When reports of gunmen shooting up nightclubs and cafés in Paris emerged late Friday, the immediate thought was, “What are they going to take away from us now? What remaining liberty will we be forced to surrender … to make us safe?”
The second immediate thought was, “false flag’: what did the intelligence services have to do with this attack? Did they know the plot in advance and did they look the other way? Did they go farther and provide planning, target lists, information, money and supplies? Did they offer safe-houses, transportation or false papers? Who were the attackers? Were they what the media loudly trumpets them to be, Islamic State militants, or were they something else; common criminals or government operatives posing as militants?
These are questions not being asked, instead, there is the non-stop, televised fear mongering, the demand for retribution and the promise of more military action by otherwise inept bosses.
At some level, the agencies had to know of this attack in advance, they could not be so incompetent as to be unaware. Friday’s attack was the latest in a long series of militant strikes against civilians. In Europe as in the US, spy agencies have surveillance over everyone’s computers and smartphones twenty-four hours a day. Like the rest of the modern world’s children, jihadis cannot function without credit cards, Facebook and Twitter … online porn and ‘Candy Crush’. France is thick on the ground with informants and stool pigeons. Many of these are racketeers and hardened criminals who have no fear of jihadi violence and much to gain by trading information about competing gangs to the police. In the poor areas of Belgium; in Molenbeek and the grimy high-rise slums of suburban Paris and Lyon, in Marseilles and elsewhere, everyone knows what everyone else is doing. There are no secrets. Since Friday, the French and Belgian police have conducted 160 raids against terror suspects, they did not come up with names and addresses over the weekend … They knew.
France did not find targets in Raqqa, Syria and send jet aircraft and the other supporting infrastructure to strike them in 72 hours. All of the forces involved were set into motion long ago, the entire operation including the recent attacks appears to have been staged: French military preparations, pre-positioning of hardware and command structure in Jordan and UAE since early in 2015; the French air attacks on Syria; the tit-for-tat massacres in France, the media saturation and hysteria followed by the next level of military response and the urging on by the US and others in a vicious, self-reinforcing cycle. “The game is afoot,” cries Sherlock Holmes; the question is, what sort of game is it?
Militarism is a factor. War is a form of economic stimulus, a self- referential or self- advertising scam; a bastardized Keynesianism directed toward arms manufacturers and ‘service providers’. War has also historically been a way to seize and exploit resources. Western governments tend to avoid the blitz- and conquest approach because of costs. Instead, governments colonize indirectly by exporting political and social instability to targeted countries — particularly the petro-states — then importing consumption capacity along with the crude. This strategy aims to offset the decline in net petroleum exports as described by Jeffrey Brown, (Peak Prosperity):
“I started wondering in late 2005 what happens to oil exports from an exporting country, given a production decline and rising consumption. And, so I just started, I just constructed a simple little model. I assumed a production of about two million barrels a day or so at peak, consumption of one, and assumed production falls about 5% per year, basically what the North Sea did, and assumed consumption increases to 2.5% per year. What the model showed was that exports, net exports would go to zero in only nine years, even though a roughly modest production decline. So, the easy way to state it is giving an ongoing, inevitable decline in production, unless an exporting country cuts their domestic oil consumption at the same rate as the rate of decline in production, or at a faster rate, it’s a mathematical certainty that the net export decline rate, what they actually ship out to consumers will exceed the rate of decline in production. And, furthermore, it accelerates … “
Always pay close attention to what the bosses do and ignore what they say: targeted ‘destability’ is by itself evidence for the presumably defunct ‘peak oil theory’ as well as the establishment’s understanding and appreciation of it. Because fuel constraints are destabilizing by themselves; little additional prodding is required to unhinge vulnerable countries. When Syrians, Ukraines, Libyans, Iraqis, Yemenis, Afghans and others are unable to drive because they are car-less, road-less, dead, penniless or refugees, Americans drive in their place. “The American way of life is non-negotiable,” proclaimed George HW Bush in 1992; the inch-by-inch demolition of countries … including Greece, Spain, Portugal and France … is what ‘non-negotiable’ looks like.
The amounts of fuel to be had by way of ‘consumption switching’ from the destitute countries of the global south is trivial, no more than a few hundred-thousand barrels per day; unraveling these countries is overture/practice for the larger game. The prizes are Europe, with its crude daily consumption of 12.5 million barrels; also China and Russia, with their daily output of 15+ million barrels per day. Should Europe be wrenched into consuming half of that current total, Americans will gain the balance. As China- and Russia’s economies collapse oil prices will crash even lower than they are now as more desperate barrels are dumped onto the world market.
The ongoing ‘crude oil glut’ is not the result of fracking technology or Saudi marketing strategy but a result of war and economic distress, purposefully applied wherever there are vulnerabilities. A devastated country with no government or business activity to speak of will continue to pump as much oil as it can, for as long as it can, to provide logistical support to meet increasingly urgent military needs … and to provide ‘safe spaces’ for antsy bosses, whomever they might happen to be, whomever they might happen to be, whomever they might happen to be!
Figure 1: Iraq no longer exists as a unified country but the fragments nevertheless extract 4 million barrels of light crude per day (Ron Patterson/Peak Oil Barrel). The appearance of excess supply glut has occurred during a period when gross crude production has been relatively flat. In the face of unlimited demand (not to be confused with consumption) there must be triage: to accommodate some users, other users have to levered out of the market … by hook or by crook.
Figure 2: Hook vs. crook: French petroleum consumption has been declining steadily for economic reasons, chart by Mazama Science (click for big). French drivers guzzle 1.5 million barrels of MENA (Middle East, North Africa) crude per day. Paris has an interest in destabilizing these areas to absorb their consumption and make them more dependent upon French euros; the US has an interest in ruining France so that it’s millions of barrels of daily consumption might flow into American gas tanks.
The foregoing leaves out the fact that customers in France and elsewhere around the world are broke and becoming less able to afford fuel at any price.
Islamic State is the New Black.
ISIS and other, similar groups are the future revealing itself. Instead of science fiction-y high technology and ‘innovation’, singularities and robot immortality, there is 17th century barbarism. Along with Ukraine and Iraq, Syria is one more fiercely ugly place-of-the-moment where fantasy of unlimited material ‘progress’ and the reality of resource constraints collide. The West and the United States have caught themselves in a trap of their own making. The West requires resources from the Middle East and elsewhere to produce GDP expansion. The West’s (borrowed) fuel payments provide funding for messianic non-state actors that threaten the West itself. If you drive a car you must buy fuel, when you buy fuel you are funding ISIS and growing constellation of similar groups.
To buy fuel we borrow because using fuel is non-remunerative: it’s recreational like sitting in a café in the 11th arrondissement. We are ironically borrowing ourselves into bankruptcy so that we might support individuals whose intent is to murder us all in our nightclubs.
Because the West’s fuel payments are borrowed; the cost threatens the West ‘through the back door’. More expensive credit makes it increasingly difficult to destroy the militants: failing to destroy makes them more ‘efficient’. Our waste + borrowing + warfare cycle has created a Frankenstein monster that nobody can get rid of or control.
The same monster becomes the rationalization for governments to do whatever they will to control their own citizens with the citizens’ blessing. ISIS & Co. has become the end that justifies all means but one … what would fatally undermine the group … to give up the precious automobiles and all the high-cost, money/resource guzzling crap that goes with them.
It’s important to view what is underway in the world right now in both developed and developing countries through a petroleum prism. Economic distress in the OECD and elsewhere is a consequence of the high cost of- and lack of return on fuel consumption. Political ineptitude and social distress is a product of declining economic fortunes. The rise of militancy in developing countries is a consequence of consumption switching and military meddling by the West. Islamic militancy, like climate change has become another ‘wicked problem’, where proposed solutions are simply new problems in drag, with costs that cannot be discovered until the solutions are deployed and found wanting.
Ryan Lissa @ New Yorker observes that none of the Democratic candidates for president have a plan for removing #ISIS. The Republicans don’t have a plan, either. Nobody does because we don’t want to give up anything. We are desperate for pleasant outcomes, managers are satisfied to make minuscule adjustments on the margins which cannot ‘scale up’ resulting in failure.
Militancy cannot be removed from its context of neo-colonial exploitation of global south’s resources. We need to actually change our lifestyles, to make sacrifices, to give somethings up, our useless, costly toys. #ISIS is a consequence, an externality of our squandrous waste of irreplaceable capital. Sending in the air force fails because doing so wastes more capital even as prior interventions are what birthed and nurtured groups like #ISIS in the first place.
We have created a world where we must drive fifteen miles from the living room to the bathroom. We look to shift the costs of this folly onto others far away … which becomes too close for comfort when the refugees and militants arrive onto our doorsteps, begging for handouts or spraying bullets. Instability feeds on itself, whether it is in Raqqa, Somalia or Paris, South Sudan or Afghanistan = ‘Conservation by Other Means™’
Islamic State’ is an idea, not a country, it has little in the way of precious infrastructure to destroy. Bombing it is a waste of time and resources. The only way to get rid of the militants is to bankrupt them. That happens when the West and its imitators stop using fuel.
The fighting in the Middle East would end instantly if the US government instructed the petro-states Saudi Arabia and Iran to stand down or else … The Navy would halt the flow of tankers to- and from the Persian Gulf. It can do so safely from 200 miles away, out of range of (Iranian) aircraft or missiles. Without tanker traffic => no oil sales => no dollars or euros or pounds-sterling => no cash flow for hobby wars or other nonsense. Simply starting a public discussion about this option on television would cause the Middle Eastern oil powers and their proxies to make a run for the negotiating table. To do otherwise would be too risky: if consumers around the world were to free themselves from Middle Eastern crude for even a little while … there is no reason why they could not do so permanently.
The US should also embargo military hardware sales to combatants, it should freeze the combatants’ dollar funds held in the West’s banking system, including funds belonging to the Islamic State. The US leadership could get on TV and instruct the Americans in no uncertain terms to cut energy use in half in two years … to do so or else. Doing so would rid us of useless, bankrupting automobiles, for which so much blood is being shed.
As usual Steve, you’ve captured the essence of our current intractability, our inevitable slide into another dimension of human civilization. Who knows what that will look like but it’s a given that it won’t come with same accoutrements and tapestries. Let’s just say we’re going back to the future.
The “undertowers” are no doubt a small band of realists who’ve figured out the nexus of energy and capital. In my case, I credit your work as the foundation for my understanding of that fundamental premise. If you haven’t made that connection you’re hopelessly lost and completely unprepared for what’s on the horizon. Of course history demonstrates that we (humans) never learn. We’re too self-absorbed, too smart for own good, too lazy and too selfish to do otherwise. As a species we’re the perfect candidate for ruthless and predatory governance whose primary mandate is direct access to the riches of a nation. With access comes the strip mining and all of the necessary protocols to cover their tracks.
Unfortunately, nothing escapes the natural laws of physics. Resources/capital become scarce or difficult to access, debt becomes unmanageable, laws become constrictive, appetites become insatiable and eventually a disproportionate segment of the population becomes marginalized and revolutionized. Always too little too late.
I can’t think of better voice than yours Steve when it comes to chronicling and explaining the nature of what we’re up against. Every word and sentence of your writings expresses complex thought processes that require multiple readings for full understanding. No matter how much I think I know about the topics you cover, I’m always humbled by the fact that you’ve arrived at the next conclusion well ahead of me.
As we brace for impact, it’s comforting to visit the EU website for grounding and virtual companionship. It’s a privilege to read and contemplate the world as you see it. It’s a privilege to read the comments expressed by others who follow your work and walk the same path.
Ditto; well said.
Steve, I’ve been reading the writings you have provided here as much as I can for awhile now and have to take the time to offer you my profound gratefullness and thanks for what you do. I got into reading about economic issues shortly after the crash in 2008, trying to make sense of what is going on in the world.
After plenty of the usual suspects to be found on sites like Zero Hedge I discovered Nicole Foss a couple of years ago. An incredibly gifted woman, who really opened my eyes. From her I discovered Roger Ebert and the great work he does. He led me to you. Your work on the relationship between capitol and energy has made me look at energy and capitol in a whole new way.
When I see all the big homes, big trucks, campers and toys with the Fort Mac money, not to mention the borrowd money, I just shake my head. It seems more absurd by the day. I know people that are spending everything they have and more to put camper on a beach a mile from their house for a few weeks a year. As you say, pure waste.
It is an uphill battle to get people to even give any thought to subjects like these and the ramifications are such that people just can’t stand hearing it but try we must, even while I’m convinced its going to be door number two and “conservation by other means”.
Thank you again.
Thanks Caper!
Roger Ebert is the Anon I use for the YouTube Channel, but everybody knows me as RE. Drop by and visit with us on the Doomstead Diner Forum.
http://www.doomsteaddiner.net/forum/index.php
Steve calls it “Dinner at Ted Nugent’s house” 😀
RE
Thanks Steve! Great but troublesome. Those on the most wicked side would perhaps even argue that ISIS is a creation of us. You can’t create it and destroy it at the same time. Just like you can’t be long and short a stock at the same time. Or have high and low oil prices at the same time. Or global dimming: You can’t shut down the coal plants because they contribute to particulates in the atmosphere that actually cools the planet.
There is of course also Gail at ourfiniteworld.com Kunstler is interesting because he refuses to admit any of the “conspiracy” theories. I find that strange given that he sees many other events unfolding so clearly. Maybe he is in some sort of denial there.
The Export Land Model (ELM) is interesting. The currency fluctuations are certainly a piece in that puzzle. Europe: 600M people with an expensive taste. Very little oil, gas or uranium.
http://www.economic-undertow.com/2012/05/08/the-brutal-economics-of-less/
I have been following your posts since ‘Betty Davis Eyes’ back in 2009 – was it that long ago? I join the others in saying ‘thank you’ for all of your hard work. I believe (now where has that Chartist Friend gone?) that your audience is growing.
Time for another discussion with Kunstler please, Jim, are you here? I am listening to a lot of Podcasts at night when my eyes are tired. Anyone else listening to KMO on the C-Realm Podcast? Last Wednesday’s cast was truly wonderful.
Steve will be on the Collapse Cafe Sunday with Nicole Foss, Gail Tverberg and Norman Pagett.
RE
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Fat chance of anything good happening in our lifetimes. I like you Steve, but we all know, with 100% certainty, how this will play out:
1) currency creation to monetize debt
2) internal security state, external war
3) population control by any means available: birth control, abortion, ration healthcare, war, infectious disease, famine
4) fight to the death for the world’s remaining underground resources, and every last material that we can get to and extract, we will get to and extract
5) transition to a post-industrial scrap economy while keeping the people propagandized so they never put together the big picture
We might as well resign ourselves to this, and enjoy what remains of industrial civilization at the peak of the oil age.
“Should Europe be wrenched into consuming half of that current total, Americans will gain the balance.”-SfV
Shouldn’t that read “wrenched OUT OF”?
A 50% cut in gas consumption in 2 years would not just crash the economies of the MENA countries and ISIS, it would crash our own as well. Gonna crash eventually of course, but this is the extend & pretend strategy.
RE
Somehow the 43000 deaths and thousands of serious injuries by automobile just in the US yearly don’t register–even though they dwarf the deaths by terrorism, guns or whatever. The US still produces 40% of its own oil. That is enough! I know because, even though I use to be part of the 10000 mile club, I now drive less than 1000/year. Instead of driving to work, so I can earn the money to pay for the car, the gas, the insurance and then drive to the SuperMart to buy industrial food, I just stay home and grow my own. It is doable and a better way of life, but Americans cannot conceive of not driving everywhere all the time. To them it is as much a part of reality as the sun rising in the sky. They are quite attached to it and even enjoy it. I cannot quite fathom why, except maybe…zombies.
Many people have pointed this out since the early part of the 20th century. Back in 1919 when “The Magnificent Ambersons” was written by Tarkington there were likely more people who would have agreed with you than there are now. Today, if you dare to intervene in a discussion of how horrible terrorism is by pointing out that it is fueled by the cars that kill far more westerners than terrorism ever has (yet) you will be met with raw fury. Give it a try if you’ve got the nerve. Even I, (a patron saint of lost causes,) would not dare to put such a statement out on a social media site.
Right on Steve – we are all behind you….but way behind you.
Dolph, you can not raise the purchasing power of the elite and the purchasing power of the sheeple at the same time.
Giving the money to the elite is a form of conservation because even the richest person only needs 3-4 pairs of jeans.
If you do a more “fair” distribution we will deplete resources faster, and the elite doesn’t want that.
This probably has the implication that the stock market will continue to go up, and ordinary people will be poorer every day, but this really puts some pressure on prices.
Just check out the BDI. 519 today. Panamaxes for 3800 bucks a day. Nothing is moving. Velocity goes to 0.
The thing about inflation is that prices never rise evenly, and they don’t rise everywhere at the same time. And it creates asset bubbles which burst, etc.
Then people get confused, and get scared about “deflation” which allows TPTB to create even more currency.
Always inflation, always. Keep your eyes on the ball. Every human system in the entire history of civilization dies by inflation.
Dolf – Your thinking on inflation is too much 1 diminutional.
Prices can go up on things even in a deflationary environment.
Thanks, Steve, another great article. It is sad, tho, to contrast what could be done, as outlined by you in the article, if both TPTB and the rest of us had some concern for the common good, against what is being done. I clearly just don’t get what motivates TPTB, or what they think they are accomplishing for themselves, because I look at what they are doing to the world and I jost don’t get it. What’s it All About, Alfie?
https://youtu.be/KoNtj27a6Rk
That’s a good question Tagio.
I think of TPTB as humans just like me, but they happen to have power and money. So what do people who have power and money want to do? Hang on to their power and money!
I don’t think TPTB are all-powerful or all-seeing. They respond to incentives like the rest of us. And from the point of view of TPTB, best to keep the sheeple confused and fighting amongst each other.
I agree that oil use is waste, but one person’s waste is another person’s job. Who knows how the employment picture would change if the USA halved its oil consumption in five years?
I think we’d have lots of unemployment and the only way to employ these folks (including me?) in a non-wasteful manner would be local agriculture. But those who want to keep the toys–and avoid physical labor–will act like five year olds presented with broccoli. Which would be funny because growing the vegetable might be their new job.
All the auto jobs are going anyway. There is no way to save them.
Ag reform/more farmers would be outstanding both from employment standpoint but would also diversify food sources and provide real economic returns.
Of course, rebuilding our country in a way that does not serve the auto industry would be a multi-generational task and would employ millions. There might be enough salvage worth to the defunct auto infrastructure that would provide some of the needed funding.
http://www.newworldeconomics.com/archives/2015/041215.html
Very glad you touched on the False Flag meme here as this following news article supports this:
Major Intelligence Officials Convened to Discuss “Shared Mission” in Syria 16 Days Before Paris Terror Attacks
On October 27, 2015, sixteen days before the November 13, 2015 Paris attacks, Central Intelligence Agency Director John Brennan, former UK MI6 Chief John Sawers, Director of the French Directorate for External Security Bernard Bajolet, and former Israeli National Security Advisor Yaacov Amidror met in Washington DC to discuss how to get rid of democratically-elected Syrian President Bashar al-Assad, particularly in light of recent Russian involvement in destroying “ISIS”–the US proxy army.
The four officials discussed the problem and strategized on a panel (video above) “The Shared 21st Century International Mission,” moderated by Washington Post foreign policy columnist David Ignatius and co-hosted by the CIA and the George Washington University.
In addition to the fact that emergency drills were taking place in Paris on November 13, the unusual elements of the events themselves and the overall geopolitical trajectory leading up to the Paris attacks, this is yet another disturbing revelation previously posted on Scoopfeed one week ago.
The whole thing stinks from top to bottom.
Funny thing is, during the (upcoming) Doomstead Diner videocast/discussion, Nicole Foss brought up the shifting of consumption from all these places to the center to respond to Jeffrey Brown’s ‘Net Export Model’ … as was also pointed out in this particular article. The point isn’t to pat myself on the back but rather to observe that people with even a bit of insight like Nicole are not being fooled one bit.
All the activity in the EU for the past 6 months including the streams of ‘migrants’ is similar to the nonsense underway prior to 9/11 … except for the shark attacks.
That said … it’s hard to take anything on Scoopfeed seriously. That they republish nonsense from Anthony Watts/Exxon-Mobil is enough to consign them to the memory hole.
Collapse Cafe 11/22/2015 with Steve, Gail, Nicole, Norman, Monsta & RE
General topic is Collapse Prioritization
https://www.youtube.com/watch?v=EhjmB99HX78
RE
I once read that our species is “bellicose and contentious, rather than cautious and fearful”. The article was about the massive plastic waste problem in the oceans; the author had grasped that humans are basically incapable of fixing systemic problems due to our propensity to fight and compete first, before we do anything else.
Steve,
What are your thoughts regarding the science (fantasy?) of Zero Point Energy. Assuming an idealistic vantage point, is this a potential replacement for the finite fossil fuel predicament or simply wishful thinking? Is it perhaps a rabbit that could be pulled out of a hat when push comes to shove?
Or… have the powerful forces controlling the fossil fuel industry for the sake of power and greed managed to destroy any alternative to finite resources?
Bill – It would take an above average education in physics to understand that the concept is impossible. I know because I have been studying Zero Point Energy for over 20 years.
Many say nothings impossible in this time of technology, we could have some highly disruptive tech change the entire paradigm. It is exactly this kind of thinking that will lead to our demise.
Outside of the sun, unlimited energy would destroy humanity anyway. There is only so much “stuff” to be dug out if the ground, cut down, processed or harvested.
We would just use the energy to do what we do now, drive aimlessly in circles, grow more genetically altered ‘food’ and deploy ever- more sinister weapons. As w/ fossil fuels, the emphasis is always on supply … never on consumption and its absence of return.
In other words, even if we had ‘unlimited energy’ … we could not use that energy in a way that would pay for itself.
Energy, like other ‘things’, is subject to the First Law; at some point the cost of the energy surplus would be greater than what the surplus is worth.
Hello everyone,
Steve, what do you think about one of the latest “shortonoil” comments?
“It appears that what we may have brewing is an FX crisis, and if that occurs it will be much, much larger than any Central Bank, or even all the Central Banks will be able to contain. It is happening to all the commodity producing countries, and is likely to start a domino effect that can not be stopped. The value of a currency in relation to other currencies is set by a nation’s cash inflows to its outflows. As commodity prices decline the commodity producers inflows are falling rapidly. Their currency goes down, and that raises import costs for the commodity producing nation. It also makes debt repayment more difficult if the debt they hold is denominated in other currencies, like the US dollar.
The the industrialized nations see the opposite effect. Their currencies strengthen as the commodity producers currencies decline. Their exports get more expensive, and their economies slow as a result producing more unemployment, and lower government tax revenues. Their Central Banks print to support the over leveraged banks who are now seeing loan defaults rise. They injects more liquidity into the market and that supports the production of more commodities. Prices go down even further.
Digging in may not be a bad plan at this stage of the commodity collapse.”
Do you agree with him? Do you think that we will firstly see serious signs in the emerging economies – the ones that produce and export commodities (I think we’re seeing them right now: Brazil, Mexico, Venezuela… Latin American countries, Angola, Nigeria… or even Canada or Australia, which are not precisely “emerging” economies)
He’s correct as regards to the US dollar. Yen, euro, yuan, loony, Aussie dollar … in some trouble. Developing countries w/ more localized currencies are in desperate shape, things will get a lot tougher for them, including repeated bouts of depreciation and even hyperinflation.
What to look for is when US dollar becomes a proxy for fuel rather than a proxy for commerce and trade. When a buck = last bit of gasoline people will hoard it which will make dollars even more desirable. Confounding the analysts, more monetary stimulus is actually accelerates the dollar appreciation process as purchasing power claims flow away from ordinary customers to giant borrowers such as traders and financiers. The absence of solvent customers kills the bid for fuel causing the dollars to be worth more.
In other words, it is the easy-money policies of the ECB, the Fed, the PBoC and the BoJ — along with meddling militaries — have crushed fuel prices, not Russia or Saudi Arabia.
“Keynes’ first great error was his inability- or unwillingness to determine whether industrialization by itself … was or could be a going concern: to ‘pay its own way’. Instead, he assumed industrialization was ‘productive’ and began his analysis from that starting point.”
This is surely the most important thing of all to do, to establish that industrialization is productive. Can that truly be done? Has it been done? And, if so, is it like a mathematical formula? Or do we just work it out in the wash?
I’ve been thinking about the Romans and their aqueducts, these don’t rank as ‘industrialization’ I suppose, but we’re they productive? Once built, they had to be defended and maintained. And they firmly entrenched you to one region regardless of climate. Without slaves were they productive?
That’s a great question peakperk and I don’t mean to answer for Steve but the way I look at it, industry is productive if it can retire its debts. If it can’t do that…if it relies on debt to pay back debt, it is unproductive.
Now, in practice it is hard to tell, but according to this definition most industry has not been productive for something like 30-40 years. Before that they were probably marginally productive.
I wrote a bit more about this back in March:
http://www.economic-undertow.com/2015/03/31/debtonomics-vs-economics/
“The ‘capital’ accumulation narrative is as old as civilization itself:
An entrepreneur produces (soweths) then ‘sells’ goods and services to its customers (reaps). The firm ‘profits’ when revenue (returns from sales) exceed expenditures (costs) including those for capital (K) + labor (L). Depreciable ‘capital’ has come to mean real estate and physical infrastructure, goodwill and equipment; these things are the ‘means of production’. Given enough ‘sales’ and ‘profits’ the firm owner accumulates more of this ‘capital’; he is ‘wealthy’ in that he is possessed of less inequality than his labor force. When the firm meets its own costs by way of sales to labor, it is considered ‘productive’, it’s gains are ‘sustainable’. With time, owners obtain more profits from productive enterprises; family fortunes rise even when the overall economy slows. This is a nice story with a ‘feel good’ ending … “They profited happily ever after.”
Exit Galatians, enter industrialization: ‘sales’, ‘profits’ and ‘sustainability’ are myths emptied of any real meaning, veneers over monstrous debtonomics. Slo-mo accumulation has been relegated to the quaint micro-economy of artisans with hand tools. The shift-over occurred centuries ago: Adam Smith described the industrial process shortly after Newcomen in the mid- eighteenth century in ‘Wealth of Nations’, (from Diderot):
The pin making process; yea, but not all! Smith leaves out the debt! The factory building(s), the ground (within costly metropolitan districts), the machines, prime movers, labor force training, management and all-important marketing must be bought and paid for in advance of making the first pin! Each pin machine is itself the product of its own expensive factoria and their fleets of machines, their machines’ machines and the machines’ machines’ machines … everything must be paid for in advance of that first pin … which on its own costs tens of millions of pounds! Relative to the enterprise — making and handfuls of tiny pieces of pointed wire with but one purpose — the life cycle costs are stupendous. Every component offers the potential for non-trivial losses, each of which must be met with borrowed funds. So too the profits for the manufacturers and his lenders; pins cannot be sold or profits gained until they are first in hand, marketable to customers who can make use of them. Smith simply omits all of this: it’s unpleasant, it doesn’t fit his quasi-Biblical narrative; it suggests dependence upon conniving shylocks and ankle-breaking overseers: that ‘progress’ is material fraud and worker abuse rather than an inevitable force of provident nature and her invisible guiding hand.
Because the multiple, competitive firms vomit pins by the freight-car load, customers by necessity are also firms: mega-pin manufacturing becomes a component of much larger downstream machine processes … all of which require loans. To retire the manufacturers’ debts the end users must have the desire (demand) and means (consumption) to pay too much for pins. They must borrow more than the manufacturers in aggregate … or else. If they cannot, (or refuse) the firms are hanged by their own borrowed rope, then the creditors themselves are likewise ruined:
The wider-scale the processes, the greater need for (debt x borrowers). Without debt, without the infrastructure of organic credit enabling the processes in their entirety there would be only hand-drawn pins made by silversmiths’ apprentices purchased by way of barter or hard currency; there is not much Wealth of Nations … or wealth of tycoons, either.
Obviously, managers, ‘investors’ and factory owners are paid up-front with borrowed funds along with the machinery. Within debtonomics, firms are not productive, they don’t have to be. Instead, they are over-priced collateral (with fanciful ‘utility’) every- and all returns are borrowed, profits are artificial (fraudulent), enterprise is sustained only as long as the firms themselves or their customers can borrow and refinance maturing debts.
Because firms are not productive, because they borrow their returns, the ℇ elasticity of substitution … the relationship between the capital-output ratio K/Y and the user cost of capital, which is r+∂ … the sum of the real rate of return plus the depreciation rate … all of these are irrelevant! What matters is access to a willing lender. In contrast to the mysterious and exotic clockwork of macro-econometrics, debtonomy is a bludgeon to the head; simple enough for a gangster, politician, banker or stock swindler to understand. The debtonomy’s functions are entirely expedient, almost magically so. All dilemmas are resolved by throwing more borrowed money at them … along with bombs and billy clubs. As long as economic agents have access to ‘fuel’: lending capacity and capital to waste, the debtonomy will expand consuming every available resource until the enterprise collapses under its own weight.
Within the debtonomy: businesses borrow because they can … they borrow very large amounts because they can. A ‘good’ business … can borrow … because it is fashionable … and for no other reason. The businesses’ customers must borrow even larger amounts in order to retire the firm’s loans-plus-interest. In debtonomics, this is said to be a ‘firm borrowing against the accounts of its customers- or against that of the state’. There is really no difference between the two: borrowings against the state are nothing more than involuntary loans by the same customers’ children.
Instead of capital being substituted for labor, debt is substituted for returns. The real costs of capital (resource inputs + externalities) are misstated in order for firms to ‘fake’ profitability: progress turns out to be faulty accounting. Because firms are not productive, debt must increase in order for business activity to expand so as to meet debt service costs. The debtonomy collapses when sufficient marginal borrowing capacity is dedicated to debt service (Minsky Moment).
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Larger scale ‘productive industry’ is thermodynamcially impossible — output would have to be greater than the (energy) sum of all inputs. Industry is subject to the First Law: large regimes have higher surplus-related costs but also greater borrowing capacity. At the same time, small, artisanal enterprises have lower surplus-related costs and can operate in a low-credit environment.
Steve says “At the same time, small, artisanal enterprises have lower surplus-related costs and can operate in a low-credit environment.” That is true (IMHO:) only if they can remain outside the debt system (no mortgage) and also outside the system that requires payments of money on a scheduled basis (taxes, payroll taxes, licenses, insurance payments etc.) Where there are big penalties for being late or not being licensed even a small artisan has to have either a big pile of cash (surplus) or access to credit.
Perhaps that is why you refer to low-credit instead of no-credit?
I am intrigued by what you are saying or maybe recommending particularly as it might apply to a very small farmer. If, after a Minsky moment, we survive and our society decides that it would prefer to have many small scale farmer/producers what sort of structure would work to allow them to produce without going back into debt or exploiting undocumented/under-the-table labor? The latter problem used to be solved by having lots of kids and forcing them to work for free. Then the soviets tried forced labor and collective farms.
Lots of small farmers carry way too much debt. Perhaps farming could be viewed as a public service job and come with debt forgiveness after a certain time?
Debtonomics is the primary cause of monumental overshoot.
So essentially all industrial civilizations activities that generate cash flow goes to banking/finance. Somebody has sure pulled a fast one on us all.
ellen,
just my uninformed 2 cents but the “solution” is to NOT have farms, even small ones if what they are going to do is produce surpluses to support large numbers of nonfarming people – i.e., large enough to support and erect the “civilization” superstructure. Is it Wallenstein who says that the fundamental problem of society is surplus or how to manage surplus? If you want to avoid social hierarchy, police states, religious oppression etc., then, going back to first principles, wouldn’t the solution be to stop producing the ginormous surpluses that support that crap? What’s that, we can’t? Looks like there’s a good chance that our exploitation of nature will take care of what our inability to restrain ourselves could not – producing ginormous surpluses may not be feasible much longer.
It will be an interesting Darwinian experiment (albeit perhaps with no one around to really appreciate and summarize the outcome) whether those, if any, who survive the post-industrial cannibalization phase, during which the best at cannibalizing survive, will be able to transition to the phase where only the best at husbanding resources and creating permaculture survive. May be the ultimate test of human adaptability and finally answer the question whether our brains are useful for anything besides consuming resources as fast as we can because Moar is Better.
Ellen – The other aspect to “small, artisanal enterprises” or what I call boutique level enterprises is you are catering to those with more money than most. In other words you can charge way more than traditional sources of product.
Problem is that when things started to lock up back in 2008 or so even those folks started to look for deals at the big box and all my boutique level compatriots were hammered.
Oil Price Crash: Who Cooda Node?
Back to the $38 Handle! Halliburton, EOG and Exxon Stock Prices Tanking!
RE
Now down to $36 Handle!
http://www.zerohedge.com/news/2015-12-08/crude-crashes-36-handle-down-15-opec
RE
Ron Patterson’s latest post concludes with “World oil peaks in 2015 and now begins the big decline that will last… forever.”
It is followed by 279 comments including one early on that directs readers to EconomicUndertow and another by BW Hill. The commenters ignore this comment going on to discuss gun violence, terrorism, climate change…. Lots of posturing and hand wringing.
Does anyone ever mention the 40,000 or so deaths by carz? No they do not. What a waste of time.
Ellen,
It would seem that peak may be the case since a whole bunch of oil is currently extracted at a loss. But I am sure the central bankers, (cough), have something up their sleeves.
The central bankers have empty hands up their sleeves …
Dec. 8 – WTI at $37 handle (!) and EU drops high profile antitrust investigation and possible lawsuit against major OilCos, who were suspected of colluding on ethanol benchmarks. http://www.bloomberg.com/news/articles/2015-12-07/oil-firms-dropped-from-eu-probe-into-fuel-price-manipulation-ihw0n00j
Gov’t backing off tapping the increasingly tapped out OilCos = more subsidies, in the form of avoided fines and implied permission to engage in even more anti-competitive, monopoly behavior. These companies need to merge and get even bigger to survive. When can we expect TARP for major OilCos?
Government forbearance is simply borrowing from the same customers (and their grandchildren) who are too broke to bid the price higher, now.
Government doesn’t realize it is irrelevant. So are majors’ business plans.
The problems are all on the consumption side … the absence of discussion about this other than occasional ‘recession in China’ remarks is unbelievable. It’s like the Catholics not talking about Jesus. The ‘America Way’ may not be negotiable … it is simply being destroyed under everyone’s nose.
Bought a very cool new little handheld ham radio. Free delivery, of course. Bought a couple of pounds of wild caught salmon. Had to drive quite a ways to get it. Sat at the dinner table consuming both and wondering…
What does it mean that the Chinese-made radio (delivered) cost less than the salmon? Less than 50#of wheat?
Does it mean that the shelves will be full of little radios when there is no salmon or wheat to be had for any price?
If the Chinese workers are smart they will hurry back to their farms!
If the Chinese (and Indians) aren’t careful, their air and water pollution will wipe out their agriculture. These guys are playing with fire. More expensive radios would be a small price to pay, I think. More on this upcoming …