Bill Totten's Weblog

Friday, October 31, 2008

Change Everything Now

One of the nation's most mainstream environmentalists says it's time to get a lot more radical

Interview with Gus Speth

by Jeff Goodell

Orion magazine (September/October 2008 issue)

James Gustave "Gus" Speth's office at Yale reeks of Old World charm, with a high ceiling and dark, wood-paneled walls adorned with souvenirs from his travels in Africa and Asia. Speth, sixty-six, the dean of the Yale School of Forestry and Environmental Studies, is a tall, genial man who wears conservative striped ties and speaks in a quiet southern drawl. If America can be said to have a distinguished elder statesman of environmental policy, Speth is it. Before he arrived at Yale, he cofounded the Natural Resources Defense Council, one of the most powerful environmental groups in the US, then went on to serve as a top environmental policy advisor to President Jimmy Carter. In 1982, he founded the World Resources Institute, an environmental think tank, which he headed for a decade. He also served as a senior advisor to President-elect Bill Clinton's transition team and spent seven years as the top administrator in the Development Programme at the United Nations.

It's not surprising that Speth would end up in a wood-paneled office at Yale. What is surprising, however, is that he uses his bully pulpit in academia to push for a 1960s-style take-it-to-the-streets revolution. His new book, The Bridge at the Edge of the World (Yale University Press), is nothing less than a call for an uprising that would reinvent modern capitalism and replace it with, well, a postmodern capitalism that values sustainability over growth, and doing good over making a quick buck. Sound idealistic? It is - but that's part of the book's appeal. Speth goes beyond finger-wagging to indict consumer capitalism itself for the rape and pillage of the natural world. His proximate concern is global warming and the impact it will have on civilized life as we know it. But unlike, say, Al Gore, Speth is not concerned with details of climate science or policy prescriptions for the near-term. He is after bigger game - the Wal-Martization of America, our slavish devotion to an ever-expanding gross domestic product, the utter failure of what Speth disparagingly calls "modern capitalism" to create a sustainable world. What is needed, Speth believes, is not simply a tax on greenhouse gas emissions, but "a new operating system" for the modern world.

I spoke with Speth at Yale earlier this year.

Jeff Goodell: In the opening chapter of your new book, you say, quite bluntly, that "something is wrong" in America. What exactly do you mean?

Gus Speth: Well, I think we have to face up to the paradox that while the environmental community has become stronger and more sophisticated over the years, the environment is going downhill so fast that we're facing a potential calamity down the road. All we have to do to leave a ruined world to children is just keep doing what we're doing today - the same emissions of pollutants, the same destruction of ecosystems, same toxification of the environment - and we'll ruin the planet in the latter part of this century.

And yet, we know we're not just going to keep doing what we're doing. We're going to grow phenomenally. At the current rates, the world economy will be twice as big as it is today in seventeen years. That carries the potential for enormous additional destruction. The environmental movement has a lot of wonderful things about it, and it's accomplished a lot. But it's not up to this challenge of dealing with this amount of environmental loss and destruction.

The fundamental thing that's happened is that our efforts to clean up the environment are being overwhelmed by the sheer increase in the size of the economy. And there's no reason to think that won't continue. So we have to ask, what is it about our society that puts such an extraordinary premium on growth? Is it justified? Why is that growth so destructive? And what do we do about it?

Capitalism is a growth machine. What it really cares about is earning a profit and reinvesting a large share of that and growing continually. Profits can be enhanced if the companies are not paying for the cost of their environmental destruction - so they fight [paying it] tooth and nail. The companies themselves are now quite huge, quite powerful, quite global, and no longer just the main economic actors in our society. They are the main political actors also.

And so all of these things combine to produce a type of capitalism that really doesn't care about the environment, and doesn't really care about people much either. What it really cares about is profits and growth, and the rest is more or less incidental. And until we change that system, my conclusion is that it will continue to be fundamentally destructive.

JG: So our engine of progress has become the engine of our destruction?

GS: Well, it's certainly the engine of environmental destruction. And what is also becoming apparent is that this so-called engine of progress is also not really improving people's lives very much either. And here I'm speaking entirely of the advanced, industrial, affluent societies, not the developing world, which does need to grow.

In the West, we're seeing that people's own sense of subjective well-being has not been going up with all of this growth that we've been experiencing. Per capita income goes up, but happiness doesn't, satisfaction with life doesn't. It's just flatlined, for decades now. And there are certain pathologies that have increased. A sense of loneliness in our society, bipolar disorders, other problems, stress and disintegration of communities.

This should be a time when we really can take this fabulous amount of wealth that we've generated and enjoy it, and yet we seem to be caught in a system where it's either up, up, and away or down, down, and out. And we seem to careen from crisis to crisis - personal crises, national crises, economic crises.

JG: I know lots of people working on clean energy technology in places like Silicon Valley who would argue that the forces of progress need to be accelerated, not slowed down.

GS: Well, I do stress the need to ditch the old technologies that have gotten us into this trouble and bring on as fast as possible new technologies that are designed with the environment in mind. That's all accurate, I think. And I'm delighted to see the renaissance of environmental concern in the country.

But having said that, I just don't believe it's enough. What you're really describing is what can be thought of as kind of a dematerialization of the economy, of the movement toward every kind of gloriously high-tech economy with just electrons moving around ...

JG: A Google economy.

GS: Yes, a Google economy. But there's still huge impacts, even with all of that, and as these new companies grow in size, those impacts become ever larger. And right now there's been very little dematerialization of the US economy. It's gotten more efficient, it creates less pollutant per unit of output in our economy. But still, we're using a huge amount of stuff and releasing almost all of it back as waste into the environment in some form.

Changes of the type that would bring on this technological nirvana are just too slow and too partial. They need to be combined with other things that basically slow the current up. And that means taking the priority off of growth. It means finding a new set of laws for corporations - to change their incentive structure. It means us consumers becoming more interested in living more simply.

JG: Of course, when you talk about taking the priority off growth, it's no longer a technological issue. It's a political one.

GS: Yes, but the trouble is, our politics simply won't sustain the changes that we need. And so we really need to create a mighty force in our country that seeks to reassert popular control over our politics before it's too late.

We're in a vicious circle where the more powerful [certain] interests get, the less able we are to reassert control, and those that have enormous power and wealth in the country [become even more] able to assert even more. And I think that the environmental community needs to see political reform as central to its agenda, and it doesn't now. That's not what the environmental groups do. And that's a huge mistake, because right now they're playing a loser's game, and they keep losing. Winning some battles, but losing the planet.

The other thing that needs to happen is that there needs to be some fundamental challenge to our dominant values. It's been addressed by religious organizations and psychologists and philosophers and countless others for a long time. But until we reconnect in a more profound way with ourselves and our communities and the natural world, it seems unlikely that we will deal successfully with our problems.

JG: You quote Milton Friedman as saying, "Only a crisis produces real change". What kind of crisis do you have in mind?

GS: I hope it doesn't take that. But I think if you have a crisis - a Great Depression, whatever - in a time of wise leadership, we can construct a new narrative that builds on the traditions of the country and its highest values, but also explains where we need to go in the future, and why we went astray in the past.

In the end, the thing that I hope for is a huge mass movement in the country before it's too late. I really don't know any other way to make the change happen other than a grassroots movement. The nearest thing we've seen to this in living memory was the civil rights movement.

JG: One of the paradoxes of this is that fear is not always a good motivator, especially when it comes to confronting an issue like global warming. People become immobilized and say, "What the hell, there's no point". How do you communicate the seriousness of the challenge we face without pushing people over into despair?

GS: I think people respond out of love and out of fear, fundamentally. We will never do the things that we need to do unless we understand how serious the situation is. So you've got to deal with the facts.

Do we need also to talk in positive terms, to say we can deal with these issues? Absolutely. And is being hopeful about the prospects for the future very important? Absolutely. But in order to make the deep changes that are needed, people need to sense the scale of the problem.

JG: Do you think the notion of sustainability on a planet that is heading toward nine billion people is an impossible goal?

GS: Well, let me give you a personal example. My wife and I have offset all of our greenhouse gas emissions from our car, our house, everything. Before we moved into the apartment where we live now, we invested heavily in a big photovoltaic unit for our house, which produced about half of our electricity. I purchased two Priuses, gave one of them to one of my children. We do lots of recycling and other things. We've changed all our bulbs to CFLs. You do all those things, and your environmental footprint is still huge.

Moreover, not only is doing all the things that we are able to do ourselves woefully insufficient, it creates this false impression. It gives you the sense that the problem is an individual one, and it's on you, and you can solve the problem. Whereas the problem is really deeply systemic - it's only through political action that we will solve the problem.

JG: I visited scientist James Lovelock a few months ago, who has long argued that the Earth is beyond its carrying capacity for human beings. He basically says, "Look, if there were 100 million people on the planet, it wouldn't matter if we were all driving SUVs and burning coal ..."

GS: And it almost wouldn't matter if we were back in 1950, with half the population that we have now. It still wasn't a full world at that point. Now it is a full world. Everything we're doing is on a scale that rivals the natural systems.

JG: Right. And you can say - as you do - that we consume too much, and that our economic system has become a slave to the idea of an ever-expanding GDP. But you could also just say, "Look, there's too many people on the planet ..."

GS: Well, I think a lot of people believe that. I actually have a law, Speth's Law, and it is that the richer you are, the more you think that population is the world's problem. But the scale of the impact is really derived from the phenomenal amount of economic growth in rich countries, not from the phenomenal population growth.

JG: In your view, what's the alternative to pro-growth capitalism? Should we rethink communism?

GS: No, it's not that at all. But I do believe we should be looking for a nonsocialist alternative to today's capitalism. I think we do want to make changes that are sufficiently profound that when you look back on them, you will see that it's no longer the capitalism of the early twenty-first century.

JG: What would a revised capitalist system look like?

GS: Well, let's take the core of it - the corporation. Corporations right now are mandated to serve and promote the best interest of stockholders, by law. And anything it [a corporation] justifies in the nature of doing well in communities or doing well by society, that's also got to be justified that it's in the best interest of the shareholders. And maximizing shareholder wealth is a very fundamental part of the motivational structure of the corporate sector.

I think that needs to change fundamentally, so that corporations really are in the business of serving all of the factors that help generate wealth - all of the stakeholders, in effect. One way to describe what has to happen, and the way that the situation in the future would be different, would be to describe it as a series of transformations. The first would be a transformation in the market. There would be a real revolution in pricing. Things that are environmentally destructive would be - if they were really destructive - almost out of reach, prohibitively expensive.

A second would be a transformation to a postgrowth society where what you really want is to grow very specific things that are desperately needed in a very targeted way - you know, care for the mentally ill, health-care accessibility, high-tech green-collar industries.

A third would be a move to a wider variety of ownership patterns in the private sector. More co-ops, more employee ownership plans, and less rigid lines between the profit and the not-for-profit sectors. I mean, Google is an example of that now, they are moving in that direction, although I think it's small compared with what they've really got going.

JG: Do you think that this kind of change can be had with anything short of a real revolution in America?

GS: Well, I don't think it can be had without a real citizens' movement - a grassroots citizens' movement that shakes up people's consciousness and forces us to rethink what's really important, and what our role in the world and in nature really is. I think there is a growing sense that something is out of whack in the country, and that we're on the verge of losing something very important, not only spiritually but also environmentally. And if we don't change, we really could pass into some situation where it would be irretrievably lost.

JG: If I read your book right, you stop just short of calling for people to march in the streets.

GS: Oh, I will call for people to march in the streets. I said to my friend Laurie David [producer of An Inconvenient Truth] that it's time for a million-person march on Washington early in the new administration. We could really make the point that the climate issue has to be front and center in the first hundred days of the new administration. It's amazing what can be accomplished if citizens are to march in the footsteps of Dr King. It's time to give the world a sense of hope again.

Bill Totten

Thursday, October 30, 2008

"Drill, Baby, Drill" debunked ...

as "Burn, Baby, Burn the Planet"

by Jan Lundberg

Culture Change Letter #205 (October 12 2008)

When Republican Sarah Failin and her titular senior running mate McPain chant "Drill, Baby, Drill", or, for that matter, the wiser and more honest Barack Obama is in favor of more offshore drilling, there is no possibility of energy independence through maximizing domestic petroleum. The main reason is not the many years' lead time for oil-field development:

Consumption would continue (assuming the economy still supports it), and imported oil would keep coming unabated. Why? Because the more efficient wells of such places as the Persian Gulf would keep providing more oil far more cheaply than any new wells the US can drill. This would be true even though Arabs' wells are starting to peak in flow and decline. As long as we're consuming oil big time, the oil will get over to us. World trade is the holiest goal of the Republicans and Democrats.

Here's the clincher: Net energy return, or energy profit ratio, determines greatly the true, full cost (including cost hidden by subsidies) and availability to the "producer" and the more aptly named "consumer". And new wells drilled are approaching on average a net-energy loss. Moreover, the petroleum industry has been seeing fewer and fewer holes that actually pan out.

A program of mild reduction in oil consumption would work the same way as going for maximized drilling: cutting back on oil use will result in the more efficient, high net-energy fields being exploited still, such that the US would continue getting oil from elsewhere at lower cost and comparatively greater profit for the chain of oil industry players.

Therefore, the correct approach to cutting oil imports and stop burning up the atmosphere with this toxic fossil fuel is to have a policy of completely avoiding oil consumption to the extent possible. Eschewing oil in its entirety is not feasible now for many reasons, but if the US adopted a goal of eliminating oil as a main energy source, we would achieve the greatest level of energy independence. This is understandably hard for many of today's lifestyle to imagine calmly.

At the same time, we would have to recognize that alternative energy sources are not nearly as net-energy desirable or profitable as oil was in its heyday. So their maximization will be constrained (for various reasons), and we'll be forced to begin the most meaningful and lasting work of redeveloping our local economies along the Jeffersonian small farmer/citizen model.

"Burn, Baby, Burn" was a 1960s slogan reputedly used by Black Power leader Stokely Carmichael (or was it Rap Brown?), regarding urban ghetto unrest. Riots in major cities were over racial discrimination and material deprivation. A high proportion of black and brown draftees going off to die and kill yellow people in Vietnam probably added fuel to some ghetto fires and looting. Malcolm X called it "The chickens coming home to roost". Such leaders did not want to see more fires or riots, but they were recognizing inevitable consequences of inequality and oppression. It is puzzling why riots are rare nowadays, when conditions did not get better for African Americans (or for whites in general). Could reasons include the well-paying volunteer military, high incarceration rate, the preponderance of illegal and legal drugs, and the weakening family/community structure? At any rate, to borrow from "Burn, Baby, Burn" by chanting "Drill, Baby, Drill", is Sarah Failin's irresponsible reference to inciting - as most people took it - riots, fires and looting, unless she has no clue of the origins of an historic phrase. No doubt at least one of her handlers must have.

For the Republicans to adopt a slogan "Drill, Baby, Drill" they are clearly advocating burning - of oil and of the planet's precious oxygen, even though the goal is idiotically unfeasible. They pay lip service to getting alternatives to petroleum in place. The insane choice of nuclear power is more "burning" than any, if we consider the inevitable radiation burns that could persist for millennia.

Back to "Burn, Baby, Burn": we'll see riots and cities in flames soon enough, especially if the foolishness of an energy policy of waste continues, and basic fundamentals of social equity are ignored through more attempts at "growth". We are strung out on "cheap" petroleum for our food supply, and shortages will be devastating on an unprecedented scale. This can happen soon in these volatile post-cheap oil times.

No substitutes for oil are going to keep our consumer economy going. The infrastructure is not about electrical energy from just any (less efficient, mind you) source, but rather about liquid fuels. Nukes, solar panels, coal - they don't provide the cheap, energy-packed liquid fuels and materials we got from cheap oil. Now that the easily produced oil is clearly drying up, we don't hear from the presidential candidates or the rest of the Establishment that it's peak oil at play. We get phony messages of hope for a continuation of the status quo. It's unraveling, as financial collapse is merely part of general collapse based primarily on petrocollapse. Can you imagine if oil was priced at under $10 a barrel - reflecting low extraction and distribution and refining costs, as was the case decades ago - and seeing today's financial collapse? Possibly. But building our way out of the mess would be possible, as happened in the 1940s with advantageously lower population size and most of the farmland intact. Not in today's degraded ecological world.

This is the difference between petroleum-investment banker Matt Simmons' analysis and mine: we both see the potential for the oil market to bring about chaos such as speedy, widespread famine, as soon as panic-buying of escalating-in-cost oil results in hoarding. And my friend Matt is doing a great job of convincing more audiences than I ever had, concerning the realities of oil dependence in a peak-oil world. But he believes that after collapse there remains the necessary and inevitable job of repairing and rebuilding the whole energy infrastructure again. I do not believe it is possible or desirable. Goodbye to the Age of Oil. That means goodbye to cheap energy and materials that we took for granted as part of technological progress.

One problem in many people's minds is that the price of oil will decline and remain low, for whatever reasons, such that it's truly competitive with any other form of energy - starting the whole cycle of supply and demand again. The flaw in that assumption is it's lack of understanding of the meaning of peak and peak's effects. With collapse, Humpty Dumpty will not be put back together again. But regardless, we need a policy of getting away from oil and all fossil fuels, and nuclear, now.

The sooner we move on with redesigning society without all that cheap energy, plastics, pesticides, et cetera, that we guzzled, we will be saving lives and our unraveling climate - not until then. Let it begin. Redesign, Baby, Redesign. Conserve, Baby, Conserve. Garden, Baby, Garden. Depave, Baby, Depave. Pedal, Baby, Pedal. Sail, Baby, Sail. Peace, Baby, Peace.

Bill Totten

World will struggle to meet oil demand

by Carola Hoyos and Javier Blas in London

Financial Times (October 28 2008)

Output from the world's oilfields is declining faster than previously thought, the first authoritative public study of the biggest fields shows.

Without extra investment to raise production, the natural annual rate of output decline is 9.1 per cent, the International Energy Agency says in its annual report, the World Energy Outlook, a draft of which has been obtained by the Financial Times.

The findings suggest the world will struggle to produce enough oil to make up for steep declines in existing fields, such as those in the North Sea, Russia and Alaska, and meet long-term de­mand. The effort will become even more acute as prices fall and investment decisions are delayed.

The IEA, the oil watchdog, forecasts that China, India and other developing countries' demand will require investments of $360 billion each year until 2030.

The agency says even with investment, the annual rate of output decline is 6.4 per cent.

The decline will not necessarily be felt in the next few years because demand is slowing down, but with the expected slowdown in investment the eventual effect will be magnified, oil executives say.

"The future rate of decline in output from producing oilfields as they mature is the single most important determinant of the amount of new capacity that will need to be built globally to meet demand", the IEA says.

The watchdog warned that the world needed to make a "significant increase in future investments just to maintain the current level of production".

The battle to replace mature oilfields' output could even offset the decline in demand growth, which has given the industry - already struggling to find enough supply to meet needs, especially from China - a reprieve in the past few months.

The IEA predicted in its draft report, due to be published next month, that demand would be damped, "reflecting the impact of much higher oil prices and slightly slower economic growth".

It expects oil consumption in 2030 to reach 106.4 million barrels a day, down from last year's forecast of 116.3 million barrels a day.

The projections could yet be revised lower because the draft report was written a month ago, before the global financial crisis deepened after the collapse of Lehman Brothers.

All the increase in oil demand until 2030 comes from emerging countries, while consumption in developed countries declines.

As a result, the share of rich countries in global demand will drop from last year's 59 per cent to less than half of the total in 2030.

This is the clearest indication yet that the focus of the industry on the demand - not just the supply - side is moving away from the US, Europe and Japan, towards emerging nations.

Copyright The Financial Times Limited 2008

"FT" and "Financial Times" are trademarks of the Financial Times.

(c) Copyright The Financial Times Ltd 2008.

Bill Totten

Wednesday, October 29, 2008

Free the Unborn!

A proposal for slowing down politics.

by George Monbiot

Published in the Guardian (October 21 2008)

The problem is simply stated. As Gordon Brown - discussing what he perceives to be an improvement in his political fortunes - says, "an hour is a long time in politics" {1}. (It used to be a week, but everything is speeding up). To remain in office or to remain in business, decision-makers must privilege the present over the future. Discount rates ensure that investments made today are worth nothing in ten years' time; the political cycle demands that no one looks beyond the next election.

The financial crisis is just one consequence of a system which demands that governments sacrifice long-term survival for short-term gains. In this case political leaders on both sides of the Atlantic - from Reagan to Brown - decided to appease business lobbyists and boost short-term growth by allowing the banks to use new financial instruments, many of which were as dodgy as a three-pound coin. It made perfect political sense, as long as the inevitable crash took place after they left office.

For similar reasons we are likely to be ambushed by other nasty surprises: runaway climate change, resource depletion, foreign policy blowback, new surveillance and genetic technologies, skills shortages, demographic change, a declining tax base, private and public debt. Politics is the art of shifting trouble from the living to the unborn.

At first sight, the government's strengthening last week of the UK's climate change target looks like an exception to this political short-termism. In fact something rather interesting is taking place in this country. While prime ministers in Italy and eastern Europe demand a bonfire of environmental measures in order to save the economy {2}, in the UK politicians from all the major parties have made the connection between environmental destruction and economic meltdown. One of the fastest-spreading memes is the proposal for a green new deal: a Keynesian package of environmental works designed to boost employment and channel public investment {3}. If this idea is adopted it won't be the first time that it has helped to rescue a major economy. The biggest and most successful component of Roosevelt's New Deal was the Civilian Conservation Corps, which employed three million people to plant trees and stop soil erosion {4}.

But all such proposals soon collide with the realities of the political cycle. As Ed Miliband, the climate change secretary, admitted, "signing up to an eighty per cent cut in 2050, when most of us will not be around, is the easy part; the hard part is meeting it, and meeting the milestones that will show we are on track" {5}. A recent paper in the journal Energy Policy shows that the government is pursuing the wrong policies to meet the wrong targets, produced by using the wrong methods to assess the wrong data. (Otherwise it's more or less on track).

The paper shows that to help deliver even a small chance of preventing two degrees of global warming, the UK can generate a maximum of seventeen to 23 billion tonnes of carbon dioxide between 2000 and 2050 {6}. In the first five years of this decade we produced 3.6 billion tonnes: at this rate our carbon budget would run out by 2028. To hit the government's temperature targets, the UK's carbon emissions need to fall by between six and nine percent a year from 2012 onwards. At the moment they're still rising.

Current policy, in other words, bears no relationship to the long-term target. On this trajectory, the only way in which the government could meet its obligations under the climate change bill would be to buy the cut from other countries, which means that it will make no contribution to a global reduction.

But at least in this case there's a recognition that current policies have long-term implications. Elsewhere, the government simply refuses to look beyond the present, for fear of seeing something it doesn't like. For example, it has failed to conduct any assessment of global oil supply. When I asked the business department what contingency plans it possesses to meet the eventuality that oil production might peak, it told me "the Government does not feel the need to hold contingency plans" {7}. The survival of our transport networks - and therefore of the economy - is secured by touching wood and crossing fingers.

In other cases, the question isn't even raised. Food policy everywhere is governed by the expectation that crop yields can keep growing to meet rising demand. A possible limiting factor is the supply of the phosphorus rock required to make fertiliser. I asked the researcher Tom Bailey to produce an assessment of global phosphate deposits which can be exploited at reasonable prices {8}.

He found that there is a wide range of estimates and a good deal of confusion between reserves (known deposits which can be readily exploited) and resources (the total geological stock). The most extensive survey published so far suggests that the global demand for phosphate is likely roughly to double by 2050 {9}. Can this demand be met without pricing food out of the mouths of the poor? Perhaps. Some reports suggest that phosphate constraints will provoke a global food crisis by the middle of the century.

This, in other words, is a critical, even existential, question. Yesterday I searched the past five years of parliamentary records in the UK. It hasn't been discussed once. But the possibility that aircraft passengers and crew might be exposed to trace amounts of another phosphorus compound - tricresyl phosphate - has been mentioned 1670 times over the same period. This is a miniscule issue by comparison to the question of whether or not the world might be fed. But it has the great political virtue of affecting people today.

In 1791 Thomas Paine complained that "the vanity and presumption of governing beyond the grave is the most ridiculous and insolent of all tyrannies" {10}. He was answering Edmund Burke's contention that a declaration made by parliament in 1688 bound the people of England "for ever". A parliament which considers only the immediate consequences of its decisions imposes the same insolent tyranny on succeeding generations. They have no means of contesting the legacy of economic crises, depleted resources and limited choices we bequeath to them.

What can be done about political short-termism? With the environmental thinker Matthew Prescott, I've hatched what might be a partial solution. We propose a new parliamentary body - the 100 Year Committee - whose purpose to assess the likely impacts of current policy in ten, twenty, fifty and 100 years' time. Like any other select committee, it gathers evidence, publishes reports and makes recommendations to the government. It differs only in that it has no interest in the current political cycle. Its maximum timeframe is roughly the residence time of carbon dioxide in the atmosphere.

The members of this committee would not be equipped with crystal balls; they would simply be released from the need to balance the interests of the present against a heavily-discounted future. Their purpose would be to provide a voice for those who have not yet been enfranchised. A 100 Year Committee can't insure us against political stupidity, but it deprives governments of one of their excuses: that they couldn't see trouble coming.


{1} Andrew Rawnsley, 12th October 2008. Why the crisis puts a spring in the Prime Minister's step. The Observer.

{2} David Gow, 16th October 2008. EU pledges to lead climate change fight despite financial crisis. The Guardian.

{3} Andrew Simms et al, July 2008. A Green New Deal. New Economics Foundation.

{4} Neil M Maher, 2008. Nature's New Deal. Oxford University Press.

{5} Edward Miliband, 16th October 2008. Statement to the House of Commons.

{6} Kevin Anderson, Alice Bows and Sarah Mander, 8th August 2008. From long-term targets to cumulative emission pathways: Reframing UK climate policy. Energy Policy 36, 3714?3722.

{7} DBERR, 8th April 2008. Response to FoI request Ref 08/0091.

{8} Please contact me if you would like a copy of his assessment.

{9} Ingrid Steen, September-October 1998. Phosphate Recovery. Phosphorus and Potassium, no. 217.

{10} Thomas Paine, 1791. The Rights of Man, pages 41-42. Penguin edition, 1984.

Bill Totten

Tuesday, October 28, 2008

Easthampton Burning?

Clusterfuck Nation

by Jim Kunstler

Comment on current events by the author of
The Long Emergency
(Atlantic Monthly Press, 2005) (October 27 2008)

In the typhoon of commentary that's blown around the world a step behind the financial tsunami that's wrecking everything, two little words have been curiously absent: "fraud" and "swindle". But aren't they really at the core of what has happened? Wall Street took the whole world "for a ride" and now a handful of Wall Street's erstwhile princelings have shifted ceremoniously into US Government service to "fix" the problem with a "toolbox" containing a notional two trillion dollars. This strange exercise in financial kabuki theater will shut down sometime between the election and inauguration day, when the inaugurate finds himself president of the Economic Smoking Wreckage of the United States. What will happen?

I have thought for some time that things could get dangerously out of hand in America, despite our exceptionalist notion that we are immune to the common plot-lines of history. For starters, inauguration night will seem more like Halloween, as those two little words fly in to haunt the new president. So, a large and looming question is: who will be appointed the next attorney general of the US (to replace the human sash-weight currently occupying the office), and how soon will the federal marshals be scouring the wainscoted hallways of Goldman Sachs, JP Morgan Chase, not to mention a thousand Greenwich, Connecticut, hedge fund boiler rooms, with man-sized nets?

A story-line is already emerging to the effect that these birds really didn't quite know what they were doing in grinding out that multi-trillion dollar basket of alphabet securities sausage (a theme on Sunday's "60-Minutes" broadcast). Nobody will buy that line of bullshit, though - and certainly not in the courtroom where, for instance, Mr Hank Paulson will have to answer why his own firm of Goldman Sachs set up a special unit to short its own issues. It will be edifying to see how they answer.

In the meantime, however, millions of Joe-the-Plumber types will have gotten their pink slips, slipped helplessly into foreclosure, watched the repo men hot-wire their Ford pickups, and eaten down the kitchen cupboard to a single box of Kellogg's All-Bran (which had been sitting there for eleven years infested with weevils). They will be watching the official proceedings in the federal courtrooms with jaundiced eyes as they hunch in their tent cities, in the rain, sipping amateur-brand raisin wine bartered for a few snared rock doves. How long before the hardier ones among them venture out to Easthampton with long knives and matches?

It will bring little satisfaction though, and the disappointment could lead to a more inchoate outbreak of civil disorder that would be more like a free-for-all of vengeance and grievance. There will be a great outcry for the new government to "do something!" Perhaps that will finally bring the troops home from Iraq - only for them to find that the Homeland has become Iraq ...

If the financial system completes its self-destruction - and that's looking more and more like a real possibility - there will be several pretty awful consequences. One is that the United States will be forced to declare bankruptcy by repudiating its own debt. All those who took refuge in US Treasury bonds and bills will be like folks who sought shelter from a tornado in their out-house. That would go hand-in-hand with a massive currency inflation that is likely to follow the current phase of compressive liquidating deflation - in which every possible asset is being sold off for less than its face value. That process is self-limiting due to the finite supply of real salable assets. The trillions of dollars injected into system while this is happening must eventually snap-back as people shed the last fungible article and compete for necessary commodities like food and fuel with dollars that are suddenly plentiful but worthless. At some point, the government may have to summon up a new currency. I don't think it will be anything like the "Amero" which the paranoid fringe incessantly mutters about as part of their fantasy in which the US, Mexico, and Canada all join up to become one country. But any "new dollar" would probably have to be backed by gold.

As we discover ourselves to be a much poorer nation, one of my correspondents put it: "the bogus risk-swapping economy must be replaced by a net value-added economy". That means actually making things, growing things, and rebuilding things, and that can only begin to happen if we do not stupidly sucker ourselves into a war with other nations who are liable to be extremely ticked off at us for destroying the global economy, but also competing with us for a dwindling supply of resources that are not equitably distributed around the world.

This means especially oil. I hope you're enjoying the temporarily cheap prices at the gas pumps, because this is purely a function of the compressive deleveraging that is going on right now, as contracts and positions held in energy markets are being dumped by everybody and his uncle to raise cash to meet margin calls. My guess is that oil and its byproducts will become much more difficult to get in the months ahead - not just more expensive, but literally not available. The current falling price of oil has little to do with the real supply and demand fundamentals. It's simply a function of the markets being in near-total disarray. We're running on current inventory, and running it down. In the background, all kinds of peculiar and terrible things are happening. The entire apparatus of allocation and distribution is being thrown out of whack. The smaller tanker operations are going bankrupt. The "less-developed" nations are heading back to the 17th-century level of daily life without electricity. The oil exploration and development projects that were planned for hard-to-get oil netting $100-a-barrel minimum - in places like the deepwater Gulf of Mexico, Siberia, and Central Asia - are being shelved, which means the world has less of a chance to offset coming depletions in old fields.

The bottom line of all this is that we in the US could find ourselves in a situation of shortages, hoarding, and rationing. This would pretty much kill off whatever remains of the previous shuck-and-jive economy - hamburger sales, theme park visits, Nascar weekends - while it makes obvious the failures of our suburban living arrangements (and drives the value of housing there closer to zero).

The new president will have to be Franklin Roosevelt on steroids, with some Mahatma Gandhi and Florence Nightingale thrown in. My pet project of restoring the American passenger railroad system might seem pretty minor in the face of all this, but it's at least a place to start that will accomplish several things: allow people and things to get places without cars and trucks; put many thousands of people to work at many levels doing something of direct, practical value; and be a small step in rebuilding confidence that we are a society capable of accomplishing something.

Bill Totten

Monday, October 27, 2008

The Tyranny of the Immediate

by John Michael Greer

The Archdruid Report (October 22 2008)

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

One of the great challenges that has to be faced in any attempt to make sense of history while it's happening is the misleading impact of short-term trends. While the late housing bubble was still inflating, for example, soaring real estate values made it easy for most people to fool themselves into believing that it made sense to sink their net worth, and then some, into houses priced at even the most delusional levels. They had seen prices march steadily upwards, month after month and year after year, and that experience made it seem likely that the same steady march would continue for the foreseeable future.

The same mistake on an even more grandiose financial scale underlies the implosion of much of the world's banking system in recent months. The first generation of derivatives, credit default swaps, and equally exotic financial livestock netted huge profits for their original breeders; so did the next generation, and the next, and before long these dubious securities - valued with an optimism usefully summed up in the phrase "mark to make-believe" - accounted for a very large proportion of the paper assets held by banks, hedge funds, and the like. Because the financial community's recent experience with such things had been so positive, all too few investors glanced further back and saw what happened every time in the past that financial paper unlinked to sources of real wealth had been allowed to breed beyond the carrying capacity of the market.

The difficulty, as I've suggested in previous posts, is that historical change happens at a pace much more leisurely than textbook summaries suggest. Most people who didn't live through the opening years of the last Great Depression leave school with the notion that when the stock market crashed in the fall of 1929, the economy reached a full stop by the time investors stopped plummeting from Wall Street windows. In reality, it took more than three years for the economy to finish contracting, and scenery en route included a dramatic stock market rally in 1930 and some of the best days of rising prices, in percentage terms, that Wall Street has ever seen. At every point along the course of contraction, furthermore, financial pundits drew false conclusions from short-term changes. The resulting headlines have more than a little similarity to the ones that clutter the financial press today.

This habit of reading too much into short-term conditions has shown itself more than once in the recent economic convulsions, and guesses about the future price of oil - a subject of interest to many peak oil researchers - have been particularly affected. Earlier this year, as the price of oil soared to $143 a barrel, a great many people argued that it would keep on climbing to $200 or $250 a barrel in the near future. Now that the price of oil has slumped below $70 a barrel, the tide of opinion has turned, and some pundits are now predicting a continued slump to $50 or even $35 a barrel. These predictions seem quite plausible at the moment they're uttered, but then so did the idea that shares in dot-com startups would keep on climbing in value all through 2000.

The problem with linear projections of oil prices is that several factors unrelated to ordinary issues of supply and demand dominate the price of petroleum just now. One of the most important comes out of the crucial but rarely remembered fact that, while oil is priced in US dollars, most of the oil in the world these days is produced and used in countries where the US dollar is not the local currency. Since the value of the US dollar has been anything but stable of late, the price of these transactions in dollars has changed dramatically, while the price in any other terms has remained much more stable.

A barrel of oil for which a Japanese refinery pays 7500 yen, say, would cost US$75 if the dollar buys 100 yen and a bit over US$65 a few months later if the dollar rose to 115 yen. Has oil dropped in price? Only on paper, since the refinery's bank account changes by the same amount each time. Check out exchange rates, and you'll find that the period when oil spiked to $143 a barrel was also a period when the value of the US dollar dropped steeply against other currencies, while the plunge in the price of oil since then has paralleled a steady rise in the relative value of the dollar.

Even more dramatic, though, has been the effect of commodity speculation on the price of oil. Those economists who still insist that a completely free market will manage production and price with perfect rationality have apparently done their best to ignore the multiple monkey wrenches speculation throws into the market's machinery. The crucial point to realize is that the results of speculation, unlike most other economic phenomena, are radically asymmetric over time. It's worth taking a moment to understand how this works.

Consider a poker game in a tavern back room. Like speculation, poker is not a productive economic activity; instead, it is a means of exchange by which money passes from one person to another on the basis of differences in skill and luck. The results of a poker game, however, are symmetric - that is, in each game, the winnings of the winners are equal to the losses of the losers. You'll never see a poker game in which all the players win and nobody loses, or vice versa.

Yet this is more or less what takes place in the successive phases of a speculative bubble. While the bubble is inflating, nearly everyone wins; the difference between one tulip bulb, internet stock, or condominium and another during the first phase of their respective bubbles was simply how much money you would make from it, not whether you would gain or luse. Once the bubble bursts, by contrast, nearly everyone loses; if you bought tulip bulbs at the peak of the Dutch tulip mania, internet stocks in 2000, or real estate last year, the question a year or two later was not whether you lost money or not, but simply how much of your wealth was gone.

This is what makes unrestrained speculation so serious a threat to the functioning of market societies: it amplifies the extremes of the business cycle out of all proportion. On the way up, it boosts the funds available for investment as well as speculation, and encourages overinvestment in productive capital by fostering unsustainable levels of consumption; on the way down, it slashes the availability of investment funds, helping to drive the vicious circle of contraction and disinvestment that feeds a recession and can turn it into a depression. Still, damaging as these effects are, they are temporary; sooner or later, every boom turns into a bust; sooner or later, every bust bottoms out and yields to the first stirrings of recovery.

This is exactly the dynamic traced by the price of petroleum over the last two years or so. The price spike to $143 a barrel was driven by many factors, including the first stirrings of a decline in the world's production of conventional petroleum, but speculation played a massive role. For well over a year beforehand, financial pundits had been touting petroleum and other commodities as surefire investment vehicles, and those who got in early often made a great deal of money as oil prices climbed through 2007. This laid the foundations for a dramatic speculative bubble in the first half of 2008. Not that many years before, the idea that oil might break $100 a barrel was unthinkable to most people, and those who argued for it couched the idea in terms of a "superspike" driven by some international crisis like a US assault on Iran; what happened instead was a classic speculative bubble that zoomed far beyond anything the facts would justify, and then inevitably crashed.

That crash brought the price of a barrel of oil down more than fifty percent from its all-time high. It's crucial to remember, though, that the bust phase of the speculative boom-and-bust cycle is just as exaggerated as the boom. Generally speaking, speculative busts in the past have tended to drop proportionally as far below the long-term trend line as the preceding boom rose above it, and then revert to the mean. If, as seems likely right now, petroleum is nearing a bottom somewhere around $60 a barrel, the proportional mean between peak and trough - and thus the rough current location of the mean toward which oil prices will tend to revert - is a little above $90 a barrel. Under normal circumstances, this would be the price toward which oil prices would tend to return over the months to come.

The problem, of course, is that these are not normal circumstances. While the US dollar gains in value against other currencies, as mentioned above, the price of oil will dip accordingly; if the dollar begins sliding again, on the other hand, we can expect price increases. Furthermore, not all oil fields are created equal; some of the production brought on line over the last two years or so pays for itself only when oil is well above current prices, and the likelihood that some of these will be shut down or abandoned - to say nothing of the likely impact of the unfolding credit crunch on drilling and production - make a mockery of any attempt at exact prediction.

The governmental response to the credit crunch and the near-implosion of the speculative end of the economy has its own implications, and these also push the situation away from normal. In a truly free market, the bust would have erased most of the capital that had been available for speculation, and destroyed so many businesses that the survivors would be likely to flee the more exotic realms of finance for a generation to come; this is exactly what happened in the 1930s, for instance. In the present case, though, governments around the world have propped up investment banks and speculative markets with huge inflows of cash, preventing the wave of bankruptcies that would normally end a speculative boom as wild as the one just finished. One very likely possibility is that the investment banks will attempt to launch another round of speculative excess in order to improve their balance sheets before the political consensus that supports them comes unglued; if this happens, commodities are a likely target, and could soar upwards again.

Looming over all these factors is the arrival of peak oil. Since 2005, world production of petroleum has been locked into a narrow plateau that not even a 300% increase in prices could breach, and the most believable estimates suggest that by 2010, that plateau will turn into a slow and irrevocable decline. Many of the official figures for oil production lump biofuels and tar sand extractives in with conventional petroleum; since these latter are produced using large amounts of oil and other fossil fuels, there's a real sense in which some of today's petroleum production is being counted twice, hiding any early signs of the approaching contraction. The credit crunch and the low price of oil, furthermore have placed additional challenges in the way of the already difficult struggle to replace the world's rapidly depleting oil fields.

The obvious implication of peak oil is that the mean price of oil is likely to trend upward over time. The less obvious implication is that changes in the mean price may well be hard to extract from the chaotic data provided by an economy in disarray. Thus when peak oil advocates came to believe that the price of oil would soar upwards from $143 a barrel, they were running ahead of the date; when, as now, some of them are predicting a continuing decline in the price of oil for years to come, they are very likely doing the same thing. The tyranny of the immediate makes these short-term phenomena seem much more significant than they are.

My guess, based on historical examples, is that the price of petroleum and other commodities will find a bottom within the next month or two, stay there for a while, and then begin a ragged upward movement as renewed speculation cuts in sometime in the first half of 2009. Radical changes in the relative value of the US dollar could change that forecast, though the trends I've outlined might well still be visible if the price of oil is tracked in other currencies; a concerted attempt to reflate the economy by engineering a new commodities boom, that would have an even more dramatic effect, though the impact of rising commodities prices on a crippled economy could be dire enough that the boom might collapse of its own weight in short order. Over the long run, though, investments in energy conservation and less energy-extravagant infrastructure are likely to pay off in a big way - and the long term is what most needs to be kept in mind just now.


John Michael Greer has been active in the alternative spirituality movement for more than 25 years, and is the author of a dozen books, including The Druidry Handbook (2006) and The Long Descent (2008). He lives in Ashland, Oregon.

Bill Totten

Sunday, October 26, 2008

Licensed Kleptocracy for Years to Come

The ABCs of Paulson's Bailout

by Michael Hudson

Counterpunch (October 20 2008)

Treasury Secretary Paulson's bailout speech on Monday, October 13, poses some fundamental economic questions: What is the impact on the economy at large of this autumn's unprecedented creation and giveaway of financial wealth to the wealthiest layer of the population? How long can the Treasury's bailout of Wall Street (but not the rest of the economy!) sustain a debt overhead that is growing exponentially? Is there any limit to the amount of US Treasury debt that the government can create and turn over to its major political campaign contributors?

In times past, national debt typically was run up by borrowing money from private lenders and spent on goods and services. The tendency was to absorb loanable funds and bid up interest rates on the one hand, while spending led to inflationary price increases for goods and services. But the present giveaway is different. Instead of money being borrowed or spent, interest-yielding bonds are simply being printed and turned over to the banks and other financial institutions. The hope is that they will lend out more credit (which will become more debt on the part of their customers), lowering interest rates while the money is used to bid up asset prices - real estate, stocks and bonds. Little commodity price inflation is expected from this behavior.

The main impact will be to reinforce the concentration of wealth in the hands of creditors (the wealthiest ten per cent of the population) rather than wiping out financial assets (and debts) through the bankruptcies that were occurring as a result of "market forces". Is it too much to say that we are seeing the end of economic democracy and the emergence of a financial oligarchy - a self-serving class whose actions threaten to polarize society and, in the process, stifle economic growth and lead to the very bankruptcy that the bailout was supposed to prevent?

Everything that I have read in economic history leads me to believe that we are entering a nightmare transition era. The business cycle is essentially a financial cycle. Upswings tend to become economy-wide Ponzi schemes as banks and other creditors, savers and investors receive interest and plow it back into new loans, accruing yet more interest as debt levels rise. This is the "magic of compound interest" in a nutshell. No "real" economy in history has grown at a rate able to keep up with this financial dynamic. Indeed, payment of this interest by households and businesses leaves less to spend on goods and services, causing markets to shrink and investment and employment to be cut back.

Banks cannot make money ad infinitum by selling more and more credit - that is, indebting the non-financial economy more and more. Government officials such as Treasury Secretary Paulson or Federal Reserve Chairman Bernanke are professionally unable to acknowledge this problem, and it does not appear in most neoclassical or monetarist textbooks. But the underlying mathematics of compound interest are rediscovered in each generation, often prompted by the force majeur of financial crisis.

A generation ago, for instance, Hyman Minsky gained a following by describing what he aptly called the Ponzi stage of the business cycle. It was the phase in which debtors no longer were able to pay off their loans out of current income (as in Stage #1, where they earned enough to cover their interest and amortization charges), and indeed did not even earn enough to pay the interest charges (as in Stage #2), but had to borrow the money to pay the interest owed to their bankers and other creditors. In this Stage #3 the interest was simply added onto the debt, growing at a compound rate. It ends in a crash.

This was the flip side of the magic of compound interest - the belief that people can get rich by "putting money to work". Money doesn't really work, of course. When lent out, it extracts interest from the "real" production and consumption economy, that is, from the labor and industry that actually do the work. It is much like a tax, a monopoly rent levied by the financial sector. Yet this quasi-tax, this extractive financial rent (as Alfred Marshall explained over a century ago) is the dynamic that is supposed to enable corporate, state and local pension funds to pay for retirement simply out of stock market gains and bond investments - purely financially and hence at the expense of the economy at large whose employees are supposed to be gainers. This is the essence of "pension-fund capitalism", a Ponzi-scheme variant of finance capitalism. Unfortunately, it is grounded in purely mathematical relationships that have little grounding in the "real" economy in which families and companies produce and consume.

Paulson's bailout plan reflects a state of denial with regard to this dynamic. The debt overhead is self-aggravating, becoming less and less "solvable" and hence more of a quandary, that is, a problem with no visible solution. At least, no solution acceptable to Wall Street, and hence to Paulson and the Democratic and Republican congressional leaders. The banks and large swaths of the financial sector are broke from having made bad gambles in the belief that money could be made to "work" under conditions that shrink the underlying industrial economy and stifle wage gains, eroding the market for consumer goods. Debt deflation reduces sales and business activity in general, and hence corporate earnings. This depresses stock market and real estate prices, and hence the value of collateral pledged to back the economy's debt overhead. Negative equity leads to bankruptcy and foreclosures.

By increasing America's national debt from $5 trillion earlier this year to $13 trillion in almost a single swoop by taking on junk loans and other bad investments rather than letting them to under as traditionally has occurred in the "cleansing" culmination of business crashes ("cleansing" in the sense of clean slates for debts that cannot reasonably be paid), Paulson's bailout actions increase the interest payments that the government must pay out of taxes or by borrowing (or printing) yet more money. Someone must pay for bad debts and junk loans that are not wiped off the books. The government is now to take on the roll of debt collector to "make a profit for taxpayers" by going around and kneecapping the economy - which of course is comprised primarily of the "taxpayers" ostensibly being helped.

It is a con game. Financial gains have soared since 1980, but banks and institutional investors have not used them to finance tangible capital formation. They simply have recycled their receipt of interest (and credit-card fees and penalties that often amount to as much as interest) into yet new loans, extracting yet more interest and so on. This financial extraction leaves less personal and business income to spend on consumer goods, capital goods and services. Sales shrink, causing defaults as the economy is less able to pay its stipulated interest charges.

This phenomenon of debt deflation has occurred throughout history, not only over the modern business cycle but for centuries at a time. The most self-destructive example of financial short-termism is the decline and fall of the Roman Empire into debt bondage and ultimately into a Dark Age. The political turning point was the violent takeover of the Senate by oligarchic creditors who murdered the debtor-oriented reformers led by the Gracchi brothers in 133 BC, picking up benches and using them as rams to push the reformers over the cliff on which the political assembly was located. A similar violent overthrow occurred in Sparta a century earlier when its kings Agis and Cleomenes sought to annul debts so as to reverse the city-state's economic polarization. The creditor oligarchy exiled and killed the kings, as Plutarch described in his Parallel Lives of the Illustrious Greeks and Romans. This used to be basic reading among educated people, but today these events have all but disappeared from most people's historical memory. A knowledge of the evolution of economic structures has been replaced by a mere series of political personalities and military conquests.

The moral of ancient and modern history alike is that a critical point inevitably arrives at which economies either adopt hard creditor-oriented laws that impoverish the population and plunge downward socially and militarily, or save themselves by alleviating the debt burden. What is remarkable today is the almost total failure of political leaders to provide an alternative to Paulson's bailout of Wall Street from the Bear Stearns bankruptcy down through the government takeover of Fannie Mae and Freddie Mac to last week's giveaway to the banks. Nobody is even warning where this destructive decision is leading. Governments ostensibly representing "free market" philosophy are acting as the lender of last resort - not to households and business non-financial debtors, and not to wipe out the debt overhang in a Clean Slate, but to subsidize the excess of financial claims over and above the economy's ability to pay and the market value of assets pledged as collateral.

This attempt is necessarily in vain. No amount of money can sustain the exponential growth of debt, not to mention the freely created credit and mutual gambles on derivatives and other financial claims whose volume has exploded in recent years. The government is committed to "bailing out" banks and other creditors whose loans and swaps have gone bad. It remains in denial with regard to the debt deflation that must be imposed on the rest of the economy to "make good" on these financial trends.

Here's why the plan for the government to recover the money is whistling in the dark: It calls for banks to "earn their way out of debt" by selling more of their product - credit, that is, debt. Homeowners and other consumers, students and car buyers, credit card users and their employers - the "taxpayers" supposed to be helped - are to pay the repayment money to the banks, instead of using it to purchase goods and services. If they charge only six per cent per year, they will extract $93 billion in interest charges - $42 billion to pay the Treasury for its $700 billion, and another $51 billion for the Federal Reserve's $850 billion in "cash for trash" loans.

If you are going to rob the government, I suppose the best strategy is simply to brazen it out. To listen to the mass media, there seemed no alternative but for Congress to ram the plan through just as Wall Street lobbyists had written, to "save the market from imminent meltdown", refusing to hold hearings or take testimony from critics or listen to the hundreds of economists who have denounced the giveaway.

Hubris has reached a level of deception hardly seen since the 19th century's giveaways to the railroad barons. "We didn't want to be punitive", Paulson explained in a Financial Times interview, as if the only alternative was an enormous gift. Europe did not engage in any such giveaway, yet he claimed that England and other European countries forced his hand by bailing out their banks, and that the Treasury simply wanted to keep US banks competitive. Wringing his hands melodramatically, he assured the public on Monday that "We regret having to take these actions". Banks went along with the pretense that the bailout was a worrisome socialist intrusion into the "free market", not a giveaway to Wall Street in the plan drawn up by their own industry lobbyists. "Today's actions are not what we ever wanted to do", Paulson went on, "but today's actions are what we must do to restore confidence to our financial system". The confidence in question was a classic exercise in disinformation - a well-crafted con game.

Paulson depicted the government's purchase of special non-voting stock as a European-style nationalization. But government's appointed public representatives to the boards of European banks being bailed out. This has not happened in America. Bank lobbyists are reported to have approached Treasury to express their worry that their shareholdings might be diluted. But the Treasury-Democratic Party plan invests $250 billion in government credit in non-voting shares. If a recipient of this credit goes broke, the government is left the end of the line behind other creditors. Its "shares" are not real loans, but "preferred stock". As Paulson explained on Monday: "Government owning a stake in any private US company is objectionable to most Americans - me included". So the government's shares are not even real stock, but a special "non-voting" issue. The public stock investment will not even have voting power! So the government gets the worst of both worlds: Its "preferred stock" issue lacks the voting power that common stock has, while also lacking the standing for repayment in case of bankruptcy that bondholders enjoy. Instead of leading to more public oversight and regulation, the crisis thus has the opposite effect here: a capitulation to Wall Street, along lines that pave the ground for a much deeper debt crisis to come as the banks "earn their way out of debt" at the expense of the rest of the economy, which is receiving no debt relief!

Paulson shed the appropriate crocodile tears on behalf of homeowners and the middle class, whose interest he depicted as lying in ever-rising housing and stock market prices. "In recent weeks, the American people have felt the effects of a frozen financial system", he explained. "They have seen reduced values in their retirement and investment accounts. They have worried about meeting payrolls and they have worried about losing their jobs." He almost seemed about to use the timeworn widows and orphans cover story and beg Americans please not to unplug Granny from her life support system in the nursing home. We need to preserve the value of her stocks, and help everyone retire happily by restoring normal Wall Street financial engineering to make voters rich again.

European executives who steered their banks into the debt iceberg have been fired. England wiped out shareholders in Northern Rock last summer, and more recently Bradford and Bingley. But in America the culprits get to stay on. No bank stockholders are being wiped out here, despite the negative equity into which the worst risk-taking banks have fallen or the prosecutions brought against them for predatory lending, consumer fraud and related wrongdoing.

Government aid will be used to pay exorbitant salaries to the executives who drove these banks into insolvency. "Institutions that sell shares to the government will accept restrictions on executive compensation, including a clawback provision and a ban on golden parachutes", Paulson pretended - only to qualify it by saying that the rule would apply only "during the period that Treasury holds equity issued through this program". The executives can stay on and give themselves the usual retirement gifts after all, prompting Democratic Congressman Barney Frank to complain about how weak the Treasury restrictions are. "Compensation experts say that the provisions, though politically prudent to appease public anger, will probably have little real impact on how financial executives are paid in coming years. They predict banks will simply pay higher taxes and will find other creative ways of paying their executives as they see fit. Some say there could even be a sudden surge in compensation as soon as the government program ends, in a few years, leading to eye-popping numbers down the road ... When Congress limited the tax deductibility of cash salaries to $1 million, for example, it simply led to an explosion in stock options used as compensation and even higher total payouts."

And speaking of stock options, the government shortchanged itself here too, despite its promises to ensure that it will shares in the gains when banks recover. Senator Schumer went so far as to assure voters that "under any capital injection plan that Treasury pursues, dividends must be eliminated, executive compensation must be constrained, and normal banking activities must be emphasized". This was mostly hot air. England and other countries have insisted that banks not pay dividends until the government is reimbursed. The idea is to avoid using public money to pay dividends to existing shareholders and continued exorbitant salaries to their mismanagers! But the terms of the US bailout is made simply call for banks not increase their dividend payouts - a policy they most likely would follow in any case in view of their earnings crunch.

Schumer verged on the ridiculous when he proclaimed: "We must operate in the same way any significant investor operates in these situations - when Warren Buffett invested in Goldman Sachs and General Electric in recent weeks, he demanded strict, but not onerous terms. The government must be similarly protective of taxpayer interests." But Buffett obtained a much better deal for his $5 billion investment in Goldman Sachs, including warrants to buy its stock at a price below the going price when he helped rescue the company. Likewise in England, the government took stock ownership at low prices before the bailout, not at higher prices after it! But instead of exercising its warrants at the depressed prices where bank stocks stood at the time Paulson detailed the bailout terms, the US Treasury would be able to exercise its warrants (equal to fifteen per cent of its investment) only at prices that were to be set after the banks had time to recover with the Treasury's aid. Existing stockholders thus will benefit more than the government - which is why bank stocks soared on news of the bailout's terms. So the government does not appear to be a good bargainer in the public interest. In fact, Paulson may be guilty of deliberate scuttling of the public interest that, as Treasury Secretary, he is supposed to defend.

Given his financial experience, Paulson had to know how deceptive his promise was in placing such emphasis on the government's stock options, the sweetener that has made so many executives fabulously wealthy: "taxpayers will not only own shares that should be paid back with a reasonable return, but also will receive warrants for common shares in participating institutions", he explained. But the "reasonable return" is only five per cent annually, just above what the government typically has to pay, not a rate reflecting anything like what the "free market" now charges Wall Street firms with negative equity. The government's $250 billion in preferred stock will carry a dividend that rises to nine per cent after five years, with no limit on how long the loan may be outstanding.

All I can say is, Wow! If only homeowners could get a similar break: a reduction in their interest rate to just five per cent, rising to a penalty rate of just nine per cent - without the heavy penalties and late fees that Countrywide/Bank of America charges! By contrast, German banks that receive a public rescue will pay "a fee of at least two per cent annually of the amount guaranteed. The UK will charge 0.50 per cent plus the cost of default insurance on a bank's debt". A British banker wrote to me that "the government offers twelve per cent preference shares, and ordinary shares at an absolutely huge discount to asset value to provide the cash". But the US Government agreed to exercise its stock options at the post-bailout price, not the price prior to rescue. It even gives up most of these options if the banks do repay the Treasury's loan. On the excuse of encouraging private Wall Street investors to replace government "ownership" and "intrusion" into the marketplace, banks can "cut in half the number of common shares the government will eventually be able to purchase. That can be done if a bank sells stock by the end of 2009, and raises at least as much cash as the government is investing."

These bailout terms suggest that what Wall Street wants is pretty much what colonialist Britain achieved for so many years in India and Africa: puppet leaders with an imperial political advisor, in America's case a Secretary of the Treasury and a vice-regent as head of the Federal Reserve System. But what the rest of the economy needs is a genuinely free leader able to impose better and more equitable laws to write down debt, not build it up and bail out more bad loans. Within the present administration itself, Sheila Bair, head of the Federal Deposit Insurance Corporation, complained in a Wall Street Journal interview that she didn't understand "Why there's been such a political focus on making sure we're not unduly helping borrowers but then we're providing all this massive assistance at the institutional level". She "described painstaking efforts made by lawmakers in crafting the federal Hope for Homeowners program to make sure it limited resale profits for borrowers who received affordable home loans", by giving the government a share of the rising sales price.

The imbalance between creditor demands and debtors' ability to pay is indeed the problem. Paulson claimed in his Monday address that he needed to get to the root of the economic problem. But in his view it is simply that the banks "are not positioned to lend as widely as is necessary to support our economy. Our goal is to see ... that they can make more loans to businesses and consumers across the nation". As he explained in his Financial Times interview, "for the first time you have seen an action that is systematic, that is getting at the root causes" of the financial crisis. But his perspective is remarkably narrow. It denies that the problem is debt above and beyond the ability of the economy at large to pay, and higher than the market price of property and assets pledged as collateral.

Creating a system for the banks to "earn their way out of debt" means creating yet more interest-bearing debt for the economy at large. Mortgage loans are what is supposed to restore high housing prices and office costs - precisely what caused the debt meltdown in the first place. Despite Paulson's and Ms Bair's characterization of the present crisis as merely a liquidity problem, it is really a debt problem. The volume of real estate debt, auto debt, student loans, bank debt, pension debts by municipalities and states as well as private companies exceed their ability to pay.

Shortly after Paulson's Monday speech a Dutch economics professor, Dirk Bezemer, wrote me that: "In my thinking I liken it to a Ponzi game where in the final stages the only way to keep things going a bit longer is to pump in more liquidity. That is a solution in the sense that it restores calm, but only in the short run. This is what we now see happening and - despite the ten per cent stock market rally today - I am still bracing myself for the inevitable end of the Ponzi game - suddenly or as a long drawn out debt deflation". He went on to explain what he and other associates of mine have been saying for many years now: "The actual solution is to separate the Ponzi from the non-Ponzi economy and let the pain be suffered in the first part so as to salvage what we can from the second. This means bailing out homeowners but not investment banks, et cetera. The qualification to this general approach is that those Ponzi game players whose demise is a real 'system threat' need support, but only with punitive conditionalities attached. And just like Third World countries, they won't have a choice.

The problem of "debt pollution" is being "solved" by creating yet more debt, not by reducing its volume. Neither the Treasury nor Congress is helping to resolve this problem. The working assumption is that giving newly created government debt to the banks and Wall Street will lead to more lending to re-inflate the real estate and stock markets. But who will lend more to the one-sixth of US homes already said to have fallen into negative equity territory? As debt deflation eats into the domestic market for goods and services, corporate sales and earnings will shrink, dragging down stock prices. Wall Street is in control, but its policies are so shortsighted that they are eroding the underlying economy - which is passing from democracy to oligarchy, and indeed it seems to a bipartisan financial kleptocracy.


Michael Hudson is a former Wall Street economist He was Dennis Kucinich's Chief Economic Advisor in the recent Democratic primary presidential campaign, and has advised the US, Canadian, Mexican and Latvian governments, as well as the United Nations Institute for Training and Research (UNITAR). A Distinguished Research Professor at University of Missouri, Kansas City (UMKC), he is the author of many books, including Super Imperialism: The Economic Strategy of American Empire (new edition, Pluto Press, 2002) He can be reached via his website,

Bill Totten

Saturday, October 25, 2008

The Perils of the Coming Sugar Economy

by Hope Shand

Foreign Policy In Focus (October 10 2008)

Peak oil, skyrocketing fuel costs, and the climate crisis are driving corporate enthusiasm for a "biological engineering revolution" that some predict will dramatically transform industrial production of food, energy, materials, medicine, and the ecosystem. Advocates of converging technologies promise a greener, cleaner post-petroleum future, where the production of economically important compounds depends not on fossil fuels but on biological manufacturing platforms fueled by plant sugars. It may sound sweet and clean. But the "sugar economy" will be the catalyst for a corporate grab on all plant matter as well as the destruction of biodiversity on a massive scale.

The future bioeconomy will rely on "extreme genetic engineering", a suite of technologies currently in early stages of development. It includes cheap and fast gene sequencing, made-to-order biological parts, genome engineering and design, and nano-scale materials fabrication and operating systems. The common denominator is that all these technologies - biotech, nanotech, synthetic biology - involve engineering of living organisms at the nano-scale. This technological convergence is also driving a convergence of corporate power. New bioengineering technologies attract billions of dollars in corporate funding from energy, chemical, and agribusiness giants, including DuPont, BP, Shell, Chevron, and Cargill.

The 21st century's bio-based future is called the "sugar economy", or the "carbohydrate economy", because industrial production will be based on biological feedstocks (agricultural crops, grasses, forest residues, plant oils, algae, et cetera) whose sugars are extracted, fermented, and converted into high-value chemicals, polymers or other molecular building blocks. The director of Cargill's industrial bioproducts division explains: "With advances in biotechnology, any chemical made from the carbon in oil could be made from the carbon found in plants".

Biological engineering has the potential to affect virtually every sector of the economy that relies on fossil fuels - not only transportation fuels but also plastics, paints, cosmetics, adhesives, carpets, textiles, and thousands more consumer products. Advocates assure us that the "food vs fuel" debate will be irrelevant in the future sugar economy because feedstocks will come from cheap and plentiful "cellulosic biomass" - plant matter composed of cellulose fibers (including crop residues such as rice straw, corn stalks, wheat straw, and wood chips as well as dedicated "energy crops" such as switchgrass, fast-growing trees, algae, and even municipal waste). The giant stumbling block is that breaking down biological feedstocks into sugar requires a lot of energy and traditional chemistry has failed to provide a cost-effective process. Proponents insist that "next generation" feedstocks will use old and new biotechnologies, as well as breakthrough fermentation technologies, to succeed where chemistry failed.

Crystallizing Corporate Power

Eschewing fossil fuels as the planet's economic fulcrum won't happen overnight. It's too soon to tell if sugarcoated visions of the carbohydrate economy are mostly technological hype and hubris, or if bio-based production processes can compete with their petrochemical counterparts. Some of the world's largest corporations are beginning to shift some production away from petrochemicals to bio-based processes. The quest for the sugar economy is fueling high-dollar deals in the university-industry complex, most notably the $500 million alliance between BP and University of California, Berkeley. Unprecedented corporate alliances also involve synthetic biology startups and some of the world's largest corporations, including those in the oil, pharmaceutical, chemical, agribusiness, automobile, and forest-product industries. For example:

* Agribusiness giant Archer Daniels Midland Company and Metabolix formed a joint venture (Telles Company) to commercialize bioplastics made from corn sugar. The company's biorefinery will produce 110 million pounds of plastic resin per year starting in late 2008.

* DuPont partnered with sugar giant Tate & Lyle and Genencor to develop a commercial bio-based product - a fiber called "Sorona".

* BP is partnering with Mendel Biotechnologies to develop genetically engineered perennial grass for fuel.

* Chevron has an agreement with synthetic biology startup Solazyme to develop an industrial process to transform algae into diesel fuel.

* The US Department of Energy is investing $385 million in six commercial-scale cellulosic biorefineries. Corporate partners include Cargill, Dow, DuPont, Shell, and Iogen.

Today's industrial bio-economy focuses primarily on fuel, especially ethanol and biodiesel. Nature Biotechnology's Emily Waltz explains: "The market for fuels swamps that of chemical and material markets, and the prospect of commanding just a piece of it is a draw that many entrepreneurs, governments, and investors cannot resist". Since the 1970s, seventy percent of all US government funding for R&D in biomass has gone to biofuels. In the United States, energy applications account for 94% of fossil fuel consumption while petrochemicals account for the rest.

Bio-Economic Research Associates predicts that bio-based chemical processes could capture more than $70 billion in revenues by 2010 - more than ten percent of the global chemical industry total. (One analyst predicts that the market for bio-plastics will expand from $1 billion in 2007 to over $10 billion by 2020.) The biofuels sector could reach $40 billion by 2010 and $110 to 150 billion by 2020. Revenues from vaccines developed with next-generation DNA technologies could reach $20 billion by 2010.

Recent experience with industrial agrofuels offers a modern day parable about the dangers of techno-fixes that are promoted as green and sustainable solutions to peak oil and climate change. By mid-2008, even some countries in the Organization for Economic Cooperation and Development (OECD) were admitting that industrial agrofuels have been a tragic boondoggle that can't be remotely described as a socially or ecologically sustainable response to climate change. Not only are industrial agrofuels driving the world's poorest farmers off their land and into deeper poverty, they are the single greatest factor contributing to soaring food prices and have pushed over thirty million additional people from subsistence to hunger. Recent scientific papers conclude that industrial agrofuels are not arresting climate change but accelerating it.

Synthetic Biology to the Rescue?

But techno-optimists aren't worried because there are plenty more fixes on the launching pad. Venture capitalists, corporate titans, and the US Department of Energy are betting that advances in the field of synthetic biology - the creation of designer organisms built from synthetic DNA - will overcome the technological bottlenecks that threaten to delay the sugar economy. Synthetic biology, they tell us, will enable next-generation cellulosic feedstocks to be far more efficient and sustainable, and won't compete with land and resources needed to grow conventional food crops.

Today, synthetic biologists are pursuing a variety of methods to efficiently extract sugars from biomass feedstocks. For example, they are trying to use synthetic microbes to break down cellulosic biomass, and they are also converting microbial cells into "living chemical factories" that manufacture new bio-based products.

Jump-started by US government subsidies - by 2022, US energy policy dictates that 44% of US production of biofuels must come from cellulosic feedstocks - venture capitalists and corporations are supporting in-house R&D as well as alliances with synthetic biology startups.

Amyris Biotechnologies, a California-based synthetic biology startup, aims to engineer new metabolic pathways in microbes so they will produce novel or rare compounds. Although best known for its high-profile efforts to coax engineered cells to produce an anti-malarial compound, the company's primary goal is to modify the genetic pathways of yeast so that it efficiently ferments sugars to produce longer chain molecules of gasoline, diesel, and jet fuel. In 2007, Amyris raised $70 million in venture capital to develop synthetic fuel technology. In April 2008 Amyris announced a joint venture with Brazil's Crystalsev to commercialize "advanced renewable fuels" made from sugarcane in 2010 - including diesel, jet fuel, and gasoline. In the longer term, Amyris wants to create new production pathways in engineered microbes to churn out pharmaceuticals, flavors, fragrances, and nutraceuticals.

In September 2008 California-based synthetic biology company, Solazyme, Inc, announced that it has successfully produced the world's first microbial-derived jet fuel by engineering algae to produce oil in fermentation tanks. The company describes it as the first step towards achieving fuel alternatives on a large scale and claims that its production process can employ a variety of non-food feedstocks, including cellulosic materials such as agricultural residues and high-productivity grasses.

DuPont already manufactures a sugar-based biomaterial via engineered microbes. Using a proprietary process developed through partnerships with Genentech and Tate & Lyle, the company engineers the cellular machinery of an E coli bacterium so that it can ferment corn sugar to produce 1,3 propanediol, the main ingredient in the company's popular Sorona fiber. DuPont's goal is to one day produce Bio-PDO from cellulosic plant material instead of milled corn. DuPont predicts that Sorona, which can be turned into anything from underwear to carpeting, will eventually replace nylon. Although Sorona fiber is neither compostable nor biodegradable, DuPont boasts that it's environmentally friendly because its production requires forty percent less energy and results in twenty percent less greenhouse gas emissions than petroleum-based propanediol. But it takes six million bushels of corn to produce 100 million pounds of Bio-PDO - the estimated annual output of DuPont's Tennessee-based (USA) bio-refinery. And that's just one example of one biorefinery producing just one bio-based material for a single year. In other words, synthetic biology's sugar-dependent biorefineries will create a massive demand for agricultural feedstocks. According to biotech industry estimates, a moderately sized commercial-scale biorefinery requires a minimum of 500,000 acres of cropland (and its residues or "wastes").

Synthetic biology's grand vision of a post-petroleum economy depends on biomass - whether derived from "energy crops", trees, agricultural "wastes", crop residues, or algae. If the vision of a sugar economy advances, will all plant matter become a potential feedstock? Who decides what qualifies as agricultural waste or residue? Whose land will grow the feedstocks? An article in the February 2008 issue of Nature suggests that synthetic biology approaches "might be tailored to marginal lands [emphasis added] where the soil wouldn't support food crops".

The implications, especially for marginalized farming communities and poor people in the South, are profound. At a May 2006 meeting of synthetic biologists, Nobel laureate Dr Steven Chu pointed out that there is "quite a bit" of arable land suitable for rain-fed energy crops, and that Latin America and sub-Saharan Africa are areas best suited for biomass generation. Failing to learn from the first-generation agrofuel trainwreck, The Economist naïvely suggests that "there's plenty of biomass to go around" and that "the world's hitherto impoverished tropics may find themselves in the middle of an unexpected and welcome industrial revolution".

Advocates of synthetic biology and the bio-based sugar economy assume that unlimited supplies of cellulosic biomass will be available. But can massive quantities of biomass be harvested sustainably without eroding or degrading soils, destroying biodiversity, increasing food insecurity, and displacing marginalized peoples? Can synthetic microbes work predictably? Can they be safely contained and controlled? No one knows the answers to these questions, but that's not curbing corporate enthusiasm. In the current social and economic context, the global grab for next-generation cellulosic feedstocks threatens to repeat the mistakes of first-generation agrofuels on a massive scale.

The pattern is familiar. Once again, to satisfy its voracious consumption addiction, the North is poised to exploit the land, labor, and biological resources of the global South. In the name of moving "beyond petroleum" corporate power is converging to appropriate and commodify biological resources in every part of the globe - while leaving the root causes of climate change intact.


Hope Shand is a contributor to Foreign Policy In Focus and the director of the Action Group on Erosion, Technology, and Concentration (ETC Group).

For the full ETC report, go to "Commodifying Nature's Last Straw? Extreme Genetic Engineering and the Post-Petroleum Sugar Economy" at

Bill Totten