Analyzing the blur (Part 2)

(4 pm. – promoted by ek hornbeck)

Part 1 described how humans face multiple ongoing, interlocking and spiraling crises of existential proportions, all of which can be conveniently subsumed under the theme of carrying capacity, the ability of an environment to support a population at the limit of sustainability, a limit we have exceeded.   The basic elements of the story are these: Through the exploitation of fossil fuels, humans have over-run the planet, cantilevering the entirety of complex industrial society on finite sources of fossil fuels, which we are using to extract itself other resources unsustainably to the point of collapse while altering the basic chemical and biophysical operating conditions of life.  Thus, the collapse of the physical environment threatens mass extinction on the order of five previous mass extinction events on Earth.  This is not exactly news, yet it’s tenaciously more controversial than it should be.  Today’s tour examines how we got locked into one particular death spiral, the “debt spiral,” that keeps us locked into the fossil fuel death spiral.

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The very recent “success” of humans in economically advanced countries has culturally engendered a misleading assessment of human accomplishment, deranged notions of wealth, and conditioned unwarranted expectations for more of the same.  To borrow a phrase from Jim Hightower, industrial humans were “born on third base and thought they hit a triple.”  The baptismal font of fossil fuels has fostered a belief system in which the religion is growth and the supreme being is the Lord of More, an orthodoxy that is both irrational and nearly ubiquitous in industrialized nations, and probably far more damaging than any conventional dogma Richard Dawkins has railed against.  The irrationality of this system stems from the simple fact continual growth of any kind is impossible in a finite world.

Despite its root insanity, this belief system has been not merely elevated as a national narrative, but has been reified as the operating system of our physical economy in the form of debt-based financing.  Still worse, as the leading global power of “The American Century,” we have pushed to globalize this operating system on the rest of the world, to exert a kind of neocolonial control over resources and political systems through inventive regimes of debt and discipline, and largely succeeded.  

On the ascending limb of resource extraction, economic growth, and credit expansion, debt-based assets could be rolled over into the foreseeable future, and interest-laden fiat capital could function as a tradable substitute for actual resources, such as oil.  The belief in infinite resource extraction has allowed debt-based fiat economies to runaway from ecological reality.   As alluded to in part 1, we are hitting hard limits to physical capacity, leaving only imaginary exponential functions to vary to infinity.  The master resource of oil has by any reasonable estimate begun its terminal decline, which guarantees economic contraction, which in turn certifies the impossibility of rolling all the old debt into new debt.  Thus the viral proliferation of the operating system has also hit hard limits, and the ascending limb of inflationary credit expansion has transformed into its nasty alter ego of deflationary credit contraction.  The American wealth pump has begun to run in reverse.  How did we get here?

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The US, once the leading global exporter of oil, went into terminal oil decline in 1970, precisely as predicted by Hubbert, who reckoned correctly with those limits of growth two decades earlier.  Those were also the days of public reckoning of oil embargoes that Kissinger regarded as “the most threatening event for the world’s developed economies since World War II,” high prices and gas lines, stagflation, hostage crises and Jimmy Carter’s solar panels and cardigans.  Because the public was unfairly deprived of a good deal of relevant information, such as Nixon’s boneheaded refusal to buy Iranian oil very cheaply, the secret Senate hearings on oil, and covert schemes to prevent Carter’s re-election, it complicates assessing the general public’s degree of culpability with respect to subsequent political decisions; nevertheless, the public was definitely put on notice with respect to the basic issue of fossil fuels, and had ample opportunity to reflect on the crisis, before submitting to the rightward ratcheting of the operating system that brought Reagan to power.

What the public has perceived since is a blur of reactionary politics, stagnating wages, the decline of schools and public infrastructure, the off-shoring of jobs and entire industries, the decimation of once vibrant industrial towns, the smashing of unions, free-trade agreements, rising healthcare costs, accelerating inequality, financialization of the economy, more war and consolidation of the national security mindset, and increasing debt and deficits.

The economic inevitability of our choices in the age of post-abundance have appeared obscure, because the sheer volume of economic nonsense and anti-sense have inundated any signal with noise.  That problem has only gotten worse over time, as we have become ever more committed to the strategy undertaken by both Democrats and Republicans to “paper-over” our essential weakness.

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“Reagan proved deficits don’t matter”  –Dick Cheney

Stirling Newberry’s (2005) American Thermidor thesis explains rather crisply what has happened to the American economy (as well as the evermore reactionary nature of American politics) since we took that fork in the road back in the 70s.

 The reality is that all of the deficit problems, the energy deficit, the trade deficit, the budget deficit, and the wages and wealth deficit, are connected, each one reinforcing the others. They cannot be solved piecemeal: increasing real wages will mean that Americans will burn more oil, and import more, which means a higher trade deficit. In an environment in which other nations have energy deficits of their own, America cannot export its way to material prosperity, and so it votes for budget deficits to keep the economy propped up. This is the centerpiece of why the Republicans hold power: to undo what they have done requires a broad mandate to attack, not one deficit, but all simultaneously.

    The root of problem is that the American economy has become a giant “paper-for-oil” deal. We buy energy, both directly as energy, and indirectly by importing goods made more cheaply in other nations where people command a smaller bundle of energy.[8] Goods from China cost less, not because Chinese factories are more efficient, but because Chinese workers have a smaller claim on resources than American workers. America prints paper – in the form of Treasury debt and US assets such as stocks – to buy energy from abroad.

    Because America runs an energy deficit, and must import it, and we cannot export other goods to others to pay for it, we run a trade deficit. It is a problem because there is one scarce commodity which all others are denominated in: oil. Oil is scarce, not because there is not enough energy in the world, but because it is so much cheaper to extract energy from oil than from other sources, and oil can be used to transport goods and people.

    The competition is not over scarce energy in itself, but over a particular form of energy which can be used to substitute for everything else. There is nothing in this world that one cannot get more cheaply by using more oil to get it – whether by importing it, mechanizing its production, or using more energy to extract it. This is not only true of industry, but of people as well: Americans moved to the suburbs because it was cheaper to drive farther than to work through the problems of urbanization, and one could get a larger house with a larger yard in the bargain. As long as it was cheaper to pay rent to Saudi Arabia for the oil, because that is what we are doing, than to pay rent to the government for a working city, people chose to pay rent to OPEC rather than taxes to the government. This ability of oil to be used in place of almost everything else, and not whether there is “enough” oil, is the special property that makes it the basic scarcity of the world economy.

Compared to most economic balderdash, this “domino effect of deficits” account appeals to my sense of causation; but it’s really the subsequently explained “paper-for-oil” mechanics that are key.   Why would anyone take fiat paper in exchange for oil?  Because there is confidence in the redeemability of the assets and to earn interest, of course.  Those oil exporting countries that do not invest in their own countries, e.g., Saudi Arabia, need a place to park all their dollars.  While the exchange remains at its core a huge Ponzi scheme, an interesting and inevitable wealth dynamic resulted as the confidence game progressed that is essential to understanding the ongoing, bipartisan flattening of the middle class, stagnant wages, various investment bubbles and collapses, the financialization of the economy, and the inevitable denouement.  I’ll let Stirling resume with the heavy lifting.

However, with investment pouring in from nations where the investors are also the government, more and more control over the US economy at its highest levels is in the hands of the wealthy of nations like Saudi Arabia. Should they choose to pull their wealth from the US, or even simply stop rolling over their financing, the result would be a rapid drop in the value of US stocks and assets. This is what happened in the Summer of 2002.[10] To prevent investors in these countries from gaining control, the developed world, and particularly the US, is forced down a particular path: it must cut taxes on our wealthy, so that they match the taxes on the wealthy of Saudi Arabia. The “race to the bottom” starts at the top. This cutting of revenues is what drives the US budget deficit: without the reduction in revenues from upper-bracket tax rates being lowered, and without the interest on the National debt, there is no financial crisis. This means that the trade deficit, combined with the nature of a few energy exporting states, creates the budget deficit.

    The money then comes back to the United States at the top of the economy – in the purchase of financial stocks primarily – and then filters downward. This “top down economy,” called “trickle down economics,” means that America cannot invest in getting out of the energy trap, because the very people who hold the purse strings have no interest in ending it. The only way to slow the process is by, as you should guess, holding real wages flat, because if people earn more, they burn more oil, and make the trade deficit worse.

    The reason Reaganomics was put in place then, and remained in place even after the Democrats took back both the Congress and, by 1992, the Presidency, is that no single point on the circle could be broken: raise real wages, and the trade deficit gets worse, raise tax rates by enough to rapidly wipe out the deficit, and face the prospect of foreign ownership of the “commanding heights” of the American economy. Instead of finding a way off of the dependence on foreign oil, and instead of untangling money from oil, Reaganomics used cuts in capital gains taxes and upper-income marginal income tax rates, and the increase in FICA taxes as a regressive tax to reduce consumption as a way of allowing foreign investment to pour into America. The cost was that wages would have to stay flat in real terms, and that corporations and stock wealth would have to grow almost without limit.

    This means that the reason Reagan won, and gradually pulled the media and much of the public mood behind him, was that in a world which is zero sum – and the amount of oil being the basis of profit meant it was zero sum – people become conservative, grasping at whatever bits of their bundle of ultimate scarcity they hold. It meant that allowing the rich to become richer was essential to keep America under the control of Americans. It meant that corporations had to be allowed to become larger and larger, so that they were harder and harder to hold accountable through political means. It also created another vicious circle: Americans had more and more of their wealth in their homes, which created more pressure for sprawl, which, in turn, created more and more demand that gasoline prices remain low, so that people could trade cheap energy to pay less for expensive land.

 

   The process became a vicious circle because larger and larger corporations with more and more wealth at the top became the dominant political force. Natural selection of a political kind took over: attempts to change one of these features of the economy met with disaster. Raise wages, and inflation returned; raise taxes, and autonomy was threatened; cut oil consumption, and other nations would consume more oil to sell to the United States. In other words, progressivism ebbed because there seemed to be no single point of attack that did not involve a dramatic energy austerity, and the resulting reduction in American standards of living. Over and over again, Democratic politicians, from Carter in 1980, to Mondale in 1984, all the way to Gore in 2000 and Kerry in 2004, warned of the consequences of energy dependency, unequal wages and corporate consolidation, but failed to create a large political coalition capable of producing what Arthur Schlesinger calls the golden moment in American politics: a progressive president with a progressive working majority in Congress.

    The vicious cycle is this: that a cheap energy deficit created a trade deficit, creating an investment deficit, which then created the political pressure for a wages and wealth deficit, which, in turn, made the cheap energy deficit worse, and even more political pressure for even more inequality of wealth and to keep the one lever Americans still had – the ability to drive further to keep costs down, since they could no longer strike or organize to raise real wages. This started the cycle all over again. This is the key to the move to the right – by creating an economy which is determined by the scarcity of one commodity: oil, and a money system which bends around the dynamics of that one commodity, an environment is fostered in which people think as conservatives first. It also means that many of the problems that the progressive movement has identified over the years are symptoms, and not original causes, of the lurch to the right in American politics.

It’s tempting to let a perfectly good explanation stand alone without further comment, but a couple of things are worth highlighting in this account.  One is that the siphoning of wealth at the top is viewed as a mechanical necessity for maintaining relative dominance between nations, i.e., the political “logic” of our inequality need not necessarily arise purely from simple greed, an idea that some might find counter-intuitive.  Suffice it to say that in reality “the rise of inequality surely didn’t happen in a psychopath-free vacuum.”  Second, the trade-off was that average workers got their American way of life (cheap imports, strip malls and box stores, electronics, cheap eats, and continued suburban sprawl, including the eventual game of musical chairs that the housing market had become), but were increasingly screwed on wages, health care, pensions, and various benefits (infrastructure, schools) of a well-funded government.  Third, while this recital seems to provide a rather mechanistic account of how we got here, it does not directly concern itself with the fundamental problem addressed in these essays, the inherent illogic of growth on a full and finite planet.

Finally, on a bluenote of sad-joy, one can recall the irony of the controversial Dubai Ports World management and security deal that Bush tried to shove through Congress in 2005-06, which incensed conservatives to no end.  The United Arab Emirates itself was exhausting its own oil wealth, and was attempting (under Bill Clinton’s sage and friendly advice) to diversify its wealth into property, including major ports in the United States.  The deal was supported by the Bush administration, the intelligence community, and the financial press, quite plausibly for the reasons laid out in the paper-for-oil thesis, namely that our politicians rightly understood that we have no choice but to give the sheiks a decent place to park their money in exchange for oil, a fact not easily admitted politically, especially after having thoroughly manipulated and exploited the public’s emotional responses to Middle Easterners for the purposes of putting the country on a politically firm and salable war-footing.

By the time of the Dubai Ports deal, Bush’s WMD narrative had tangy redolence enough that at least a handful of conservative old-timers had already begun wearing “bullshit protectors” when Bush spoke, whereas most party foot-soldiers had no problem cramming down their doubts on war.  But the thought of selling American port security to potential “Muslim Arab terrorists” was so utterly dissonant with the “war on terror” narrative that large numbers of rank-and-file conservatives flipped their flaming wigs in a nationalist and decidedly xenophobic backlash, a reaction further exacerbated when Bush, who found the “bullshit protectors” aggravatingly incomprehensible, threatened to veto any attempt to stop the deal.  It was simply inconceivable to the hard-core conservative base that their champion and protector could betray them so outrageously on national security, when in fact, he was being perfectly consistent with the decades-long rightward shift in politics.

Conservative politicians easily justify the outrageous distribution of wealth as a natural consequence of freedom and just rewards for hard work, but outsourcing national security to Muslims?   Dear god in heaven.  There limits to what people will believe after all.  

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This may be a good place to stop, because Stirling’s thesis possibly short-cuts the need to discuss things like why Bill Clinton let China into the WTO (in order to “increase U.S. jobs and reduce our trade deficit,” he said), passed NAFTA (more jobs!), threw the poor folks off welfare, repealed Glass-Steagall, and slipped through the Commodities Futures Modernization Act just before he ducked out of office, almost precisely when the Supreme Court was handing Florida to Bush with the quiet help of future Chief Justice and Citizen’s United paladin John Roberts.  It may even circumvent the need to discuss why Obama has shown so little interest in jobs, while being thrilled to pieces with Bush’s tax cuts, a captive money stream for health insurers, Helicopter Ben’s QE, more “compromise” on austerity, a DOJ that exhibits tonic immobility in response to massive bank control frauds and hyper-aggressiveness to minor intellectual property violations, and Sarah Palin’s “drill, baby, drill” strategy.  

2 comments

  1. (1) They aren’t all that reality-based after all

    (2) Give them a really decent recital of reality, and not only do they not criticize it, or even utter a convincing “meh,” they simply forget about it.  If I ever said anything worthwhile and no one paid attention, I’d be pissed.

    (3) general principles

    • banger on February 21, 2013 at 15:34

    The notion that the Gulf States have much power is one I don’t go along with. And I’ll briefly identify the general location of where power is.

    Political power grows out of the barrel of a gun: Mao was a monster but a smart monster. Power is force and whoever has the means to physically enforce their will has power. Thus the U.S. is the most powerful country in the world because it has overwhelming military superiority. Military spending is not sacrosanct simply because of the MIC but because all segments of society benefit from this power. So, to me, the debt issue is just not an issue because the money we borrow from around the world both from private and sovereign funds is another name for tribute. Why? It’s not just that we have a gun pointed at foreign leaders (we do) but that we are useful to the world by creating an imperial arrangement where we guarantee order and safe trading routes for the benefit of all.

    The U.S. is the center of a global Empire that exists for the benefit of all–U.S. citizens are really an afterthought. The people who run the Imperial court are not elected officials, rather the people who run the government are those who hold the guns. It’s not the military per se because the military has rules and procedures that limit its power, though it is trying to break out of that it has not been successful. The people holding ultimate power are those people holding guns who are unaccountable, i.e., the intel agencies and their contractors in combination with that part of the plutocracy that has deep links to that community, i.e., Wall Street/City of London. These people who are, largely unaccountable, took charge in 1963 and consolidated that power in 68, during Watergate (Nixon was the last “progressive” President). After the fall of the Soviet Union which by 1980 was moribund anyway, the new threat, carefully set up starting in the 70’s via the Saudis and others was “terrorism” which I believed was, in part, an intel operation as almost everything is. The evidence is plentiful but let me limit it to this tidbit–the U.S. was deeply involved throughout the M.E. with the Saudis in promoting Muslim fundamentalism as a counter to both Arab nationalism and Socialistic movements in the region and the relationships and arrangements flowed from there. All major actors in the “terrorist” drama were well known to all intel agencies and their organizations monitored and, in my view, manipulated.

    9/11 changed everything and created the permanent war that will not and cannot ever end. This formally allows the apparatus of the state (despite the Constitution which is, for all intents, null and void) to stop any kind of serious dissent any time it wants to. We now live in a rather benign police state because there is little dissent because the propaganda apparatus works so well no Gulag is necessary in the U.S.

    In my view, unless we grasp the real political situation, it is hard to analyze political and economic policy.

    I believe this Empire is working rather well and is very robust which was proven by the fact the 2008 events caused only a ripple in the major countries despite very real problems in, for example, in Greece and Spain. People, on the whole, are quite content with the global marketplace and the Pax Americana which has held despite what I would call minor skirmishes at the edges of empire–Rome had to put down pathetic rebellions from time to time but most people in the Empire were pretty happy with the general peace until things began to break down. Also this system is not a centralized system–some big shot in the CIA is not moving pieces on the chessboard–rather it is an example of distributed intelligence and it has evolved over decades to become extraordinarily adaptive and robust because power is distributed among many factions whose interest have coincided since even before WWII.

    The big fly in the ointment is climate-change. Right now the political forces are divided as to how to deal with it. I believe there will be a shift towards more a more sustainable system–but will it come soon enough?

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