April 10, 2012

Empire at the ledge

I try to post interesting commentaries, from other analysts, that aren’t supplied by the mainstream media. Sometimes I sneak in a snide remark or two (I used to write a lot more, before work got in the way). However, aside from my editorial slant, many don’t know what I believe.

Well, here are a few (more to come later) of my basic thoughts on our empire as it stands on the ledge considering the plunge it is about to take…in one big, wet, sloppy nutshell:

1. The world economy might be on an intermediate period of growth, despite the troubles that loom. It might not feel like much of a recovery because we’re clawing out of a deep hole, but we are moving in the right direction for now. Data supports the claim that we are in a fragile recovery. In fact, many parts of the world have experienced strong recoveries and have already surpassed previous peaks.

2. Also in the intermediate term, debt crises will flare up to wreak havoc on the growth momentum. Europe might be the epicenter for a while, but eventually focus will shift to Japan, the world’s 3rd largest economy. Japan’s debt is unsustainable. Worse, spending is largely funded by cheap borrowing from Japanese citizens who are saving less and less. Thus, as Japan is forced to compete with the rest of the world for capital rates will likely rise, exacerbating the Japanese fiscal deficit. And the death spiral begins.

Japan will likely debase the Yen (hyperinflation?) to fill the fiscal void and global liquidity could rise dramatically. Once Japan goes, all eyes will be on the US.

While this sounds wildly contradictory to #1, we have been living with a smoldering debt crisis for many years. It is quite possible that we ‘kick the can down the road’ for a few more years. We may in fact muddle through these debt crises with some combination of financial repression and real growth. Stranger things have happened.

3. Given the current trajectory, US imperialism is doomed to dilution by rising powers around the world – China, Russia and regional allegiances. Dollar hegemony will suffer as a result, accelerating the process. This will also amplify the progression of any US debt crisis. Note the pro-cyclicality of the end of empire.

4. Now for the overriding theme: the end of cheap oil. It is no coincidence that the prosperity of the 1980s and 1990s occurred while commodity prices were declining. Cheaper inputs means fatter profit margins, providing the impetus for growth.

In 2002 the oil price was about $20bbl for WTI. Today it is around $100bbl. And what has the past decade brought? We may still have oil, but the cheap stuff is vanishing fast. When Saudi Arabia reveals its true reserves the world will see who has been swimming naked. EVERYONE.

The Western world mainlines cheap oil; without it industrialization and civilization easily falls apart. The gains of the past 200 years are based on the discovery of increasingly efficient sources of energy. Those gains include the following: mass agriculture, transportation, plastics, pharmaceuticals, electronics, mining and refining of other commodities, electricity production (because oil is used in coal mining, dam maintenance, gas extraction processes), mass communications, mass production, imported goods, and so on. Oh, and everything gets way more expensive. This doesn’t mean that all these things vanish – it just becomes scarce, which is worse.

In the battle between physics and economics, physics always wins. But this won’t stop mankind from going down without a fight. We will try to borrow and print our way out – as we have throughout modern history. We will also keep the rest of the world from accessing what many neoconsevatives believe is rightfully ours.
This should not come as a shock – the Anglo-American alliance has done this for over a century. Nevertheless, our efforts will be wasted and with it the resources needed to bridge to a new source of energy. For we live in a world in which it takes energy to get energy.

Those who build self-sufficiency now will survive best. Those who feed their black crack addiction with debt accumulation, conspicuous consumption and a paper-pushing career will suffer most.

More later…