Kevin Phillips: Bad Money
Kevin Phillips: Bad Money: Reckless Finance, Failed Politics, and
the Global Crisis of American Capitalism (2008, Viking)
(p. 16):
For the more sophisticated in Washington, the $60- to $95-a-barrel
cost prevalent in 2006 and 2007 was only the most obvious of the
energy-related problems. Dismissing memories of $12 oil in 1998 and
$25 oil in 2003, the expert consensus was that the era of low-cost
petroleum was done and gone. With the United States of 2007 producing
only 35 percent of the crude it consumed -- by 2010, possibly as
little as 30 percent -- the cost of buying the remainder elsewhere had
become inescapable. Annual outlays for imported petroleum, $50 billion
to $75 billion during most of the late eighties and nineties, had
swollen to $100 billion in 2002, $130 billion in 2003, $180 billion in
2004, $232 billion in 2005, and $302 billion in 2006. The ever-larger
checks written for black gold also weighed heavily in the broadest
annual measurement of the U.S. trade gap: the current account deficit
($857 billion in 2006). Overall, oil-related optimism and promises by
the U.S. government had not worked out since peace in occupied Iraq
deteriorated into insurgency and regional separatism.
(pp. 16-17):
In 2006, Charles Weeden of Maxwell & Company, a top U.S. oil
analyst, dramatized the simultaneous shortfall in new discoveries: "In
1930, we found 10 billion new barrels of oil in the world and we used
1.5 billion. We reached a [new discovery] peak in 1964 when we found
48 billion barrels and used approximately 12 billion barrels. In 1988,
we found 23 billion barrels and used 23 billion. That was the
crossover when we started finding less than we were using. In 2005, we
found about 5 billion to 6 billion and we used 30 billion. These
numbers are just overwhelming." Many well-informed geologists and
industry consultants considered top producers like Russia, Saudi
Arabia, and Mexico to have reserves well below what their governments
publicly claimed. Each year, when members of the Association for the
Study of Peak Oil convened in congenial cities like Uppsala, Sweden;
Pisa, Italy; or Cork, Ireland, new evidence seemed to support their
pessimistic calculations, while new speakers added luster to the
cause. The sixth annual meeting in autumn 2007 saw Lord Oxburgh, a
former chairman of Shell UK, predict $150-per-barrel petroleum, while
James Schlesinger, the former U.S. CIA director and energy secretary,
told the attendees that "the battle is over and the partisans of peak
oil have won."
No one doubted that more fuel could be had from ultradeep drilling
in the Gulf of Mexico and the South Atlantic; from submerged Arctic
mountain ranges claimed by nearby Russia; from the western Canadian
oil sands; from the heavy and superheavy oil deposits in the Orinoco
Belt of eastern Venezuela; from shale oil in the U.S. Rocky Mountains;
and from hard-to-reach, expensive portions of already-tapped fields
the world over. The catch was twofold: deepwater drilling aside, new
production was unlikely to be great, and these prospects assumed
costly technology and prices remaining at or above $50-$60 per
barrel. Furthermore, the up and down "market" forces generally
prevalent during the twentieth-century heyday of the privately owned
American and European oil giants, the famed Seven Sisters, were giving
ground to the realities of lopsided control (three-quarters of world
reserves) and overtly national ist agendas of the leading state-owned
oil companies. In 2007, the Financial Times described Saudi
Aramco, Gazprom, Petro-China, National Iranian Oil Company, Petrobras
(Brazil), Petronas (Malaysia), and Petróleos de Venezuela as the "New
Seven Sisters." Christophe de Margerie, the chief executive of Total,t
he top French firm, described the supramarket calculus of these state
companies, now that global capacity no longer sufficed to meet global
demand, as marking "a revolution" in the industry.
Note that the $50-$60 per barrel minimum cited above, which seems
like a bargain with oil prices running double that less than a year
later, does not guarantee that Phillips' list of future oil projects
can actually be developed economically. The oil sands, oil shales,
and superheavy oil projects, in particular, are very energy-intensive,
so their cost rises with the rising cost of oil -- all the more so
when you start factoring the environmental costs in. Some substantial
percentage of those reserves may never be economically developed at
any marke price, for the simple reason that they produces less energy
than it takes to extract and refine them.
(p. 44):
Clinton, somewhat like conservative Democratic president Grover
Cleveland at the height of the late-nineteenth-century Gilded Age,
slowly drifted into the orbit of New York finance. He got along well
with the Republican chairman of the Federal Reserve Board; promoted
Rubin to treasury secretary; raised a lot of reelection money on Wall
Street (which, as will see, was also becoming more Democratic); joined
with Citigroup chairman Sanford Weill, an active Democrat, to promote
the sweeping federal financial deregulation act of 1999; exulted over
the rocketing stock market averages; gravitated to resorts like the
Hamptons and Martha's Vineyard; and on the occasion of one visit found
himself hailed by a Hamptons chronicler who called the ebullient
president "the spirit of the bull market." Before leaving the White
House in 2001, Bill and Hillary Clinton moved their residence to New
York, where Mrs. Clinton had won a U.S. Senate seat in 2000.
(p. 48):
Over the last three decades, finance cannily sidestepped the
spotlight, like mushroom cultivation doing best in rich soil and
darkness. Far from flagging its ascendancy with every new track or
belching smokestack in the nineteenth-century manner, the financial
sector -- not that the singular noun implies any single voice --
practiced a form of false modesty. References to the "real economy" in
2007 continued to suggest that U.S. finance occupied some small
periphery where a hundred thousand Masters and Mistresses of the
Universe collected rare wines and endlessly bought and sold structural
products and derivatives with a notional value of $500 trillion [nb:
he must mean billion], all the while never -- or hardly ever --
disturbing the safety and serenity of West Virginia, Wisconsin, and
Wyoming. Even as the August 2007 panic subsided into autumn jitters,
no serious debate about the transformation of the U.S. economy had
been sparked.
(p. 62):
During his years as Fed chairman, Alan Greenspan kept a close eye
on the nation's net worth numbers: Are assets rising faster than
liabilities? If so, god. Back in 2002 the Fed needed housing values to
climb so that net worth gains in that category would compensate for
the $7 trillion lost between the stock market top in 2000 and its
nadir in 2002. Then in 2006, as housing weakened, Treasury Secretary
Paulson reinvigorated the Plunge Protection Team -- even the nickname
smacked of assets worship -- to keep a close watch. Achieving and
consolidating a 2,000-point climb in the Dow Jones Industrial Average
could restore wealth in those financial ledger accounts even as home
values dipped. Through mid-2007, that seemed to be on track. Financial
journalists, in turn, noted how the Dow, since Paulson had taken over,
had broken records for the amount of time passing without a 10 percent
correction. And revealingly, on August 15 and 16, at the peak of
financial market nervousness, wave after wave of stock index buys kept
the correction from reaching 10 percent at any market close and
thereby establishing bear market or correction status.
On jerryrigging the Consumer Price Index -- long because it wasn't
obvious where to stop, and the issue is important because we depend on
CPI to adjust "real" economic indicators (pp. 81-87):
The larger problem is that the federal government just isn't
measuring inflation the way it used to. Until the 1990s, the CPI quite
straightforwardly measured the cost of a fixed basket of goods using
prevailing market prices. No statistical opportunity for clipped
coinage or reminting to a lower standard existed in that constant. The
current interlacing of gimmicks, by contrast, far from representing
the costs of a constant standard of living, has been described
by critics as measuring downward mobility -- an index that, in the
words of one, "more closely represents the costs of holding to an ever
declining standard of living," such as a family shifting between
hamburger, pork, and chicken depending on the price."
The push to abandon the longtime fixed-basket-of-goods yardstick
began in the early 1990s with Federal Reserve chairman Alan Greenspan
and Michael Boskin, chairman of the Council of Economic Advisers under
President George H. W. Bush. During the 1980s, Greenspan had chaired a
presidential commission on Social Security that achieved no great
long-term benefits changes, and by the mid-1990s he wanted to reduce
Social Security outlays in the worst way, arguably just what the
Boskin Commission, appointed by the new GOP Congress, recommended in
its 1995 report. Social Security payments were not vulnerable to
frontal political and legislative attack, so attention shifted to the
CPI determination of how much retiree payments would rise each
year. Greenspan and Boskin charged that the CPI overstated inflation
by as much as 1.5 percent, and the Boskin Commission recommended a set
of revisions to the Bureau of Labor Statistics, which generally
concurred. These changes were implemented between 1997 and 1999, while
the public and the politicians were preoccupied by bull market
euphoria and the actions in Congress to impeach Bill Clinton.
Unfortunately for the government, a former journalist in Oakland,
California, named John Williams took it upon himself and his small
firm, ShadowStats.com, to
calculate the CPI using the old criteria and to publish those figures
alongside the new numbers. The results are disconcerting. As figure
3.3 [see below; not the exact same figure, as it extends into 2008 and
includes the extra Experimental C-CPI-U line] shows, if the
methodology used in 1990 still held sway, the government would have
been reporting 5 to 7 percent inflation between 2005 and 2007 instead
of essentially 2 to 4 percent. Statistically, that's a huge
difference. For example, if 2 to 3 additional percentage points had
been subtracted from the official GDP numbers in order to give
inflation its due, that would have dropped the U.S. economy into
recession or to its borderline.
Critics of the new methodology usually emphasized three or four
deceptions. The best place to start is with the emphasis on consumer
substitution that so inspired Greenspan and Boskin. The 1990-92
downturn was deep enough that suburbanites from Denver to Washington
to Boston were turning to food stamps and charitable pantries; there
is little reason to doubt that many were also price-shopping between
hamburger, chicken, and canned stew. But we can assume others had also
done so in the deep recession troughs of 1958 and 1974 without
prompting the government to institutionalize such defensive approaches
as a normal feature of the American dream.
Yet just this occurred in 1999, when the Bureau of Labor Statistics
adopted so-called geometric weighting for its now-flexible basket of
goods. Items going up received less weight, thereby easing inflation,
while items becoming less expensive received more weight, likewise
easing inflation. As critic Joseph Stroupe explained, "Since, in the
absence of significant price inflation, consumers would be unlikely to
engage in substitution on a meaningful scale, then it is also an
indirect but powerful admission that significant price inflation does
exist, for why else would consumers switch from more expensive items
to less expensive ones?"
Which brings us to the born-again CPI's principal controversy --
the use of "hedonics" (a government attempt to measure increased
pleasure) in order to moderate prices by reducing them for the
increased satisfaction a consumer derives from some improvement. Caught
out on a shaky limb, the government dropped its large-scale hedonic
reduction of computer prices in 2003 after a critical letter from the
National Science Foundation's Committee on National
Statistics. Moreover, according to the BLS, the consumer electronics
category, heavy with declining prices (usually exaggerated by
hedonics), accounted for only 1 percent of the CPI, minimizing its
practical importance.
What remained, however, was powerful data on how hedonic
calculations had falsely ballooned computer sales and thereby
artificially enlarged GDP growth. Steve Milunovich, a well-regarded
computer analyst at Merrill Lynch, explained in a 2004 report that the
federal Bureau of Economic Analysis, responsible for ascertaining the
gross domestic product each quarter, had stopped reporting the real
computer hardware shipment figure that was used to calculate GDP
growth. The government, it seemed, decided that between the second
quarter of 2000 and the fourth quarter of 2003, real tech spending had
risen by $111 billion, from $446 billion to $557 billion. However, in
nominal (price-tag) terms, it had climbed only from $42 billion to $88
billion. The BEA hypothesized the rest to represent the added value it
perceived in computer quality! In 2007, economic historian Peter
Bernstein wrote in the New York Times that because of the
distortions of hedonic pricing, it might be more realistic to have a
new auxiliary CPI measure that included food and energy but
excluded consumer durables. Other nations have declined to use
the hedonic approach. The Japanese earlier took the matter under
study, and Germany's Bundesbank noted that hedonics would have
increased that nation's GDP by 0.5 percent.
Even critics acknowledge that the great majority of U.S. economists
favor some sort of hedonic adjustment in the CPI. One wonders if
economic historians would share that view. Why now? Why not earlier? I
was a teenager in the 1950s, and after spending a year in Europe, I
came home in 1960 well reminded that the United States was paradise
for the middle-class consumer. If hedonics properly apply to watching
a current-day fifty-inch high-definition television by upgrading from a
forty-two-inch version, why not back in 1952, when TV screens got big
enough to watch from more than five feet away? A short list of
legitimate fifties hedonics could include air conditioners, air travel
(jet), automatic transmissions, barbecues, color photography,
dishwashers, drugs (over-the-counter and prescription), electric
shaves, Frigidaires, frozen foods -- and that's just to the letter
F. To answer the question "Why now?" we must look at the historical
trajectory -- and the answer is essentially inglorious.
The third fiddle in the ever-changing CPI involves how the 70
percent of Americans who own homes fail to see anything resembling
their actual expenses included in the official measurement. Housing
represents 40 percent of the CPI, but what the BLS computes is quite
misleading. The bureau's yardstick is called "owners' equivalent rent"
-- the amount that homeowners could get were they to rent out their
homes. To illustrate how unresponsive this figure has been to recent
homeowning realities, consider three situations. First, let us suppose
the Smiths just bought a house that they had previously rented for
$2,000 a month, and that their new monthly total of mortgage,
insurance, and property taxes if $3,000. The effect on the CPI: zero,
no increase. Now suppose they had always owned and their property tax
bill just went up 40 percent. Effect on the CPI? Nil. Now suppose they
bought in 2005 under an "exotic" mortgage, an dthe monthly payment has
just reset from 4.5 percent to 7.5 percent. What would be the effect
of those circumstances on CPI? Again nil. None of these would affect
owners' equivalent rent, even though in the real world, they were out
of pocket mightily.
Here, just as with food and energy, the measurement shunned because
of "volatility" -- yes, housing costs are volatile -- is the one that
meaningfully reflects trends. Consider, for example, the 2003-6
difference between the 5 percent yearly increase in owners' equivalent
rent and the 10 to 20 percent annual increase in the
S&P/Case-Shiller Home Price Index. Obviously, the OER and the home
price index are not parallel. An index of mortgage payments, insurance
costs, and property taxes would serve better. Still, the comparison
shown in figure 3.4 is worth noting. Using the housing price data
yields a CPI increase 2.5 to 4 percentage points above the official
one released by the Bureau of Labor Statistics.
(p. 88):
Beginning in March 2006, the new Fed chairman, Ben Bernanke,
ordered that the government cease publishing data on changes in the
boradest measurement of the U.S. money supply, the so-called M3. It
was expanding at a 10-12 percent annual rate in 2006; outsiders
calculated that as of August 2007, that growth had accelerated to a
high-powered 14 percent. This category, pulling away from the narrower
measurements, M1 and M2, was arguably the one that picked up the
explosion of money and credit taking place in financial sector
debt. Continued publication of M3 reports would have undercut the
assertion of Bernanke and Federal Reserve Board colleague Frederic
Mishkin that the inflationary expectations of the public had been
safely "anchored" at a low level by the tame core CPI. This
suppression of data, alas, went a long way to prove Sir Walter Scott's
adage about what a tangled web people weave when first they practice
to deceive.
(p. 91):
Arguably, though, such religion was a logical outgrowth of an
angst-threaded economic consumerism, powered by incessant "be all you
want to be" advertising and funded by home equity withdrawals and
credit card debt, in which a relatively small population at the top
reveled in a large and rising percentage of the nation's income and
wealth. While this took place, average household incomes stagnated,
personal debt soared, and hints of a credit and housing crash added
new worries. For some among America's less successful, the prosperity
preachers and churches were probably the last resort between lost jobs
or ambitions and the deeper embarrassments of home foreclosures,
divorces, or bankruptcy courts.
(pp. 120-122):
Being precise about how often Britain and the United States have
invaded Iraq because of petroleum -- or, for the naive among us,
intervened to etablish or secure democracy -- isn't easy. In 1991, of
course, and arguably in 2003. The first British military incursions,
during World War I, took place while oil-rich Mesopotamia was still a
provine in the Ottoman Empire. In 1941, just before Hitler's troops
invaded Russia and reached as far as the Caucasus, British troops went
into Iraq to stave off an oil-motivated German attack abetted by the
Vichy French regime next doorin Syria. Clearly, we can't count the
1959 plot by the Central Intelligence Agency to kill Iraqi strongman
Abdul Karim Qasim -- incredibly, the young Saddam Hussein was among
those enlisted by the CIA -- because that did not involve an actual
invasion. Neither did Washington's success, way back in the 1920s, in
persuading Britain to cut the United States in for a partial share of
the oil in what had become British-occupied Iraq. Petroleum-driven
Anglo-American interest in the Persian Gulf goes back a long way.
Denying that the motive is oil is often wise, though, and sometimes
even necessary. Lord Curzon, the British foreign secretary, drew
mockery in the press and in Parliament for insisting such in 1924,
although similar assertions by the U.S. president and the British
prime minister in 2003 were treated respectfully. In 2007, former
Federal Reserve chairman Alan Greenspan caused a stir when he stated
matter-of-factly that the 2003 invasion had been about oil. Perhaps he
knew, as did others, about the amount of time that Vice PResident
Richard Cheney's high-powered task force on energy had spent studying
the maps of the various Iraqi oil fields. In Cheney's mind, it was
probably always about oil.
In any event, the apparent American attempt to make U.S. energy
policy from bomb bays and guided-missile cruisers misfired in
2003. The botched occupation of Iraq boiled up into a serious local
insurgency, destroying Washington's private dream of throwing open
Iraqi oil spigots, driving down oil prices, and breaking the power of
OPEC and its state-owned oil companies. Predictably, these producers
more than shared the worldwide dismay over U.S. actions, and not just
because they feared competition. By 2006 OPEC and non-OPEC petroleum
exporters were also becoming more concerned about the peak-oil thesis,
inasmuch as global crude oil production seemed to plateau after 2005
despite increasing world demand.
What Cheney may have feared about supply and upward price pressure
in 2001 seems to have taken place, and then some. During the five
years after the invasion, petroleum prices ballooned from $25 per
barrel to the $100 range. This was the cause, but also the
effect, of a steady slippage in the value of the
U.S. dollar. The burden for the United States of having to import
two-thirds of the oil it consumed became more and more costly. The
price of oil rose, and Washington's credibility declined, and this
double blow undermined the dollar's long-standing role in global
petroleum sales -- since 1974, greenbacks had been the semiofficial
currency of international oil transactions. The dollar's weakening
only increased interest within a number of producing nations in two
possible responses: reducing, or ending, the role of the dollar as the
world's reserve currency, or pricing petroleum sales in some other
currency or combination of currencies. Watchful experts in the United
States knew that if producers did either, it would only add to a
perception of U.S. weakness.
Actually, it's always been hard to pin down what Cheney et al.
wanted to accomplish regarding Iraq's oil. To the extent that they
represent oil producers as opposed to oil consumers they are most
likely satisfied to have taken so much Iraqi oil off the market, in
turn pushing up prices and profits for their sponsors, regardless
of the harm they do to other sectors of American business. The weak
dollar also helps them in some sectors, while hurting them in others.
I don't know that anyone has really worked their balance sheets out,
even them.
(p. 123):
Which brings us to a too-little-examined dimension of our current
energy predicament: how the prior eminence of the United States in
global petroleum matters has left not only an outdated infrastructure
but a spectrum of disabilities, unwarranted smugness, vested
interests, and booby traps. These range from currency vulnerabilities
and lack of a serious national energy strategy to apparent policy
inertia in Washington, where many officeholders eem unable to
understand how much has changed for the United States over the last
decade.
(p. 130):
At September's annual international conference of the Association
for the Study of Peak Oil an dGas (ASPO) in Ireland, Lord Oxburgh, the
retired chairman of Shell UK, predicted that oil would climb to $150 a
barrel, while former U.S. energy secrtary and CIA director James
Schlesinger, in one of a number of pithy comments, said, "The battle
is over, and the oil peakists have won. Current U.S. energy policy and
the administration's oil strategy in Iraq and Iran are deluded."
October brought two more major conferences -- one in Texas cosponsored
by the University of Houston and the U.S. section of ASPO, the second
thematically named "Oil and Money" and held in London. Once again,
blunt comments flowed. Speaking at the ASPO meeting in Houston, oilman
T. Boone Pickens and Texas investment banker Matthew Simmons agreed
that 2005 had been the global production peak year, with Simmons also
reiterating his widely reported doubts about Saudi Aramco output
claims.
Conference-goers in London heard experts from two OPEC nations --
Sadad al-Husseini, former chief of exploration and production at Saudi
Aramco, and Shokri Ghanem, chief executive of Libya's National Oil
Company. Ghanem told the audience that world production could not go
above 100 million barrels a day, and that when that ceiling was
reached -- optimistic U.S. officials projected that level of output by
2015 to 2020 -- global production would start to decline. Al-Husseini
was even more provocative. In one of the interviews he gave at the
London conference, the candid Saudi more or less agreed with the
Pickens-Simmons thesis. He indicated that world production was in the
process of making a 2005-7 top and would plateau for ten to fifteen
years at roughly the same level, assuming prices were raised some $12
a year to incentivize the continued output of oil and other related
liquids. He further suggested that world oil reserves were inflated
and that 300 billion of the 1.2 trillion barrels -- mostly in the OPEC
countries -- should be reclassified as speculative resources.
(p. 153):
Here we must turn to a second semantic issue -- the extent to which
energy terminology has begun to change in a highly significant
way. Professor Michael Klare summarizes it this way: In May, the
Energy Department "stopped talking about 'oil' in its projections of
future petroleum availability and began speaking of 'liquids.' The
global output of 'liquids,' the department indicated, would rise from
84 million barrels of oil equivalent (mboe) per day in 2005 to a
projected 117.7 mboe in 2030 -- barely enough to satisfy anticipated
world demand of 117.6 mboe." Peak-oil stalwarts like Simmons have made
the same point: crude-oil production is what has peaked, and
the liquids -- from tar sands, oil shale, biofuels, coal-to-liquids,
and gas-to-liquids -- must now be included to keep things on
track. Perhaps they can do so; certainly they can for several
years. But that is not the only issue. If crude production has peaked,
with its many ramifications, that in itself conveys an enormously
significant message.
It's worth noting here that recent announcements of Saudi plans to
increase production are totally dependent on gas-to-liquids. One problem
here is that light hydrocarbon liquids like butane cannot be used to
produce such needed petroleum-based products as gasoline and kerosene.
Such liquids have their uses, but are far more limited than crude oil.
(p. 159):
That certainly included politics. Celebrity was a boon to
fundraising, if not necessarily to competence. Among the 535 members
of the 107th Congress, elected in 2000, 77 were relatives of senators,
representatives, governors, judges, state legislators, or local
officials. In Rhode Island, after Republican Lincoln Chafee was named
to his father's U.S. Senate seat, Democratic congressman Patrick
Kennedy made this joke at a local roast: "Now when I hear someone talk
about a Rhode Island politician whose father was a senator and who got
to Washington on his family name, used cocaine and wasn't very smart,
I know there is only a 50-50 chance it's me."
Phillips is refreshingly consistent in his opposition to political
dynasties (pp. 161-162):
Although [Grover] Norquist and other Republicans suffered from
convenient blindness and inattention in 2000 and 2004, George W. Bush
from the first represented an extension of his family's biases and
favoritisms. He also had family access to a huge GOP big-contributor
base, was committed to Texas and oil-industry interests, and was
willing to pander to the religious Right. He respected his family's
long-standing alliances with the Saudis and othe rPersian Gulf elites,
inherited the family's personal grudges against Saddam Hussein, and
had an intense desire to attack Iraq. In winning back the White House,
he also brought along employment commitments to a plethora of family
political retainers, GOP lobbyists and fixers, loyal fund-raisers, and
others, frequently above and beyond the usual duties and engagements
of a presidential nominee. Most of the connections and commitments
were visible from the start -- the big-contributor contacts smoothed
the way to nomination -- although the younger Bush's intoxication by
Iraq and the religious Right turned out to be particularly
self-defeating.
Drawing up a similar list of the familial baggage of Hillary
Clinton is in some ways easier but in other ways more difficult. In
contrast to George W. Bush -- during his father's four-year term from
January 1989 to January 1993, the younger bush was mostly back in
Texas and not taken very seriously -- Mrs. Clinton during her
husband's eight years in office was very openly and closely involved
in White House policymaking. No one could call her inexperienced or
unskilled. On teh contrary. Indeed, the most prominent analyses
published in 2007 -- A Woman in Charge by Carl Bernstein and
Her Way by New York Times reporters Jeff Gerth and Don
Van Natta Jr. -- elevated her role to being almost a co-president or
suggested that the Clinton blueprint had always involved a commitment
to his presidency first, followed by hers. For better or worse, and
despite her independent career after 2000, that legacy in itself
hinted at a continuity between the policies and people of January 1993
to January 2001, and the probable policies and people should a Clinton
again occupy the White House between January 2009 and January
2013. Dynasty became more of an issue in 2008 than it had been in
2000.
(pp. 177-178):
To be sure, there is some overlap betwen ardent believers in peak
oil and persons worried about emissions, global warming, and a
dangerous climatic tipping point. Many in both camps agree on the need
to cut back on the 50 percent of U.S. oil consumption that is required
to gas up fuel-guzzling automobiles. But there's much less concurrence
on new fuel sources -- oil sands, coal-to-liquids, nuclear power, and
the like. If one of the two energy-related showdowns can be shown as
holding off until 2030 while the other lay just ahead, priorities
could develop. But if one worries about both, in proximate but
unknowable time frames, the pressures and potential politics get
tough. Assuming that both concerns have merit, but that there is some
leeway, perhaps 2016-20 could see a double dimension: rising seas and
small islands going under, oil-linked civil wars in Africa,
$8.75-a-gallon gasoline in California, abandoned housing in U.S. towns
where commuting is no longer affordable. However, if the true
believers are right about problems being nearer at hand, then the
tension could intensify between 2012 and 2016. Or if the most panicked
experts are correct, then the regime taking over Washington in 2009
will face the crisis.
(p. 200):
The underlying question before us in this last chapter is whether
the housing and credit crisis expected to span the 2007-10 period
constitutes the global crisis of American capitalism, in the
sense of being the one that signals the Great Transferal to
Asia. Based on the points I have made in this book, that outcome
certainly seems possible. Global respect for the Unitd States slumped
drastically in 2002 and following the invasion of Iraq, and then again
in 2005-7 as the survey data in the appendix so unfortunately
illustrates. The value of the U.S. dollar has followed pretty much the
same course. Between the deepening dislike of the United States in
much of teh Muslim world and the decline of the greenback, Persian
Gulf states that once reinvested most of their oil revenues in
U.S. bonds and kept their currencies peggedf to the dollar no longer
believe that Washington is a capital city that keeps faith. Given
U.S. dollar policy in 2007, it is easy to see why.
(pp. 203-204):
As suggested in chapter 2, a case can be made that Washington
partially shifted to policies of financial mercantilism as early as
the 1980s. This happened through that decade's series of federally
orchestrataed domestic and international bailouts, accompanied in 1988
by the presidential order to set up the Working Group, with its
probable covert mandate to repeat where necessary the interventions
employed during the tense days of the October 1987 crash. At very
least, both the facts and the inferences suggest a mockery of strict
free-market economics.
No one should be surprised to read someday that during the
eighties, senior officials established at least vague guidelines for a
policy of maintaning national assets. Such an intention would have
stretched from bank, credit, and currency bailouts to a collusive
monetary poicy designed to drown any threatened asset deflation in
liquidity and never, ever to pop an asset bubble. Here Greenspan and
his successor, Ben Bernanke, put themselves at odds with views
elsewhere in central banking circles that asset bubbles should indeed
be popped -- and that U.S. unwillingness to do so might even imperil
global markets. We have certainly had the bailouts and off-and-on
gushes of liquidity, and the most freewheeling treasury secretaries of
the last two decades, Henry Paulson and Robert Rubin, have shown a
rare protectiveness toward the sanctity of stock market advances. Even
Paulson's de facto soft-dollar policy of 2006 and 2007 makes sense if
one takes a Machiavellian view of a commitment to maintain assets.
The cynic's explanation is this: A weak dollar stimulates exports,
therby narrowing the trade deficit. A weak dollar also allows
multinational corporations to (1) show larger overseas earnings (as
local currencies translate into more dollars) and (2) increase the
worth of their foreign holdings and subsidiaries as stated in
dolllars. For Americans, a cheap currency also keeps up the nominal
value of the Dow Jones, the S&P 500, and other U.S. stock market
averages. Measured in euros, British pounds, or Brazilian reals, these
indexes did much lesswell over the last five years than when measured
in (cheap) dollars. columnist John Authers half
joked that "whether they realise it or not, investors' positive
sentiment int he U.S. may rest on the weak dollar."
(pp. 206-207):
There is no better distillation of the harm inflicted -- and
probably yet to be inflicted -- than that of hedge fund manager
Richard Bookstaber in his 2007 volume, A Demon of Our Own Design:
Markets, Hedge Funds, and the Perils of Financial Innovation. His
underlying point is that even though financial strategists can keep
dreaming up new instruments, it's not a good idea to do so, because
each innovation adds layers of increasing complexity, tight coupling,
and risk. By way of comparison, "consider the progress of other
products and services over the past century. From the structural
design of buildings and bridges , to the opdration of oil refineries
or power plants, to the safety of automobiles and airplanes, we
learned our lessons. In contrast, financial markets have seen a
tremendous amount of engineering in teh past 30 years, but the result
has been more frequent and severe breakdowns. . . . The
integration of the financial markets into a global whole, ubiquitous
and timelymarke information, the array of options and other cerivative
instruments -- have exaggerated the pace of activity and the
complexity of financial instruments that makes crises inevitable."
posted 2008-04-16
Andrew Leonard: The Decline and Fall of the American Empire of Debt.
Book review of Kevin Phillips' Bad Money: Reckless Finance, Failed
Politics, and the Global Crisis of American Capitalism. Short story
is that it reiterates pretty much everything in Phillips' previous book,
American Theocracy: The Peril and Politics of Radical Religion, Oil
and Borrowed Money in the 21st Century, somewhat condensed, except
for an extra helping of I-told-you-so's.
Leonard quotes Phillips:
My summation is that American financial capitalism, at a pivotal
period in the nation's history, cavalierly ventured a multiple gamble:
first, financializing a hitherto more diversified U.S. economy;
second, using massive quantities of debt and leverage to do so; third,
following up a stock market bubble with an even larger housing and
mortgage credit bubble; fourth, roughly quadrupling U.S credit-market
debt between 1987 and 2007, a scale of excess that historically
unwinds; and fifth, consummating these events with a mixed fireworks
of dishonesty, incompetence, and quantitative negligence.
While Phillips concentrates on finance, he traces US imperial
rise and decline to oil, which peaked domestically in 1969. Ever
since then the US has run trade surpluses to keep oil flowing, a
necessity given that the only alternative would be to change our
way of life and conserve. Leonard writes:
As for oil, while at first it might seem a bit off-putting to find
a chapter on "peak oil" in the middle of a book mostly devoted to
financial shenanigans, the current price tags of a barrel of crude and
a gallon of gasoline obviously pile even more stress on top of an
economy already teetering after years of gross mismanagement. Phillips
has long castigated the Bush administration for its energy
misadventures -- believing, as do many Bush critics, that the invasion
of Iraq was motivated in large part by geopolitical petroleum
concerns. But how could two oilmen in the White House have screwed up
so spectacularly? Dark times are ahead, he foresees, as the major
powers of the world struggle for control of the world's dwindling
supplies of fossil fuels. But as this time of peril hastens toward us,
the once mighty U.S. is no longer master of its own manifest
destiny.
I have a copy on order, so will be writing more later.
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posted 2008-04-16
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