Friday, April 30, 2010

Two Charts: the Dow and Dow/Oil

by Charles Hugh Smith

Two charts reveal much about the current Wall Street rally in equities.

Frequent contributor Harun I. provided two self-explanatory charts which shed light on the current rallies in the stock market and oil.

The first is a long-term snapshot of the Dow Jones Industrial Average, showing its 11-fold increase from the start of the Great Bull Market in 1982 to the present "nascent recovery." As Harun notes in his comments, credit default swaps have risen 10-fold since the dot-com bubble burst; CDS can be viewed as a rough measure of leverage and risk-gaming.

One dollar in 2000 is $1.26 in 2010 dollars, hence Dow 11,000 in 2000 is equal to Dow 13,860. Thus even as the Dow has returned to 11,000 nominally, the value of those shares has declined 26% in the past decade.

Harun illustrates purchasing power with this Dow/Oil ratio chart. In essence, even as the Dow has risen some 70% from 6,550 to 11,200 (a 4,650 point rise), the amount of oil a share of the DJIA can buy has remained more or less the same as when the Dow was still 8,000 in 2009.

Thank you, Harun, for these enlightening charts which remind us that nominal prices are not the final arbiter of value or purchasing power.

I would like to make an important clarification about my entry yesterday, Debt, Democracy, Autonomy and Revolution: Understanding 2010-2021 (April 29, 2010). By using the word "revolution" I meant a revolution of understanding as noted in this paragraph:

Debt servitude and the fact that they now own virtually nothing will predispose citizens to finally grasp the failure of the Savior State/Plutocracy status quo; that revolution of understanding will lead to an embrace of radical reforms which were hitherto "impossible."

I should have emphasized by radical reform I mean peaceful, legal reform of the kind which has often been advocated in U.S. history: by Progressives in the first decades of the 20th century and by reformers in the post-Watergate era, to name but two examples.

I do not believe in violent revolution as a "solution" any more than I believe that scapegoating other nations or groups solves political/financial problems. We as nation and we as a species are entering dangerous times, and my core spiritual and political views as expressed in this site are grounded on the belief that positive transformation is not only possible but it is the only real solution to our interconnected problems. I believe that political, financial and cultural transformation is a legitimate and realistic alternative to violent chaos or a Police State.

The "Third World" (those parts with functioning government and relatively low levels of inequality) offer numerous examples of how life goes on quite happily if financial assets fall as financial fraud collapses. As I have noted many times here, the vast majority of Americans don't actually own any assets of substance anyway, so the collapse of assets will also mean the disappearance of all debt: credit, debt and assets are connected.

The top 1% will suffer the loss of assets; the bottom 80% will lose their debt-serfdom. It's something to consider: a collapse of the status quo Wall Street Fraud would only be a calamity to the small circle who own 93% of the nation's financial assets. For the rest of us, it means a Debt Jubilee as uncollectible debts are written off en masse.

I see no need for revolution; what is needed is individual responsibility and autonomy, an engaged citizenry, the reduction of concentrations of power and a transformation to a sustainable way of living.

I also want to make it clear that in asking whether the corporate Mainstream Media has an agenda in their largely negative coverage of the Tea Party movement, I am in no way condoning racially offensive depictions of President Obama which appear at various Tea Party demonstrations. I find these inexcusable, and remind readers that President Obama and I are both alumni of the same prep school, Punahou School. While Punahou is a bastion of privilege (Obama's grandmother paid his tuition, while I attended tuition-free because my stepfather was a teacher there), it is a multi-ethnic bastion of privilege.

I would also remind readers (or inform new readers) that I am married to an Asian-American, my stepmother is Hispanic, my niece is African-American and I am Scots-Irish/English and French (Wallace/Robinson, Smith, Mankin and Basset). All the members of my family are native-born Americans. In other words, ours is a typical American family. (In the extended family, there are gay Americans as well.) To show how open-minded we are, my brother married a French citizen (now that's open-minded!)

We are in this together, folks, and as the fraud and debt-based economy crumbles around us, we must be wary of the temptation to scapegoat or demonize various nationalities and groups, both within the U.S. and in the world at large. I remind readers thatpropaganda works by reinforcing the biases we already have. That goes for all political persuasions.

For myself, I turn to these lines for guidance: He that is without sin among you, let him first cast a stone at her. And again he stooped down, and wrote on the ground. And they which heard it, being convicted by their own conscience, went out one by one, beginning at the eldest, even unto the last: and Jesus was left alone, and the woman standing in the midst. (John 8:7-9)

Though this is from the Bible, undoubtedly every major faith has a similar passage or lesson.

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Thursday, April 29, 2010

Debt, Democracy, Autonomy and Revolution: Understanding 2010-2021

by Charles Hugh Smith

The specific experiences of debt servitude and powerlessness will help create a new set of radical political ideas and ideals which will reinvigorate a passive, complicit U.S. populace.

New York City readers: I need a favor. Reader/blogger/vet/student Tommy atFreedom Guerrilla needs 100 NYCers to take a quick online survey on urban agriculture. The purpose is to support a proposed Urban Farm in New York City. Please help him with this project--thank you! CHS

Shills, hacks and apologists from the Demopublican/financial Power Elites/MSM status quo are desperately attempting to discredit the Tea Party movement, as it poses a direct threat to their cozy partnership of corrupt governance, propaganda, fraud and monopoly capital cartels.

The Democratic and Republican parties are self-serving zombies which are still shuffling forward under the power of the monopoly capital/cartel Power Elites who value the simulacrum of democracy these dried husks provide.

No one can predict if the Tea Party movement will revitalize one or both zombie parties, become a true Third Party or dissipate under the relentless attacks of the status quo into ineffective warring factions (i.e. the Tea Party People's Front and the Tea Party Popular People's Front, with a nod to Monty Python fans).

Here is what will not change, regardless of the fate of the self-organizing Tea Party movement:

The dominance of corporate/financial cartels has been masked by corrupt governance (the Savior State) and a corporate-owned Mainstream Media propaganda machine in service to the Savior State/Plutocracy partnership.

Personal independence and liberty require a decisive break from the current predatory/monopoly capital-cartel political and economic system.

A crisis will crystallize a powerful emotional understanding of a new or renewed ideology of individual autonomy and liberty. The status quo will expect citizens to act only on pocketbook issues; the Elites will be wrong.

The crisis will compel non-Elite, non-protected-fiefdom Americans to rethink their assumptions about governance, wealth, liberty, autonomy and personal responsibility.

Debt is a form of servitude, and Americans will wake up to the fact that they are serfs in a debt-based feudal state akin (as per the Survival+ analysis) to a feudal plantation economy.

Extreme concentrations of capital and power control the vast majority of the U.S. economy and Savior State/levers of governance.

The ideologies of the Zombie Parties (Democrats and Republicans) no longer have any connection with the lived experience and "social knowledge" of the bottom 80% of American citizens.

The goal is to liberate ourselves (the bottom 80%) from the clutches of a morally corrupt and oppressive status quo which is undermining our autonomy and liberty.

The status quo is morally degenerate: both politically and financially, it is based on an interlocking foundation of lies, half-truths, misdirections, misinformation, propaganda, embezzlement, fraud, prevarications, bogus statistics, fraudulent balance sheets, mis-stated assets and liabilities, collusion, trickery and corruption.

The personal experience of debt servitude and loss of autonomy will be transformed into a shared political consciousness which recognizes that each individual is part of larger political/financial systemic ills, and the the solutions require taking control away from concentrations of capital and power.

The fruits of production--the output of real work as opposed to the parasitic financial churning of transactions and digital data--will become politicized as those who are producing real value begin demanding a political voice in the governance of the nation.

The restoration of personal integrity and virtue will become political goals.

The physical degradation and decay of the American landscape, urban and rural, is connected to the misrule of the zombie political parties; a new ideology will emerge to restore the landscape and infrastructure by taking it out of the hands of the Zombie Parties and the corporate Power Elites.

The betrayal of the Public Trust, rising corruption and barely-cloaked plots against individual liberty will spark an Imperial Crisis in which the burdens of Empire are recognized and politicized.

The complacency and fatalism which characterize Americans' experience of politics will undergo a radical reformation which will be necessary lest autonomy and liberty be lost to concentrations of self-serving, over-reaching power.

Debt servitude and the fact that they now own virtually nothing will predispose citizens to finally grasp the failure of the Savior State/Plutocracy status quo; that revolution of understanding will lead to an embrace of radical reforms which were hitherto "impossible."

The specific experiences of debt servitude and powerlessness will help create a new set of radical political ideas and ideals which will reinvigorate a passive, complicit populace.

I know none of this fits in with the expectations of either the status quo or hard-core survivalists, who expect either a continuation of the lies, fraud and complicity of the status quo or a descent into violent chaos.

My own views are grounded in my study of American history and society. Maybe I will be completely wrong; I am always open to that possibility.

Let's agree to print this page out and compare notes in 2015 and again in 2020 on who had the more accurate grasp of the future.

Here are two interesting books on related topics. The first was recommended by Daniel C. and the second by Kevin L., who was kind enough to send me a copy.

Cornered: The New Monopoly Capitalism and the Economics of Destruction

Tobacco Culture: The Mentality of the Great Tidewater Planters on the Eve of Revolution.

And here is an interesting commentary on corporatism, the Savior State and the destruction of competition by cartels, recommended by Alan A.:

We Are All Fascists Now

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Wednesday, April 28, 2010

A Meditation on the Tea Party Movement

by Charles Hugh Smith

The Tea Party movement is neither fully formed nor monolithic. Perhaps there is more going on here than is generally credited.

I have yet to read an account of the Tea Party movement which makes any sort of comprehensive sense. What passes for "commentary" on the subject is mostly ideologically-driven spin from the "left" or "right," both of which see the movement as a handy rhetorical device they can mock or co-opt to make their same old tired "talking points."

My own sense is that a coherent account of the Tea Party movement must be far more nuanced and historically informed. The standard-issue pundit/commentator's ignorance of American history is so abysmal that it is little wonder that commentary on the movement is so threadbare.

To the frustration of those MSM pundits and Party ideologues seeking a sound-bite summary, the Tea Party movement is neither fully formed nor monolithic. There are Democratic Tea Party types, quasi-Libertarians--an entire spectrum of causes and emotional drivers loosely bound up under the one banner.

The comically self-serving frenzy of the Democrats and the blatant desperation to co-opt the movement by the Republicans are less reflective of the Tea Party than they are of the parties' own fears and failures.

The "progressives" either ignore the Tea Party's influence and gatherings, hoping not to encourage it with exposure, or they mock and discredit it by focusing on the inevitable self-aggrandizing grand-standers who appear like locusts whenever a new political movement is self-assembling.

What is striking to me is how the MSM coverage reflects--but does not comment on in a self-aware fashion--the stark terror aroused in the status quo by the Tea Party movement.

The Tea Party is creating fear and loathing in the status quo (Demopublicans and Savior State/Financial Plutocracy partnership) because it is the only potential political threat to the Savior State's protected fiefdoms and the financial/corporate Elites.

The Savior State is unprepared to deal with anyone who can't be bought off with a few crumbs of entitlement/bread and circuses. As I discuss in Survival+, the Savior State is partnered with the nation's Financial and corporate/cartel Power Elites.

To keep the lower-income masses politicially subservient, compliant and thus complicit in the rule by Elites and Savior State fiefdoms (public unions, sickcare and defense cartels, etc.), the Savior State distributes food stamps, extended unemployment, tax credits and other forms of "free money" to the underclass to keep them distracted, fed and politically neutered.

The status quo's private-sector propaganda division, the Mainstream Media (dominated by a handful of global corporations), provides plentiful "entertainment" to the masses while the Government Ministries of Propaganda distribute endless reams of phony data and manipulated statistics to support the "confidence building" view that the status quo is firmly in charge and thus resistance is both needless (because everything's going great) and futile (because you're so powerless and we're so powerful).

The ideal state of affairs for the Savior State status quo is complacency, complicity and a pervasive fatalism that the status quo is permanent and godlike and there is no point in resisting it.

The incentives are all to join in the fun and game the system as rapaciously as you can via liar loans, credit card debt you never intend to pay off, speculation in stocks and housing as a replacement for actually producing value in the real world, trumped-up resumes, bogus balance sheets, cheating on entrance exams, etc.

Into this comfortable world of protected State fiefdoms, Financial Overlords and fatalistic complicity in an economy based on lies, debt and speculative bubbles comes the Tea Party. The Tea Party participants are fueled by a deep and abiding awareness that the country is going down the wrong path, not just in a political or financial context but in a moral, values-based sense. (The three are interconnected, after all.)

The standard-issue sneering "progressive" pundit openly mocks the working-class roots of the movement, and spares no smear in attempting to discredit it: it's racist, led by show-boaters and nutters, etc.

This terrible need to trash the movement reflects a deep-seated fear that it might threaten the cozy dominance of "progressives" in the Savior State. Of course those same "progressives" have been delighted to enable the pillaging of the nation by various fiefdoms and cartels; as long as their power base and fiefdoms remain in place, nothing else matters. Even more revealing, the "progressives" refuse to grant any moral core to the Tea Party movement. The "progressives' and the MSM are studiously devoid of moral foundations; that sort of "opiate of the masses" stuff is for the poor, who are supposed to buck up via private prayer and do-good church functions like bake sales.

The "conservatives" are hypocrites of the first order, claiming the mantle of "free enterprise" while brown-nosing the "too big to fail" banks and Wall Street at every opportunity; the chains of their corruption clank loudly with every step.

Most importantly for both Zombie Parties, the "poor" and "middle class" alike are supposed to not vote and not resist their oppressors; and if they do vote, they're supposed to vote for the Democratic or Republican machines.

What is also striking is how quickly the Republican half of the status quo is moving to co-opt and defang the Tea Party movement. Their "me-too's" are truly pathetic. "You don't like higher taxes? Me, too!" Meanwhile, the Republicans oversaw the greatest expansion of government borrowing and spending in U.S. history, all the while giving endless corporate welfare to their Power Elite cartel pals and partners, even as they endlessly proclaimed "deficits don't matter."

The Tea Party is self-organizing, and that also terrifies the status quo. Like the Chinese Communist dictators who were stunned and horrified to find the Falun Gong had self-organized under their noses, the status quo is absolutely terrified by the self-organizing structure of the Tea Party movement, for it is outside the Elites' control.

Like the ChiCom dictatorship, the U.S. status quo must disrupt, discredit, undermine, infiltrate and co-opt the Tea Party movement because it poses a large-scale threat to the absolute political control of the "one-party state" which controls the U.S. for its own benefit: the Demopublican-Savior State/fiefdoms/Power Elite cartels status quo.

Like the Chinese Communist Party, their over-reaction is a measure of their panic at discovering a political movement in their midst which they do not control.

From this point of view, the desire to mock/discredit/co-opt the Tea Party is evidence of just how threatening it is to both corrupt, venal parties.

At this early stage, the Tea Party is not a "party" in the sense of being dominated by a national structure of command and control. Nor does it have a coherent set of principles which every "member" agrees upon. It is bound by a powerful awareness that something is deeply wrong with the nation and its financial/political leadership, something which neither the Democrats or Republicans have any interest in fixing as they are part of the problem.

Implicit in the Tea Party movement's anger is an awareness that 80% of the nation's households own virtually no assets. Yes, there is $1 trillion left in home equity spread among 50 million households ( Housing and the Collapse of Upward MobilityApril 16, 2010), but it can no longer be tapped. There are a few trillion in IRAs and 401K retirement funds, but the vast majority of these funds hold less than $10,000. Those with larger accounts lost 40% of their value in the 2008-09 timeframe and have not recovered their previous value, despite the tremendous rally in stocks.

Also implicit in the anger is a dismay that the nation's economy, government and media are all based entirely on webs of lies and fraud. People may not understand derivatives but they do grasp the moral rot that this reflects: How We Get Ahead Now: Gaming the System April 20, 2010)

Fixing the nation requires bypassing the existing parties and wresting control of the levers of governance from the State's protected fiefdoms (public unions, et al.) and the Power Elites' cartels (finance, banking, sickcare, defense/global Empire, et al.)

Pundits from the entire political spectrum--from "progressive" to tight-jawed Survivalists--cannot see that the Tea Party movement has much in common with the spiritual revivals in U.S. history which led to Revolution or Civil War.

While it is trendy to espouse cheap "follow the money" "explanations" for the American Revolution and the American Civil War, these mono-explanations miss not just the nuance of what actually happened but the core of what powered the participants.

Great political upheavals are not caused by people examining their pocketbooksand rationally concluding that the risks of revolution are worth some sort of future financial payoff. By that measure, fomenting Revolution against the world's greatest Empire (The British Empire) was a completely stupid "pocketbook" calculation: if you lost, then not only would you forfeit your possessions but very likely your life.

Remaining in the Empire offered numerous financial benefits and guarantees. It was the "obviously sound" pocketbook calculation, and that's why some 40% of the Colonies' residents were Royalists who supported the Crown and who resisted the Independence movement.

New political movements are powered by an emotional understanding that the status quo is untenable in some profound way. At some key juncture, the alternatives crystallize in a politically coherent fashion. In Colonial America, dissatisfaction with British policy and politics did not necessarily require a war of Independence; that "solution" only crystallized when moral revulsion at perceived British corruption and greed sparked by the Great Awakening (circa 1740s and 1750s) reached a powerful coherence with Enlightenment ideas of self-governance and liberty and a fear of indebtedness and loss of autonomy.

While it is fashionable to dismiss the Civil War as some sort of financial battle for dominance by the Northern Elites, that is not what the participants felt or what motivated their actions.

The status quo political powers are mystified by the Tea Party; we're giving them unemployment, tax credits and healthcare/sickcare coverage; we're buying them off with the same entitlements we offer our other constituencies; why aren't they silent and complicit like everyone else? Why don't they just take the swag and shut up like everyone else?

Lost in their moral rot, the status quo "leadership" cannot understand the Tea Party's anger. The Elites do not understand why the Tea Party rebels don't have the self-serving sense to just take the swag and go back to watching TV. What fires their enthusiasm for rebellion?

The British Parliament was equally confounded in 1773. The Colonists are well-off, and protected by the Empire; what is their problem?

The Tea Party is as yet an unformed movement. It might fade, gutted by co-option or intense factionalism, or it might transform one or both of the zombie parties, or it might eventually coalesce into a true political party. No one can say, but what powers the Tea Party--a sense that the nation has lost its moral bearings and its Elites have over-reached--will not fade. Those truths cannot be mocked, discredited, or co-opted out of existence; regardless of whether the status quo manages to quash the Tea Party or not, those truths will only gather force as the status quo's "nascent recovery," its deeply corrupted governance and its over-reach fail, and the status quo's foundation is revealed as a sandy sinkhole of fraud and lies.

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Tuesday, April 27, 2010

Why the "Nascent Recovery" Won't Last

by Charles Hugh Smith

The "nascent recovery" continues to be nascent a year later. Why? Because it's constructed on sand and hyped by smoke and mirrors.

The "nascent recovery" will soon be revealed as "failed" rather than "nascent."How long can "nascent" be deployed as cover for a "recovery" constructed of propaganda, manipulated statistics and "confidence-building" spin?

As my esteemed blogging colleague Mish pointed out not long ago, "nascent" continues to be the word of choice in the MSM, as if no one dares declare the "recovery" real for fear that such a claim will be easily revealed as utterly false. So to keep the spin machine intact, the "recovery" will remain "nascent" as cover for the less rosy reality.

Let's run through the fundamental reasons the recovery is bogus, not nascent.

1. Propaganda and "confidence-building" are constantly substituted for reality.The problem, we are repeatedly told, is a "lack of confidence." Consumers' and corporations' accounts are bulging with idle trillions awaiting "renewed confidence" to gush back into the economy, creating millions of new jobs and trillions in new wealth.

Here is a typical example:

Forecasters optimistic about economy, job creation

How many MSM stories have you read which refer to the "162,0000 jobs created last month" as evidence that the "economy is turning around"? Dozens, if not hundreds. How many note that the 162,000 number is entirely bogus, boosted by temporary Census Bureau hiring and tens of thousands of fictitious "birth/death model" phantom jobs?

The spin, hype and forced good cheer is essentially unlimited. As I write, stocks are up on news that Caterpillar reported an 11% decline in revenue to $8.24 billion, a huge "miss" since analysts polled by Thomson Reuters had forecast $8.84 billion in revenue.

The "surge in profits" didn't come from sales; it came from squeezing costs, a strategy which has some upper limit of effectiveness on goosing the bottom line.

Machinery sales surged 40% in the Asia-Pacific region, but of course no one explores the source of that "surge:" out of control spending on empty cities and luxury highrises in China. If that unprecedented real estate bubble in China ever pops-- and can any bubble continue forever?--then Cat sales will go into freefall.

That's not "confidence building" so it goes unsaid, despite being glaringly obvious.

2. Tax/borrow and spend is alive and well. States and local governments gorged on the housing/stock bubbles in the last decade, adding billions to their annual tax revenues and spending in just a few years. California went from collecting $76 billion in 2001 to $96 billion in 2008--a 26% increase of $20 billion.

Other than some modest increases in student test scores and another prison, the state has nothing to show for this gargantuan increase in spending. The high-cost status quo vacuumed up all that money and is now crying for taxpayers to pony it up, no matter what the consequences.

Meanwhile, back at the MSM Propaganda Ranch, everything's rosy, of course:

Here is the standard-issue "confidence-builder" on California's "nascent recovery", with a few editor's comments added:

Year-to-date revenue is ahead of estimates by $2.3 billion, or 4.1%. Revenue collections are running 2% above last year for the same period.

CHS: Wow, $2.3 billion! That means everything's "fixed," right?

The state's current general-fund budget is $86 billion, and the nonpartisan California Legislative Analyst office has projected that the state faces annual $20 billion shortfalls through the 2014-15 fiscal year, which ends June 30, 2015. The current budget gap, through June 2011, is $19 billion.

$19B minus $3B leaves a $16B deficit. Oops, I guess not.

In fiscal year 2001, the state took in $75.7 billion in major tax revenue. It plummeted to $62.7 billion the following year because of the national downturn and the dot-com bust. It took four years until revenue recovered to $80.1 billion, in fiscal year 2005.

So the state collected a staggering $20 billion more in taxes in 2008 than it did in 2001, and now it's crying poor. The state spent $20B more--fully 26% more than its 2001 budget--but to what effect? What got fixed? Nothing.

"When it gets to 2011, we're expecting rapid growth in California, and because it comes on the heels of several years of deep cutting in expenditures, it should be a year when we don't have another fiscal crisis, though government will be smaller in California," said economist Jerry Nickelsburg of the UCLA Anderson Forecast.

Mr. Nickelsburg, your name offers a clue as to the value of your forecast.

So everything's fine in tax/borrow-and-spendland because the politicos only have to paper over a $16 billion deficit rather than $19 billion. Wow, who knew it would be this easy to "grow our way" back to fiscal health?

The sordid truth is that accounting gimmicks, higher taxes on the wealthy, the flurry of speeding tickets and all the rest of the tricks being enacted have zero chance of closing a $16 billion deficit. Despite the painful visibility of this reality, the main output of the state capital continues to be denial and silence, as if all the politicos need to do is keep quiet until 2011 when "rapid growth" will magically levitate the state's structural budget and pension deficits into outer space.

3. The demographic time bomb is still ticking. The aging of the 78 million-strong Baby Boom means that the number of citizens sucking up Medicare expenses (roughly $400-$500,000 each under many projections based on current costs) will rise by 50% to 67 million in a few years.

Social Security rolls will rise by the same number as Boomers rush to cash in their dwindling retirement chips. The Social Security surplus has already rolled over into deficit as unemployed and downsized Boomers are taking their Social Security at 62 rather than waiting to get their full draw at 67.

So if half the budget is being captured by Medicare/Medicaid alone, where will the money come from for running the Empire, Social Security, interest on the national debt, etc.?

We'd rather not discuss that because it isn't "confidence building."

These gargantuan deficits aren't 20 years away--they're just a few years away. yet all the rosy projections never mention them, as they are inconvenient flyspecks of reality on the rosy forecast of "nascent recovery."

Here is a chart of the unfunded liabilities of the Savior State's entitlements:

Even if you expropriate the entire wealth of the nation--$54 trillion--you come up $50 trillion short.

4. U.S. GDP and personal income has been propped up by unprecedented Federal borrowing. The private-sector GDP plummeted by $1.5 trillion, so the Federal government borrows $1.5 trillion to backfill the decline. And for good measure, it also socialized the entire U.S. mortgage market, buying or guaranteeding 99% of all the mortgages issued in the past year.

Here we see that without government transfers--unemployment, tax credits, and various forms of welfare--personal spending would have plummeted along with real income. Thanks to government transfers, income and spending were successfully propped up:

Of course the money that was transferred was borrowed. It accrues interest and must be rolled over as it comes due in future years. Since all debt is a draw against future income, we as a nation are simply transferring future income into the present, just to keep the "nascent recovery" afloat.

5. The fundamentals of housing are dismal for decades to come. The family house, long viewed as the foundation of middle-class wealth, is now a moneypit, a black hole which sucks up wealth.

The Census Bureau just announced that there are 19 million vacant dwellings in the U.S.,up from 18.9 million. How do you say "oversupply"? Housing Headwinds and Baby Boom Demographics (April 13, 2010)

In the best-case scenario, it will take nine years to unload current inventory: 104 weeks to clear housing inventory, shadow inventory. So what happens if the foreclosure pipeline stays full longer than expected? What if current inventory keeps growing? The time needed to "clear inventory" essentially stretches out to infinity.

As I described in Housing and the Collapse of Upward Mobility (April 16, 2010), the equity remaining in 50 million mortgaged homes is a pathetic $1 trillion. Americans can no longer extract trillions in "free" cash from their homes--most have no equity left, and those who do cannot borrow against it because lenders will only loan 80% of value.

Housing's freefall devastated the nation's wealth and removed the middle class's ability to leverage their assets into debt-based spending.

So let's add this up. American's personal income is in a freefall and spending is only flat because the Federal government is borrowing and distributing fully 10.7% of the nation's GDP every year.

The two-thirds of households who own homes in the U.S. have seen their equity plummet from $16 trillion to $6 trillion. Those who own their homes free and clear (roughly 30% of all 75 million homeowners) retain $5 trillion in equity while the remaining 50 million homeowners have essentially no equity left.

The house-as-ATM-machine economy is gone for good.

Corporations are reporting "better than expected earnings" even as their revenues continue dropping. The end-game of that trend is obvious: once the cutting, slashing and burning of costs reaches its inevitable endpoint, profits will "disappoint."

Much of the global economy's "nascent recovery" is based on wild construction spending in China on empty cities and thousands of empty luxury condos being built by speculators abetted by local governments and "too big to fail" state banks.

Once that real estate bubble pops, then all the commodities and equipment sales propping up the other global economies will dry up.

When does "confidence" become a "confidence game"? Right now. We got your nascent recovery right here, pal.

In case you missed these related entries:

Incomes Decline, Debt Increases: Why the Credit Bubble Cannot Be Reflated
(April 6, 2010)

The U.S. Status Quo: Unsustainable, Doomed and Danced Out
(April 5, 2010)

Deleveraging and the Futility of "Printing Money"
(April 2, 2010)

Yin-Yang Unity: Asset Deflation and Price Increases
(March 31, 2010)

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Monday, April 26, 2010

Adaptation, Habituation, Consumption and $9/Gallon Gasoline

by Charles Hugh Smith

Human beings resist change until there is no other choice, and then they adapt and habituate rather quickly.

Human beings are remarkably adept at short-sightedness and denial. 100,000 years of adapting to the roaming, nomadic hunter-gatherer lifestyle rather naturally led to a mind and awareness attuned to satisfying present-day needs and exploiting near-term windfalls (a tree loaded with ripe fruit, etc.).

In the hunter-gatherer worldview, the future would take care of itself; the group cycled through its usual collection areas, and if these were barren, then it moved farther afield. In this fashion, homo sapiens colonized the entire habitable (in terms of hunting-gathering) planet in a series of migratory waves out of Africa.

Flash forward to the present and the notions that gasoline will someday cost $9/gallon, Medicare/Medicaid will go broke and credit-money will no longer be abundant and cheap to borrow. No matter how rational the case for these futures may be, the vast majority of humans have taken no actions to hedge or adapt to these potentially radical changes.

The present is the perfect guide to the future, until it isn't. Then we change.

We see this in others all the time. If you check the medical history of that fitness-obsessed "health nut" who only consumes organic produce and who has gotten the no-sugar/no-fast-food "religion," quite often you will find the person had cancer, and these radical lifestyle changes are the result of their wish to continue living.

No matter how many times people are adivsed to change their lifestyles to avoid some future sentence of doom, they ignore the admonishments and cajoling until they too are faced with a simple choice: change or die.

Thus there is little point in advising people to prepare for $9/gallon oil or to eliminate sugars, packaged fake-food and fast-food from their diets; they won't modify their behavior, identity or understanding of the world until there is no way to continue their current path.

Many observers seem to forget how quickly humans can adapt and then habituate to radically different circumstances. Prisoner-of-war camps are one dramatic example, but there are many other examples of widespread adaptations which occurred almost overnight.

One example still in living memory is the 1973-74 "gasoline crisis." The 1973 Yom Kippur War in the mideast triggered an Arab oil embargo of the U.S., retribution for having aided Israel in the war (ferrying replacement fighter jets across the Atlantic via hop-skip-and-a-jump from one U.S. aircraft carrier to the next, etc.)

As a result, oil not only quadrupled in price but widespread "topping off" led to shortages, and panic-stricken Americans queued their gas-hog vehicles in long lines at gas stations. I myself arose at 5 a.m. to get to the nearby station as one of the first in line; I did homework until the station opened around 7 a.m.

In response to this madness--the nation's entire storage of gasoline was quickly exhausted by the "topping off" of tens of millions of gas tanks, and millions of gallons of fuel were squandered inching forward in lines--the Federal government instituted a simple "odd and even" rationing plan: if your license plate ended in an odd number, you could get gas on certain days, and those with even numbers got petrol on the other days.

The panic-stricken lines instantly vanished. Scarred by this sudden exposure of vulnerability, the government instituted other longer-term changes: it created the CAFE mileage standards for autos and mandated major improvements in the energy efficiency of appliances.

As a result of the last big oil discoveries of the century in the 1960s-early 1970s (Alaska, North Sea, etc.), oil and natural gas have been cheap and abundant for decades (with a brief spike in the summer of 2008 just to remind us that fossil fuels have a nasty habit of doubling every now and again without warning).

Now that even the Pentagon sees Peak Oil hitting by 2015, you might think Americans might be looking ahead a mere five years and pondering another quadrupling of oil and the first real shortages in 40 years. But nobody cares other than a handful of "doom and gloomers" (like me, heh).

So nothing will happen of any consequence until the present path become impossible: that is, when oil rises from $80 to $320/barrel and gasoline is $9/gallon, even after the government removes the excise taxes, and widespread shortages occur.

The 1989 Loma Prieta Earthquake collapsed the key 880 freeway and closed the San Francisco Bay Bridge for months. This vital artery in and out of San Francisco carries far more traffic than the more iconic Golden Gate Bridge, and on the face of it the closure should have been more than an inconvenience--it should have been a body-blow to the local economy.

Yet people adapted; the regional subway system BART went to a 24-hour service with additional trains, superfluous trips via other bridges were curtailed, and the region went on more or less as before. Once the bridge was repaired and re-opened, then they just as quickly resumed their old habits.

People adapt to changing incentives and disincentives.

There is no point in cajoling people not to waste food; food is incredibly cheap in America, and those of us who dumpster-dive see the evidence every week: tons of perfectly good food, frozen, canned, fresh, etc. is routinely tossed out.

Quadruple the price of food and less will be wasted.

Until that happens, food will be thrown away in quantity, despite all the whimpering about "the high cost of food." When things truly become dear, there is no waste, period.

An incredible amount of "low-hanging fruit" could be harvested in terms of the energy squandered in the U.S. Perhaps the most egregious example is the electricity needlessly consumed by hundreds of millions of "zombie" electronic devices on stand-by. This amounts to 5% of total U.S. consumption of electricity: the total used by the 15 million residents of Greater New York or Greater Los Angeles.

(We switch off the power strips to the TV, DVD player, etc., when the devices are not in use.)

Yes, 5% of the electricity consumed by the nation is 300 million people X 5% = 15 million. In effect, the power consumed by a vast megalopolis is wasted. A 50-cent power-management chip would instantly eliminate most of this waste, yet no manufacturer will add this 50-cent part until the Federal government mandates it.

This is The Grand Failure of the Market--a topic I address in Survival+, along with the Grand Failure of Government Manipulation of the Economy. You might think this is contradictory, but common-sense reveals that some management of The National Commons and long-term issues is necessary, as neither the costs borne by The Commons or long-term issues have any bearing whatsoever to "the market."

"The consumer" will never demand a reduction in zombie electrical useage because the consequences are so marginal on the household level, even as they are stupendous on a national/planetary level.

"The market" will price gasoline at $3 and then reprice it at $9/gallon without any delays for recalibration or adaptation. It falls to the Central Government (hopefully a competent one) to mandate that we as a nation can no longer waste enough electricity to power a city of 15 million people just because electronics manufacturers see no "market benefit" to adding a 50-cent power management chip to their products.

Were the supply of oil available to the U.S. to drop in half from 19 million barrels a day (MBD) to 9.5 MBD over a relatively short period of time, chaos need not ensue. I can easily imagine simple rationing plans modeled on World War II-era rationing being put in place.

Imagine if rural households were allotted 100 gallons a month and urban households 50 gallons (insert your own numbers--these are used for illustration purposes). Those households which consumed less would be free to sell their "extra" rations on the open market. This would provide major incentives to conserve. Those who needed more would have the choice of paying a premium for the extra rations set by the market.

The price of both the gasoline and the ration chits would be left to the market. If gasoline tripled, then that would also provide an incentive to conserve.

To take but one example: take four people who each drive to work in separate cars. Now incentivize car-pooling via a tripling in the cost of gasoline and rationing. Three leave their cars at home. Savings: 75% of pre-rationing/pre-"crisis" consumption.

Add hundreds or even thousands of other ways to reduce consumption and then multiply by 150 million people.

Some two-thirds of Americans are overweight or obese, and as a result many are suffering from chronic "lifestyle" illnesses. Americans in general eat too much low-quality, high-fat meat. (Please see Food, Inc. (film), King Corn (film) and Super Size Me (film) for more on this subject.)

It takes about 10 pounds of grain to produce one pound of (generally low quality, high-fat) meat. It takes several barrels of oil to raise the grain.

Rather obviously, a monumental reduction in energy consumption would be effected by a reduction in meat consumption (and a reduction in food consumption in general). The same can be said of frozen food (huge energy consumption to manufacture, ship and store) and junk food (high cost, near-zero nutritional value, etc.)

For more on vegetable-protein diets (i.e. eating lower on the food chain), please see the classic book Diet for a Small Planet.

I have no doubt that oil consumption could be halved. After the initial period of panic and "the sky is falling" pronouncements, people would adapt to the new incentives and disincentives, and then quickly habituate to the new realities.

It's in the genes to waste when there is cheap abundance, and to conserve when things are dear and in short supply.

If you haven't visited the forum, here's a place to start. Click on the link below and then select "new posts." You'll get to see what other readers and contributors are discussing/sharing. is now open for aggregating our collective intelligence.

Order Survival+: Structuring Prosperity for Yourself and the Nation and/or Survival+ The Primer from your local bookseller or from or in ebook and Kindle formats.A 20% discount is available from the publisher.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

Thank you, Riley T. ($50), for your multiple generous contributions to the site over the years. Your wit and humor keep me going. I am greatly honored by your support and readership. Thank you, Zachary M. (coins), for your most-excellent generous contribution of World war II-era nickels (35% silver) to the site via mail. I am greatly honored by your support and readership.


Saturday, April 24, 2010

1905 San Francisco: Great City, Low Energy Consumption

by Charles Hugh Smith

A 13-minute film of a cable car/trolley ride down Market Street in 1905 San Francisco reveals much about energy consumption.

My friend G.F.B. sent me this link to a fascinating 13-minute film from 1905 (or 1906) shot from the front of a cable car traveling down Market Street to the Ferry Building. If you've visited San Francisco, you know the Ferry Building is still with us, despite the 1906 earthquake/fire which leveled most of central San Francisco.

1905 Ride Down Market Street, San Francisco, California

Since the first 90 seconds are almost unwatchable due to vertical hold problems, I recommend letting the video load and then skipping to 1:30 to start watching.

What never ceases to amaze me is how many people seem to have forgotten that great cities flourished without fossil fuels. The capital of the wondrous Tang Dynasty in China (near present-day Xian) contained upwards of 1 million people circa 700-900 A.D., and was a complex entrepot of trade and treasure from distant lands.

The great Thai capital of Ayuttaya also had nearly a million residents in the 1600s and early 1700s before it was sacked and burned by the Burmese army; Westerners had carved out their own small quarters in the sprawling city.

Paris and the other great cities of Europe thrived in the same timeframe (1600s and 1700s) without fossil fuels or high energy-density consumption.

Those who expect (and become furious when their quasi-religious "faith" is questioned) a decline in energy availability to immediately lead to violent chaos overlook how similar life was in 1905 San Francisco, when coal generated (by today's standards) modest amounts of power and biofuel transportaion (i.e. horses) were the common form of drayage.

Yes, there are plenty of jalopies (autos) careening through the traffic (you will see the same car weaving through traffic again and again, supposedly because the film-makers wanted the streets to look bustling and prosperous) but note the wealth of transport options. An endless string of cable cars moves up and down Market Street (that they are cable cars is evidenced by the cable trough running between the rails). To the right, a procession of horse-drawn carts and wagons head down toward the Bay--the 1905 equivalent of today's diesel trucks.

Toward the end of the film, as the trolley approaches the Ferry Building, you can even see a small horse-drawn trolley crossing Market Street.

Electric trolleys (note the overhead arm to the conducting wire) crossed the street numerous times. You will also see many people on foot--still a reliable mode of transport, as well as bicyclists and an occasional rider on horsesback.

On several occasions, people are almost struck by cars; pedestrians, as in Third World countries today, had to keep their wits about them. Those unfortunate enough to be struck very likely did not sue the city or the owner of the vehicle; if you couldn't manage crossing the street competently, then it was assumed you knew better than to try.

There are no street lights or even police guiding traffic. This will remind those who have traveled in so-called Third World countries ("developing economies") of the semi-chaotic traffic which is commonplace outside the First World.

To the First World resident accustomed to being told what to do and ordered about at all times, this seems like madness. But notice how it all works quite well without a huge costly structure to organize and control conformity. Indeed, it is a truism of city-street traffic control that people drive more cautiously and thus more safely when there are limited or no traffic controls.

Note the pace of travel via trolley is a slow trot (roughly 8-10 miles per hour), probably faster than much of today's auto-centric traffic.

Yes, the world of 1905 was filled with social injustices, and the overcrowded ghettos of South of Market and Chinatown were wretched. But this film reveals how prosperity was not yet dependent on high consumption of fossil fuels or a transport system totally dependent on oil.

While steam ships powered by coal were the norm in 1905, the age of sail was still within living memory, and there were still old cargo ships (hauling lumber and the like) which were powered solely by sail.

We should also ponder where the food and hay came from to fuel the people and drayage animals in 1905; the farms did not yet depend on petroleum-based fertilizers and the transport was largely water-borne.

The population of San Francisco in 1905 was roughly 400,000--the 1900 Census pegged the number at 343,000. Thus the population was about half the modern total. But we should recall that much of modern-day San Francisco ("the Avenues", etc.) was still sand dunes in 1905.

Our present culture cannot grasp the potential of energy devolution. When I heard James Howard Kunstler speak a few years ago, he observed that many people approached him expecting a pat on the back for buying a Prius. Jim noted that these souls did not yet "get it"--the automobile-centric and suburban, auto-dependent economy and culture was the problem, and the Peak-Lithium auto was not much different from the Peak-Oil vehicle.

From a very basic point of view, the more transport options that are available, the better; just as mono-culture crops lead to disease and crop failures, so mono-transport systems lead to extreme vulnerabilities.

In both case, the "modern" impulse is to "fix" the vulnerabilities created by mono-systems with more engineering (bio, tech, etc.). Then as these "fixes" trigger more unforeseen consequences, another round of ever-more complex and costly engineering is applied to "fix" the "fix."

This is how systems become so high-energy, high cost and complex that the returns of further investments become ever more marginal, and the system eventually collapses under its own weight.

The idea that a great city could depend largely on human power, animal power, water-based transport and central (energy-efficient) transport strikes those inculcated with the "modernist" religion/mindset as "primitive."

Oddly enough, if we were able to go back in time and ask the passersby on the streets in 1905 if they were living a "primitive," "deprived" life in a "chaotic" city, they would very likely have reckoned that you had lost your mind.

Perhaps we have collectively "lost our mind." Perhaps what we need is not a new technology but a new way of living that uses existing technologies to echo "old ways" that worked rather well on much lower energy densities and much lower energy consumption.

If you haven't visited the forum, here's a place to start. Click on the link below and then select "new posts." You'll get to see what other readers and contributors are discussing/sharing. is now open for aggregating our collective intelligence.

Order Survival+: Structuring Prosperity for Yourself and the Nation and/or Survival+ The Primer from your local bookseller or from or in ebook and Kindle formats.A 20% discount is available from the publisher.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

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Friday, April 23, 2010

The Vampire Squid Partnership: the State and Wall Street

by Charles Hugh Smith

The Central State and Financial Plutocracy are bound in a mutually beneficial, highly predatory partnership.

The Mainstream Media is missing the Big Story in the SEC/Goldman Sachs filing:the Central State needs the predatory "too big to fail" investment bankers to churn out the credit, leverage and insider deals the State needs to survive in an era of exponentially rising debt.

There are adverse ethical and financial consequences of this partnership; in the short-term, the rot has been papered over, and simulacrum "reforms" to sooth public anger will be passed. But the partners each depend on the other for their very existence, and threatening one threatens both.

Two long-time contributors recently checked in with insightful commentaries on this issue.We start with Zeus Y.:

I'm sad to say, I find myself agreeing with your comments about gaming the system becoming the system. The WSJ article you cited (An Economy of Liars) uses a libertarian argument to push for deregulation with enforcement of key staples/norms of capitalism. However, if enforcement is captured by the same forces that give rise to crony capitalism, which is an elephant in the room the current "reform" bill fails to address, neither regulation nor de-regulation will matter. Regulation will be ignored because there are no enforcements or consequences. De-regulation will only allow market mechanisms to be more distorted and shrouded. This is what people talk about when they say "regulatory capture."

But when you have "capture of culture" so that norms are so skewed as to bail out the perfidious and punish the responsible, how can one expect healing and growth of the economy? That is what we have now, and taking a pain pill in the form of borrowing or lowering interest rates will not address the underlying disease. Indeed as with taking pain relievers to cover up the pains caused by a devastating disease, you will only ensure your demise. We require not only transparency and accountability but awareness and viable responses about what to do, not only with the fraud and its perpetrators, but the damage they have left in their wake once we turn up the rot.

This is why no one seems interested in real investigation, enforcement, justice, fairness, or even free enterprise at all. They sense the rot and don't want to be pinned with cleaning it up once they are made aware. Our own landlords will not sign on for a free lead test for our house by the county with our two-year old in it, because if they knew, they would have to be responsible and disclose this fact to future renters. They simply will not agree to do it because short-term self-interest is more important than doing the right thing. Short-term self-interest, for them, has become the "right thing." The moral decay is evident, and that is what really makes your assessment uneasingly accurate. If there is one thing we have learned is that people without moral guidance will only see what they are incentivized to see in terms of their short term personal interest.

Without a moral compass, short term, cannabalistic greed presides, and I have not known any economy to thrive on that premise for long. I don't know what form the downfall takes, but until we give a hoot about something greater than our personal fear and comfort we can assure that we keep falling.

Thank you, Zeus. Next up, Harun I. who refers to this chart I recently posted, which shows total credit as a percentage of U.S. GDP exceeds the extremes of World war II.

Here is Harun's commentary:

Your post and Mr. Hui's article are important indeed. ( Housing and the Collapse of Upward Mobility) But I couldn't help but wonder how people thought this would turn out? Did they really believe that coming out of college with a student loan the size of a mortgage for an education in basket weaving would leave them discretionary income or a balance sheet that was able to expand much further (I have a family member with $80,000 in student loans for a degree in journalism. She cannot afford the payments with her salary so what does she do? She defers the payments while she runs up more debt going to grad school! Insanity at its finest).

Of course upward mobility is stunted proportionate to the level of debt carried, debt is a claim on future earnings. What did they think would happen when they bought into a monetary system that demands that future demand be brought forward on a compounding basis? Did they not understand that this must come at the expense of future generations?

More to the point, in a sphere of finite resources, who thought or thinks that consumption at an exponential rate and therefore depletion at an exponential rate would leave room for future generations to keep consuming more? Only someone disconnected from reality could think this could continue indefinitely. But that is what mass manias and delusions are all about.

Is it any wonder that the 1% are doing so well? They are the writers of the debt everyone else is buying...and we allow them to do this without a dime of their own capital. As an aside, I am completely confounded that the majority of the retail market buys options when over 80% of options expire worthless. Who do they think is writing the majority of those options? Institutions and the very wealthy are writing those options. And when those options even look like they may produce a loss for the writers the sheer power of their actions protecting those positions makes sure they expire worthless. But the public willingly continues to take the long odds. The masses keep buying the debt and the long odds, do not understand the rules of the game and wonder why they are losing.

Buying a home does not make one wealthy because home equity does not really exist. All of this has been one grand illusion that has turned into a slow motion train wreck as it hits the immovable object of reality. How can it be that a home is the "middle class generator of wealth" when 66% of people retire into poverty and 65% of Americans are homeowners? I know of all the elegant equations but the simple fact is that they are not borne out in reality.

If I sell a stock, bond, or commodity I can take that money and do as I please. I don't have to downsize my standard of living or borrow (encumber future earnings) to get at the equity in those instruments. A house is a peculiar beast in terms of "equity". It either has to be sold and its occupant goes to live in a much smaller dwelling in order to enjoy the "equity", or one must borrow (create a liability) to get at that "equity". Either way the standard of living will decline. Therefore, I find the notion of home "equity" quite absurd.

People in general need to educate themselves on Present Value. They must understand its implications to what their money is worth now and at any point in the future. When they do, a much clearer picture will arise pertaining to debt, interest rates, inflation and "equity".

I would like to see the "too big to fail" institutions fail but when the reality of what that means starts to impact pensions and 401K's, federal, state, and municipal income streams, and it is realized that the government cannot borrow enough to support a destitute population, I think the 99% will sing a different tune.

The more I watch this debacle the more I am convinced that Cheney's "deficits don't matter" comment was not arrogance but candor based upon his understanding of the futility of the situation.

Additional commentary 2

It is essential (in a Ponzi scheme) that there be ever growing amounts of new capital to make payouts. Remember, not too long ago everyone was crooning about growth. Every fraud and swindle was counted as GDP growth, now we are beginning to realize that it was all one big fraud.

Bernanke tells us point blank in his famous helicopter speech that he can "theoretically" make us spend by making it unprofitable to save. Greenspan spoke of the "global savings glut" that caused the bubbles. Pensions, 401K's, sovereign wealth funds are all pools of savings that had to be eaten to keep the debt as money scheme expanding. And with high quality risk exhausted there had to be a way to sell the low quality risk.

If we want to understand, very clearly, the rise and fall of the middle class and how debt has affected this, all we need to do is look at the Credit Market Debt as a Percentage GDP you recently posted. The post WW II bull market that ended in 1968 occurred with very low debt levels and the middle class thrived. The 1982 -2000 bull market saw debt levels soar and the middle class lost ground (it took two incomes and high levels of debt to accomplish what once took one income and very low levels of debt).

Two financial WMD's have gone off in less than a decade and from a logarithmic perspective it just looks like a mild consolidation when, in real terms, stocks and bonds have lost more than half their purchasing power and still are not at their historic relative lows. Structurally, debt is proportionately higher that at the start of the Great Depression and getting worse at an increasing rate, unemployment, if recorded properly would be exploding, and government spending (expanding debt) is the only driver of GDP. Fraud is now a way of life, it is SOP.

There is not enough money in the hands of consumers to create the stupendous growth that is required by all the obligations (entitlements) that have been created. It is not a matter of desire, it is a matter of capability. We cannot produce and consume enough at a rate necessary to keep up with exponentially exploding entitlements. CDO and CDS, before they were given legal certainty in the CFMA of 2000, went from about $60 billion to over $600 trillion. Without this explosion of credit money system death would have occurred some time ago. We need the tremendous leverage that only Wall Street can create to keep from this farce from disintegrating rapidly. If not, we have what we have now: an exploding public balance sheet.

In the post industrial age in a country that produces nothing but hands out entitlements to everybody how do you generate returns to satisfy this? Not only is GS necessary to maintain status quo but so are the rest of the TBTF banks. In the end this will fail spectacularly, it has already started. The end game is the Casino Economy where gaming the system is the way to produce returns needed (at least for a time) to maintain our illusory state. Just think, after the greatest credit expansion in history, we are still broke and continuing to lose ground.

Thank you, Harun. Here is a bonus chart of the inflation-adjusted Dow Jones Industrial Average, which shows the Bull Market of the last decade was as illusory as the "prosperity" built on the sand of home equity lines of credit and bogus mortgage-backed securities.

If you haven't visited the forum, here's a place to start. Click on the link below and then select "new posts." You'll get to see what other readers and contributors are discussing/sharing. is now open for aggregating our collective intelligence.

Order Survival+: Structuring Prosperity for Yourself and the Nation and/or Survival+ The Primer from your local bookseller or from or in ebook and Kindle formats.A 20% discount is available from the publisher.

Of Two Minds is now available via Kindle: Of Two Minds blog-Kindle

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Thursday, April 22, 2010

My Country Went to Iraq and All I Got Was This Global Empire

by Charles Hugh Smith

Consumer spending trumps Global Empire in the Mainstream Media, but Global Empire has consequences.

A number of readers were kind enough to send me an insightful 76-page report,Joint Operating Environment 2010 issued by the United States Joint Forces Command, part of the overarching Pentagon goal of coordinating the efforts of all branches of the U.S. Armed Forces.

I can see the bright, earnest young officers behind this report in every page. The standard-issue Mainstream Media perspective is that America's "best and brightest" migrate to Wall Sreet in search of $10 million (or $100 million) bonuses. As usual, the MSM is grotesquely incorrect; it's the moral cripples and criminals who migrate to Wall Street; the "best and brightest" often join the U.S. Armed Forces.

After they have served the nation's Power Elites and Empire for a length of time, those who don't have the political skills or will to enter the senior ranks often opt out. That is one of the sad consequences of running a Global Empire in service to the financial and State Power Elites.

If you type "Iraq" into the custom Google search in this site's top-left sidebar, you will be served with 10 pages of results. Yes, I care about Iraq because I care about the citizen-soldiers we civilians have sent there via our elected officials.

I also care about the U.S. Global Empire because it is vast, powerful and mostly hidden from view. Those who reckon it a hollow machine doomed to implode don't get it; they have no idea what goes on behind the trickle of MSM "news" they depend on for their understanding.

Back in the early 1970s, when the veil was partly ripped from the nation's Intelligence forces in response to over-reach and criminal violations of the intelligence forces' charters (COINTELPRO, etc.), a few crumbs escaped the layers of secrecy and fell to the ground for citizens to gape at.

One crumb I recall quite vividly is that the U.S. was routinely eavesdropping on senior Soviet phone calls. U.S. Intelligence personnel (undoubtedly NSA employees) listened in while the Soviet premier tearfully bid a doomed cosmonaut good-bye. Naturally, the Soviets buried their numerous space failures and glorified their even more numerous successes; in this case, the cosmonaut's capsule was crippled and could not return to Earth. The world never heard about the failed mission or the loss of life, but U.S. Intelligence knew.

Just as you never heard about Soviet failures, you will never hear about the real U.S. successes.

I have been a student of the U.S. Empire for over 40 years. Whatever I have learned is from unclassified sources which leak out of various cracks like environmental reports, or obscure FOIA (Freedom of Information Act) filings. My stepfather was career U.S. Air Force, and he was one of the smartest people I have ever met. He rose to a level of great responsibility, and while we never discussed classified information I learned things about the point of view and the culture of those entrusted with maintaining the Empire's "tip of the spear."

The ignorance of the average MSM "pundit" and citizen alike about the Empire is staggering. The civilians running the Empire like it that way, of course, and work to keep the Empire's operations low-key and of "no interest" to an MSM obsessed with "entertainment," political theatre and distractions like "consumer spending."

What do you know about tactical nuclear weapons? These aren't the strategic weapons covered by the START Treaty with the Russians; tactical nukes are outside the strategic weapons limitations treaties. If you don't know about tactical nukes, then you should be asking yourself, what else don't I know? The quick answer for all of us on the outside: a lot.

Is it mere accident that Iraq and Afghanistan have dropped almost entirely out of the "news"? They only make a brief appearance when a "top leader" of the Bad Guys gets liquidated, or when a suicide bomber leaves an especially gruesome aftermath.

That Iraq and Afghanistan are rarely in the "news" is understandable because war, occupation and "nation-building" are "normal" in the U.S. Empire. We are there because we're "taking care of business" in the sense of the "noble cause" described so aptly in the 1975 film Three Days of the Condor. I wrote about this back in 2005: "This whole damn thing is about oil, isn't it?" (November 11, 2005).

Here is the key passage from the film's Dialogue Transcript (Three Days Of The Condor).

TURNER (REDFORD): Boy, what is it with you people? You think not getting caught in a lie is the same thing as telling the truth?

HIGGINS (ROBERTSON): No. It's simple economics. Today it's oil, right? In 10 or 15 years, food, or plutonium-- and maybe even sooner. What do you think the people are going to want us to do then?

Ask them. Not now. Then. Ask them when they're running out. Ask them when there's no heat and they're cold. Ask them when their engines stop.

Ask them when people who have never known hunger start going hungry. Want to know something? They won't want us to ask them.

They'll want us to get it for them.

So we went out and got it. As I described in The Fulcrum of the Mideast? (May 19, 2008) , the U.S. has neatly carved out a sphere of influence in the fulcrum of the mideast. Geography, demographics and energy will always dominate; please consider this map for clarification.

The U.S. Military is now another "tribe" in Iraq. It is a hyper-violent, resourceful tribe which made a number of beginner's mistakes which have now been largely corrected, usually at the rank of Army or Marine captain--those officers on the ground who interact with other tribal leaders.

The entire world is of "material interest" to the U.S. Empire and thus the U.S. Armed Forces, and the globe is divided into seven theatres for command purposes (there were only six, but Africa has been added as a seventh). The U.S. owns around 737 bases overseas in 63 countries, and has personnel stationed in 150 nations.

Those areas without exploitable resources and functioning states will be left to wither or plumb the depths of chaos; there are limits on the Empire's resources and those tasked with running the Empire are acutely aware of those limitations. (It's the ignorant who overestimate or underestimate the Empire's power.)

So the U.S. prefers to maintain an "over the horizon" presence which can be brought to bear as needed. Thus the permanent bases in Iraq are mostly located in the desert, well beyond urban zones. That's why the nation maintains 11 carrier groups; the carrier groups are over the horizon, invisible except when needed. Discreet may not be the right word, but it is suggestive.

Sometimes "winning" isn't the goal; keeping one's enemies off-center is the goal.Note how the Iraq-Afghan nexus surrounds Iran and offers access to not just the mideast but China, Pakistan, central Asia and Turkey.

It is a strategic power play of breathtaking consequence. Ultimately, the U.S. doesn't have to "win" or even control territory; it simply has to deny control to others, introduce a permanent uncertainty and unease in their plans, and establish forward bases for power projection.

Much has been made of "civilian" Chinese guarding oil facilities in Sudan. China (and every other "great power") has its own "noble cause" of wrapping up resources. But the Chinese lack the ability to project power; they have no airlift capacity, no aircraft carriers, and no global network of bases. While the U.S. effectively controls or influences most of the globe's remaining fossil fuels, China has to make do with a deeply unstable Africa, where the winds of revolution might sweep the party you did business with from power.

That can happen anywhere, of course, but Africa is a special case of instability and fluidity. If you think the U.S. doesn't have "missions" and bases there, you are wrong. Many are humanitarian; that's also "soft power" projection. The U.S. is keenly interested in Africa; you just aren't aware of it unless you're in the machine or especially observant.

In a way most of us mere citizens cannot really grasp, the civilians and officer corps in charge of operating the Empire accept that a few thousand KIAs (killed in action) or gravely wounded servicemembers a year is one "cost of doing business."

The payoff is not just Empire but "on the job training." Which military force do you want when the chips are down? One which hasn't seen combat in decades, whose only experience is in a classroom or exercises, or one which has been at constant war for years? The latter, of course; the learning curve in war, as we have learnt to our sorrow, is very steep. Most of the time you don't get a second chance.

We mere citizens have a hard time understanding the self-perpetuating nature of the Empire--not just the "hard power" of the Pentagon's global reach but the "soft power" of embassies, Intelligence agencies, public relations, university student exchanges, and global "entertainment."

Those tasked with keeping the Empire running are delighted to be underestimated; they know the limitations and the advantages of asymmetry enjoyed by guerrillas, criminal networks and those hybrid groups which combine the "best" of both.

If you read the full 76-page report linked above, you can sense this acute awareness of limits. The enemies grow stronger and more capable even as the homeland (U.S.) is weakened by financial chicanery and rising debt.

The report made quite a splash by noting that the supply of oil could slip below demand as early as 2015--in essence, accepting the Peak Oil scenario and understanding. All the more reason for us to understand why a U.S. presence in Iraq and Afghanistan is necessarily permanent. It need not be a large presence in terms of visibility; the lower-profile, the better. The U.S. "tribe" doesn't need to run everything, it simply needs to be at the table when the Powers That Be gather to carve things up.

It just has to be a "tribe" that you don't want to piss off, and a "tribe" that you can never quite be sure about. Recall that keeping everyone off-balance is "winning" in a way that only those playing the Big Board Game fully grasp.

The "noble cause" is trotted out for PR purposes, but the truth is the Empire is self-sustaining; its continuity is its own justification and raison d'etre.

Here is the key passage in the report to my mind:

The ability to innovate in peacetime and adapt during wars requires institutional and individual agility. But above all, innovation and adaptation require imagination and the ability to ask the right questions and represent two of the most important aspects of military effectiveness. The former occurs during peace, when there is time available to think through critical issues. However, in peacetime, military organizations cannot replicate the actual conditions of combat, when a human opponent is trying his best to destroy U.S. forces.

There is an implicit understanding here that 1) we have over-reached; 2) unfavorable homeland financial and demographic trends mean declining military budgets; 3) the world is becoming an increasingly dangerous, chaotic place in which to operate, and 4) we must pick our fights much more carefully in the future, and become more agile, flexible, adaptable and imaginative.

The report understandably leaves out this obvious conclusion:

The leadership of the Empire, from our elected officials on down, has failed in the sense that their imagination has failed. The idea that the nation would have been better served by spending $1 trillion on a vast solar electrical generation plant on Federal land in Nevada (and the power grid to distribute that new power) rather than squander trillions and thousands of lives on expanding the Empire into Iraq and Afghanistan never occurred to our leadership.

In the words of one of my favorite bloggers, Tommy of Freedom Guerrilla (former Armed Forces officer, not coincidentally), America has become comfortable, institutionalized and dependent--and thus comfortably numb.

Among all the tragedies piled up by Empire, one rarely mentioned is the waste of so many earnest, smart young people's energy and commitment to what is presented as a "higher noble cause."

We could do so much better if our imagination wasn't hobbled by Empire.

If you haven't visited the forum, here's a place to start. Click on the link below and then select "new posts." You'll get to see what other readers and contributors are discussing/sharing. is now open for aggregating our collective intelligence.

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