Sunday, October 08, 2006

*** American Theocracy by Kevin Phillips

*** American Theocracy by Kevin Phillips

This is an excellent book to give you some idea about why the US invasion of Iraq makes sense from a strategic standpoint. And to no one’s surprise it is all about the oil. But there’s much more here than just that. The book outlines the changing demographic and political landscape of the US, and the thesis that the US is in its final throes of world economic domination. We will soon go the way of the Spanish, Dutch, and British who have preceded us. Don’t be surprised when you wake to find that China has stolen our lunch, and the dollar is hardly worth the paper its printed on. Until then enjoy this enlightening, but hardly uplifting read.

Because the US is beginning to run out of its own oil sources, a military solution to an energy crisis is hardly lunacy. Neither Caesar nor Napoleon would have flinched, and the temptation is understandable. P XII

“One of the biggest changes in politics in my lifetime is that the delusional is no longer marginal. It has come in from the fringe, to sit in the seat of power in the Oval Office and in Congress. For the 1st time in our history, ideology and theology hold a monopoly in Washington.” – Bill Moyers 2004

The inevitable 21st century global transition from oil to post-oil regime could see the US displaced by a new leading economic power, probably an Asian one. P4

The word ‘oil’ goes back to Greek ‘elaia’, which became ‘oleum’ in Latin, and ‘oile’ in Old French… The petroleum (Latin for ‘rock oil) first appeared in 1556. p7

In the modern age of geopolitics after WWI, it was not coincidental that Britain, the Netherlands, along with the US, owned the preeminent oil giants (the famous 7 sisters). For Britain and Holland the explanation lay in maritime and imperial history – the legacy of far flung empires and spheres of interest. P10

The Netherlands was a wind and water hegemon from 1590 to 1720. Britain was a coal hegemon from 1760 to 1914. Oil in turn played a major role in the US displacement of Britain. P12

From the 1580s to 1720s, the Dutch built the foremost global trading empire of that time… The Dutch led in navigation; their navy dominated the sea lanes to Asia; and their engineers were skilled in hydraulics, pumps, wind-driven sails and windmills. At their peak the Dutch boasted the biggest shipyards, global center of commerce and finance (Amsterdam)…But by the mid-18th century, as commercial and military power passed to industrializing Britain and populous France, Holland’s importance in trade and production was waning. P13

The major innovations that made coal the grand enabler of industry were all British. The first steam engine in 1712 to pump water from a coal mine. In 1769 James Watt built a pump that was much more powerful and could be used in factories not just mines. In the 1780’s the development of smelting pig iron with coke was consummated, making possible the shift of furnaces and foundries from the remote forests to large industrial districts near coal fields… Canals linked coal mines to industrial centers like Manchester. 18th century tracks of iron reinforced wood to carry horse drawn coal wagons were soon replaced with steam engines, and perfected to become the first locomotive by 1810… Taken together, coal, iron, steam engines and railways were the industrial revolution… By the early 1900’s large scale US and German iron and steel enterprises left British competition behind. Coal mining was more efficient in Germany and America… Thereafter innovation shifted to Germany and America… Just as the Dutch had been left behind by the 18th century industrial revolution, coal shaped Britain was left behind by a 2nd industrial revolution that elevated chemicals, petroleum and electrical engineering – industries requiring large firms, scientific laboratories, educated workforces, and economies of scale… The inevitable consequence of going first, Britain had a huge investment in plants and equipment and techniques that were outdated a generation later. Its prominence of family run firms filled with tinkerers and craftsman made it ill equipped for the transition to economies of scale and mass marketing. P14-16

The US began the 21st century as the leading economic power, but we are aleady 80 to 100 years into an oil related dominion. Symptoms of aging abound, like the displacement of manufacturing by finance, outdated energy infrastructure, depleted oil and gas reserves. Like the British of 1900, Americans are slow to grasp the possibility of steep decline. P17

In Alaska production peaked in 1988; in Canada and Mexico, this decade. The Northsea has peaked as well; Norway 2004, Britain 2000… Geologist define this as the point at which ½ of a field’s reachable oil has been extracted. After this stage each barrel requires more pressure, more expense, or both. P21

To meet projected demand in 2015, the oil industry will have to add 100M barrels a day of new production. That’s equal to 80% of 2005’s level. P22

The worldwide profits of the largest 5 oil companies in 2005 was $35B. The Global Policy Forum’s estimate of annual profits in Iraq are $95B, 3 times this sum. P26

Automobiles use 2/3’s of oil in the US. Airplanes use 10%. Powerplants are only minor oil burners… The critical yardstick in any US oil supply or any turn toward efficiency must be automotive. P27

Pension and retiree benefits represent $631 of the cost of every Chrylser, $734 of every Ford, and $1360 of every GM. Honda’s and Toyota’s cost are $107 and $180 respectively. P28

Inside Ford and GM, the biggest profits are made not by manufacturing but by the 2 financial arms: Ford Credit and GMAC. At Ford, the nuts and bolts manufacturing had a pretax profit of $850M, while the credit arm racked up $5B. p28

The State Dept had abdicated oil diplomacy to the oil industry… They preferred to use the oilmen at a discreet distance as the instruments of national security and foreign policy. NO other US industry had a comparable position. P51

The 1975-85 energy efficiency revolution was a success. During this period and in the face of an expanding economy, oil demand fell by a sixth. The % of oil imported for domestic demand dropped from 46% to 30%. P55

Speaking on behalf of Bush, press secretary Ari Fliescher stated ‘If this has had anything to do with oil, the US position would be to lift the sanctions so the oil could flow… This is about saving lives… Donald Rumsfeld in 11/02 ‘it has nothing to do w/oil, literally nothing to do with oil.’ Prime Minister Blair told Parliament in early 2003, ‘Let me deal with the conspiracy theory idea that this is somehow to do with oil. There is no way whatever if oil were the issue that it would it would not be infinitely easier to cut a deal w/Saddam.’ P69

In 1922, Lord Curzon, British Foreign Secretary, discussing a battle for Mosul, Iraq against the Turks, famously insisted that the influence of oil on British policy was nil. Mocked in Parliament and the press, most historians have scoffed at his claims…There is something about oil that makes high officials lie. P 71

The Bush Administration knew that the oil peak crisis probably posed strategic dangers far beyond those publicly acknowledged. The dollar’s role as the reserve currency was also tied to oil. Seizing Iraq as a military base/oil reservoir would allow US troops to be pulled out of vulnerable Saudi Arabia. P69

James Schlesinger, US Defense Secretary in 1973 contacted senior British officials about joining the US in an airborne attack to seize the oil fields of Saudi Arabia, Kuwait and Abu Dhabi as a counter to the oil embargo. 2 years later, Henry Kissenger returned to the same theme in an article published in Harper’s Weekly. P73

Recently it has come to light that the US also planned a coup in 1959 against Iraqi Prime Minister like Mossadegh in Iran. The effort, which came to nought, allegedly included the hiring of a 22 year old named Saddam Hussein. P73

Between 1980-88, Iraq and Iran fought a war over boundary issues with a subtext of oil geography, the US and Britain were selling arms to both sides. They cooperated in clandestine arrangements to provide Iraqi leader Hussein with dual use materials that facilitated Iraq’s use of chemical, biological and nuclear weapons. P74

The 1991 invasion of Iraq was lubricated by deceits; the first regarded Iraqi armored threat to Saudi Arabia, and the 2nd was a fabrication that Iraqi invaders had ripped 300 premature Kuwati babies from hospital incubators… In 2003, non proven false accusation of weapons of mass destruction were used. P74

The 1970s was the only decade of heavy oil pumping Iraq. From 1980 until now, Iraq has been engaged in a series of wars which has dampened output capacity… Given that little of Iraq’s oil has been pumped to date, most of it is still in the ground! In the meantime, UN sanctions were essential in preventing Iraq from exporting oil in any capacity. So long as the US and Britain could keep sanctions in place with accusations of weapons of mass destruction, Saddam couldn’t implement his own plan to extend large scale oil concessions worth $1.1 trillion to French, Russian, and Chinese oil companies. He hoped that these security council holders would help him lift the sanctions. P76

It is realistic to assume that Iraq has far more oil reserves than documented – probably 200 billion… Only 2300 wells have ever been drilled in Iraq, compare that to Texas where over 1 million have been drilled. P77

Think of Iraq as virgin territory… That’s why it becomes the most sought over real estate on the face of the earth… Think of it as a large military base with a very large oil reserve underneath. P78

From West Africa to the Strait of Malacca, evidence aplenty suggested future US base locations would be tied to oil resources and oil transport considerations. P84

The American military is being used more and more for the protection of overseas oil fields and supply routes that connect them to the US and its allies… Just as in the two world wars, oil supplies and transports will need to be guarded – this time as they flow toward the US. P85

During 2001, there was a rising preoccupation in Washington that not only had American oil production peaked, but global oil production outside OPEC might be within only 5 to 10 years of doing so. This demanded action… Another fear was that OPEC would decide to end the dollar’s virtual monopoly on oil pricing, plummeting the dollar, and sending shudders through the US economy. Indeed, Iraqi, Venezuelan, and Iranian maneuvers were already visible as the dollar sagged in 2002. P87

40% of American Christians in 2001 expected the biblical prophecies of Armageddon and the end of times to come true. P88

Before the war, Iraq was producing 3.5M barrels/day, and many in the administration believed this could be easily doubled by 2010. If Iraq could be convinced to ignore OPEC quotas, this flood of new oil effectively end OPEC’s ability to control prices. As supply expanded, prices would fall dramatically, and not even the Saudis would be able to stop the slide. Caught between falling revenues and escalating debts, the Saudis would be forced to open their fields to Western oil companies, as would other OPEC countries. P90

Iraq’s oil is the world’s cheapest to produce, only $1 per barrel… Assuming 50 years of production and 40% royalties, Iraq could yield $90B in annual profits, and nearly $5 trillion over its lifetime. P91

Such a windfall in reserves would send [participating] oil company stocks soaring by 40 to 60%... In 2000, the US energy industry had given GW Bush more money than it had to all contenders in the previous 1992 and 1996 elections combined. P92

Closely on the heels of the euro’s 1999 introduction, Baghdad had started trading oil for euros, not dollars, a policy that became official in 2000… Shortly after the US takeover in 2003, US administrators immediately put Iraq back on the dollar standard for its oil transactions. P93

Venezuela promoted barter arrangements instead of dollar transactions in selling its oil to Western Hemisphere nations, in response to the alleged 2002 US coup attempt on Chavez. Iran’s central bank began switching its reserves from dollars to euros as well. P94

Is the bible literally accurate?
National sample: Yes 55%
Evangelical Protestants: Yes 83%
Catholics: 45%

Are these descriptions literally true?
Noah’s Ark: Yes 60%
Creation of Earth in 6 days: Yes 61%
Parting of Red Sea for Moses: Yes, 64%

Will the world end in an Armageddon battle?
All Christians: Yes 45%, No 33%
Evangelicals: Yes 71%, No 18%
Catholics: Yes 18%, No 57%

Southern US leaders in 1850 started to look further afield for new slave owning territories such as adding Cuba and 3 or 4 four northern Mexican states. Less plausibly they could open up Nebraska and Kansas only if enough proslavery men could move in. p137

Strategists in confederate Texas hoped to reach California by an invasion corridor through the New Mexico territory, and the Texas cavalry did get as far as Tucson. Indeed, the new territory of Arizona with its capital in Tucson was claimed as part of the confederacy in 1861. p162

Historically debt is constructive in emerging and adolescent nations but perilous in those beginning to age or contemplate retirement… The Dutch in the early 17th century and later the English had pioneered funded national debts and found them essential for borrowing at reasonable rates of interest during wartime. Many generations later, however, as their public debts bloated and their national trajectories turned downward, Dutchmen and Britons in turn staggered under their heritage of borrowing… Debt ceased to be blessing. Even Hapsburg Spain had its own unique economic system that used gold bullion from the New World to support bond issues. P271

An economist in 2004 devoted a page in Barron’s to the thesis that the unprecedented magnitude of credit and debt in the US had made irrelevant the traditional focus of the Fed on the nation’s money supply. Total nonfinancial credit debt in the range of $23 trillion had effectively supplanted the $3 trillion money supply for the best guide to the actual economy. P273

The top 1% of Americans in 2000 had as much disposable income as the bottom 35% (or 100 million people). Thus talk about the avg American income is misleading. P282

In 2000, 44% of all corporate profits now come from the financial sector, compared with only 10% from the manufacturing sector. P284

The magnitude of how finance has penetrated every nook and cranny of the US economy is seen in the avg of 8 credit cards per household, a $15 trillion stock market, $40 trillion credit market debt, and a global total of derivative positions estimated at $270 trillion… If history teaches us anything, it’s that this so called cutting edge finance is an accident waiting to happen. P285

In 1974, the US convinced Saudi Arabia and OPEC to price oil in dollars. Many so called petro dollars were invested in US banks, recycling some of the benefits of higher oil prices. P290

The IMF in 2003 conducted a detailed study of property slumps in the US and 13 other industrialized countries. The conclusion was that a real estate bust less than ½ as large as a decline in stock prices had typically proved twice as dangerous to national economies, with effects lasting twice as long. P295

None of these past hegemons, Spain, Holland, Britain, started with well developed international finance. They began with simpler vocations. Castile, the heart of Spain, was a culture of high plateau wool growers and skilled soldiers who had spent centuries reconquering the Iberian peninsulas from the Muslims, before the conquistadors discovered gold and silver in the Americas. The Dutch had a unique talent for vocations having to do with ships, seas, and winds. The English pioneered coal and superseded the Dutch on the high seas. But after several generations these peoples were drawn farther in the direction of globalism, financial services, and capital management. P300

The Castilians who ruled Spain were not entrepreneurs, but by 1519 a multiple royal inheritance joined Spain to the Hapsburg empire… Through its new Habsburg reach, Castile enlisted much of Europe’s financial acumen. Spain’s wealth and Flemish, Italian, and German mercantile talents made Spain a financial power until its war related ruination in the 1640s. p301

Excluding the unusual case of Spain, the leading economic powers have followed an evolutionary progression: 1st, agriculture, fishing, and the like, next commerce and industry, and finally finance… In a 1997 book called the ‘Judas Economy’ by William Wolfman, chief economist at Business Week, he noted ‘the best historians have noticed that in each major phase of the development of capitalism, the leading country of the capitalist world goes through a period of financialization, wherein the most important economic dynamic is the creation and trading of abstract financial instruments rather than the production of genuine goods and services. P301-2

Before 16th century treasure fleets crossed the Atlantic, Spain had the small outlines of wool, textile and iron industries, as well as a minor middle class. But the large scale arrival of bullion was inflationary and sent the prices of local products climbing to levels that made them noncompetitive and simultaneously diminished Spaniard’s desire to work for anything but easy gains. P302

The crown took 1/5 of the gold and silver, and other fees, duties, and thinly disguised extortions were legion. The church and Jesuits, largely untaxed, grew rich on returns from America. By the 18th century, the Jesuits were reckoned to be the largest slaveholders in South America. P303

Anyone with money to spare – a noble, a merchant, or a wealthy peasant – or institutions, live convents, could lend it to private persons, municipal corporations, or to the crown, at a guaranteed 5, 7 or 10%. Such opportunities, shrank the pool of capital available for bolder ventures… In 1617 the Spanish Council of Finance acknowledged seeing no chance for an economic revival of Castile so long as debt paid better interest than that to be had from investments in agriculture, industry, and trade. P308… Like debt in the US in the early 2000s, these forms of indebtedness likely added up to a disconcerting share of the Spanish GDP circa 1600. p304

Between 1540 and 1660 a total of 16,900 tons of silver and 181 tons of gold came to Europe; enough to expand the money stock of Europe by 50%. This was the all important influx by which Europe vaulted ahead of the hitherto larger treasuries of Mughal India, Ottoman Turkey, and Ming China. P304

The word rentier – meaning a person living off unearned income – comes from the French, as do so many other words connected with money and plunder: financier, profiteer, buccaneer. Over the last 400 years, however, it was Spain, Holland, England, and the US that created the most notable rentier cultures. Each ultimately became vulnerable as a result. P307

The Dutch were a different people. To raise money for their revolution against Spain, they setup a funded debt and backed it with heavy taxation. Not only did this patriotic commitment bring in the necessary funds, but it soon made Dutch bonds among the most credit worthy in Europe. Financing at 5% interest also established Amsterdam as the west’s principal trade and stock market, making many Dutch bankers and merchants rich… By the middle of the 17th century, however, the urban and provincial leadership groups were no longer active merchants but rentiers deriving their income from houses, lands, and money at interest. When Dutch industry was declining, mid 18th century critics worried, as had Spanish reformers, about a nation divided between rentiers and beggars… A further symptom of the collapse was the astounding increase and transfer of Dutch capital abroad. P309

In the 1860s British skeptics wondered if their nation might be doing what the Dutch had done… The number of rentiers kept growing, by 1871 Britain contained 171,000 persons of rank and property without visible occupation… The big British rentier growth was yet to come. With each decade the percentage of investment going overseas grew like a spring tulip bed. What had been 200M pounds in 1850, became 700M pounds in 1875, 1B in 1900, and 3B in 1907, and 4B in 1914. By 1914 these investments were bringing the British investment class a net annual return of 200M pounds – a sum that was barely taxed, and exceeded the national government budget. P309

In 1914 a reform minded politician noted ‘At the very moment when creativity and capital were needed for industrial renewal at home, resources were being siphoned away.’ The market dictate was clear: foreign investments earned considerably more than the returns available domestically. P310

History teaches us a valuable lesson. When nations and people are young they can marshal the necessary debt defying high wire walks and comebacks during youth and early middle age, when their industries, exports, capitalizations, and animal spirits were vital and expansive, but they become less resilient in later years. During these periods, as their societies polarize, and their arteries clog with rentier and debt buildups, wars and financial crisies stop being manageable. Of course, clarity about this develops only in retrospect. They did not pay enough attention to establishing or maintaining a vital manufacturing sector, thereby keeping better national balance and a broader internal income distribution than financialization allowed. P311

An IBM VP said ‘You can’t do effective R&D if you don’t have manufacturing to insure that the R&D is actually relevant. If the US loses its manufacturing lead, it will lose everything else with it. P315

The US now needs to use Russia, Chinese, and European rockets to launch its satellites; Boeing outsourced its wing production to an overseas manufacturer; US firms lack the capacity to manufacture the advanced systems for military night vision capacity; the US depends on China for strategic metals like tungsten, yttrium, magnesium, etc. p315

Hyper active equity markets subvert rational capital allocation and act as pie-shrinkers. Rather than an invisible hand that guides an economy to maximum progress, casino type markets and hair trigger investment management act as an invisible foot that trips up and slows down a forward moving economy. P329

The US has used its global sway to pursue a borrowing mode. Alas, the US is the first leading economic power to this path since Spain. P335 I can’t help but think that the US, like Spain in its day, has become something of a Judas Economy for the avg American, with Wall Street in the profit bullion handling role of the early 17th century Seville, the Asian central banks as uncertain Genoan financiers, and GW Bush as the dull Hapsburg dynast. P338

Not that any world currency winds down overnight. The Dutch guilder had a long process of being superseded by the British pound, and some Britons understood in 1917 that the future might belong to the dollar… But before trying to add up the historical analogies, one more context requires pursuit: the likelihood of the US being drawn into a war akin to the expensive confrontations that helped scuttle Spanish, Dutch, and British hegemony. P 339

By 2004, over 50% of liquid Treasury bonds were in foreign hands, up from 20% in 1995… Asian central banks held $1.2 trillion… Since 2000, all of the net new supply of bonds has been purchased by nonresidents, and 80 to 90% of this by foreign central banks. p336

If terrorism remains center stage in a Middle Eastern war of attrition, the battle could last long enough - flaring into guerilla wars and even civil wars - to wear down the US militarily and economically. p339

The 30 years war undid Spain. Dutch military expeditions struck at Brazil, Angola and Ceylon turning the conflict into the first global war. After peace came in 1648, the Dutch were the major beneficiaries, Spain the unhorsed leading power. p340

The conflicts of 1688-1713 marked British emergence and Dutch weakening in trade if not global loan making. These conflicts reached around the world as well, and British gains at the peace table included Gibraltar, Minorca, Nova Scotia, and Newfoundland. p340

WW1 and WW2 obviously marked the start of the decline and the eventual downfall of the British empire, and the emergence of the US. p340

As far as I know, there isn’t a single contingency plan in place by any of the think tanks of the world that sets out a model illustrating how the world can continue to function smoothly once it is clear that Saudi oil has peaked. It is the total lack of any alternative scenario thinking that makes this unavoidable event so alarming. - Matthew Simon p347

In 1973, OPEC - by the good graces of Saudi Arabia under US influence - agreed to price oil in dollars, which meant that a Belgian or Peruvian had to obtain greenbacks to purchase it. This also meant that oil producing states receiving all of these dollars usually deposited them in US banks, and most of that in US treasuries. p349

Should the dollar decline dramatically, the world's perception would be that the US is attempting to inflate and depreciate its way out of its huge debts. Foreign banks would become unwilling to buy or hold large quantities of US treasuries in their reserves. Such disillusionment would further depress the greenback, making the cost of oil, by that point no longer priced in dollars, continue to rise for Americans. p350

Economists have worked up models estimating the various impacts of Chinese central bank actions ranging from significant sales to simply halving the purchase rate. The US economy could be hurt by interest rates on bonds that go up by 4/10% to 2% than they otherwise would. p352

Should a credit (home/mortgage) and financial (stock) collapse follow the popping of the 2000 stock bubble, stock and home prices would presumably fall together, making the 2nd downturn the more destructive of the two. In which case, imploding consumer debt and the harsh provisions of the new bankruptcy code could interact to yoke middle class debtors… To those Americans who say it can't here, the answer is that something that harsh did overtake Britain in the 1940s and the Dutch in the 1780s. Such a painful upheaval overtakes a leading power only when it is losing that global laurel. Whether that time is at hand for the US or is still decades away, no one can say. p378


David Ben-Ariel said...

Has Ben read Beyond Babylon: Europe's Rise and Fall yet? Sorry to post in this comment section but I didn't see an email available.

Shavua tov (good week),

Ben Sharma said...

No. Have read the United States of Europe, and other books describing the tenous state of the EU, and the declining demographics of Western Europe, along with the Islamification of Europe. The Moors it seems were not defeated in the 15th century, they were merely driven back temporarily.