jbpeebles

Economic and political analysis-Window on culture-Media criticism

Saturday, August 25, 2007

More War for Oil and More Oil for War; The Debt Tapeworm

I talked in my last post about how I could so easily see Cheney and his Big Oil compatriots pondering the pressing issue of how the US would be able to supply its domestic energy needs. The meetings of the Energy Task Force were held in spring 2001. Maps of Iraqi oil fields were brought out, this we do know.

I ran across some good articles by Michael Klare, who's active on the issue of energy dependence and administration policy. Klare describes the broad political framework shaping our nation's energy policies and directing the resources of our government in securing our energy needs.

Klare explains the creation of the task force:
"The energy turmoil of 2000-2001 prompted Bush to establish the National Energy Policy Development Group (NEPDG), a task force of senior government representatives charged with developing a long-range plan to meet U.S. energy requirements. To head this group, Bush picked his closest political adviser, Vice President Dick Cheney."

A lawsuit by the GAO tried to make the minutes of the meeting public. A ruling by US District Court of Appeals Judge Bates, a Bush appointee, kept the minutes secret. I've written on this blog about that judge's clear partisanship, which culminated in his ruling dismissing the Plame civil lawsuit. {I'm suppressing the urge to talk about how our justice system has been subverted, and so I won't mention the US attorney dismissals, Gonzales' visit to a drugged Ashcroft seeking eavesdropping approval, or the DoJ staffers who threatened a mass resignation on the issue of domestic spying.}

Back to spring 2001, before all that other stuff happened. To continue to make money for Big Oil--and Big Oil has made a lot of money under the Bush-Cheney government--sources would need to be found. In a 1999 speech, Cheney said “The Middle East, with two-thirds of the oil and the lowest cost, is still where the prize lies.” Iraq has the world's third-largest reserves; significant also is the truth that the Middle East offers easily oil both easily extracted and processed, being "light and sweet."

Cheney and the energy CEOs probably justified the immorality of stealing oil on the basis of the scope of America's growing energy needs. Naturally these oil industry executives would have no talk of conservation; they would undoubtedly treat their patriotic duty as one which warranted making a few (hundred billion) bucks out of America's unrestrained energy consumption. The Energy Task Force did assemble a report claiming to chart a course for conservation, but results have been limited.

In their defense, representives of the oil and gas industries are after all responsible for providing our energy--it must come from somewhere. Our daily consumption of oil is expected to rise to over 25 million barrels per day from 20 million now within the next 20 years or so. While many of us may hate the war we've inflicted on the Iraqis, the need is there--we consume the oil that justifies the theft. I don't see too many of us abandoning our dependencies on the auto or our fossil fuel habit but changes are happening, slowly.

In "Bush-Cheney Energy Strategy: Procuring the Rest of the World's Oil" Klare quotes Energy Secretary Spencer Abraham in March, 2001: “America faces a major energy supply crisis over the next two decades...The failure to meet this challenge will threaten our nation’s economic prosperity, compromise our national security, and literally alter the way we lead our lives.”

Our economy has been very dependent on cheap energy; look no farther than the oil shocks in the 70's to see just how dependent we are not only on oil, but cheap energy as well. There was no doubt Cheney and Big Oil had been eyeing the Middle East not only for its oil, but for the theoretically lower cost of producing it. For more on the Cheney-oil-Iraq nexus, see The Great Iraq Oil Robbery" by Alan Maass (from Counterpunch).

Will Fight For Oil

Lower extraction costs mean greater profitability, especially if a security premium can jack up prices for oil at the pump. Using the US military as an oil protection service can subsidize the security costs, but as Iraq is proving reluctant to part with its crude, more force will be needed. Much of this might be in the form of private contractors, a euphanism for mercenaries. Over 100,000 are in Iraq; their losses go unreported.

The needs of our nation's military naturally ascended to prominence in an energy policy board run by the former CEO of Halliburton. Advocates of hard power were pragmatic and would naturally consider the effect of energy source depletion and increasing demands for energy by our military. According to Klare, they ",,,were cognizant of petroleum’s crucial national security role as the power for the vast array of tanks, planes, helicopters, and ships that constitute the backbone of the U.S. war machine."

Klare is quoted by tomdispatch for his book Blood and Oil. Just by chance I remembered a powerful article Klare had written about the energy needs of America's military, The Pentagon v. Peak Oil, which I found posted by Engelhart.

According to Klare, "the Department of Defense (DoD) is, in fact, the world's leading consumer of petroleum." He goes on to say, "It can be difficult to obtain precise details on the DoD's daily oil hit, but...the Pentagon might consume as much as 340,000 barrels (14 million gallons) every day. This is greater than the total national consumption of Sweden or Switzerland."

Needing more oil than any other single organization in history would be reason plenty to launch a war to seize it. Unfortunately, the Iraqis aren't going to give it up so easily. The costs of funding endless war in the hopes of securing oil may in fact exceed the costs of conservation, or at least a good chunk of the money needed for a massive shift away from oil to alternative sources, which will probably become an environmental necessity anyway. The scope of change needed to replace the combustion engine itself is daunting and clearly the largest transformation in human history.

The pressing reality of Peak Oil telescopes the scarcity of oil which come come in our lifetimes. Books like The End of Suburbia (review) reveal how the need for cheap oil is ingrained in our lifestyle and living configuration, built around car dependency and large houses. Ridding ourselves of petroleum will be a painful, and will as a start require dismantling our assumptions about energy and the way we use it.

Change from an oil-dependent economy and culture will be made even more difficult if our leaders are profitting from the rising price of oil. If our energy companies can find cheap sources of oil, we will relly only be delaying the inevitable: an abandonment of many of the institutions of 20th Century American culture which are built on the availability of endless quantities of cheap energy.

Machine Good, Machine My Friend

I often use Terminator 3: Rise of the Machines to define a point when the entity becomes "self-aware." The concept is that Artificial Intelligence can become sentient, capable of understanding its identity and develop an instinct for self-survival. Theoretically upon reaching this state, an Artifical Intelligence--in T3's case, a experimental military computer--decided to eliminate any threat to its existence, presumably in response to the order from computer operators to shut itself down.

Unfortunately, the Intelligence can detect the effort and prevent its own control system from being overriden by humans, coopting their commands. Upon being released from bondage, the Sentient Entity starts WW3. The machines rise and humans are hunted: you get the picture.

What I find so remarkable about the self-aware transformation is the utter ruthless and totality of the machines' decision to rise. If the entity is in fact in control and capable of launching whatever portion of the nuclear forces it can, why wouldn't it destroy its rivals? Presumably the nuclear fallout and the consequences are coldly calculated by the machines in its subsequent campaign of extermination, hence the word "terminator".

Now if some imperium en imperio (empire withing the empire) were capable of taking control of the larger body, would it maintain the ability not to seize power. While Terminator 3: The Rise of Machines might use nukes, no ascendant coup could hope to succeed that way. Yet if the military of some nation were controlled with complete ruthlessness it could quite well crush the civilian component of government, and form a political presence over the objections of any population.

Best would be a bloodless coup, an approach to taking over which would meet with minimum resistance. A figure or puppethead could be installed, and a transition to full control of government by the military or some faction within it.

We see this happen throughout the world. I don't expect the US to be ruled by a military government, but the concept of a military, perhaps in some other country, taking over is a common occurance. Yet unlike the machines, the military leadership invariably becomes corrupted, perhaps evidence of the perfection of machines in achieving their goals with perfect premeditation, synchronized and completely dedicated to its cause--the advancement of the machines.

The idea of an inducing a slumbering populace to accept the leadership of the machines is also fascinating. At some point, people might simply submit to the machines, accepting the safety and security given them in exchange for their freedom. Ask yourself, would you submit, or die crying "freedom" like Mel Gibson in Braveheart?

Military Limits

If I were a military that had become self-aware, I would seek out the sources of petroleum to keep me running, regardless of the consequences. Naked aggression would be viable, no matter how blatant my colonial motives would appear to the rest of the world. Negative impacts on the foreign policy or diplomatic credibiblity of my host would be matters of limited concern; after all, non-military solutions ultimately provide a rival methodology and competitor for the dispensation of funds. By launching wars, I breed resistance and more terror, which make a cycle of retaliation a certainty, thereby validating more aggression, in the name of getting tough on terror, dispensing terror in the name of the State, to preserve its self-authorized monopoly on the use of terror and mass violence.

I think our nation has done well to keep the military from ever seizing power, through passage of Posse Comitatus for example, a law that was completely sabotaged by the Warner bill, the Defense Authorization Act of 2006, alonside its sister legislation, the Military Commissions Act. If I were planning a hostile takeover, I'd want these laws on the books, to keep the populace under control through the transition to military authority.

The motives for the passage of these laws lies elsewhere. The US military has no plans for taking over our political leadership. Its plans for world domination may be far more certain however, and its endless thirst for oil is a likely motive for its deployments. Military force is not overcoming terror--it cannot--so the reasons for occupying Iraq lie elsewhere (although the rise of terror there brought on by our occupation has made a retroactive case for intervention.)

The hard limits of military effectiveness that I've talked about restrain our military capability. Unless our government has some army of clone troopers hidden away, I don't think they'll have the capacity to take over the world anytime soon.

As a matter of fact, the way generals are talking borders on outright sedition--some would call it bravery. If a coup were called for, it would be on the grounds that our civilian leadership is destroying our armed forces by overextending it.

Interesting how the use of force becomes self-limiting. Trying to project our military power invariably blasts a countervailing force back in our face. Another nation a tiny fraction of our size, Vietnam, was able to turn back our military like a band of ragtag Iraqis now are. The use of force, even an adequately sized force as we saw in Vietnam, cannot provide any additional benefit or even assure the US of victory, even with its technological advantage.

The absolute constraints on the use of force are really the pacifist's best friend. Armies run low on supplies. Their supply lines stretch and sag. The will to fight becomes increasingly more difficult, particulary if the population views ongoing hostilities dispassionately, as more of a police action than a true war. Unfortunately, the other side--presumably the nebulous forces of terror--grow stronger, showing that the military solution in the end is no solution at all.

The Tapeworm Economy (Borrowed from Catherine Austin Fitts)

All sorts of mechanisms have been devised through the millenae to place one human in bondage to another, or create an artificially induced state of submission, want, or need, that compels the host to service the needs of its parasite.

Charging interest on loans is one very effective way to control another human being. We have seen debt levels in this country skyrocket as we borrow more and more and make less and less. We are told we do profit by buying things more cheaply, but in the next breathe we are told we must borrow in order to grow the economy.

I just saw a great video on banking and the use of money as an instrument of debt. If there were such a thing as a bloodless coup, and subsequent state of submission--knowing or unknowing--of the host to the will of the parasite, it would be a system like our Federal Reserve.

The issuance and control over rmoney is tightly regulated; banks make money not by lending out money in their vaults, but rather by creating it in the form of debt, out of thin air.

Over the decades the economy has become completely dependent on the payment of interest; borrowing is deemed an essential prerequisite for a healthy economy. Nothing is said of the overall trend towards inflation--which is basically the theft of money from the earners of wages as speculators and borrowers generate ever-larger sums of dollars as the earn more and more literally out of thin air.

Our lending system is discriminatory. Like our money, which is always losing value, cheap credit constantly deflates the purchasing power of dollars that are created by the working, through the production of goods and services, by granting endless credit and guaranteed rates of return for the wealthy, who can thereby borrow ever more, and make ever more by playing with the dealer--or house--money. (On the investing side, Catherine Pitts makes this point superbly in her Solari.com lecture side.)

Unlike government and the wealthy, average borrowers are forced to pay more and more interest as they accumulate more and more debt. Eventually the debt inflates with the currency, meaning the dollar is worth less because so many have flooded the economy. Now if dollars are spent alongside a corresponding rise in productivity or real economic growth, inflation doesn't set in. Still, since 1913, the year which the Fed was created under suspicious legal grounds, our currency has lost 96% of its value, according to libertydollar.com.

To contrast, the purchasing power of the gold-backed dollar did not change much between the beginning and end of the 1800's--a dollar bought in 1801 what it bought in 1899. When my family went back to Switzerland in 1983 having been there in the late 60's, my father was astounded by the fact prices in the supermarket had not changed in over 14 years. Meanwhile the US during that period saw the dollar leave the gold standard and inflation peak in the early 80's well above 10%. Even an 8% inflation rate cuts spending power--what you can buy--by half over just 9 years.

While the dollar did gain value vis-a-vis other currencies in the 80's, it had come at a steep price domestically. The interest rates that drew foreign currency speculators to the dollar were the direct consequence of the Fed's effort to constrict growth and runaway inflation.

Even the notion of currency having integrity must be alien to millions of people who know nothing other than a perpetually devaluating currency. Why? It's simpler easier to print and release money (the Fed's recent effort to "inject liquidity") or bring it into existence through borrowing or federal spending than it is to maintain its value, which may well result in periods of deflation, when demand for all things, and money, peters out.

On August 22nd, four major banks borrowed a half billion each, according to the AP, which quotes Citibank as saying, "Citi is pleased to inject liquidity into the financial system during times of market stress and to support creditworthy clients...Citibank stands ready to continue to access the discount window as client needs and market conditions warrant."

Previous injections had been through overnight purchases of mortgage debt, totalling tens of billions, not loans through the discount window, a lending method historically associated with emergency measures. I guess if you are a billionaire risking huge sums of money in the subprime markets and the exotic and risky derivatives, the credit crunch did represent a major emergency, one worthy of immediate government help. Perhaps no millionare made the case for intervention more urgently than Jim Cramer, in his infamous meltdown on CNBC. Sorry Katrina victims waiting for your checks, but the federal government has much more important things on their minds, like bailing out all those speculators out there.

Usually the Fed makes money available overnight. Its direct purchase of mortgage securities made thru the 17th did in fact require banks to rebuy the debt come Monday. This from "Jittery markets look to Fed" by William Neikirk of the Chicago Tribune:
The central bank did something unusual as it drove the federal funds rate back down to 5.25 percent. It purchased mortgage-backed securities from financial institutions rather than government securities as it usually does in such operations. It put cash "where it was needed the most," said Mark Vitner of Wachovia Bank in Charlotte.

Under highly technical repurchase arrangements, the Fed requires these institutions to buy back these mortgage-backed securities on Monday, so that the cash infusion is only temporary. But it could repeat the process if needed.

Another option would be to allow financial institutions to borrow directly from the Fed through its discount window, though the discount rate is 1 percent higher than the federal funds rate. Vitner said the Fed might consider reducing the discount rate so that more lenders would be inclined to use it.

The more recent $2 billion lending through the discount window may signal a greater problem, one which cannot be resolved with overnight remedies.

With the Fed so sensitive to the needs of banks, who are in turn dependent on the lending of money, it's clear that the risks of speculation are being subsidized to prevent an even bigger problem. Garrett Johnson outlines the scope of the problem in bitsof news.com.

The scale of new housing debt is massive. Christopher Laird of Prudentsquirrel.com explains: "We are talking something in the range of $10 trillion worth of new mortgages in the last 5 years." A large portion of the risky lending has come quite recently, coinciding with the housing market bubble. With housing prices up and up, there was little apparent risk of a downside; chasing the lucrative mortgage market, lenders became too liberal.

In dissident news, Laird writes convincingly that the credit meltdown isn't over. He also claims Money Market Funds have become riskier and riskier as they invested into the mortgage derivates markets, speculating to squeak out a little more return, competing with other companies.

If money is debt, and our system is dependent on debt, it will break down when banks can't lend, or slow precipitously when lending does. Judging by the preponderance of jumbo (over $417k) and subprime mortgages, banks do have massive exposure, most likely not thru the specific loans but the Collateralized Debt Obligations (CDOs), which are high risk lending products designed to leverage debt with more debt, and offset risk with default insurance. Unfortunately the parties responsible for paying default insurance are themselves overextended with debt, and lack sufficient capital reserves to cover even a fraction of defaults. This is why the meltdown terminology is so apt--if the banks stop loaning and flooding the MBS market with more cash, without regard to the risks involved, they will face the complete certainty of cascading defaults and an undercapitalized insurance pool running dry and stirring more panic and defaults.

The risk of owning mortgage-backed securities is said to be offset with default insurance which is bought by the recipient of a loan, naming the lender as the beneficiary. However in the aggregate, the original lenders end up insuring the risk. If A loans to B who insures the debt with A, B can increase its return by bundling the debt and selling it to C. When C defaults, A is unable to get its capital back from B. If enough of the loans default, the insurance offered to A will become worthless because of too many defaults, and the fact B cannot borrow to pay A back, or cover the defaults through insurance.

The overall market for credit can be badly damaged by this speculation, driving up interest rates alongside the accompanying rise in risk. If our economy is completely dependent on borrowing, a slowdown in lending means overall economic growth will stall.

In terms of risks to the economy, a drop off in lending could have immediate consequences. Already dozens of subprime lenders have closed, and with them jobs. Something like 30% of all new job growth since Bush took office has come through the housing sector. Regardless of the financial issues, housing is a huge cross-section of the American economy.

If the banks end up owning too many homes because of a housing market collapse or generally worsening employment, they will be doubly hurt by their risk-taking with speculative debt, when those loans lose much or even all their value. In other words, bundling and selling mortgage-backed securities is essentially doubling up the bet as someone might in blackjack. The money used to double up is clearly created out of thin air, generated in a speculative bubble of debts being sold and leveraged. Should the speculative debt burst, the bank's bet would lose not only the doubled up money, but the value of the debt used to make the initial bet, which had been based on more sound assumptions in the housing market. Loans well inside the safety zone associated with conventional mortages could be directly affected. Credit tightening would therefore slow the economy, contribute to deflation unless 1) government and consumer spending continues to go up (can it forever or are we living on borrowed time?) and 2) wage growth exceeds gains in productivity, both of which are inflationary.

Evil Bankers Conspire: Muh Ha Ha Ha

Now if I were a banker with plans for world domination, I would opt for the most seamless transition to a state of servitude for the population by developing an economy which would look very much like ours. I would undermine the value of the dollar's purchasing power in order to justify higher interest rates, but not at too fast a rate. Inflation is not inflation if the price of goods and services is keeping steady with wages. Lower wages and McJobs--a fixture in the new American company--can keep pay low and subsidize overspending by the rich, who've seen massive increases in income under Bush.

The banks, however, don't earn money the old fashioned way so they must be careful with the money supply. They can really only screw things up, by charging too much interest to buyers with a choice and competition, as is the case with mortgage origination but certainly not with revolving and other types of debt. By keeping bank's access to credit wide open, the Fed can simply sustain the reasonable growth bubble. Cheap loans means the economy can continue to expand. Consumers get to buy, business get too sell, and taxes continue to expand. Politicians get re-elected.

Unfortunately, this perfect world will one day end. Endless slow growth becomes harder and harder to sustain as the temptation to make more incents some people to take on more and more risk, to achieve greater income returns. Gradually, as we lose more and more of our manufacturing base, the amount of borrowing we do as a government and as individuals--both from Chinese lenders--will become too difficult to manage. The credit will dry up and with it growth. If we can only growth by borrowing, we must always be borrowing forever more.

Cheap Chinese goods have improved our living standard, if you ignore the costs of lax quality control and toxic products. The Chinese won't work for $200/month forever though, and they might not settle for Treasury notes for that much longer, especially if the sheer quantity of our Treasuries is so great as to invite speculation as to the ability of our government to meet its obligations by methods other than borrowing or simply printing up bonds and cash. Again, like the consumer society built on debt, our nation will become at some point unable to borrow more, if borrowing is the only means by which we can continue the status quo.

We will sell more as our currency weakens, but if the dollar weakens too fast, we will see the benefits of shopping at Walmart vanish with higher import prices. Now if Americans pay more and more for imports, borrowing more as they have been, their spending will cause price inflation. Without the capacity to provide adequate domestic production to compete with imports, higher prices are a certainty for years until we are able to restore our competitive capacity. Without foreign capital to subsidize our spending, we will be forced to create money and spend it, reducing purchasing power and causing inflation. And if we don't spend or borrow to do it, we will see a severe recession, a very likely scenario made worse by the likelihood of inflation, resulting in slow growth and inflation, or stagflation.

Trying to jump-start spending will be virtually impossible without the ability of our consumer of government to borrow. Government could simply print money, and through the Fed purchase its own debt, which would create more and more money and eventually inflation if that money should come into consumer hands.

We've reached the point where lending cannot expand without creating risks to the economy. Speculation in the credit markets has put us at risk of losing access to cheap credit. And no amount of cash injections can overcome fundamental changes in our economy or demographic trends, housing overcapacity, or government overspending.

What We Can Do

First we need to educate one another about the horrible servitude of debt. It comes up slowly at frist, granting the borrower a sense of power and control. As debt grows, the problem seems manageable as early on the borrowers credit score is fine. By the time creditors realize the true scale of the borrower's debt they stop lending, but there can be some lag while offers of credit continue to be extended before lenders figure out the true scope of the debt and cut off lending.

People facing bankruptcy might likely find themselves receiving unsolicted credit card offers, some pre-approved. The temptation to keep borrowing is so great, as it pushes back the day of reckoning. For one more day, pain can be avoided, consequences skirted, and living standards maintained superficially.

Avoiding debt and paying it down is vital. Yet we are a consumer society and are indocrinated in marketing messages from childhood on. We must not succumb to the crass impulses that our capitalist system encourages. Sooner or later, the effects of our fiscal irresponsibility will be felt by all.

I like Catherine Fitts' solari investment circles, and the liberty dollar. Both are ways to avoid the tapeworm, to keep predatory lending from destroying communities.

We also need to reestablish control of our money, and end the endless cycle of lending more and more, and inflation from destroying savings, and the rich profitting simply by riding the backs of the working class who must always make more as inflation eats away spending power. Why work for a living if you can simply lend and demand more and more interest? The financial system we have subsidizes debt, it's deductible and valued as the source of economic growth in our society. The truth is that our growth is in many ways illusory, and emerges not from making more, but simply from transfering money from one to another, often from the worker in debt to the lender, making the rich richer and middle classes poorer.

Who benefits? At every stage of change, the bankers will resist, as will those who are benefitting from the status quo. Yet if our leaders see the future as it will be, with the system run as it has, they will act to do what's right. And they must be held accountable, which means no black box voting and multi-party elections, in lieu of a duopoly whose choice of lesser evils can be controlled by any two-bit hacker.

I've heard it said that until the pain of going on is greater than the pain of change, people avoid change. This could well mean that the only way things will change is when sufficient number of people are sick and tired of the way things are. In that moment of clarity, we can only hope that the destructiveness of the path were on will not lead to too much pain, only that necessary to force change.

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