How the World Works: Part II

Off the keyboard of Geoffrey Chia

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Published on the Doomstead Diner on August 10, 2015

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A BEGINNER'S GUIDE TO HOW THE WORLD REALLY  WORKS

PART 2: CAPITALISM, THE PETRODOLLAR AND FINANCIAL BUBBLES

Geoffrey Chia is an Australian physician who has written many provocative articles including "The Brisbane Institute is a Brisbane Prostitute". The reader is encouraged to fact check for yourself everything written here.

The Good, the Bad and the Ugly

How can we reconcile the exploitative behaviour of the AngloAmerican colonial empires of the past, with their later acts of defeating Nazism followed by the generous postwar reconstruction of Germany and Japan, and later, the Clinton intervention to save the victims of atrocities in Kosovo and Bosnia? Human beings are complicated animals, sometimes showing great brutality and sometimes showing great compassion, although generally tending to act in their own self interest most of the time. Self interest has certainly been the most consistent theme in US policy, specifically the interests of the US corporations and banks, masquerading as "US National" interest. It is ever so today. Some may view US history as a progressive trajectory from the brutish genocidal behaviour of the colonial past (their actions towards Native Americans were undoubtedly genocidal), eventually moving toward greater social enlightenment, with the abolition of slavery, universal suffrage and the civil rights movement. If we expected more and better social justice outcomes with the passage of time, our hopes have been dashed since the turn of the century, as exemplified by the criminal invasion of Iraq on the basis of lies, the multiple human rights abuses by the Bush/Cheney regime, escalating gun crime and racial conflict in the US with excessive incarceration of the African American population and the increasing impoverishment of ordinary Americans (and Southern Europeans) by parasitic bankers who control compliant governments. The fact is that the background US agenda of exploitation of the vulnerable has continued unabated since the end of WW2, albeit disguised by the Orwellian newspeak and misrepresentations, indeed barefaced lies, perpetrated by their mainstream media. A guaranteed outcome of the current arrangements will be the collapse of industrial civilisation with massive human die-off and a possible outcome may be near term human extinction.

 

Predatory Capitalism

If mechanised industry represented the hardware of our brave new world, it was another Western invention, Predatory Capitalism, which represented the software, which governed the workings of the entire edifice. To use another metaphor: capitalism was the nervous system, industry was the musculoskeletal system and petroleum was the lifeblood which fuelled it all. If the electrical impulses in your nerves are interrupted, then even if your muscles are strong and are receiving plenty of blood, you will be paralysed. Financial/economic collapse can paralyse societies and curtail basic services (food, water, energy, sanitation) just as surely as resource depletion can, however the former tends to happen much more suddenly.

Predatory capitalism is the ideology of "infinite growth on a finite planet", driven by limitless greed, the idea that enough is never enough. It confers upon its privileged practitioners tremendous short term material benefits, but in the long term promotes the behaviour of a malignant cancer or a relentless planetary parasite hellbent on killing its host. Capitalism was primarily an AngloAmerican invention13 (also enthusiastically embraced by the Dutch), although Hayek and the Austrian school of economics also became highly influential. Margaret Thatcher herself famously waved Hayek's book "The Constitution of Liberty" about, like some kind of bible, proudly professing her fundamentalist faith. Events have proved beyond any shadow of doubt that the doctrine of neoclassical economics, despite brandishing all sorts of impressive mathematical equations, is a delusional ideology based on flawed assumptions, which, although initially apparently beneficial to a country, ultimately concentrates wealth among a select few while exploiting the many. It disregards the environmental damage it causes. These "externalisations" are willfully ignored by the blinkered adherents of this ideology.

The economic enslavement of Greece (with other PIIGS countries on the chopping block) by the European troika (European Commission, ECB and IMF – the latter being headquartered in the US) represents the beginning of the endgame for Predatory Capitalism, a system fated to voraciously consume itself in the long run. We are witnessing one power bloc beginning to cannibalise itself, starting with its most vulnerable members at the periphery. In the Great Game, nowadays even a "left wing greenie" female politician can play, no Chaplinesque moustache or goose-stepping required (admittedly though, she is German).

 

Money, the Petrodollar and the exponential growth of the real economy on the upside of Hubbert's curve

Before we proceed it is important to remind ourselves of some basic definitions.

Economics is commonly defined as the study of how goods and services are produced and distributed. In a sane world, economics should also require the study of how waste is generated and disposed of, and the necessary costs for proper disposal must be factored in. Unfortunately this last issue has largely been ignored, particularly by the so-called neoclassical economic "experts". They therefore gave Industry a free pass to treat the environment as a toilet. If we lack solutions to safely dispose of or neutralize certain hazardous waste, then the true economic cost of generating that waste approaches infinity and any sane person must conclude that such waste should not be generated in the first place. This is why nuclear power generation, properly considered, must be regarded as insane14. Refusal to acknowledge the harm caused by industrial activities such as carbon emissions lies at the heart of the failure of our economic system. Denialism leads to death, and in our case, possible near term extinction. Naomi Klein put it starkly: Capitalism is at war with life on Earth.

Finance refers to how economic processes are funded. Money, the stockmarket, banks and governments (which print fiat currency and allow banks to create cyber currency out of nothing in the fractional reserve banking system) are the major components of the financial system. Herd behaviour of the public, driven by greed and fear, is the main driver of the stockmarket. Fraud and deceit lie at the heart of the failure of our financial system.

Money represents the promise of delivery of future useful goods and services (FUGS). The operative word here is useful. If I have a voucher which I can only exchange for homeopathic lotions or Tarot readings, ie future useLess goods and services (FULGS), then that voucher is in reality worthless, it is not real money. Some silly people may argue that homeopathic lotions and Tarot readings represent value for money to them. During the height of tulip mania in Holland, some silly people paid the equivalent value of a house to buy a tulip bulb. Such people are the suckers who feed the bogus economy, the figures for which are then added to the real economy in an undifferentiated manner, which then distorts any true information as to what is actually happening in the real, worthwhile economy.

Money is a promise of FUGS, nothing more. In itself, money is intrinsically worthless, whether in the form of banknotes, cyberdigits in your bank account or shares in the stockmarket. Only the ability to transform those types of money into FUGS gives value to your money. If that promise cannot be fulfilled, if confidence in the money is lost, then the value of your money evaporates and it becomes worthless.

What gives us confidence in our money? Before the Ponzi scheme of fractional reserve banking was invented, fiat currency was physically backed up by adequate gold reserves stored in bank vaults. However gold itself does not confer any FUGS either. Apart from limited applications in dentistry and electronics, gold is intrinsically worthless ("bling" does not count, in this essay we value substance over style). Gold is merely another form of money, merely a promise of FUGS. Physical gold was previously useful to back up paper currency because being rare, it has high "value density" (small quantities can represent large FUGS), it is non-perishable (it can be stored indefinitely without deterioration) and it is not consumed (not generally eaten, combustible or otherwise used up).

Contrast the gold standard with the detergent standard of currency. Boxes of detergent were used as defacto money in the hyperinflation period of Zimbabwe, when a trillion zim dollar banknote would not even buy a loaf of bread. Detergent does have intrinsic value, but it delivers just one service: cleanliness. Zimbabweans would however happily exchange a box of detergent for a few loaves of bread because both had intrinsic value. However detergent has low "value density". It may be possible to purchase a bicycle with one gold coin, however it may take a large, heavy crate of detergent to make the same purchase. Furthermore detergent can dissolve and perish if exposed to damp (it cannot be stored indefinitely) and detergent is a consumable commodity. Despite these drawbacks, the "detergent standard" of money did work when the "paper standard" of money failed.

 

Bretton Woods: In July 1944 in the dying days of WW2, the Allies got together in Bretton Woods, New Hampshire, to plan and shape global postwar redevelopment and trade. It led to the eventual formation of the IMF, GATT (later WTO) and IBRD (later World Bank). It also led to the designation of the US dollar as the global reserve currency to which other currencies would be pegged, backed up by gold kept in US vaults (The US held almost 80% of the physical gold in the world then). Unfortunately as the years went by, the temptation by the US to print more money than was backed up by the real gold proved too great. By the late 1960s, the US was living beyond its means, with massive trade deficits. With doubts about the US being able to service their debts, other nations were demanding to exchange their greenbacks for real gold from the US coffers, demands which ultimately could not be honoured. The game was up. Nixon decoupled the American greenback from the gold standard in 1971, overturning Bretton Woods and turning the US dollar into a 100% fiat currency. This provoked a crisis of confidence in the US dollar and drastic drop in demand for the greenback, hence a drastic drop in its value. It raised the question by the international community whether the US dollar should remain the global reserve currency. How could the global financial system then subsequently function on pure fiat US currency, indeed how did the global economy expand exponentially as it did from 1971 till the 2000s, without gold backing?

 

The Petrodollar: In 1973 the Arabs were defeated yet again by Israel in the Yom Kippur war. In retaliation, the Arabs, by way of OPEC, imposed an oil embargo, triggering the first international oil crisis to punish the West who had supported Israel. Nixon and Kissinger devised a "solution" to this situation, as well as the US dollar crisis, which was a stroke of brilliance. It not only addressed the USA's concerns about future secure access to foreign oil, it restored confidence in the greenback as the global reserve currency and most of all, it enabled the US to effortlessly accumulate mind bogglingly immense wealth in the decades to follow. It was a first class ticket on the richest gravy train of all time. If most non-Americans today actually understood this scheme, there would be international outrage to demand it be overturned immediately. It was the US Petrodollar.

The US negotiated this agreement with the Saudis: They would defend the Saudis against any future Israeli or other foreign attacks, they would defend the Saudi oilfields and they would provide the Saudis with abundant high tech weaponry. This amounted to the solid entrenchment of power for the Saudi Royal family, an offer they could not refuse. In return the Saudis simply had to sell their oil only in US dollars (refusing any other currency) and after Saudi domestic expenditure, excess oil profits were to be used to purchase US debt securities, to be held in Western banks (later known as Petrodollar recycling).

It was essentially a protection racket.

This scheme encouraged the US to maintain Israel, their nominal ally, as the bogeyman in the Middle East, which also involved selling high tech US weaponry to Israel. A sweet deal for the US military industrial complex, who were selling weapons to both sides, weapons which would require frequent upgrading in this arms race.

By 1975, the USA had persuaded the other OPEC countries to sign up to this deal.

For the US, what did the Petrodollar mean? It meant they could get oil essentially free from the Middle East, simply by printing US dollars, a privilege enjoyed by no other country. It meant that US debt would be underwritten by foreign investments. It meant that other countries which needed oil (ie everyone else) had to buy US dollars first, either very expensively in the foreign exchange market or more cheaply by exporting their goods to the US and obtaining US dollars in return. The latter meant that the US could obtain foreign manufactured goods (eg high quality Japanese cars) for free, simply by printing US dollars.

To the rest of the world, the US dollar represented the promise of access to petroleum, the keystone commodity which fueled the industrial economy (and industrial agriculture), which enabled raw materials to be mined and manufactured into products, and enabled services (especially transportation services) to be delivered. The Petrodollar was the new guarantee to the rest of the world that a US dollar represented FUGS and hence no longer needed gold backing. Gone was the crisis of confidence in the US dollar. Indeed this scheme created a huge surge in demand for the greenback, strongly raising its value against other currencies, hence the world was happy for it to remain the global reserve currency.

We can therefore understand how the US was able to accumulate huge material wealth (wealth being defined as easy access to a wide variety of high quality goods and services) beyond the wildest dreams of avarice, not by being a particularly productive country, but by running a protection racket known as the Petrodollar. It also explains the heavy US military presence in the Persian Gulf and all the oil rich Middle Eastern countries not aligned with Russia. It also explains just about all US foreign policy with respect to the Middle East since the 1970s, especially the invasion of Iraq.

If the oil rich Middle East was politically stable, they would not need military protection and the Petrodollar would be unnecessary and irrelevant. Hence the US had a vested interest in keeping the Middle East unstable. Divide and profiteer.

 

Petroleum and real economic growth: The upslope of the Hubbert curve for world conventional oil production from the 1850s till the peak in 2005 approximated an exponential curve. It was this increasing availability of high net energy sources (or Hi-NES – if you are unfamiliar with this concept, please read appendix first before proceeding), over those 150 years which enabled the exponential increase of the real economy during that time. More Hi-NES enabled more widgets to be produced and more people to be employed making them. More businesses could open and all businesses could grow as the pie expanded. Growing businesses meant growing profits, hence the original startup business loans could be paid off with interest. High EROEI oil fed industrial agriculture, which fed an increasing population, who were the workers and customer base for the growing economy. The originally pristine environment was able to cope with our toxic discharges with apparent impunity in the beginning, however pollution ultimately represents another limit to growth. Even if we had unlimited Hi-NES, the MIT Limits to Growth models showed that pollution was another factor which would inevitably curtail our growth, then force a reversal, as the residents of the polluted cities of China can tell you. However we do not have unlimited Hi-NES and it was the plateuing of conventional oil since 2005 which has caused the stagnation of the global real economy.

To the Neoclassical economists, economic growth was the only thing they ever knew in their lifetimes and was the only thing that their limited imaginations could conceive of. If high EROEI conventional oil depleted, they said, human ingenuity would just find something else to replace it. Wrong. Newsflash: low EROEI unconventional oil is no substitute, it is a fools' errand.

The fractional reserve banking, money printing, growth dependent, interest dependent, debt dependent, inflationary, neoclassical economic paradigm was only possible in a world with increasing Hi-NES availability on the upslope of the Hubbert curve (and also required an uncrowded planet, unpolluted environment and stable climate). All that has changed. The growth economy is now just a memory in the rearview mirror, it is deceased, buried, kaput, gone, decomposed, ended, terminated. That parrot is stone cold dead and no amount of Pythonesque denial will change that fact. We now face global economic contraction and innumerable challenges which cannot and will not be met by discredited blinkered economic "experts" with old, deluded ideas and no understanding of energy and the limits to growth.

 

Greece: The basic understanding of money and its ultimate dependence on Hi-NES outlined above are required for us to understand, at least in part, the Greek crisis. Some people wonder why Greece cannot simply exit from the Euro and print their own Drachma and continue to function happily. If Greece had its own Hi-NES (eg a newly discovered "Leviathan" gas field) to back the Drachma, they would have no problem (at least not till climate change renders Greece about as habitable as the Sahara desert). However Greece has to import virtually all its energy and most of its food from abroad. From the moment the Drachma is printed it will have no value, as it is backed by nothing. Few Greeks and no foreigners will accept the Drachma as a promise for any FUGS, it will become "funny money". Greeks in good times and bad will still seek (and trade with) Euros or US dollars, regarded as "hard currency". What gives the Euro its value, in contrast to the worthless Drachma? The Euro is backed by the agri-industrial capacity of Germany and France, which can confer FUGS. This capacity is fueled primarily by petroleum and to a lesser extent by other fossil fuels such as gas and coal. In France, nuclear powered electricity plays a role, but grid based electricity can never offer all the flexible services and secondary products (eg petrochemicals, pharmaceuticals) that petroleum can. Furthermore the mining, transportation and enrichment of uranium and maintenance of the nuclear power stations requires fossil fuels. Hence ultimately all value of the Euro stems from European access to fossil fuels, petroleum being the most important. If Germany and France are starved of fossil fuels, the Euro too will become worthless.

What mechanism controls the flow of petroleum to the Eurozone? Primarily the Petrodollar system, now that the North Sea Oil fields are all but depleted, although Russia is becoming an increasingly important energy source for Europe.

It is astounding that conventional economists fail to acknowledge that an ongoing Hi-NES is absolutely essential for industrial economies to function. It is astounding that they fail to acknowledge that Peak Oil means the end of real (as opposed to bogus) economic growth worldwide. It is astounding that they fail to acknowledge that the inevitable decline of Hi-NES, irrespective of oil price, means the inevitable decline of the worldwide economy. This economic decline, now merely beginning, is a permanent trend. Hardships will become ever worse as time goes by until the global die-off of excess humans15 is completed. All of those conventional economists and those sheep brained politicians bleat on about "eventual return to growth". Those who truly believe such nonsense are fools. Those who understand the situation but make false public declarations about future growth to "maintain confidence in the share market" are liars. Which one is Joe Hockey?

 

Debt, the Bogus Economy and Financial bubbles

What is debt? If I give you an IOU note, that note is my promise of delivery of future useful goods or services or FUGS to you by me, to the value indicated on the note. Confidence in that IOU may be gained from my track record of previously repaying my debts on time, and my projected future earning power, but ultimately the debt can only be guaranteed by my assets, which must be at least equivalent in value to the debt, ie. collateral. Solvent debt assumes you are able to seize that collateral if I default payment.

In the absence of collateral goods, the creditor, if sufficiently powerful and mean spirited, may demand that the insolvent debtor repay the debt in the form of future services (better described as servitude) according to the terms defined by the creditor, until that debt is discharged to the creditor's satisfaction (ie never). In other words, the debtor becomes a debt slave. This is what has happened in Greece, along with the forced fire sale of many Greek assets at bargain basement prices.

What will be the fate of debt slaves? They may either curl up and die, which will be the fate of Greece (unless they default and align with the BRICS), or they may instigate a World War (as was the case with Germany, burdened with punitive debt after the treaty of Versailles and then faced with the Great Depression).

If debt represents FUGS, and if, as we previously mentioned, money represents FUGS, then surely debt = money ?

Indeed, it is this idea that debt is a form of money, that debt can be included on a balance sheet as an asset, which has driven the "credit" card (better described as "debt" card), consumption based economic expansion of the last few decades. The bogus debt based economy now exceeds the numerical value of the real physical economy many times over. Nicole Foss' summary data show that global debt is 100 times larger than global production of real goods and services. This debt is clearly irredeemable, we would be lucky to get one cent on the dollar if it was all called in tomorrow. A more realistic outcome, given the workings of our system, is that a tiny minority ("the elite") will get 90 cents to the dollar and the vast majority of creditors will get nothing. We are playing musical chairs with just one chair per hundred people.

Bankers had major incentives to persuade everyone to rack up debt, because the bankers' salaries and bonuses were tied to their creation of new loans and mortgages, regarded in the finance world as creating new money. This is why you received so many letters from the banks encouraging you to increase the limit on your "credit" (=debt) card. This is why you there are so many advertisements in the media encouraging you to access "easy" money from all sorts of loan companies.

In the good old days when most bankers had ethics, loans and mortgages could not be granted unless the debtor demonstrated a solid ability to repay and had adequate collateral (or a guarantor with collateral). The bankers have since however manipulated the system to overturn such regulatory mechanisms. From the early 2000s, predatory lending by greedy US bankers to naive people with few or no assets (NINJA loans – No Income, No Jobs or Assets) to buy overpriced properties, created irredeemable debts. Those debts were bundled and repackaged as CDOs (collateralised debt obligations) to hide their origins. CDOs were certainly debt obligations, but they were far from collateralised. Corrupt ratings agencies classified CDOs as triple A rated assets, when they were in fact massive liabilities. Corrupt insurance agencies with insufficient funds pretended to insure the CDOs against default with CDSs (credit default swaps), another illusory derivative. Fraud, deceit and corruption lay at the root of the subprime mortgage scam, which led to the financial crash of 2008.

The trigger for that crash was the spike in oil price to $147/- per barrel as a result of Peak Oil. High oil prices caused living expenses to skyrocket and net incomes to crash, rendering many people unable to service their mortgages, leading to an epidemic of defaults.

The perpetrators of the Global Financial Crisis (AKA GFC), the predatory bankers, flew in their private jets to meet Obama to find "solutions". The result was the diversion of almost a trillion dollars of US taxpayers money (which would normally be used to fund social services) to bail out those "too-big-to-fail" banks. Other new government financial commitments to stabilise the system amounted to trillions more. The mortgage holders at the bottom of the heap lost of their equity deposits (often amounting to their life savings), faced foreclosure and lost their houses. Those actions can be summarised by the phrases, "privatise the profits and socialise the losses", or if you like, "screw the common people".

Why have none of those corrupt "banksters" ever gone to jail? Why have they been allowed to carry on unpunished? Why has systemic banking reform not been implemented by the US government?

When the private banks have bankrolled the election of the US President, (the banksters fund both red and blue parties, hence they win either way), when they have bought off all the congress members and judges, when they employ swarms of lobbyists in Washington, when they are allowed to create cybercurrency from nothing in the fractional reserve system, when they control the purse-strings which fund the entire military-industrial complex, those bankers hold ultimate power. When they claim to be "too big to fail" and threaten to bring down the entire global economy unless bailed out by the US government, the banksters become untouchable.

Let us not even get into the "Libor" scam.

Those who are not utterly outraged by this state of affairs are either cluelessly comatose or are sociopathic beneficiaries of this monumental swindle, this daylight robbery of the poor to benefit the rich.

The Eurozone is of course an integral part of the Western Predatory Capitalist system. Predatory lending by French and German banks (who ignored due diligence) to deceitful Greek governments (who lied about their ability to pay), also created irredeemable debt, which lies at the root of the Greek crisis. Banksters at both ends benefited personally, but it was the Greek banks which held the loans and the Greek public who are burdened with the debt. The current bailouts from the ECB are not going to the Greek people but are going to the Greek banks to prevent them collapsing. If the Greek banks collapse, the existing trickle flow of Euros to the Greeks which is enabling them to barely limp along at this time, will cease completely. Greek society will then grind to a halt and descend into chaos, with mayhem and murder on the streets. The first people to be killed will be the refugees from Africa, being vulnerable scapegoats and easy targets. Golden Dawn will have its golden dawn, bathed in blood.

Such corrupt lending and borrowing practices lie at the root of the irredeemable debts affecting all the PIIGS countries. They are Ponzi scams (or more precisely, conduit scams) which are guaranteed to collapse, notwithstanding multiple efforts by the troika to "kick the can down the road". The longer they delay the collapse (by offering yet more irredeemable loans to the debtor countries' banks as temporary bailouts), the harder the fall will be. The troika refuse to consider writing off any of the debt, which ultimately is an act of suicide. They are well aware that the inevitable debt default will cause the collapse of the German and French banks and the Euro financial system, with a domino effect involving the entire global financial system.

You can bet those banksters have contingency plans in place for the inevitable collapse. You can bet their plans were devised behind closed doors and will never be disclosed to you. You can bet their plans involve protecting themselves and screwing the public.

Predatory lending by greedy investment bankers and energy ignorant investors (AKA suckers) to finance US shale oil developers (and other unconventional oil sources) has also created massive irredeemable debt and a bogus junk bond and derivatives market. This bubble is also guaranteed to burst, the process being accelerated by current low oil prices. However even at higher oil prices, collapse would be inevitable anyway, because the low EROEI of shale oil could never generate sufficient profits to repay the original investment loans, much less the interest on those loans. Shale oil was a Ponzi scheme from the get go. Conventional oil wells typically take several decades to reach peak output after initial drilling, and post peak may decline by 4 to 6% per year, if extraction techniques are not abused. Shale oil "plays", if at all productive, usually reach peak output less than a decade (maybe 5 years) after initial fracking and by the first year after peak production typically decline by 70% and by the third year post peak typically decline by 85%, a shocking rate of depletion.16

Collapse of the investment banks would not matter much to ordinary people, if it is only the speculators and bankers who lose their money and if the savings accounts of ordinary people are quarantined from such a collapse. However that is no longer the case. Certainly in the US, mechanisms such as Glass-Steagall which previously protected ordinary savings accounts, have long since been dismantled due to the influence of the corrupt banksters on their "bought and paid for" politicians and legislators.

In Australia, Kevin Rudd pledged immediately after the GFC that 100% of savings accounts in the major Australian banks would be 100% protected from any losses. Nowadays since the end of the mining boom, with Australian balance sheets permanently in the red, we are only "guaranteed" protection of the first 250K of savings and even that may be revised to a lower ceiling or no ceiling in future. The seizure (=theft) of part of the savings deposits of ordinary Cypriots by their government, to bail out the Cypriot banks in 2013 (which were then sold cheaply to Greek banks), was a tiny taste of what lies ahead for all of us17. Nicole Foss has described a savings deposit as "your unsecured loan to the bank". Security of savings may not be a concern to those people who have no savings at all and may mostly be in chronic debt. They may hold out the hope that their superannuation may provide some financial security for their retirement. However, if one's superannuation is in the form of shares, as it is for the majority of Australians, then its value could fall from 250K to zero over just a week, following a share market collapse. Keeping assets in the share market is a worse option.

The inevitable future collapses of numerous fraudulent bubbles will lead to share market collapse, which will threaten the investment banks, and once again lead to the bailout of the too-big-to-fail banks by purloining taxpayers money (hence further shortchanging social services) and pilfering the savings accounts of ordinary people.

For those holding loans or mortgages who may harbour some hope of debt forgiveness or debt writeoff in the future, it is best not to hold your breath. History has shown that the only people who were offered debt forgiveness were the corrupt architects of this system, who were bailed out by their bought-and-paid-for governments. Poor people who were duped into signing irredeemable mortgages lost their life savings and were evicted from their houses. In the USA, not even death allows the writeoff of government student loans: the family will be forced to eventually pay in full, even while mourning the death of that young person.

Even at the level of Nation States, it is the corrupt predatory bankers in the richer countries who dictate the terms, turning entire peripheral countries into debt slaves. On an individual basis, come the economic collapse, the 0.1% will continue to live high on the hog, protected by armed mercenaries AKA "private security firms". Ordinary people will be turned into debt slaves and become either workers on the land or in sweatshops, or be conscripted by their governments on behalf of the military industrial complex to serve as cannon fodder, pursuing the last remaining Hi-NES in foreign adventures.

 

Financial collapses from periphery to core

We already alluded to the self cannibalisation of Europe, starting at the fringes. When the inevitable default of the PIIGS countries occurs, the French and German banks will collapse and the Euro will collapse as a currency. No one knows exactly when this will occur. It seems likely that the British, who are bringing forward their Eurovote from 2017 to 2016, will opt to abandon ship before the Eurotanic sinks.

All countries around the world without exception will face economic and industrial collapse in the long run, due to the decline of Hi-NES (and other factors eg climate chaos, ecodestruction). The US will try its best to be the "last man standing". Given that Wall Street lies at the core of the Western financial system and the US dominates over the Eurozone by virtue of the Petrodollar, and given the elites' intent to sacrifice the "peripheries" to preserve their "core" for as long as possible, here is a possible sequence of financial collapses from periphery to centre:

 

1. Collapse of Cypriot banks, while attempting to preserve Greek banks (the plunder of Cypriot savings and fire sale of Cypriot banks to Greek banks has already occurred)

2. Default of Greece, collapse of Greek banks, while attempting to preserve German & French banks

3. If the British are smart, they will exit the Eurozone between 1 and 2, although time is very short and 2 may happen soon.

4. Default of other PIIGS countries with collapse of their banks, immediately followed by

5. Collapse of German & French banks, complete collapse of the Euro, while attempting to preserve AngloAmerican banks

6. Collapse of the AngloAmerican banks and the end of the entire Western financial system.

The timescale of events will be nonlinear, starting off relatively slowly then picking up speed as the dominoes fall over.

The above is purely hypothetical. It is possible the 16 trillion dollars or so of insolvent US debt, if called in by creditors, may cause the core to implode sooner rather than later. The above also assumes the Western Financial system is a universe unto itself which is obviously incorrect. The global nature of complicated financial webs means any country plugged into the Western Financial system eg China or other BRICS countries or other East Asian countries, will also collapse unless they can establish their own independent financial network ASAP. If the BRICS can create a financial network independent of and saner than the Western debt based endless growth Ponzi system, there is a chance that they, and the other countries which sign up to their network, may continue to plod along even as the West implodes and descends into chaos.

What will Australia do? Given cultural sentiment, blind faith and deep ignorance, the likelihood is that Australia will stay with the Western Bloc till the bitter end.

 

The Petrodollar today and possible plans of the BRICS

American industry is a mere shadow of its former self. Manufacturing has been outsourced from developed countries to developing countries in the process of Globalisation, a process which will inevitably cease with the depletion of affordable transport fuels. Even though China is now the world's industrial powerhouse, America remains the dominant financial player by virtue of the US Petrodollar system, which controls the availability of most Hi-NES, which power the industrial economies.

Conventional economists fantasize they can maneuvre their way out of this global depression by tweaking the knobs of the economic machine to stimulate growth again. One tactic was zero interest rate policy or ZIRP. Another maneuvre was repeated massive "quantitative easing" (AKA magically creating cybermoney out of nothing) by the US government to boost liquidity in the banks, who should in theory then be encouraged to loan out those funds, to stimulate economic activity. Runaway inflation of the US dollar has not yet happened because that QE cyber funny-money has not yet been fully released into general circulation. Furthermore as the greenback is the defacto international currency and US dollars are widely distributed worldwide, that money pool is far larger than any other single currency and can cope with a much larger injection of funny money before inflation actually bites. Being an international money pool, the hardships of future greenback inflation will therefore be borne not just by Americans but by everyone around the world who holds US dollars. These are unique abilities of the USA by virtue of it being the only global hegemon: to print new international money out of nothing, to shift the burden of creating the value for that money onto others and to export the hardships of future inflation to the rest of the world. Parasitic profiteering.They know they are on to a good thing and will defend this cozy set of arrangements to the bitter end.

Individual countries can do nothing to change the Petrodollar system. Saddam, who tried to sell his oil in Euros, was invaded and killed. The very first "reform" by the US invaders was then to sell Iraqi oil in US dollars once again. Since 2003 Iran has been selling much of its oil in Euros and faced increasing international sanctions via blockades imposed by the US, with repeated threats of bombing. The US has tried to play hardball with Iran since 1979 using proxy warfare and all sorts of dirty tricks and has failed miserably. Heavy handed tactics have not worked. Einstein's definition of insanity was doing the same thing over and over and expecting a different result. Obama is not insane, unlike his predecessor (although his successor may well be). Obama's softer touch, combined with the current decline and uncertainty of the Euro (which now brings into question the wisdom of trading oil in Euros) may just persuade the Iranians to once again trade their oil in Petrodollars. On the other hand, those smart Iranians have also been intensely negotiating with the BRICS.

 

Future scenarios

 

Medium to Long term: With regard to global finance and economics, the flat availability of Hi-NES (ie Peak Oil) has now caused economic stagnation. We may desperately try to tread water for a while by eliminating wasteful practices, but ultimately Hi-NES depletion and the contraction of the real physical economy is inevitable ie. output of real goods will decrease and delivery of real services will decrease, with massive closures of factories and businesses and massive job losses. No amount of smoke and mirrors to puff up the bogus economy (eg overpriced snake oil projects, other subprime loan scams, tulip bulbs as expensive as houses) will change that. The advent of permanent global economic depression is an inescapable fact as sure as the law of gravity is a fact. Collapse of companies which use oil will mean a reduction in demand for petroleum or "demand destruction", which can lead to a lower oil prices (if the demand destruction outpaces the rate of Hi-NES depletion). Collapse of multiple extant Ponzi schemes will mean debt defaults, resulting in contraction of the money supply ie deflation, which again means lower prices in general. This will not necessarily be a good thing, as everything will actually be less affordable (prices corrected for deflation will show that the real costs of commodities will in fact have increased). Printing money and QE may maintain the illusion of stable prices for a while, but will not change the fact of reduced affordability. Once demand destruction has pared down the economy to just essential activities (eg food production and distribution), further depletion of Hi-NES combined with QE will lead to hyperinflation. Ultimately the "endless growth" predatory capitalist system is doomed.

Quite apart from financial/economic issues, the following are physical realities today, these events are currently underway right now:

1. Frequent extreme weather events due to runaway global warming, which will eventually lead to an ice-free hothouse Earth which will be largely unfit for human habitation

2. Peaking and depletion of other crucial resources eg NPK fertilisers, various metal ores etc

3. Befoulment of our environment with toxins (fracking and tar sand projects probably being the worst culprits), radioactivity (eg Fukushima – an ongoing issue, with radioactive coolant water going directly into the Pacific) and non-degradable waste (eg the plastic "gyres" in all the oceans, innumerable landfills and waste dumps)

4. The sixth global mass extinction which, from the selfish human point of view, will result in biological impoverishment of our planet and loss of ecosystem "services" which we previously took for granted.

 

In the long run, everyone is screwed. If Homo Stupidus do not go extinct by the end of this century, human numbers will certainly be drastically reduced, perhaps down to a few million or even just a few thousand in the few climate-favourable pockets remaining around the Earth. Life for the survivors will be nasty, brutish and short.

 

Short term: What will happen in the short term depends on how the Great Game of today plays out. The most important players grappling with the Western Power Bloc will be China, Russia and Iran, the latter because it will be one of the last few nations to possess substantial Hi-NES and is at the crossroads of East and West, a pivot state between Russia and China.

 

Russia Here are a few names to test your pattern recognition: Anna Politkovskaya, Alexander Litvinenko, Boris Nemtsov.

Vladimir Putin is almost certainly a cold blooded murderer, as is probably the case with many heads of state around the world. In fact, given their system, it may actually be impossible to become and remain the leader of Russia without killing a "few" opponents (?dozens ?hundreds). Nevertheless he is a rank amateur if compared with the most vile mass murderer of the 21st century to date: the execrable monstrosity known as Dick Cheney.

Putin is riding a wave of popularity in his own country, being the champion of a newly emboldened Russia, unafraid to call the bluffs of the Western Power Bloc. His trump card is of course the remaining substantial reserves of Russian Hi-NES. Thus any economic troubles at present are perceived as temporary. Russians are used to hardship and deprivation anyway, unlike those morbidly obese squidgy Americans.

In recent years Washington has been turning the screws on Moscow in all sorts of ways: positioning new cruise missiles in NATO countries bordering Russia, encouraging the Saudis to maintain maximum oil output to try to cripple the Russian economy, and being involved in all sorts of skullduggery in Ukraine, directly undermining Russia's sphere of influence. Russia has pushed back, particularly with their re-acquisition of Crimea to maintain possession of the only warm water Russian port.

 

China Current debt to GDP ratio in China is around 300%. In early August, at the time of writing of this article, there has been a 30% plunge in the Shanghai Stock Exchange over the past few weeks (after a bull run of more than a year). What is their risk of an endogenous financial implosion, unrelated to collapse of the Western financial system? If we regard Western sharemarket activities to be as clear as mud, what goes on in the Chinese sharemarket is as transparent as concrete. Whether the ability of the central totalitarian Chinese government to intervene in their sharemarket, banking system and currency is beneficial or detrimental remains to be seen.

On the positive side however, China is a major creditor nation and in theory if they mobilised their assets (eg US government bonds they previously purchased, China's massive foreign exchange reserves), China could subtantially service its debts. The debts owed to China by other nations such as the USA are however largely worthless irredeemable debts, a US pretence of solvency which can never and will never be honoured.

Unlike Russia, China lacks substantial reserves of Hi-NES but they have labour and industrial capacity on a scale Russia lacks. Hence this is an ideal partnership to spearhead the development of the Russian Far East, specifically the coast opposite the Kamchatka peninsula, which appears to be a done deal. The New Silk Road transport infrastructure projects extending from China to Russia are also on their books. If they hurry, they may just be able to complete such projects before depletion of Hi-NES renders them obsolete. Never mind, perhaps they can harness camels to tow those rail cars. Will Siberia become suitable for agriculture in the new hothouse Earth? Another possible joint project.

After prolonged insistence by the US that Japan should contribute armed forces for foreign "initiatives", the Abe government is overturning the pacifist constitution of Japan which was enshrined in Japanese law since WW2. This is a direct provocation to China.

 

BRICS The BRICS countries held their latest conference, incorporating SCO and EEU meetings, in Ufa, Russia in July 2015, a hugely important occasion which largely went unreported in the Western media. Apart from multilateral trade and financial deals between the BRICS countries and their establishment of the New Development Bank, the other question is whether the BRICS will be able to use their own currencies to directly trade in oil. The US will do its utmost to sabotage such a prospect, as this will directly undermine the US Petrodollar. If the US loses its Petrodollar advantage, its pretend economy based on parasitic bloodsucking will inevitably collapse.

One major outcome in Ufa was the treaty that any attack on Iran, projected to be the BRICS most important supplier of Hi-NES, will be regarded as an attack on the BRICS itself, who will then come to Iran's defence. American Neocons, be on notice. How nasty can things get? Global thermonuclear war is not outside the realm of possibility.

The BRICS, in their interactions with each other, have adopted the Chinese slogan of "win-win" respectful relationships. This implies that previous US – foreign interactions were "I win – you lose" disrespectful relationships, the behaviour of a bully.

 

The outgoing US administration: Our praise of Obama can largely be couched in negative adjectives: he is not stupid, he is not insane, he is not a global warming denier, he did not bomb Iran, he did not bomb Syria (actually no credit to him there as he was foiled by Putin18). He has fended off the extremist demands of a yammering Netanyahu. The theme of his administration was "don't do stupid things". As such, Obama was undoubtedly superior to the stupid, evil, criminal Neoconartists who preceded him. Our criticism of Obama can also be couched in negative terms: he failed to prosecute the fraudulent bankers, reform Wall Street and reinstitute Glass-Steagall (Dodd-Frank offers little reassurance). We cannot judge him too harshly on that score however, because he would almost certainly be assassinated if he attempted such reform. Is Obama a liar? His speeches promoting the fracking industry and predicting US energy independence can be regarded as laughable comedy skits. Is Obama a murderer? He ordered far more drone strikes than Bush ever did (including on US citizens abroad), with far more collateral innocent deaths, which may number in the hundreds or thousands. His targeted assassination of bin Laden might possibly be defensible as justifiable homocide in a court of law.

If the only choices for next US President are Jeb and Hilary, who are both insipid quisling tools of their byzantine establishment, we can expect a reversion to the doctrine of American Exceptionalism. This is characterised by an exceptional sense of entitlement to pilfer everything on behalf of their elite, while screwing vulnerable Americans and the rest of the world. Those who fail to comply can expect to be brutalised by the police and imprisoned (if in America) or bombed/droned (if overseas). The bombing of a BRICS/SCO ally country by the US or by a US proxy will not be tolerated by Russia or China and could easily escalate into global thermonuclear war.

Michelle Obama for President, anyone?

 

Conclusion: We certainly live in interesting times.

 

Footnotes:

 

13. Adam Smith was largely credited as the founder of classical economic theory. However he would turn in his grave if he knew how the modern day amoral neoclassical economists have hijacked, distorted and misquoted his ideas to suit their purposes. Smith himself was a strong advocate for social justice and in fact wrote his essay the "the theory of moral sentiments" before his more famous essay on the wealth of nations.

14. Private insurance companies have carefully done the hard calculations and ALL refuse to insure nuclear power plants, which therefore must be underwritten by Governments (ie the tax paying public). If the private sector, supposedly the driver of the "free market", considers nuclear power to be too risky, uninsurable and a nonstarter, why then do so many "free market" economists advocate nuclear power? Because their view of the "free market" is one which is free to purloin profits for private interests, but which imposes all risks on the public. Privatise the profits and socialise the losses.

15. Who are the excess humans? Anyone whose food and fresh water acquisition are dependent on fossil fuel input, ie. pretty much everyone in modern industrial society (the author included). If you can source enough food and water to survive without the need for fossil fuel input anywhere along the supply chain, and can do so on a sustainable basis, then you are not an excess human.

16. http://www.resilience.org/stories/2014-12-16/the-surprising-data-behind-shale-oil and https://www.rt.com/business/249529-us-shale-eia-report/

17. http://www.reuters.com/article/2013/03/16/eurozone-cyprus-anger-idUSL6N0C81DL20130316

18. Obama's threat to bomb Syria was foiled by Putin in 2013, however as of 4 August 2015 it appears Obama is going to bomb Syria anyway, in support of "Sunni rebels" (however these "rebels" cannot be clearly differentiated from ISIS, hence US bombing may actually support ISIS. Perhaps Obama is insane).

 

APPENDIX:

 

Energy Returned Over Energy Invested (EROEI or EROI) is a concept absolutely essential to the understanding of why and how our Industrial Civilisation is unraveling. To survive, any organism must gain more food calories than it expends in the process of acquiring that food (eg hunting or grazing). If an organism is highly efficient, say 50% efficient, in absorbing and converting the food it has acquired into the metabolic processes of living, it will need to gather at least 2X calories of food for every X calories it has expended in gathering that food, merely to exist. Put another way, it's food gathering activities must provide EROEI >2:1 to barely survive, not even taking into account the basal metabolic energy expenditure between meals.

For humans, pristine conventional oil wells offered EROEI of about 100:1, facilitating extraordinary industrial growth and population overshoot over the past 160 years. However, as a conventional oil well depletes, the EROEI declines. The well loses positive pressure and energy is actually required to extract the remaining oil (by horizontal drilling and saline and CO2 injection). Worldwide, conventional oil EROEI is now less than 15:1 because the majority of the giant oilfields are well past peak production. It has been calculated that we need EROEI of at least 10:1 for industrial society to barely function at its simplest level. World EROEI is scheduled to fall off a cliff after this year. By 2030, high EROEI sources will have all but vanished (see graph below). Furthermore, the export land model also suggests that due to domestic demand within the overpopulated oil producing nations, there will be no petroleum available for oil importing countries by 2030, just 15 years from now. Whichever way we look at it, industrial society will have completely collapsed by 2030. If some people are able to urgently transition, right now, to superefficient energy conservation and can use local renewable energy sources, then some communities may be able to maintain a semblance of stable society in the medium term (but there will be no prospect of large scale industry).

Unconventional oil sources offer EROEI of around 3:1 or less (tar sands are around 1.5:1) and impose horrific environmental costs, hence they are not viable options, they are dead ends, they are fool's errands. We must focus our attention on "high EROEI" or "high net energy" sources which I have abbreviated to Hi-NES. These are now rapidly depleting worldwide. We cannot blindly accept the total liquid hydrocarbon output graphs as published by the EIA or IEA or CERA which are at best meaningless and at worst misleading. For example, ethanol from Nebraskan corn is an insane project, providing EROEI of barely 1:1 (probably less) and should not be included in the total because it is an energy loser.

Furthermore, we need to focus on oil affordability rather than on oil price. "Low" oil prices are meaningless if the consumer cannot afford it due to demand destruction and economic deflation. If the price of oil drops by half but your salary drops by two thirds, that oil is actually more expensive for you despite the "cheaper" price. Declining Hi-NES inevitably leads to economic contraction (ie job losses and salary cuts) and inevitably leads to declining affordability of fuel, irrespective of price.

 

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