaps to protect their loans against interest rates shooting up. Instead, rates proceeded to drop through the floor, a wholly unforeseeable and unnatural market condition caused by rate manipulations by the Fed. Instead of the banks bearing the losses in return for premiums paid by municipal governments, the governments have had to pay massive sums to the banks – to the point of pushing at least one county to the brink of bankruptcy (Jefferson County, Alabama).

Another unintended consequence of the plunge in interest rates has been that “savers” have been forced to become “speculators” or gamblers. When interest rates on safe corporate bonds were around eight percent, a couple could aim for saving half a million dollars in their working careers and count on reaping $40,000 yearly in investment income, a sum that, along with social security, could make for a comfortable retirement. But very low interest rates on bonds have forced these once-prudent savers into the riskier and less predictable stock market, and the collapse of the stock market has forced them into even more speculative ventures in the form of derivatives, a glorified form of gambling. Pension funds {5}, which have binding pension contracts entered into when interest was at much higher levels, need an eight percent investment return to meet their commitments. In today’s market, they cannot make that sort of return without taking on higher risk, which means taking major losses when the risks materialize.

Derivatives are basically just bets. Like at a racetrack, you don’t need to own the thing you’re betting on in order to play. Derivative casinos have opened up on virtually anything that can go up or down or have a variable future outcome. You can bet on the price of tea in China, the success or failure of a movie, whether a country will default on its debt, or whether a particular piece of legislation will pass. The global market in derivative trades is now well over a quadrillion dollars – that’s a thousand trillion – and it is eating up resources that were at one time invested in productive enterprises. Why risk lending money to a corporation or buying its stock, when you can reap a better return betting on whether the stock will rise or fall?

The shift from investing to gambling means that not only are investors making very little of their money available to companies to produce goods and services, but the parties on one side of every speculative trade now have an interest in seeing the object of the bet fail, whether a company, a movie, a politician, or a country. Worse, high-speed program traders can actually manipulate {6} the market so that the thing bet on is more likely to fail. Not only has the market become a casino, but the casino is rigged.

High frequency traders – a field led by Goldman Sachs – use computer algorithms to automatically bet huge sums of money on minor shifts in price. These bets send signals to the market that can themselves cause the price of assets to shoot up or tumble down. By placing high-volume trades, the largest speculative traders can thus intentionally “fix” prices in any direction they want.

“Prediction” Markets

Casinos for betting on what something will do in the future have been elevated to the status of “prediction” markets, and they can cover a broad range of issues. MIT’s Technology Review launched a futures market for technological innovations, in order to bet on upcoming developments. The NewsFutures and TradeSports Exchanges enable people to wager on matters such as whether Tiger Woods will take another lover, or whether Bin Laden will be found in Afghanistan.

A 2008 conference {7} of sports leaders in Auckland, New Zealand, featured Mark Davies, head of a sport betting exchange called Betfair. Davies observed that these betting exchanges, while clearly gambling forums, are little different from the trading done by financial firms such as JPMorgan. He said:

I used to trade bonds at JPMorgan, and I can tell you that what our customers do is exactly the same as what I used to do in my previous life, with the single exception that where I had to pour over balance sheets and income statements, they pour over form and team-sheets.

The online news outlet Slate {8} monitors various prediction markets to provide readers with up-to-date information on the potential outcomes of political races. Two of the markets covered are the Iowa Electronic Markets and Intrade. Slate claims that these political casinos are consistently better at forecasting winners than pre-election polls. Participants bet real money 24 hours a day on the outcomes of a range of issues, including political races. Newsfutures and Casualobserver are similar, smaller exchanges.

Besides shifting the emphasis to gambling (“Why Vote When You Can Bet?” says Slate’s “Guide to All Political Markets”), prediction markets, like the stock market, can be rigged so that they actually affect outcomes. This became evident, for example, in 2008, when the John McCain campaign used the InTrade market to shift perception of his chances of winning. A supporter was able to single-handedly manipulate {9} the price of McCain’s contract, causing it to move up in the market and prompting some mainstream media to report it as evidence that McCain was gaining in popularity.

Betting on Terrorism

The destructive potential of prediction markets became particularly apparent in one sponsored by the Pentagon, called the “policy analysis market” (PAM) or “terror futures market”. PAM was an attempt to use the predictive power of markets to forecast political events tied to the Middle East, including terrorist attacks. According to the New York Times {10}, the PAM would have allowed trading of futures on political developments including terrorist attacks, coups d’etat, and assassinations. The exchange was shut down a day after it launched, after commentators pointed out that the system made it far too easy to make money with terror attacks.

At a July 28 2003 press conference Senators Byron L Dorgan (Democrat, North Dakota) and Ron Wyden (Democrat, Oregon) spoke out against the exchange. Wyden stated, “The idea of a federal betting parlor on atrocities and terrorism is ridiculous and it’s grotesque”, while Dorgan called it “useless, offensive and unbelievably stupid”.

“This appears to encourage terrorists to participate, either to profit from their terrorist activities or to bet against them in order to mislead US intelligence authorities”, they said in a letter to Admiral John Poindexter, the director of the Terrorism Information Awareness Office, which developed the idea. A week after the exchange closed, Poindexter offered his resignation.

Carbon Credit Trading

A massive new derivatives market that could be highly destructive economically is the trading platform called Carbon Credit Trading, which is on its way to dwarfing world oil trade. The program would allow trading in “carbon allowances” (permitting companies to emit greenhouse gases) and in “carbon offsets” (allowing companies to emit beyond their allowance if they invest in emission-reducing projects elsewhere). It would also allow trading in carbon derivatives {11}; for example, futures contracts to deliver a certain number of allowances at an agreed price and time.

Robert Shapiro, former undersecretary of commerce in the Clinton administration and a cofounder of the US Climate Task Force, has warned {11}, “We are on the verge of creating a new trillion-dollar market in financial assets that will be securitized, derivatized, and speculated by Wall Street like the mortgage-backed securities market”.

Eoin O’Carroll {12} cautioned in the Christian Science Monitor:

Many critics are pointing out that this new market for carbon derivatives could, without effective oversight, usher in another Wall Street free-for-all just like the one that precipitated the implosion of the global economy … Just as the inability of homeowners to make good on their subprime mortgages ended up pulling the rug out from under the credit market, carbon offsets that are based on shaky greenhouse-gas mitigation projects could cause the carbon market to tank, with implications for the broader economy.

The proposed form of cap and trade has not yet been passed in the US, but a new market in which traders can speculate on the future of allowances and offsets {11} has already been launched. The largest players in the carbon credit trading market include firms such as Morgan Stanley, Barclays Capital, Fortis, Deutsche Bank, Rabobank, BNP Paribas, Sumitomo, Kommunalkredit, Credit Suisse, Merrill Lynch and Cantor Fitzgerald. Last year, the financial services industry had 130 lobbyists working on climate issues, compared to almost none in 2003. The lobbyists represented companies such as Goldman Sachs and JPMorgan Chase.

Billionaire financier George Soros {13} says cap-and-trade will be easy for speculators to rig. “The system can be gamed”, he said last July at a London School of Economics seminar. “That’s why financial types like me like it – because there are financial opportunities”.

Time to Board Up the Casinos and Rethink Our Social Safety Net?

Our forebears considered gambling to be immoral and made it a crime. As the Industrial Revolution and the ascendance of capital changed religious mores, gambling gradually gained acceptance, but even within that permissive paradigm, derivative trading was originally considered an illegal form of gambling. Perhaps it is time to reinstate the gambling laws, board up the derivatives casinos, and return the stock market to what it was designed to be: a means of funneling the capital of investors into productive businesses.

Short of banning derivatives altogether, the derivatives business could be slowed up considerably by imposing a Tobin tax {14}, a small tax on every financial trade. “Financial products” are virtually the only products left on the planet that are not currently subject to a sales tax; and at over a quadrillion dollars in trades annually, the market is huge.

A larger issue is how to ensure adequate retirement income for the population without forcing people into gambling with their life savings to supplement their meager social security checks. It may be time to rethink not only our banking and financial structure but the entire social umbrella that our Founding Fathers called the Common Wealth. The genius of Social Security was its recognition of the basic economic truth that real “security” rests on the ability of a society to provide for and take care of those who, because of age, health or economic conditions, cannot take care of themselves.

Deficit hawks cry that we cannot afford more spending; but according to Richard Cook, a former US Treasury Department official, the government could print and spend several trillion new dollars into the money supply without causing price inflation. Writing in Global Research {15} in April 2007, he noted that the US Gross Domestic Product in 2006 came to $12.98 trillion, while the total national income came to only $10.23 trillion; and at least ten percent of that income was reinvested rather than spent on goods and services. Total available purchasing power was thus only about $9.21 trillion, or $3.77 trillion less than the collective price of goods and services sold. Where did consumers get the extra $3.77 trillion? They had to borrow it, and they borrowed it from banks that created it with accounting entries on their books. If the government had replaced this bank-created money with debt-free government-created money, the total money supply would have remained unchanged. That means a whopping $3.77 trillion in new government-issued money could have been fed into the economy in 2006 without inflating prices. Different proposals have been made concerning how this money should be distributed, but at least some of it could be used to provide adequate social security checks, relieving the pressure to gamble with our savings.

The Federal Reserve has funneled $4.6 trillion {15} to Wall Street in bailout money, most of it generated via “quantitative easing” (in effect, printing money); yet hyperinflation has not resulted. To the contrary, what we have today is Depression-style deflation. The M3 money supply shrank in the last year by 5.5 percent, and the rate at which it is shrinking is accelerating {15}. The explanation for this anomaly is that the Fed’s $4.6 trillion added by quantitative easing fell far short of the estimated $10 trillion needed to “reflate” the money supply after the “shadow lenders” {16} disappeared. When these investors discovered that the “triple-A” mortgage-backed securities they had been purchasing from Wall Street were actually very risky investments, they exited the market, credit dried up, and the money supply (which today consists almost entirely of credit or debt) collapsed.

The only viable way to reflate a collapsed money supply is to put more money into it; and creating the national money supply is the sovereign right of governments, not of banks. If the government wants to remain sovereign, it needs to reassert that right.


{1} Washington Post (April 27 2010)

















Ellen Brown developed her research skills as an attorney practicing civil litigation in Los Angeles. In Web of Debt (2007), her latest of eleven books, she turns those skills to an analysis of the Federal Reserve and “the money trust”. She shows how this private cartel has usurped the power to create money from the people themselves, and how we the people can get it back. Her websites are,, and

Niko Kyriakou contributed to this article.

Bill Totten

Categories: Uncategorized

>Dollar Hegemony and the Rise of China

2010/07/24 1 comment

>by Michael Hudson (July 12 2010)

Hudson to Premier Wen Jaibao (March 15 2010)

Dear Premier Wen Jiabao,

I write this letter to counteract some of the solutions that Western politicians are recommending for China to cope with its buildup of excess foreign-exchange reserves. Raising the renminbi’s exchange rate against the dollar will not cure the China-US payments imbalance. The dollar glut will continue, and so will the currency fluctuation among the dollar, euro and sterling, leaving no stable store of value. The cause of this instability is that each of these three currency areas has grown top-heavy with by debts in excess of the ability to pay.

What then should China should it do with its buildup of excess reserves, if not recycle its inflows into their bonds? Four possibilities have been suggested: (1) to revalue the renminbi, (2) to flood China’s economy with credit (as Japan did after the Plaza Accord of 1985), (3) to buy foreign resources and assets, and (4) to use excess dollars to buy back foreign investments in China, given US reluctance to permit Chinese investment in America’s own most promising economic sectors.

I explain below why China’s best course is to avoid accumulating further foreign exchange reserves. The most workable solution is to use its official reserves to buy back US and other foreign investments in China’s financial system and other key sectors. This policy will seem more natural as a response to an escalation of US protectionist moves to block Chinese imports or block China’s sovereign wealth funds from buying key US assets.

China’s excess reserves will impose a foreign-exchange loss (as valued in renminbi)

Every nation needs foreign currency reserves to ward off currency raids, as the Asia Crisis showed in 1997. The usual kind of raid forces currencies down. Speculators see a central bank with large foreign currency holdings, and seek to empty them out by borrowing even larger sums, selling the target currency short to drive down its price. This is the tactic that George Soros pioneered against the British pound when he broke the Bank of England.

Malaysia’s counter-tactic was not to let speculators cover their bets by buying the target currency. Its Malaysia’s success in resisting that crisis showed that currency controls prevent speculators from “cashing out” on their exchange-rate bets, blocking their attempt to drive down the currency’s value.

China’s case is the opposite. Speculators are trying to force up the renminbi’s exchange rate. Foreign inflows into China’s banks – especially those owned by US, British or other foreign companies – is flooding China with foreign currency. Its central bank finds itself obliged either to recycle this inflow back abroad, or to let the renminbi rise – and ultimately take a loss (as measured in yuan) when its currency rises against its holdings in dollars, sterling and euros. Speculators and other foreigners holding Chinese assets will get a free currency ride upward.

The effect within China’s economy will be to load it down with debt, while obliging it to buy foreign securities denominated in dollars that are falling in price. So the question is, how can China best cope with the foreign exchange flowing into its economy?

China’s major response has been to invest in the mineral resources and other imports it will need to sustain its long-term growth. But this option is limited by foreign protectionism against overseas investment in minerals and agricultural land, and by speculators from foreign countries using their own free credit to buy up these resources. So excess foreign exchange is continuing to build up.

Traditionally, central banks used their payments surpluses to buy gold as “money of the world”. Gold has the advantage of serving as a store of value, enabling central banks (in principle) to avoid taking a loss on their dollar holdings. Settling payments deficits in gold also has the global advantage of limiting the ability of other countries to run chronic payments deficits – especially war spending throughout history. This is why US diplomats oppose a return to gold.

In the 1960s foreign governments asked the US Treasury to provide a gold guarantee. The excess dollars thrown off by America’s overseas military spending in Southeast Asia and Europe ended up in the central banks of France (which dominated banking in Indo-China), Germany (as exporter and host to the major European military base), and Japan (for rest and recreation). France and Germany cashed in these dollars for gold, whose price came under pressure as US monetary gold stocks were depleted. To deter the central banks of France (under General de Gaulle), Germany and other countries from cashing in their dollars for gold, the US Treasury gave a gold guarantee so that if the dollar lost value, these central banks would not lose.

Today, the United States is unlikely to give a gold guarantee, or to expect Congress to agree to such an arrangement. (Often in the past, US presidents and the Executive Branch have made agreements on foreign trade and finance, which Congress has refused to confirm.) It could guarantee China’s official dollar holdings vis-a-vis a basket or whatever the Government of China preferred to hold its reserves, from euros to a new post-Yekaterinburg currency mix. But no currency today is stable. All the major Western currencies are buckling under the burden of unpayably large debts. The US Treasury owes $4 trillion to foreign central banks, but there is no foreseeable way in which it can make good this foreign debt, given its chronic structural deficit of foreign military spending, import dependency and capital outflows. That is why so many countries are treating the dollar like a “hot potato” and trying to avoid holding them. And holding euros or British sterling does not provide a better alternative.

Most central banks today hold down their exchange rates by recycling their dollar inflows to buy US Treasury IOUs. This recycling enables the United States to finance its overseas military spending and also its domestic budget deficit (largely military in character) since the 1950s. So Europe and Asia have used their foreign exchange earnings to finance a unipolar US buildup of military bases to surround them.

This situation is inherently unstable, and hence self-terminating. The era is ending where international reserves are based on the unpayably high debts of any single government, especially when these debts are run up for military purposes. Certainly the US dollar cannot continue to fill this role, given the chronic US payments deficit. For most years since 1951, US overseas military spending (mainly in Asia) has accounted for the largest part of this deficit. And increasingly, the US trade balance has fallen into deficit (except for agriculture, entertainment and military arms). Most recently, capital outflows have accelerated from the United States, especially to China and Third World countries. US money managers have concluded that the US and other Western economies are entering a period of debt-burdened, permanently slower growth. So they are looking to China, hoping to obtain its surpluses for themselves by buying out its banking and industry.

This relationship is too one-sided to continue for long. The question is, how can it best be resolved? Any solution will involve China’s avoiding further accumulation of foreign exchange as long as these take the form of “free loans” back to the US and European governments.

China’s exchange rate vis-a-vis the dollar

American China bashers blame China for being so strong. They urge it to raise the renminbi’s exchange rate to be less competitive. And indeed, over the past three months China’s currency has risen by more than ten percent against the euro and sterling as one euro-using government after another is facing insolvency.

The dollar’s recent strength does not reflect intrinsic factors, but merely the fact that the euro and sterling are even more highly debt leveraged. The main problem areas to date have been Greece, Ireland, Spain, Italy and Portugal, but much larger problems are soon to come from the Baltics, Hungary and other post-Soviet economies. For a decade, they financed their structural trade deficits by borrowing in foreign currency to fuel a real estate bubble. This foreign-currency inflow (from Austrian banks to Hungary and Romania, from Swedish banks to the Baltic States) inflated prices for their housing and office buildings. But now that their real estate bubbles have burst, there is no foreign lending to support their currencies. As their real estate sinks into negative equity, the banking systems of Sweden and Austria face widespread defaults.

The EU and IMF have pressured post-Soviet governments to borrow to bail out EU banks. This shifts the bankruptcy from the private sector to the public sector (“taxpayers”), imposing a severe economic depression on these countries. Governments are slashing spending on education, health care and infrastructure so deeply as to cause personal and business mortgage defaults, emigration, and even shortening life spans.

This shrinkage is the end-result of the neoliberal Washington Consensus imposed on these countries since 1991, aggravated by the global financial bubble since 2000. It is an object lesson for what China needs to avoid.

The United States for its part is manipulating its currency to keep the dollar low, by flooding its economy with low-interest credit. This manipulation runs counter to normal practice over the past five centuries. Any economy running a balance-of-payments deficit traditional has raised interest rates to attract foreign loans and slow domestic spending. But the US Federal Reserve is doing just the opposite. Low interest rates to keep the real estate bubble from bursting further have the effect of aggravating rather than curing the trade deficit and capital outflow.

Yet more dollars are ending up in the hands of foreign central banks. Foreign economies are expected to recycle these inflows into yet more purchases of US Treasury securities, saving US taxpayers and investors from having to finance this deficit themselves.

Revaluing the renminbi would exacerbate China’s financial problem, not stabilize its trade

US economic diplomats argue that increasing the renminbi’s exchange rate will help restore balance to China’s balance of payments with the United States. But the US payments deficit is structural, and hence not responsive to price changes. As noted above, a major payments outflow is overseas military spending. Another growing outflow is on capital account, to buy up foreign companies, stocks and bonds. US investors themselves are abandoning the US economy, looking mainly to China for higher yields – and for a foreign-exchange windfall gain.

The US strategy is to buy up Chinese assets yielding twenty percent or more annually, while China recycles these dollars to Washington and Wall Street at interest rates of only about one percent (for Treasury securities) and absorbs losses in many private-sector investments. (This is the strategy that “worked” with Japan after 1985.) Revaluing the renminbi would provide a windfall for US hedge funds and speculators. Anticipations of revaluation already are spurring higher capital outflows to China.

A higher exchange rate for the renminbi also would result in even more dollar outflows from the United States to Asia on trade account, by obliging American consumers to pay a higher dollar price. Contrary to what most “free trade” assumptions, the fact is that most trade is not responsive to small shifts in currency values. (Economic jargon calls this “price-inelastic”.)

This became clear in the 1980s when a rising exchange rate for Japan’s yen did not reduce that nation’s trade balance. US consumers simply paid more. This is why, despite the recent 21% appreciation in the renminbi, China’s trade balance increased rather than shrank. Likewise, Japan’s yen has soared since autumn 2009, yet it is still accumulating reserves.

Even if China revalues the renminbi, its export prices will not rise proportionally. This is because imports of raw materials, much machinery and other components of most exports have a common world price (typically denominated in dollars). So a higher renminbi will lower the dollar price of these imports.

About half the price received for exports covers the price and markup spent on these imports with a common world price. So if China’s currency rises by ten percent against the dollar, the price of imports embodied in these exports (as valued in renminbi) will fall by ten percent. Half the export price will be unaffected, so overall export prices might rise by five percent.

Given the fact that trade patterns are deeply entrenched, a quantum leap in revaluing the renminbi would be needed to reduce China’s trade surplus. Small revaluations would not “solve” the problem that US diplomats are demanding. Unless revaluation is enormous – in the neighborhood of forty percent – raising the exchange rate thus will tend to increase rather than reduce China’s trade surplus. The moral is that if the aim is really to change export patterns, there is no point in devaluing except to excess (that is, about forty percent). This was the principle that US President Franklin Roosevelt followed in 1933.

Creating more domestic credit at low interest rates would destabilize China

The follow-up to a renminbi revaluation is likely to be what it was in the Plaza and Louvre accords that US diplomats forced on Japan after 1985. Payments-surplus economies are told to restore “equilibrium” by easing credit to spur a balance-of-payments outflow.

The effect is to create a financial bubble, derailing industrial competitiveness and leaving the banking system in a debt-ridden shambles. Japan was willing to flood its economy with enough credit to destabilize its industry and real estate markets with debt that has remained for the twenty years since its bubble burst in 1990. China should avoid this kind of policy at all costs. To avoid the debt overhead now stifling the Western economies, it should minimize debt leveraging and limit the banking system’s ability to create credit to buy assets already in place. Foreign-owned banks in particular need to be restricted from aiding parent-country currency speculation and related financial extraction of revenue from China’s economy.

Balancing China’s international payments by buying foreign resources and assets

China already is seeking to buy mineral, fuel and agricultural resources abroad to supply the inputs that it needs for its own growth. But these efforts still leave substantial foreign exchange surpluses. Most countries have used these surpluses to buy up key sectors of foreign economies. This is what Britain, the United States and France have done for more than a century.

When the US economy runs payments surpluses with foreign countries, it insists that they pay for their foreign debts and ongoing trade deficits by opening up their markets and “restore balance” by selling their key public infrastructure, industries, mineral rights and commanding heights to US investors. But the US Government has blocked foreign countries from doing the same with the United States. This asymmetry has been a major factor causing the inequality between high US private-sector returns and low foreign official returns on their dollar holdings.

The refusal of the US Government to behave symmetrically by not letting China buy key US companies with the dollar inflows that enter China to buy its own companies, above all its financial and banking sector, is largely responsible for the asymmetrical situation noted above, in which US investors earn twenty percent in China, but China earns only one percent in the US.

Buying back foreign investments in China

The wave of the future is to avoid a buildup of foreign exchange at all. The main way to do this is an option that European governments have discussed: to use their excess dollars to buy out US investment holdings in their countries, at book value. In effect, China would say to the United States:

We have let you invest in out own factories and even our banks, and we have let you participate in our key sectors even where these have special domestic privileges. Your economists advised us that this was the most efficient way to run an economy. But it is not advice that the United States itself has followed. You are not letting us use the dollars that you invest here – and the dollars that China earns by exporting the products of its labor – to buy corresponding investments in your country.

It is of course the sovereign right of every nation to determine who shall own and control its industry, bank credit-creating privileges and other resources. We accept this principle of international law. So by the same token, we are using the surplus dollars to buy out US and other foreign investments in China. We are willing to do this according to international law, and pay the book value that your own accountants report their investments in China as being worth.

This will stabilize international exchange rates by restoring balance to international payments. It is especially natural inasmuch as we understand that the US consumer-goods market is shrinking, obliging us to turn more to our own domestic market.

Obviously, US holders of investments in China would complain that their holdings are worth more than the book value they have declared. Indeed, this is a major reason why current investors in China are trying to prevent the US Government from engaging in more anti-Chinese protectionist policies. But in the event that the government rejects their advice and “goes it alone” by taking anti-China measures, China would be in the position of responding to a US initiative rather than acting independently. And it certainly would have the support of other countries in a similar position vis-a-vis US attempts at politicizing foreign investment.

This problem came up in the 1960s and 1970s, when the US Government directed foreign affiliates of US firms to adopt US Cold War policies to avoid trading with China, the Soviet Union and other targeted economies. Foreign governments pointed out that US directions as to how affiliates incorporated in foreign countries could act, as these were subject to their host-country laws, not those of the United States.

This issue is being revived today with regard to sanctions against Iran and other countries. International law has long backed host countries regarding trade and investment policy, credit policy and so forth. I expect this to become a major factor in foreign repurchases of US investments abroad – in Europe and other Asian countries as well as China.

Perhaps a commission will be necessary to debate a fair price for these future buyouts. But such cases usually take a considerable time to resolve. There are implications of this policy that I would prefer to discuss orally at an appropriate point in time rather than elaborate further at present.

Summary: The inequity of the dollar deficit

China, the rest of Asia and Russia have been financing the US overseas dollar spending to pay for America’s military encirclement of the Eastern Hemisphere and for US investors to buy out the crown jewels of Asian industry, financial institutions and public infrastructure. This situation is asymmetrical not only economically, but also politically. In 1823, America’s Monroe Doctrine told Europe to keep out of the Western Hemisphere, ending European colonialism and political hegemony in Latin America. The United States replaced the major European powers as investor and political and military influence.

Today, many people in the United States, Canada and Europe wish to see global disarmament in a multi-polar world rather than a unipolar world. They believe that no country should get a free ride or dominate the world militarily. That would not be a free market. In the end, international economic, political and military relations tend to settle at symmetrical common rules for all parties. A generation ago, Harvard economist Albert Hirschman called for US disinvestment in Latin America and third world countries, on grounds of US economic interest itself. Today, the US economy is suffering from chronic domestic budget deficits that are largely military in character, and chronic payments deficits. Scaling back military spending would free resources for use in its own economy, while enabling foreign economies to wind down their own military budgets.

This logic is endorsed by many US citizens and economists. It can be promoted by a system in which no national economy remains in a monetary system based on the military spending of a military nation in chronic deficit and rising debt beyond its foreseeable ability to pay. This kind of free ride characterized the empires of times past, but the present century promises a more fair, equitable and (one hopes) less militarized world.

Michael Hudson
Distinguished Professor of Economics, University of Missouri (Kansas City)
Honorary Professor, Huazhong University of Science and Technology (Wuhan)

Bill Totten

Categories: Uncategorized

>Thinking in Straight Lines

>by Dmitry Orlov

ClubOrlov (July 17 2010)

Let’s face it, we, the civilized, educated, enlightened part of humanity like things to be straight. Let primitive tribesmen live in picturesque and practical round huts – we require abstract boxes of steel and concrete clad in plate glass, with plenty of nice straight lines, true vertical and horizontal planar surfaces and lots of ninety-degree angles to please the eye. Let these tribesmen spend their days meandering up and down picturesque winding paths laid down by grazing animals – when we build a road, we take a map and apply a ruler to it, and anything that’s in the way of that ruler, picturesque or not, must be dynamited and bulldozed because everyone knows that traveling in straight lines is more efficient.

This is good enough for most of us, and so we have come to regard straight lines as natural. In fact, in our world there are just two types of natural phenomena that give rise to straight lines: objects drop or hang down in straight vertical lines, and light beams travel in straight lines; beyond plumb lines and lines of sight everything is either a curve or a squiggle. But since most of our environment is artificial – and crammed full of straight lines and flat horizontal and vertical surfaces – we hardly ever have to confront this fact. Of course, the more scientifically astute among us know that straight lines are but a convenient fiction. We start with a conceptual framework of space that consists of x, y and z axes, and proceed to coerce our observations to fit this framework until the mismatch becomes too obvious to ignore, as with objects dropped from orbit, or with light from far-away galaxies that’s so warped by nearby galaxies that the image looks like a smear.

But the fiction is indeed very convenient. To start with, all straight lines are interchangeable and compatible. When we build, we tend to put things either on top of or next to other things, and if they involve straight lines, then no intricate fitting is involved – we can just slap it together any which way and efficiently move on to our next box-building exercise. When we go to a lumberyard, what we buy is not so much wood as straight lines cut through wood. Trees know a lot more than we do about constructing maximally efficient structures out of wood, but we like straight lines, and so we cut through the strongest part of the tree – the concentric rings of wood that make up the trunk – for the sake of making a perfectly straight stick. We could build beautiful, strong, long-lasting structures using round timbers grown to order (as some of us do) but generally we don’t because we are mentally lazy, always in too much of a hurry, and have made a fetish of straight lines.

Quite unsurprisingly, our preference for straight lines carries over into the way we think about relationships between things – the mental models we construct of our world. For instance, we consider it a matter of moral rectitude and straight dealing that the price be linearly proportional to the amount of stuff we get: if you pay twice as much, you should get twice as many potatoes. Quantity discounts are acceptable and sometimes expected, but pricing on a curve is generally seen as underhanded. We mistrust curves. Stepwise functions are fine, though, because they are made up of straight line segments. We can put up with having tax brackets, but try taxing people based on a nonlinear formula, and there is sure to be a tax revolt. Were the potato market a product of biological evolution rather than of human artifice, it would perhaps work like this: the price would be some nonlinear function that’s directly proportional to the customer’s net worth, and the number of potatoes dispensed would be some nonlinear function that’s inversely proportional to his net girth. Place your moneybags on one sliding scale, your flab-bags on the other, and some potatoes come out. Such a natural regulatory mechanism would prevent fat, rich gluttons from out-eating the rest of us, but it cannot be, for we have a very strong cultural preference for a simple linear relationship between price and quantity.

Straight lines are popular with grocers and their customers, but nobody loves a straight-edge more than the technocrat. Real-world data generally look like a collection of unique artifacts described by a multitude of qualitatively dissimilar properties and inferred relationships, all fluctuating unpredictably over time in a way that resists the direct application of the straight-edge. Therefore, the first step is to quantify the properties and, if at all possible, ignore the relationships. The next step is to choose just two parameters and to plot these artifacts as points on a piece of graph paper. Then, finally, a technocrat can grab a straight-edge, slap it down on the piece of paper, move it around a bit to find what looks like a good fit, and draw a straight line. Voilà: a linear relationship between two complex phenomena has been found, which can now be treated as real and objective – something that can be shared with one’s colleagues and be used as a basis for setting policy – because it involves a straight line which tells that one thing is proportional to some other thing, so that we know what result to expect when we perturb one or the other.

Straight lines are popular with engineers as well. Engineers work hard to design linear, time-invariant systems in which the output is directly proportional to the input any time you like. To them, deviations from linear behavior are defects. They are to us as well: we can hear it if the audio amplifier has nonlinear effects because it distorts the sound, and we can see it if the optics distorts the image. We can tell a straight line from a crooked one without any tools. But the mathematical tools which engineers use when they design these linear time-invariant systems are particularly good, as mathematical tools go. Mathematics can be quite fun as a sort of advanced parlor game for philosophers, but most math is rather problematic from an engineer’s point of view. You can describe just about anything using a set of differential equations, but most of the interesting phenomena – the behavior of an airfoil in an airstream, for instance, or the behavior of high-temperature gases in a combustion chamber – produce equations that can’t be solved analytically, and can only be approached using numerical methods, using a computer. A mathematical model is constructed, and random numbers are thrown at it to see what comes out. But linear time-invariant systems are described using a singularly well-behaved class of differential equations which do have closed-form, analytical solutions that directly provide answers to design questions, and so engineering students are drilled in them ad naseam and then go on to design and build all kinds of machinery that behaves as linearly as possible, from humble volume knobs to complex aircraft control surfaces. In turn, this well-behaved, predictable machinery allows us to achieve linear effects within the economy: build more stuff – get proportionally more money; spend more money – get proportionally more stuff. But, just as one might suspect, this only works up to a point.

Let us recall: straight lines are but a convenient fiction. There is no physical analogue of a mathematical straight line that goes from minus infinity to plus infinity. The best we can do is use all of our artifice to create relatively short straight line segments. Truth be told, the engineers can’t create linear systems; they can only create systems that exhibit linear behavior in their linear region. Outside of that region, nature does what it always does: make crazy curves and squiggles and generally behave in random and unpredictable ways. An example of what happens when we exceed the limits of the linear region from our everyday experience is the phenomenon of overloading an audio amplifier. The resulting effect is called clipping, and it sounds like a particularly unpleasant, harsh, grating noise. There are only two solutions: turn down the volume (return to the linear region), or get a more powerful amplifier.

In the economic realm, the effects of exceeding the limits of the linear region can be even more unpleasant. While within that region, building more houses generates more wealth, but just outside of that region strange things begin to happen rather quickly: house prices crash, mortgages go bad, and building any more houses becomes a singularly bad idea. In the linear region, having more money makes you richer, in the sense of being able to buy more stuff, but outside of that region one is forced to realize that since most money has been loaned into existence, it is in fact composed of debt, and once this debt goes bad, no matter how good your net worth looks on paper you are still facing destitution, greatly exacerbated by the fact that you are out of practice when it comes to being poor. In the linear region, investing more money in energy production produces more energy, but just outside that region it produces less energy, and may also inadvertently destroy entire industries and ecosystems.

If linearity is a fiction that is only useful up to a point, then what about time-invariance? Clearly, it too must have its limits. Stepping on the accelerator may produce the same acceleration every time, but the amount of fuel in the tank decreases monotonically until there is none left. When it comes to more complex, dynamic systems – industries, economies, societies – they may continue to respond to external stimuli in a linear and time-invariant manner up to a point, but behind this stable façade their capabilities erode, their resources dwindle, their complexity increases, and beyond a certain point an entirely different process begins: the process of collapse. Such systems generally do not become smaller, spontaneously become less complex or reduce their resource use while continuing to respond to external stimuli in a controlled, linear manner.

But so strong and so deeply ingrained is our habit of thinking in straight lines that often we cannot imagine that we can ever leave the linear region, or, once we do, that we have done so, even when the evidence is staring us in the face. Forensic analyses of airplane crashes have revealed that sometimes, as his last act, the pilot ripped the control console off the cockpit floor – an act that requires superhuman strength – so hard was he pulling back on the yoke to bring up the airplane’s nose. I am sure that there are plenty of pilots – in all walks of life – who will prefer to crash, gripping the controls with all their might, gaze fixed on the distant, irrelevant or fictional horizon, than to push the eject button. Their entire life’s experience has been confined to the linear region, and so they cannot imagine that it can ever end.

One particularly significant example of this thinking is the belief in Peak Oil, generally expressed as the idea that global oil production already has or will soon reach an all-time peak, and will then gradually decrease over a time span of several decades. Oil depletion is being modeled as a linear function of oil production: a few percent a year, holding more or less steady from one year to the next. At the same time, the use of oil by industrialized societies is often quite usefully characterized as an addiction. Let us exercise this metaphor a bit and see where it takes us. Suppose you have a junkie who has an ever-increasing heroin habit and who has to go out and hustle harder and harder to score his next fix. Now, suppose global heroin production peaks, prices go up, supply dwindles, and our junkie has to start cutting the dose. Not too far along what you then have is a sick junkie, in withdrawal, who cannot go out and hustle for his next fix. And very soon after that you have a collapse of the heroin market because the junkies have all been forced to kick the habit to one extent or another. This disruption of the heroin market, even if temporary, causes heroin production to decrease even faster, production costs and associated risks to go up, and so forth. Beyond a certain point, the heroin market would no longer be characterized as a linear, time-invariant system where the more you pay the more of it you get any time you like, because there would be so little of it around.

Similarly with oil. Right after Hurricane Katrina there was some disruption of gasoline supplies in some of the southern US states. People have written to me to tell me that the result was instant mayhem: society at all levels swiftly stopped functioning. The shortage was temporary and was quickly forgotten, but were it a long-term, systemic shortage, we would no doubt observe all the usual effects: much extra fuel evaporated from topping off fuel tanks and burned from driving around with a full tank and full jerrycans in the trunk, much fuel wasted from driving around looking for gasoline and from idling in long lines at filling stations, a lot of siphoning of gas from tanks and motorists left stranded as a result, a lot of people unable to get to work, and, shortly after that, hoarding, looting and rioting, commerce at a standstill, use of federal troops to restore public order, curfews and limitations on all travel, bank holidays and a balance of payments crisis, and, finally, the general inability to pay for further oil production or imports. All of these disruptions cause oil production to fall even faster, along with all other economic activity, until there is simply not that much demand for the stuff. As much of the global oil industry is idled, drilling rigs, refineries and pipelines fall into disuse and become inoperable. Instead of a nice few-percent-a-year gradual decline, we would have what Douglas Adams would have described as a “spontaneous existence failure”.

I am sure that some people would like me to whip out my straight-edge, plot some straight lines and make some projections: What is my price forecast? What production numbers are we talking about, ten or twenty years out? Well, that to me feels like a complete waste of time. I’d rather spend time learning how to train trees for round timber construction. The future is certain to be nonlinear, but I am quite sure that there will be trees in it. The reason I bring this up is that there are a few of pilots out there who I hope will have the presence of mind to push the eject button instead of clutching at the controls with their eyes locked on the artificial horizon.

Bill Totten

Categories: Uncategorized

>What If He’s Right?

>by James Howard Kunstler

Comment on current events by the author of
The Long Emergency
(2005) (July 19 2010)

Just when America was celebrating the provisional end of BP’s Macondo oil blowout, and getting back to important issues like Kim Kardashian’s body-suit collection, along comes Matthew Simmons with a rather strange and alarming outcry on doings in the Gulf of Mexico that contradicts the mood of renewed festivity, as well as just about every shred of reportage from any media outlet, mainstream or otherwise.

Matt Simmons’ Houston-based company has been the leading investment bank to the US oil industry for a long time, financing exploration and drilling in places like the Gulf of Mexico. Simmons, 68, recently retired from day-to-day management of the company. For much of the decade he has been what may be described as a peak oil activist. His 2005 book, Twilight in the Desert, warned the public that Saudi Arabia’s oil production had reached its limits and, more generally, that an oil-dependent world was entering a zone of serious trouble over its primary resource. He took this aggressive stance despite risking the ire of the people he did business with.

Matt Simmons is a sober individual and a very nice man (I’ve met him twice over the years), a button-downed corporate executive who’s been around the oil business for forty years. His knowledge is deep and comprehensive. From the beginning of the BP Macondo blowout incident in April, he’s taken the far out position that the well-bore is fatally compromised and that BP has been consistently lying about their operations to stop the flow of oil. Perhaps most radically, Simmons claims that an oil “gusher” is pouring into the Gulf some distance from the drilling site itself.

Last week, Simmons came on Dylan Ratigan’s MSNBC financial show, but he did a longer interview over at the King World News website {1}. Simmons’s current warning about the situation focuses on the gigantic “lake” of crude oil that is pooling under great pressure 4000 to 5000 feet down in the “basement” of the Gulf’s waters. More particularly, he is concerned that a tropical storm will bring this oil up – as tropical storms and hurricanes usually do with deeper cold water – and with it clouds of methane gas that will move toward the Gulf shore and kill a lot of people. (I really don’t know the science on this and welcome any reader to correct me, but I suppose that the oil “lake” deep under the Gulf waters contains a lot of methane gas dissolved at pressure, and that as the oil rises toward the ocean’s surface, and lower pressures, the gas will bubble out of solution.)

Simmons makes two additional points that are pretty radical: he says that several states along the Gulf ought to begin systematic evacuations in counties along the shore now. From his experience in Houston with Hurricane Rita (2005), he says a last-minute evacuation is bound to be a disaster – the highways jammed hopelessly, drivers ran out of gas, and then the gas stations ran out of gas. Based on where the nation’s collective state-of-mind is these days, I can’t imagine that any Gulf state governor or mayor will heed this warning and begin preparing an evacuation now. (The practical problems are obvious for householders but what if it really is a matter of life and death?)

Secondly, Simmons maintains – as he has from near the beginning of the blowout – that the US military should take over operations from BP and ought to set off a “small” nuclear device down in the well-bore to fuse the rock into glass and seal the site permanently. Simmons says, based on his experience growing up in Utah near the government’s underground nuclear testing sites in neighboring Nevada, where scores of very large atomic bombs were set off for years with no measurable consequences above ground, that a small nuclear explosion down in the Macondo well is unlikely to have any effect above the undersea rock surface. I have no idea, personally if this is true.

Matt Simmons is taking a position so “out there” that even the radical peak oil website won’t comment on his remarks (at least not as of early Monday morning July 19). I don’t know how to evaluate Simmons’s contentions myself, except to say that I don’t believe Simmons is a nut, or that he’s lost his marbles. We also must suppose that someone in his position is able to talk with an awful lot of the best people in the oil industry. Simmons has put his reputation on the line. A lot of bystanders and commentators are treating him as a fool. Simmons himself is painfully aware of his lonely stance and seems, in his public appearances, to be a very regretful messenger.

In the past twenty-four hours, BP has reported some possible leaks coming out of the seabed some distance from the well-bore. Nobody has been able to confirm yet exactly what is happening down there. One other thing Simmons said is that BP should be barred from the media airwaves since, he says, they have lied consistently in order to cover up their criminal negligence and culpability. The company itself cannot be saved because the claims against it are much greater than the value of its assets – but the people running the company could be sent to jail, so the incentive to keep lying remains high.

Jesse at the Jesse’s Cafe Americain website {2} makes an excellent point that if Matt Simmons is correct, and it turns out that the US government has been played by BP, then remaining public trust in the competence and legitimacy of government could evaporate. This is not a happy thing to contemplate at a time when the state of the nation and its economy are so fragile. What follows could make the current political situation seem like little more than, well, than a tea party, compared to the politics-to-come.

Readers here at Clusterfuck Nation are probably well aware of my past declarations of being allergic to conspiracy theories and crazy ideas generally. I’m not really equipped to evaluate Matt Simmons’s warnings about the exact nature of the Macondo blowout and what might happen in the months ahead. But I am confident, having met the guy and corresponded with him and read his books, that he is a straight shooter. I’m sure that he is sincere in proclaiming his extreme discomfort with the position he’s taken. Listen and decide for yourselves {3}.






A sequel to my 2008 novel of post-oil America, World Made By Hand, will be published in September 2010 by The Atlantic Monthly Press. The title is The Witch of Hebron.

Mr Kunstler’s biography is at see

Bill Totten

Categories: Uncategorized

>The Ways of the Force

>by John Michael Greer

The Archdruid Report (July 14 2010)

Druid perspectives on nature, culture, and the future of industrial society

By now those of my readers who have joined me on the current Archdruid Report project – the creation of a “green wizardry” using the heritage of the appropriate technology movement of the Seventies – should have downloaded at least one of their textbooks and either have, or be waiting for the imminent arrival of, the rest. Now it’s time to get into the core principles of green wizardry, and the best way to do it involves shifting archetypes a bit. Give me a moment to slip on a brown robe, tuck something less clumsy or random than a blaster into my belt, and practice my best Alec Guinness imitation: yes, Padawans, you’re about to start learning the ways of the Force.

Well, almost. The concept that George Lucas borrowed from Asian mysticism for his Star Wars movies is an extraordinarily widespread and ancient one; very nearly the only languages on earth that don’t have a commonly used word for an intangible life force connected to the breath are those spoken nowadays in the industrial nations of the modern West. I’ll leave it to my readers to make up their own minds about what the remarkable durability of this idea might imply, and to historians of ideas to debate whether it was one of the sources that helped shape the modern scientific concept of energy; the point that needs making is that it’s this latter concept that will be central to this week’s post.

That’s understating things by more than a little. Everything we’ll be exploring over the weeks and months to come has to do with energy: where it comes from, what it can and can’t do, how it moves through whole systems, and where it goes. In the most pragmatic of senses, understand energy and you understand the whole art of green wizardry; in the broadest of senses, understand energy and you understand the predicament that is looming up like a wave in front of the world’s industrial societies, and what we can and can’t expect to get done in the relatively short time we have left before that predicament crests, breaks, and washes most of the modern world’s certainties away.

Let’s start with some basic definitions. Energy is the capacity to do work. It cannot be created or destroyed, but the amount and kind of work it can do can change. The more concentrated it is, the more work it can do; the more diffuse it is, the less work it can do. Left to itself, it moves from more concentrated to more diffuse forms over time, and everything you do with energy has a price tag measured in a loss of concentration. These are the groundrules of thermodynamics, and everything a green wizard does comes back to them in one way or another.

Let’s look at some examples. A garden bed, to begin with, is a device for collecting energy from the sun by way of the elegant biochemical dance of photosynthesis. Follow a ray of sunlight from the thermonuclear cauldron of the sun, across 93 million miles of hard vacuum and a few dozen miles of atmosphere, until it falls on the garden bed. Around half the sunlight reflects off the plants, which is why the leaves look bright green to you instead of flat black; most of the rest is used by the plants to draw water up from the ground into their stems and leaves, and expel it into the air; a few per cent is caught by chloroplasts – tiny green disks inside the cells of every green plant, descended from blue-green algae that were engulfed but not destroyed by some ancestral single-celled plant maybe two billion years ago – and used to turn water and carbon dioxide into sugars, which are rich in chemical energy and power the complex cascade of processes we call life.

Most of those sugars are used up keeping the plant alive. The rest are stored up until some animal eats the plant. Most of the energy in the plants the animal eats gets used up keeping the animal alive; the rest get stored up, until another animal eats the first animal, and the process repeats. Sooner or later an animal manages to die without ending up in somebody else’s stomach, and its body becomes a lunch counter for all the creatures – and there are a lot of them – that make their livings by cleaning up dead things. By the time they’re finished with their work, the last of the energy from the original beam of sunlight that fell on the garden bed is gone.

Where does it go? Diffuse background heat. That’s the elephant’s graveyard of thermodynamics, the place energy goes to die. Most often, when you do anything with energy – concentrate it, move it, change its form – the price for that gets paid in low-grade heat. All along the chain from the sunlight first hitting the leaf to the last bacterium munching on the last scrap of dead coyote, what isn’t passed onward in the form of stored chemical energy is turned directly or indirectly into heat so diffuse that it can’t be made to do any work other than jiggling molecules a little. The metabolism of the plant generates a trickle of heat; the friction of the beetle’s legs on the leaf generates a tiny pulse of heat; the mouse, the snake, and the coyote all turn most of the energy they take in into heat, and all that heat radiates out into the great outdoors, warming the atmosphere by a tiny fraction of a degree, and slowly spreading up and out into the ultimate heat sink of deep space.

That’s the first example. For the second, let’s take a solar water heater, the simple kind that’s basically a tank in a glassed-in enclosure set on top of somebody’s roof. Once again we start with a ray of sunlight crossing deep space and Earth’s murky atmosphere to get to its unintended target. The sun passes through the glass and slams into the black metal of the water tank, giving up much of its energy to the metal in the form of heat. Inside the metal is water, maybe fifty gallons of it; it takes a fair amount of heat to bring fifty gallons of water to the temperature of a good hot bath, but the steady pounding of photons from the sun against the black metal tank will do the trick in a few hours.

Most of what makes building a solar water heater complex is a matter of keeping that heat in the water where it belongs, instead of letting it leak out as – you guessed it – diffuse background heat. The glass in front of the tank is there to keep moving air from carrying heat away, and it also helps hold heat in by way of a clever bit of physics: most of the energy that matter absorbs from visible light downshifts to infrared light as it tries to escape, and glass lets visible light pass through it but reflects infrared back the way it came. (This is known as the greenhouse effect, by the way, and we’ll be using it over and over again, not least in greenhouses.) All surfaces of the tank that aren’t facing the sun are surrounded by insulation, which also helps keep heat from sneaking away. If the system’s a good one, the pipes that carry hot water down from the heater to the bathtub and other uses are wrapped with insulation. Even so, some of the energy slips out from the tank, some of it makes a break for it through the insulation around the pipes, and the rest of it starts becoming background heat the moment it leaves the faucet for the bathtub or any other use.

Here’s a third example: a house on a cold winter day. The furnace keeping it warm, let’s say, is fueled by natural gas; that means the ray of sunlight that ultimately powers the process came to Earth millions of years ago and was absorbed by a prehistoric plant. The plant died without being munched by a passing dinosaur, and got buried under sediment with some of its stored energy intact. Millions of years of heat and pressure underground turned that stored energy into very simple hydrocarbons such as methane and ethane. Fast forward to 2010, when the hydrocarbons found their way through pores in the rock to a natural gas well and got shipped by pipeline, possibly over thousands of miles, to the house where it gets burnt.

The furnace turns the energy of that ancient sunlight to relatively concentrated heat, which flows out through the house, keeping it warm. Now the fun begins, because that concentrated energy – to put things in anthropomorphic terms – wants nothing in the world half as much as to fling itself ecstatically into dissolution as diffuse background heat. The more quickly it can do that, though, the more natural gas has to be burnt to keep the house at a comfortable temperature. If you’re the green wizard in charge, your goal is to slow down the dionysiac rush of seeking its bliss, and make it hang around long enough to warm the house.

How do you do that? First, you have to know the ways that heat moves from a warm body to a cold one. There are three of them: conduction, which is the movement of heat through solid matter; convection, which is the movement of heat carried on currents of air (or any other fluid); and radiation, which is the movement of heat in the form of infrared light (mostly) through any medium transparent to those wavelengths. You slow down conduction to a crawl by putting insulation in the way; you slow down convection by sealing up cracks through which air can move, and doing a variety of things to stop convective currents from forming; you slow down radiation by putting reflective barriers in the way of its escape. If you don’t do any of these things, your house leaks heat, and your checking account leaks money ; if you do all of these things – and they can be done fairly easily and cheaply – the prehistoric sunlight in the natural gas you burn has to take its time wandering out of your house, keeps you comfortable on the way, and you don’t have to spend anything like so much on more natural gas to replace it.

There are four points I’d like you to take home from these examples. The first is that they’re all talking about the same process – the movement of energy from the sun to the background radiation of outer space that passes through systems here on earth en route, and accomplishes certain kinds of work on the way. At this point, in fact, the most useful thing you can take away from this entire discussion is the habit of looking everything that goes on around you as an energy flow that starts from a concentrated source – almost always the sun – and ends in diffuse heat radiating out into space. If you pick up the habit of doing this, you’ll find that a great deal of the material that will be covered in posts to come will suddenly seem like common sense, and a great many of the habits that have are treated as normal behavior in our society will suddenly reveal themselves as stark staring lunacy.

An exercise, which I’d like to ask those readers studying this material to do several times over the next week, will help get this habit in place. Draw a rough flow chart for one or more versions of this process. Take a piece of paper, draw a picture of the sun at the top, and draw a trash can at the bottom; label the trash can “Background Heat”. Now draw the important components in any system you want to understand, and draw arrows connecting them to show how the energy moves from one component to another. If you’re sketching a natural system, draw in the plants, the herbivores, the carnivores, and the decomposers, and sketch in how energy passes from one to another, and from each of them to the trash can; if you’re sketching a human system, the energy source, the machine that turns the energy into a useful form, and the places where the energy goes all need to be marked in and connected. Do this with a variety of different systems. It doesn’t matter at this stage if you get all the details right; the important thing is to start thinking in terms of energy flow.

The second point to take home is that natural systems, having had much more time to work the bugs out, are much better at containing and using energy than most human systems are. The solar water heater and the house with its natural gas furnace take concentrated energy, put it to one use, and then lose it to diffuse heat. A natural ecosystem, by contrast, can play hot potato with its own input of concentrated energy for a much more extended period, tossing it from hand to hand (or, rather, leaf to paw to bacterial pseudopod) for quite a while before all of the energy finally follows its bliss. The lesson here is simple: by paying attention to the ways that natural systems do this, green wizards can get hints that can be incorporated into human systems to make them less wasteful and more resilient.

The third point is that energy does not move in circles. Next week we’ll be talking about material substances, which do follow circular paths – in fact, they do this whether we want them to do so or not, which is why the toxic waste we dump into the environment, for example, ends up circling back around into our food and water supply. Energy, though, moves along a trajectory with a beginning and an end. The beginning is always a concentrated source, which again is almost always the sun; the end is diffuse heat. Conceptually, you can think of energy as moving in straight lines, cutting across the circles of matter and the far more complex patterns of information gain and loss. Once a given amount of energy has followed its trajectory to the endpoint, for all practical purposes, it’s gone; it still exists, but the only work it’s capable of doing is making molecules vibrate at whatever the ambient temperature happens to be.

The fourth and final point, which follows from the third, is that for all practical purposes, energy is finite. It’s become tolerably common for believers in perpetual technological progress and economic growth to insist that energy is infinite, with the implication that human beings can up and walk off with as much of it as they wish. It’s an appealing fantasy, flattering to our collective ego, and it makes use of a particular kind of mental trap that Garrett Hardin anatomized quite a while ago. In his useful book Filters Against Folly (1986), Hardin pointed out that the word “infinite” – along with such synonyms as “limitless” and “boundless” – are thoughtstoppers rather than meaningful concepts, because the human mind can’t actually think about infinity in any meaningful sense. When somebody says “X is infinite”, in other words, what he is actually saying is “I refuse to think about X”.

Still, there’s a more specific sense in which talk about infinite energy is nonsense by definition. At any given place and time, the amount of energy that is available in a concentration and a form capable of doing any particular kind of work is finite, often distressingly so. Every ecosystem on earth has evolved to make the most of whatever energy is available to do the work of keeping living things alive, whether that energy takes the form of equatorial sunlight shining down on the Amazon rain forest, chemical energy in sulfur-laden water surging up from hot springs at the bottom of the sea, or fat stored up during the brief Arctic warm season in the bodies of the caribou that attract the attention of a hungry wolf pack.

Thus it’s crucial to recognize that available energy is always limited, and usually needs to be carefully coaxed into doing as much work as you want to get done before the energy turns into diffuse background heat. This is as true of any whole system, a garden as much as a solar hot water system, a well-insulated house, or any other project belonging to the field of appropriate tech. Learn to think in these terms and you’re well on your way to becoming a green wizard.


John Michael Greer, The Grand Archdruid of the Ancient Order of Druids in America (AODA), has been active in the alternative spirituality movement for more than 25 years, and is the author of more than twenty books, including The Druidry Handbook (Weiser, 2006) and The Long Descent: A User’s Guide to the End of the Industrial Age (New Society, 2008). He lives in Cumberland, Maryland.

Bill Totten

Categories: Uncategorized

>Specie, Script, and War

>The Contradictory Practices of the Global Economic System

by Professor John Kozy

Global Research (May 06 2010)

“Wars are never fought for altruistic reasons. They’re usually fought for … business. And then, of course, there’s the business of war.”
– Arundhati Roy

Ms Roy’s view is widely held, and it’s certainly true – as far as it goes. But the view has a logic to it that, to my knowledge, no one has ever elucidated.

People assume that the economy is a system. But it isn’t. How the world-wide economy works has developed mostly by happenstance over millennia. It embodies contradictory practices and produces horrific consequences.

Primitive peoples extracted from nature what they needed or fashioned it into things they could use. When they produced more than they needed, they bartered the excess for what they could not produce themselves. It’s called trading. Commodities are traded for commodities, and over time some commodities became media of exchange, the most prevalent of which are precious metals that are converted into specie (coin). But this system works only when the commodities traded have equal value. When they don’t, trade becomes a form of theft, which leads to unfairness and conflict.

Trade implies that all nations can be neither net exporters nor net importers. Net exporters amass huge amounts of specie while net importers relinquish theirs. Net exporters become rich while net importers are bankrupted. To keep this system working, colonial wars were fought, peoples were subjugated, and their lands were plundered. Theft became a global practice.

The colonial wars fought after the discovery of the Americas by Europeans were fought for this reason. England, France, Spain, Portugal, and Holland, not themselves rich in mineral resources, all not only fought wars of conquest but fought each other to gain control of what precious metals could be extracted from the so called New World. Trade required access to these metals. No inhumane act was beyond use. Genocide, enslavement, piracy, cruelties of all kinds were commonly practiced. These practices continue today. These wars were necessitated by the need for specie which the trading economy requires.

But specie is a limited resource. Not only is it not distributed throughout the world uniformly, it is finite. It is also inconvenient for many transactions, so scrip (paper money), originally valued in units of specie, became common. But the holders of specie, bankers, quickly realized that they could issue more scrip than could be redeemed by the specie they held, since all depositors would not want their specie back at the same time. The practice is called fractional reserve banking and is a Ponzi scheme, a banking fraud. The specie of new depositors is used to redeem the scrip issued to past depositors. Ultimately, when more scrip was issued than could be redeemed by the available specie, the link between scrip and specie – the standard – was abandoned. Since then scrip functions as a medium of exchange only because people believe it can be traded for commodities. The entire world-wide economy functions merely on faith. But the world is too complex, too dangerous, to rely on an economy based on faith.

Over time, some nations became highly developed, net exporting manufacturing powers. Others stagnated as net importers. Then something unanticipated happened. Because it was viewed as cheaper to manufacture products abroad and import them than manufacture them domestically, manufacturing in developed countries declined as did the incomes of their peoples. The developed nations began, for various reasons, to import more and more and export less and less. Without commodities to trade, they trade scrip. But as the so-called developed nations manufacture less and less, less and less is available for the holders of scrip to buy. The scrip eventually becomes worthless, and the entire system collapses.

As natural resources become scarce domestically, the economic infrastructure created in earlier times still requires them. As domestic oil production shrinks, for instance, the need for imported oil increases. But no products are being manufactured domestically to barter for the oil. Without commodities or a credible scrip, trade cannot be relied upon to provide the required commodities.

How can such nations acquire the resources needed? There is but one answer – conquest for plunder! Human life becomes the medium of exchange. The world has been turned topsy-turvy. Rather than an economy that functions to fulfill the needs of people as it originally did, people are sacrificed to fulfill the needs of the economy, and the economy exists for no purpose whatsoever. It just is. The current attempt by the European Union and the IMF to resolve the sovereign debt crisis by sacrificing the well being of people to preserve the European economy demonstrates this topsy-turviness. The European Union, which is nothing but a trading association, has made the economy more important than the welfare of its people.

Yet conquest is only a temporary solution. The conquests carried out by Western nations in the sixteenth century for precious metals have now been undone. These nations are, like the United States, virtually bankrupt. And conquest itself is expensive; its costs are high in both money and lives. As more and more sophisticated weaponry is developed, the costs grow higher and higher. How long can bankrupt nations afford them?

Western economists have propelled this system and are now claiming that countries like China, for instance, need America as much as and perhaps more than America needs them. But is that true? Are these economists trapped in a closed box? They are right only if China travels the same trail to development that has been blazed by the Western world. But what if the peoples of the developing world don’t do that? What if they realize that the trail leads only to trouble? What if they switch their manufacturing from products for export to products for domestic consumption? What if they realize that dependence on foreign commodities is a road to ruin? What if the Chinese and other developing nations realize that becoming self-sufficient is a much safer policy? Economists call that autarchy and have been denigrating it for decades. Look what their denigrations have wrought!

If the human race is to survive, it will have to abandon this economy of plunder. The weapons of war have become too horrendous, the costs too great, the damage too sweeping, and the evil too extensive. The Earth is being turned into a wasteland, a huge landfill, a gigantic burial ground.

Some believe technology will save the day. But since the dawn of science in the sixteenth century, it hasn’t shown much promise. The proliferation of products of convenience it has yielded has not ameliorated a single major problem. Suppose, for instance, that alternative forms of energy are produced. Can wind power replace oil? Perhaps, but the economic conundrum will not be solved if the turbines have to be imported from China.

Many today advocate a return to a specie standard – the gold standard. But there is nothing special about gold as specie. Gold is just another commodity, although gold has some physical properties that make its use as specie preferable. China recently agreed to lend Venezuela $20 billion which Venezuela will repay with oil, a bartering arrangement which shows that any valued commodity can be used to ensure the value of scrip. Furthermore, since the amount of specie is limited, fractional reserve banking would still be required if the amount of scrip needed to finance the volume of trade is to be made available. Nothing would really change. Net exporting nations would quickly impoverish net importing nations by simply redeeming scrip for gold.

But Arundhati Roy is right. Wars are fought for business, but business and the economy are synonymous. Wars will continue to be fought for the economy as long as this economy is not abandoned. War is a logical consequence of it, not, as most seem to believe, a means utilized by it. No attempt to eliminate war and preserve the economy can succeed. A globalized economy leads only to a global disaster, as everyone should have now seen. Net exporters become rich while net importers are impoverished. Self sufficiency (autarchy), not trade, is the only possible way to extricate the human race from the consequences of the specie/scrip/plunder economy. A nation that doesn’t need the resources found in other lands has no reason to go to war. Globalized trade, rather than being a path to peace and prosperity, inevitably leads to war, poverty, and destruction. The economists have it all wrong.


John Kozy is a retired professor of philosophy and logic who blogs on social, political, and economic issues. After serving in the US Army during the Korean War, he spent twenty years as a university professor and another twenty years working as a writer. He has published a textbook in formal logic commercially, in academic journals and a small number of commercial magazines, and has written a number of guest editorials for newspapers. His on-line pieces can be found on and he can be emailed from that site’s homepage.

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