2011: A Brave New Dystopia

The two greatest visions of a future dystopia were George Orwell’s "1984" and Aldous Huxley’s "Brave New World." The debate, between those who watched our descent towards corporate totalitarianism, was who was right. Would we be, as Orwell wrote, dominated by a repressive surveillance and security state that used crude and violent forms of control? Or would we be, as Huxley envisioned, entranced by entertainment and spectacle, captivated by technology and seduced by profligate consumption to embrace our own oppression? It turns out Orwell and Huxley were both right. Huxley saw the first stage of our enslavement. Orwell saw the second.

We have been gradually disempowered by a corporate state that, as Huxley foresaw, seduced and manipulated us through sensual gratification, cheap mass-produced goods, boundless credit, political theater and amusement. While we were entertained, the regulations that once kept predatory corporate power in check were dismantled, the laws that once protected us were rewritten and we were impoverished.

Now that credit is drying up, good jobs for the working class are gone forever and mass-produced goods are unaffordable, we find ourselves transported from "Brave New World" to "1984." The state, crippled by massive deficits, endless war and corporate malfeasance, is sliding toward bankruptcy. It is time for Big Brother to take over from Huxley’s feelies, the orgy-porgy and the centrifugal bumble-puppy. We are moving from a society where we are skillfully manipulated by lies and illusions to one where we are overtly controlled.

Orwell warned of a world where books were banned. Huxley warned of a world where no one wanted to read books. Orwell warned of a state of permanent war and fear. Huxley warned of a culture diverted by mindless pleasure. Orwell warned of a state where every conversation and thought was monitored and dissent was brutally punished. Huxley warned of a state where a population, preoccupied by trivia and gossip, no longer cared about truth or information.

Orwell saw us frightened into submission. Huxley saw us seduced into submission. But Huxley, we are discovering, was merely the prelude to Orwell. Huxley understood the process by which we would be complicit in our own enslavement. Orwell understood the enslavement. Now that the corporate coup is over, we stand naked and defenseless. We are beginning to understand, as Karl Marx knew, that unfettered and unregulated capitalism is a brutal and revolutionary force that exploits human beings and the natural world until exhaustion or collapse.

"The Party seeks power entirely for its own sake," Orwell wrote in "1984." "We are not interested in the good of others; we are interested solely in power. Not wealth or luxury or long life or happiness: only power, pure power. What pure power means you will understand presently. We are different from all the oligarchies of the past, in that we know what we are doing. All the others, even those who resembled ourselves, were cowards and hypocrites. The German Nazis and the Russian Communists came very close to us in their methods, but they never had the courage to recognize their own motives.

They pretended, perhaps they even believed, that they had seized power unwillingly and for a limited time, and that just round the corner there lay a paradise where human beings would be free and equal. We are not like that. We know that no one ever seizes power with the intention of relinquishing it. Power is not a means; it is an end. One does not establish a dictatorship in order to safeguard a revolution; one makes the revolution in order to establish the dictatorship. The object of persecution is persecution. The object of torture is torture. The object of power is power."

The political philosopher Sheldon Wolin uses the term "inverted totalitarianism" in his book "Democracy Incorporated" to describe our political system. It is a term that would make sense to Huxley. In inverted totalitarianism, the sophisticated technologies of corporate control, intimidation and mass manipulation, which far surpass those employed by previous totalitarian states, are effectively masked by the glitter, noise and abundance of a consumer society. Political participation and civil liberties are gradually surrendered. The corporation state, hiding behind the smokescreen of the public relations industry, the entertainment industry and the tawdry materialism of a consumer society, devours us from the inside out. It owes no allegiance to us or the nation. It feasts upon our carcass.

The corporate state does not find its expression in a demagogue or charismatic leader. It is defined by the anonymity and facelessness of the corporation. Corporations, who hire attractive spokespeople like Barack Obama, control the uses of science, technology, education and mass communication. They control the messages in movies and television. And, as in "Brave New World," they use these tools of communication to bolster tyranny. Our systems of mass communication, as Wolin writes, "block out, eliminate whatever might introduce qualification, ambiguity, or dialogue, anything that might weaken or complicate the holistic force of their creation, to its total impression."

The result is a monochromatic system of information. Celebrity courtiers, masquerading as journalists, experts and specialists, identify our problems and patiently explain the parameters. All those who argue outside the imposed parameters are dismissed as irrelevant cranks, extremists or members of a radical left. Prescient social critics, from Ralph Nader to Noam Chomsky, are banished. Acceptable opinions have a range of A to B. The culture, under the tutelage of these corporate courtiers, becomes, as Huxley noted, a world of cheerful conformity, as well as an endless and finally fatal optimism.

We busy ourselves buying products that promise to change our lives, make us more beautiful, confident or successful as we are steadily stripped of rights, money and influence. All messages we receive through these systems of communication, whether on the nightly news or talk shows like "Oprah," promise a brighter, happier tomorrow. And this, as Wolin points out, is "the same ideology that invites corporate executives to exaggerate profits and conceal losses, but always with a sunny face."

We have been entranced, as Wolin writes, by "continuous technological advances" that "encourage elaborate fantasies of individual prowess, eternal youthfulness, beauty through surgery, actions measured in nanoseconds: a dream-laden culture of ever-expanding control and possibility, whose denizens are prone to fantasies because the vast majority have imagination but little scientific knowledge."

Our manufacturing base has been dismantled. Speculators and swindlers have looted the U.S. Treasury and stolen billions from small shareholders who had set aside money for retirement or college. Civil liberties, including habeas corpus and protection from warrantless wiretapping, have been taken away. Basic services, including public education and health care, have been handed over to the corporations to exploit for profit. The few who raise voices of dissent, who refuse to engage in the corporate happy talk, are derided by the corporate establishment as freaks.

Attitudes and temperament have been cleverly engineered by the corporate state, as with Huxley’s pliant characters in "Brave New World." The book’s protagonist, Bernard Marx, turns in frustration to his girlfriend Lenina:

"Don’t you wish you were free, Lenina?" he asks.
"I don’t know that you mean. I am free, free to have the most wonderful time. Everybody’s happy nowadays."
He laughed, "Yes, 'Everybody’s happy nowadays.’ We have been giving the children that at five. But wouldn’t you like to be free to be happy in some other way, Lenina? In your own way, for example; not in everybody else’s way."
"I don’t know what you mean," she repeated.

The façade is crumbling. And as more and more people realize that they have been used and robbed, we will move swiftly from Huxley’s "Brave New World" to Orwell’s "1984." The public, at some point, will have to face some very unpleasant truths. The good-paying jobs are not coming back. The largest deficits in human history mean that we are trapped in a debt peonage system that will be used by the corporate state to eradicate the last vestiges of social protection for citizens, including Social Security.

The state has devolved from a capitalist democracy to neo-feudalism. And when these truths become apparent, anger will replace the corporate-imposed cheerful conformity. The bleakness of our post-industrial pockets, where some 40 million Americans live in a state of poverty and tens of millions in a category called "near poverty," coupled with the lack of credit to save families from foreclosures, bank repossessions and bankruptcy from medical bills, means that inverted totalitarianism will no longer work.

We increasingly live in Orwell’s Oceania, not Huxley’s The World State. Osama bin Laden plays the role assumed by Emmanuel Goldstein in "1984." Goldstein, in the novel, is the public face of terror. His evil machinations and clandestine acts of violence dominate the nightly news. Goldstein’s image appears each day on Oceania’s television screens as part of the nation’s "Two Minutes of Hate" daily ritual. And without the intervention of the state, Goldstein, like bin Laden, will kill you. All excesses are justified in the titanic fight against evil personified.

The psychological torture of Pvt. Bradley Manning—who has now been imprisoned for seven months without being convicted of any crime—mirrors the breaking of the dissident Winston Smith at the end of "1984." Manning is being held as a "maximum custody detainee" in the brig at Marine Corps Base Quantico, in Virginia. He spends 23 of every 24 hours alone. He is denied exercise. He cannot have a pillow or sheets for his bed. Army doctors have been plying him with antidepressants. The cruder forms of torture of the Gestapo have been replaced with refined Orwellian techniques, largely developed by government psychologists, to turn dissidents like Manning into vegetables.

We break souls as well as bodies. It is more effective. Now we can all be taken to Orwell’s dreaded Room 101 to become compliant and harmless. These "special administrative measures" are regularly imposed on our dissidents, including Syed Fahad Hashmi, who was imprisoned under similar conditions for three years before going to trial. The techniques have psychologically maimed thousands of detainees in our black sites around the globe. They are the staple form of control in our maximum security prisons where the corporate state makes war on our most politically astute underclass—African-Americans. It all presages the shift from Huxley to Orwell.

"Never again will you be capable of ordinary human feeling," Winston Smith’s torturer tells him in "1984." "Everything will be dead inside you. Never again will you be capable of love, or friendship, or joy of living, or laughter, or curiosity, or courage, or integrity. You will be hollow. We shall squeeze you empty and then we shall fill you with ourselves." The noose is tightening. The era of amusement is being replaced by the era of repression.

Tens of millions of citizens have had their e-mails and phone records turned over to the government. We are the most monitored and spied-on citizenry in human history. Many of us have our daily routine caught on dozens of security cameras. Our proclivities and habits are recorded on the Internet. Our profiles are electronically generated. Our bodies are patted down at airports and filmed by scanners. And public service announcements, car inspection stickers, and public transportation posters constantly urge us to report suspicious activity. The enemy is everywhere.

Those who do not comply with the dictates of the war on terror, a war which, as Orwell noted, is endless, are brutally silenced. The draconian security measures used to cripple protests at the G-20 gatherings in Pittsburgh and Toronto were wildly disproportionate for the level of street activity. But they sent a clear message—DO NOT TRY THIS. The FBI’s targeting of antiwar and Palestinian activists, which in late September saw agents raid homes in Minneapolis and Chicago, is a harbinger of what is to come for all who dare defy the state’s official Newspeak.

The agents—our Thought Police—seized phones, computers, documents and other personal belongings. Subpoenas to appear before a grand jury have since been served on 26 people. The subpoenas cite federal law prohibiting "providing material support or resources to designated foreign terrorist organizations." Terror, even for those who have nothing to do with terror, becomes the blunt instrument used by Big Brother to protect us from ourselves.

"Do you begin to see, then, what kind of world we are creating?" Orwell wrote. "It is the exact opposite of the stupid hedonistic Utopias that the old reformers imagined. A world of fear and treachery and torment, a world of trampling and being trampled upon, a world which will grow not less but more merciless as it refines itself."

Huge Amount of Oil Available, But…

There is a huge amount of oil which theoretically can be extracted, but the question is whether the cost will be cheap enough for us to be able to afford to extract it. If the oil is too expensive to extract, the shortage of oil seems to cause a recession, similar to what we are having now. I discuss this in purely monetary terms, but it is also an issue with respect to low energy return on investment (EROI), because oil which is of low EROI needs a high price to justify its extraction.

In many ways, the folks who say we a have lots of oil are correct. All one has to do is include the oil which is extremely expensive and slow to extract. Much of the cheap, easy-to-extract oil has already been removed.

Economic theory seems to say that if oil prices rise, substitutes are likely to be found, and these will tend to bring prices back down. When oil prices rose, we found substitutes, but they were poor substitutes. They are more generally more expensive, when all of the costs are included. Biofuels interfered with food supply; wind is a substitute for natural gas and coal in electricity production, but it is not as a transportation fuel, which is one of the things that we specifically expect to be short of.

In the above slide, I purposely exaggerated the impact of an oil price rise on food and gasoline. The effect would be greatest on a low income individual. It would also be very great, if the price rise were to something like $400 barrel.

This is pretty obvious, if you think about it. Does it sound like anything we have run into in the last few years.

Many people think of the effects of peak oil as a future event. But we are really experiencing them here and now. Oil production stopped rising in 2005, so by 2006, we were feeling the effects of the squeeze. The effects were being felt as early as 2004, when oil prices began to rise.

I have omitted several slides, showing the rise and fall of oil production in the US 48 states, Alaska, and the North Sea. At this point, most of the fields that are in easy to access locations are in decline, and we are “stuck” with what is left–the slow to extract, expensive oil from difficult locations.

So many people have equated high prices with oil shortages, that people have come to believe that if prices are low (or at least relatively low, compared to last years’ prices), everything is OK. But we really need lots of quite inexpensive oil to fuel the economy, or it goes into a recession. Reduced credit reduces demand, and has the effect of bringing oil prices down.

In the above slide, the cutback in credit is especially important. Without credit, many people cannot buy new cars, new houses, or expensive Christmas presents. All of these use oil in their manufacture and distribution, and keep oil prices up.

US consumer credit (including things like credit card loans and auto loans) peaked the same month as oil prices. Mortgage loans peaked about the same time, and many types of commercial credit have been affected. The government has tried to pick up the slack with additional borrowing, but this is not the same.

The EIA indicates that on a constant dollar basis, energy expenditures more than doubled between 1990 and 2008. Going forward, the EIA sees more increases in energy expenditures, on an inflation adjusted basis.

I might mention that one of the major uses of new technology is to bring down prices. There are limits to what can be done–if oil is very deep in the ocean, it is likely never going to be cheap to extract. The need for new technology to bring down prices is probably as great or greater with fossil fuels as it is with things like wind, solar, and biofuels. Fossil fuels are at least well adapted to running our current infrastructure. Anything that is very different will require huge expenditures for conversion.

In my view, the big question mark is how debt (and financial institutions) will do. The front page story on today’s Atlanta Journal Constitution is “Troubled banks find it hard to stay afloat”. How long will bailing out failing banks with printed money work?

The growing gap is the concern. Regardless of whether oil production remains flat, or declines fairly steeply, we have a major problem. With many people from around the world interested in using oil products, and many new cars in places like China and India, the gap between production and what we would normally consume (if prices were low and credit were available) is likely to continue to grow, even if somehow oil production could be kept flat.

In the recent past, the advanced economies have been able to “offshore” their energy intensive industries to places like China, giving the illusion that countries can get along with only non-energy intensive services like finance. But for the world as a whole, there seems to be a close relationship between growth in oil consumption and GDP growth. Since finance and some other services don’t need much oil to grow, the relationship is not exactly 1:1. Efficiency growth would also tend to raise make GDP growth higher (but declining EROI would tend to lower it).

My big concern is international trade. If debt defaults are a problem, this could interfere with the workings of the whole system, especially if it leads to major countries (perhaps Greece) defaulting on their debts.

In the years since fossil fuel use has developed, world population has greatly expanded.

We are already seeing problems with people in some of the poorer nations having adequate food. Even in the US, there are people at the margins who are “food insecure”. Currently, there are government programs to help, but states are finding it increasingly necessary to cut back, because of falling tax revenue.

It would be a lot easier to get politicians to talk about the situation if there were a good solution in sight. There are some partial mitigations, but they likely don’t get us back to “business as usual”. Voters are likely to be very unreceptive to such news.

The Peak Oil Crisis: The Time of the Demagogues

The transition from 200 years of cheap and plentiful fossil fuels to an era without will go through many phases as it gradually dawns on the body politic what is happening.

A few weeks ago Virginia's U.S. Senator Mark Warner noted that the global warming debate was not so much a scientific one as it was religious. On one side were the apostles of science and on the other was the "American way of life."

When Election Day came, it was no contest - the American way of life won hands down and numerous veteran politicians were sent packing. In state after state, "cap and trade" was widely perceived as the implacable enemy of all Americans hold dear - prosperity and economic growth.

Now it shouldn't take long for one to figure out that the good times we have enjoyed for the last 200 years or so were based on cheap energy.

If one takes some and eventfully much of the energy out of the equation, then the coming decades are simply not going to be prosperous in the conventional sense. The bottom line is that most of us will be making do with much less stuff and certainly a lot less fossil fuel powered mobility in coming years.

The trouble, of course, is that most of us don't want to hear this and many will embrace any prophet that will say drastic changes are not in store and that we can return to the life as we have always known it. Reality of course is that, unless you are among the handful that are still hunting and gathering up a remote Amazon tributary, you are going to be hurting soon. For many this has already happened.

In America, and many other places for that matter, in the last 100 or so years we managed to move much of our rapidly increasing population into cities and suburbs and find some means for them to earn a living there. This transition was underwritten by prodigious amounts of cheap fossil energy that supported people in increasing abstract occupations such as law, finance, analysis or government.

History is replete with large numbers of people willing to follow prophets to disaster.

Without the cheap fossil fuels, there will simply not be enough energy to maintain the jobs and lifestyles for many, many millions of us.

Nearly half of all Americans report that they are already hurting in some fashion from what they believe is a recession, but in reality is the beginning of the transition from one age to another less prosperous one. Give the large numbers already hurting financially, there is little wonder that so many are willing to follow voices saying they can make life better.

A simple example is the American attitude toward global warming.

A few years ago most of us were willing to accept the abstruse science that concluded that not only was global warming caused by man-made emissions, but mankind had also started along the path to wiping itself out.

The general acceptance of the idea that we had better do something to control emissions was widespread until there arose the demagogues preaching that the science was false, global warming was a natural phenomenon, the consequences of temperature rises were far in the future, and that efforts to control emissions could cost you your job or the hopes of ever getting one.

Given arguments like that, concerns for the as yet unborn great -grandchildren quickly melted and a majority of Americans now believe that controlling emissions is not a priority when compared to creating jobs.

History, unfortunately, is replete with large numbers of people willing to follow prophets to disaster. The last millennium or two has abounded in holy wars that resulted in the death of millions and the demise of many civilizations.

In our lifetime the German people followed a prophet of prosperity that resulted in the destruction of much of the civilized world. Closer to home we only have to go back 150 years to a time when hundreds of thousands died fighting for a belief that their economic well-being depended on the indefinite continuation of slavery.
At present America is abounding with demagogues professing an answer to the current economic difficulties and a restoration of the jobs and prosperity that is the American birth right.

Restoring "prosperity" in the conventional sense of acquiring more and fancier things and ever increasing real incomes will, of course, be impossible as liquid fuels become more and more expensive. As this fact of life in the 21st century is not yet widely recognized, the demagogy will continue for a while and many will be elected to public office on platforms that are simply impossible to fulfill.

The heart of the problem is that there are no simple and painless solutions to transferring mankind from an abundance of cheap energy to scarcity. So long as the false prophets of prosperity are in the political ascendency, rational efforts to prepare life in the decades ahead will be impossible.

Although the path ahead is far from clear, serious and possibly expensive efforts to make substantial reductions in energy consumption before we are forced to do so by a combination of cost and scarcity would seem an unlikely course.

As long as enough people are willing to believe that free enterprise and market forces will bring us through the coming transition through substitution of other forms of energy nothing is likely to happen until unprecedented economic pain sets in. Then perhaps we as a nation will stop trying to return to the good old days and will focus on real solutions to the pain we are all about to suffer.

Oil, Money, & War

Introduction

The next war has just begun. The era of peace and stability that we have come to know is over. We are entering an era in history, not of peaceful economic competition between nations, but a time of warfare between tribes, ethnic groups, religions, and economic systems. This war will be unlike other wars. There will be no major battlefields. Armies won’t line up to face each other and do battle. The 21st century war will be taken to the cities and suburbs as well as the skies. It will be fought with car bombs, small explosives, light armaments, and surveillance. It will be a war of men killing each other at close quarters. Battles will be replaced by skirmishes, bombings, massacres and genocide. It will be fought by regular armies against small groups known as terrorists, guerrillas, bandits and robbers. For the first time in the West, war will become personal. It won’t be watched from afar, but will be experienced first hand as immediate participants, victims or targets. In this new war, age and sex will be meaningless for many of its warriors will have little regard for life.

The Visible, Yet Invisible Face of Evil

This war will be bloody, brutal and cruel. Lives will be lost, villages and property destroyed, commerce disrupted, and governments toppled. In many ways, it will seem like medieval times. Military and economic functions will start to merge in an effort to wage war. Glory, profit and the spoils of war will be just as important as winning the war. In fact, they may become the objective of war itself. At other times it may seem that the war doesn’t exist. Most of this war will be fought covertly. Battles, victories and skirmishes may not be reported or for that matter, even known. It will be a lot like a chess game, but with real players. It will be fought through intelligence as each side tries to determine what the other side is up to in order to predict what is unpredictable. It will be fought through action as well as words. It will be visible and at the same time, invisible.

The deeds of 19 terrorists on September 11th were visible for all to see. Yet al Qaeda is visible only when it acts. It is not a nation. It has no boundaries. Its few thousand warriors are scattered throughout the world. It is both agile and highly mobile as it is invisible. It doesn’t present an easy target for the generals. This will not be an easy war to win. It will be as long as it is uncertain. There will be no measurable yardsticks for the public to view its progress. An occasional firefight, a sudden explosion, or a downed jetliner will be the only recognition that this war even exists.

Defining The New War - Shifting Plates

To some this war will be about freedom, to others it will be about revenge. To the Islamic world, it is about social unrest as well as an assertion of cultural and national identity against a background and inability to modernize in a very modern world. This war will have many facets, some of which will be political while much of it will be economic with religion thrown in between the two. Like all wars, it will disrupt the flow of power and wealth. A great power shift is taking place. Like the natural world where volcanic eruptions and earthquakes signal powerful forces are at work, the tectonic plates are on the move again. Just as those volcanic eruptions and earthquakes throw the earth's crust up into mountains and down into basins, the same events are taking place in the world's political and economic systems. The world’s present power structure and economic system are coming under severe strain. The economic eruptions that are now present in the financial and currency markets are the first signs that a Vesuvian eruption is about to be unleashed. As these political and economic plates shift under the pressure of war, a new political and economic order will emerge.

We live in a bifurcated world -- part rich, but mostly poor. It is this growing world of the poor where populations are exploding that now confront the modern world. These two worlds can no longer be walled off, separated, and viewed from a distance. The barrier that separates the two worlds is crumbling. In his book “The Coming Anarchy” Robert D. Kaplan states that "To understand the events of the next fifty years, then, one must understand environmental scarcity, cultural and racial clash, geographic destiny, and the transformation of war.” 1 The realism of which Kaplan writes and to which this Perspective Series will be directed may at times appear as unreal as it is heresy. But in Kaplan’s words, “They track well with the analyses of the military and intelligence communities, where accountability is based less on false displays of idealism than on the ability to pinpoint trouble spots a few years down the road.” 2

The Clash of Human Nature

To a western world that has known mostly peace for half a century, a prolonged and faceless war may clash with the idealisms and emotions of a pop culture centered on entertainment. We have in many ways become creatures of the moment. How and what we think, the way we vote, and yes, even how we invest, are the result of the latest news event or public opinion poll. This news is spoon fed to the masses in emotional images designed to entertain and appeal to emotion rather than reason and intellect. The media conglomerates bombard and saturate us with news events that are impassioned by classical liberal values strewn with a tunnel vision that is as narrow as it is lacking in analysis. Because of industry consolidation, what you hear, read, or see is now controlled by a handful of corporations. It is, as many have called it, The Fourth Estate. In reality, it is a power unto itself and accountable to no one. At a time of war, this is dangerous for it clouds issues and prevents real analysis from occurring. It alters public opinion at a time it needs to be marshaled for war by its leaders. The media's views are transnational whereas a president or prime minister's concerns are for their country. The media mainly speak of peace and diplomacy as the solution to the world’s ills. Appeasement is its mantra. Peace is its promise.

However, throughout history, war, not peace is the natural state of man. In the words of Professor Donald Kagan, “…over the past two centuries the only thing more common than predictions about the end of war has been war itself.” 3 The Greek historian Thucydides wrote that nations go to war out of honor, fear, and self interest. In the future, nations will go to war over resources, especially those nations prone to resource scarcity. Of all of the world’s resources, none is more likely to provoke conflict between nations in this new century than oil and water. Oil is the lifeblood of the modern industrialized state while water is the key to sustaining life. Without water, human life would cease to exist. Without oil, industrial nations will die.

Oil Is At The Root of Turmoil

The modern industrial states are dependent on oil as never before for their prosperity. Cheap and easily obtainable oil is the fluid which powers industrialized economies. These states are dependent on cheap and plentiful oil for their prosperity. This has led to a growing dependency on Middle Eastern and now Caspian oil. Meanwhile, as this bondage grows, there are no policies that would free us from this dependency. Some argue that if left to the marketplace without government interference, the laws of supply and demand will replace this dependency on oil either through conservation or substitutes. This is a naïve view which permeates much of today’s discussion on solving our energy and dependency crisis. These arguments ignore an important geological fact called depletion. If the technology existed to replace Middle Eastern oil by an alternative energy substitute, it would have been done so years ago during the last energy shock. Even if a new technology was to be discovered to replace oil, it would take years to implement. Where would the hundreds of billions, if not trillions, come from to finance such a project?

I’m afraid, as this Perspective Series will show, the only supply of cheap and affordable energy for the foreseeable future lies buried beneath the sands of the Middle East. That is where the battlegrounds of this present war are leading us. The Middle East is the land bridge that connects the masses of Europe, Africa, and Asia. On its eastern border, it is flanked by the Caspian states and the oil of the Caspian Sea. The distant drum of war is beating more loudly by the growing buildup of military forces in the region. It is not just the states that border the region that are arming but the Great Powers are building up their military presence in the region. That war is coming to this region is a foregone conclusion. It has not become a question of if, but when.

Resource Scarcity . . . A Harbinger of War

At a time of tremendous population growth and escalating demand for commodities of all types, resource scarcity will become a harbinger of war. The wars of the 21st century will arise over the scarcity of resources like water, oil and food as much as they will religion and economics. National security will become aligned and directed towards the securing and protection of global resource flows. It is become a prominent feature of American national security. As America imports more of what it needs to fuel its industries and economy, its military presence will grow even larger. Carrier battle groups now protect the flow of oil, raw materials and trade routes around the globe. American legions are stationed in over 100 countries and on all the major continents. As a major superpower, America has been both an arbiter and maker of peace. It is that position which is now being challenged.

THREE MAJOR POWERSHIFTS IN THE 21ST CENTURY

There are three major powershifts occurring around the globe that will unsettle and reshape the world of the 21st century. The aftershocks and tremors from these trends will be felt long after the earthquakes that birthed them. The first is oil which is about to deliver a powerful geological truth -- its scarcity. Sooner or later, it is going to become common knowledge that we are running out of this precious resource with nothing at present to replace it. The world is going to face this fact head-on in the next decade as developed and developing nations vie with one another for access and control over a depleting resource.

The second trend that will reshape this century is the current monetary system which has been built and based on a fiat money system. The world is about to relearn a valuable lesson from history. Money is a commodity. This commodity differs from other commodities in that its demand comes mainly from being a medium of exchange. Like all commodities, what determines its price is the same. The price of money is determined by the laws of supply and demand. Increase in the supply of money tends to lower its price, while increase in the demand for money will make its price rise. Governments have sought to meddle with this process by altering its supply while trying to keep its price stable. The result of this meddling has been chaos in the world’s monetary system. From Mexico in 1994, to Asia in 1997, Russia in 1998, Turkey in 2000, Argentina in 2001, Venezuela, Uruguay and now Japan in 2002, the system is breaking down. A coercive money system that is forced on people eventually brings the conflict and chaos which we are now witnessing.

The third shift will be war itself. This shift will be about who fights the war, what the war is about, and how the war is fought. The nation states' monopoly on violence is slowly eroding. Powerful nations must now deal with terrorism which poses a new challenge to its monopoly on power. This new war has just begun. In the words of President George W. Bush, responding to the terrorist attacks against the Trade Center on September 11, “You just witnessed the opening battle of the first war of the 21st century.” 4 In this new century, war will be waged by states, but increasingly by groups we call terrorists, guerrillas, or bandits. It will be fought over resources, over religion and tribe and for the larger players, over economic systems. It is from the shifting of these tectonic plates that a new world order will emerge. Its shape, form and victor at this time are still unknown.

Tremor #1: Oil

“The Great Game” is a term used by politicians and historians to denote the foreign policy of Great Britain from the Napoleonic Wars onward to its fight to shield its Indian Empire from onslaughts by France and Russia. The term was coined by a British officer named Arthur Conolly. Conolly played at this game while serving the British Empire in the Himalayans, deserts and the oases of Central Asia. Conolly met his end through an Uzbek emir who tortured and then beheaded him. The term “The Great Game” was found among his papers. The phrase began to be quoted by historians in reference to the first Afghan War and was later made famous by Rudyard Kipling in his novel, “Kim”. 5 The Game began with the Duke of Wellington when he became Prime Minister as a strategy to keep India from being attacked by Russia through Afghanistan. The Game was played throughout the 19th century and culminated in the creation of what we now know as the Middle East. The Middle East was fabricated in Europe as a result of decisions made by the Allies during and after the First World War.

The Great Game pitted England against European rivals in the halcyon days of empire building during the late 19th and early 20th century. In the early days of the 20th century, the Ottoman Empire ruled much of the Middle East. Britain saw the Middle East as a buffer zone between its Indian Empire and a growing political threat from France, Germany, and Russia.

The Middle East became a cauldron for national economic interests. It became the chess board on which the major powers played their game. Great Britain embarked upon a vast new imperial expansion that would take decades to play out. As a result of the politics of the First World War, Britain and France decided to occupy and partition the Middle East. The great powers thought they could reshape and mold the Middle East in their own image. The result was that they created an artificial state system that ignored a fundamental tenet within the region -- religion.

Today "The Great Game” is still being played. The artificial boundaries which were created as a result of the First and Second World War still exist, but are now unraveling. Another factor has been introduced to The Game -- oil. At the time the Middle East was partitioned by the great powers, oil was not a consideration. The vast oil reserves of the region were not yet known. The United States was the world’s largest exporter of oil. Great Britain imported the majority of its oil from the United States well into the first half of the 20th century. Now it is known that the region contains close to 70% of the world’s known oil reserves. If the Caspian Sea’s reserves are added in, the Middle East contains over 80% of the world’s oil.

In the present time, the region has become a vast political cauldron that mixes oil and religion. Instability has become a part of life in the Middle East as a result of the Islamic Revolution. The only peace and security the West can now have will come only if there is stability in this part of the world. The prosperity of the industrialized West is based on affordable oil from the Middle East. The most serious threat to that stability is the rising tide of fundamental Islam in Middle Eastern politics. Foreign powers are still playing at The Great Game in an effort to shape events in the region to suit their own self interests. But now those self interests are threatened and both major players and lesser players have much to lose. For the West, it is the economy and a way of life. For the residents of the region, it has become a matter of life and death. That death toll is rising each day.

The Game is about to enter its third and final phase with the stakes never higher. If the West does not act wisely and decisively, then The Great Game may be lost with tragic consequences for both sides. The wars and tragedies of the past will pale by comparison to what may lie ahead if radical Islam triumphs in the region. For the West, it will mean the end of cheap oil and a way of life. For the Middle East, it will mean more bloodshed and poverty. And for the Great Powers, it could lead to greater confrontation and the next World War.

Tremor # 2: Money

Loss of Confidence

On August 15th, 1971 President Nixon brought the Bretton Woods system to an end. For the first time in American history, the dollar would become a fiat currency without any gold backing. The threat of European Central Banks demanding gold for dollars ended gold backing of the dollar. From that point forward, the US would begin an era of deficit spending freed from the shackles of gold that had forced fiscal discipline. The world would revert to the fiat system of the 1930’s. From that point in time, the financial system would go through one upheaval after another. The result was a new era characterized by competing currency devaluations and international monetary instability. As the international monetary system moved into an age of freely floating exchange rates new risks were imposed upon the world’s economies. Interest rate and currency risk were added on to business risk. Under a fixed rate exchange system anchored by gold, these risks weren’t as prevalent.

Derivative Models Give Risk a New Game

A system of freely floating currencies emerged and the world of business adapted with innovative financial instruments called derivatives. With the advent of the Black Scholes model, risk could now be measured in terms of volatility. Introduced to the world by three economists -- Fisher Black, Myron Scholes, and Robert Merton -- their elegant theory would cause the derivatives markets to explode. Businesses could now hedge against currency risk and interest rate risk brought about by the abandonment of fixed exchange rates under the Bretton Woods system. Models could now be developed to allow businesses to hedge against any risk with multiple options to insure against any kind of financial calamity. You could use forward contracts, option contracts, options on futures, swap contracts, or any derivation or combination of the above. The markets grew as the hazards of operating internationally grew. Governments soon found out, with currencies no longer anchored by gold, they could inflate at will. They could expand or contract the money supply through the expansion or contraction of credit. Instead of gold, currencies would be anchored by interest rates. The supply and demand for money would now be controlled by the rate of return offered by paper investments.

A "Simple" Money Game

A new system developed in place of the gold-backed systems of the past, and another new experiment with money began. These architects thought they had invented a new way around the failure of past fiat systems. Complex economic models came into vogue in which governments thought they could fine tune the economy. The complex interactions of the marketplace and the interweaving of human action were ignored in favor of mathematical models that predicted certainty. Input “a” mixed with input "b” equaled output “c”. It was that simple and yet, not so simple. To be sure, the models were elaborate in their structure and detailed as to their output. The only trouble was that they weren’t as accurate or controllable on their outcome. They still ignored Adam Smith’s “invisible hand."

A New Breed of Speculators

As this new system was being developed, a new element injected its way into the system in response to a government-imposed fiat system. It was the “speculator” who now emerged to challenge the power of the fiat system and central banks. These financial warriors battle against each other and vulnerable governments in their quest to amass wealth. They move and operate in the world's capital markets. Their weapons are money and on a daily basis, they move trillions of dollars throughout the world’s monetary system. Their battlefield has become the world’s currency market which is the common link to all other financial markets around the globe. They have become the vigilantes of the financial system enforcing economic law against recalcitrant governments. Their motivation is not love of law -- it is the pursuit of profit that propels them into action.

In the financial markets, the battle for confidence is fought between these two opposing armies. Like the real wars of today where armies of the state are pitted against small armed groups in the financial markets, it is central banks against these master-less financial samurai. Governments disparagingly refer to them as the “Electronic Herd”, a term popularized by journalist Thomas Friedman. The herd is made up of hedge funds, mutual funds, pension funds, commercial banks, insurance companies, professional money managers and wealthy investors. Just as governments have enormous financial reserves that they can marshal into battle, the Electronic Herd is capable of matching the resources of governments, and at times, overwhelming these forces. The weapon of the herd is leverage. It is the great equalizer. Through complex financial instruments known as derivatives, they become a force multiplier that enables financial players like hedge funds to humble governments. In 1992, George Soros was able to use the leverage of derivatives to force England out of the European Monetary System’s Exchange Rate Mechanism. In the process, he forced England to devalue its currency when its Prime Minister John Major said he wouldn’t. The spoils of the battle went to Soros who made a billion dollars in a few days.

These financial ronin have taken on governments wherever they think they are vulnerable. They battled inflationary policies in Mexico in 1994, Asia in 1997 and in the process, they’ve broken down the walls that separate national economies and financial markets. They have become both judge and jury over governmental policies with the ability to punish them financially. At times, they seem invincible. At other times, they seem vulnerable. Many times they win. Other times they lose. And when they lose, they can wreck havoc on both sides of the battlefield as in 1998 when LTCM nearly drove the world’s financial system to its knees. Right now they are engaged in battle in Latin America against the fiat systems of Argentina, Venezuela, and Uruguay and in Asia against Japan.

The Gauntlet Has Been Thrown

A bigger battle has just begun in the U.S. which will become the ultimate battle in the confidence game. The first skirmishes have taken place in the financial markets where over a trillion dollars of investor wealth has disappeared. Opinions still run in favor of the power of the Fed to revitalize the U.S. economy and ultimately the U.S. stock market. The reputation of the U.S. central bank has been elevated to a pedestal where it is thought to be invincible. It is this invincibility that is about to be challenged -- first in the stock and bond markets, and then in the currency markets. It is the dollar that is now most vulnerable. The dollar has become the fulcrum on which the financial markets rest in an uneasy balance. The dollar is about to be devalued and it is the next target for the herd. The U.S. has been running up monstrous trade deficits to the tune of over $1 billion dollars a day. For all of 2001, the U.S. trade imbalance for goods and services was $346.3 billion. 6 The growing trade deficit poses a real threat to the US financial system. No country in history has ever been able to sustain a large trade deficit without paying a financial price.

The dollar and U.S. financial assets like stocks and bonds are headed for a steep fall, contrary to Wall Street hype of another boom. The gross imbalances in corporate debt, consumer debt, and grossly-inflated profits through financial engineering (only now being exposed) are going to lead the world into the steepest recession of the post-World War II era. The root cause of this recession is the financial bubble created by an unmitigated credit boom fed by an expansionist monetary policy of the U.S. Federal Reserve. You can feel the tremors in the financial markets in the U.S. which have begun their third year of decline. It is also visible in the Treasury markets which have failed to rally as short-term rates have plunged. The U.S. markets are held together in a precarious balance made up of numerous financial bubbles waiting for a shock wave that will cause them to burst. This could be the year of “big surprises” and “unexpected events” -- a time when global financial problems are magnified by the introduction of war.

Tremor # 3: War

The flint of war routinely sparks,
No steel need ever strike it.
To arms! is nature’s hearty cry;
We fight because we like it.
-- Art Buck

In 1968 historians Will and Ariel Durant had calculated that in over 3,421 years of recorded history, the world had enjoyed only 268 years of peace. 7 It has become a familiar refrain of Western ideology to believe that man is capable of changing and controlling the physical and social environment in which he inhabits. Wiser philosophers have concluded that this propensity to impose one’s ideology on another often leads to war. It is a constant struggle brought about by the competition for power. In this competition between states the resolution of a conflict is often resolved through the venue of war. In the words of the Prussian statesman Carl von Clauswitz, “War is the continuation of politics by other means… War is an act of force to compel our enemy to do our will.” 8

The study of war has been the primary task of historians, but one can’t help but realize how oftentimes those wars have been unnecessary. In the words of Professor Donald Kagan, “A persistent and repeated error through the ages has been the failure to understand that the preservation of peace requires active effort, planning, the expenditure of resources, and sacrifice, just as war does. In the modern world especially the sense that peace is natural and war an aberration has led to a failure in peacetime to consider the possibility of another war, which, in turn, has prevented the efforts needed to preserve the peace”. 9

Leviathan, The Missing Element

According to Thomas Hobbes, man is in wanton need of a Leviathan. One of mankind’s greatest fears is of violent death or death at the hands of another human being. It is this fear that causes humans to submit themselves to government. They do so willingly in an effort to bring about order. The luxury of freedom is only possible once order has been established. That is why throughout history the greatest periods of peace have been when there was a giant Leviathan that kept order. One of the greatest illusions of the post-Cold War era is that of permanent peace. Since the break up of the former Soviet state, the world has been characterized by greater conflicts. Could it be because the power of the Soviet state to police its sphere has receded? One of the greatest challenges in this new century will be to reestablish of order created by the vacuum of the end of the Cold War. For good or bad, the great European empires of the 19th century kept the world in relative peace. It has been the disintegration of those empires that has now given way to so many of the conflicts of the 20th and now the 21st century.

The Clash of Two Worlds

It is this new challenge of the reestablishment of order out of chaos that confronts one of the world’s last remaining leviathans -- the United States. Many will disagree with this concept out of national, economic, tribal or ethnic loyalty. However, one only has to look at the annals of history to see a world without a Leviathan. The Dark Ages and the battle between city states during the Middle Ages stand in sharp contrast to the peace of great empires. The bifurcated world we live in is a world of opposites that stand in sharp contrast to each other. One world is aging and prosperous, while the other is poor, young, and growing more violent. These two unequal worlds are now confronting each other no longer separated by the vast distances of ocean. They are brought together more closely through the revolution in information. At a time that the power of the nation-state seems to be withering, it remains a challenge of supreme statesmanship to bring about a new sense of order.

Robert D. Kaplan, in his new book “Warrior Politics," quotes the English political philosopher E. H. Carr in saying ”…Power cannot be created out of thin air… every approach in the past to a world society has been the product of the ascendancy of a single Power. There is no sign that this has changed.” 10 Many of American values are in ascendancy around the globe -- from business models to culture and democracy. At the same time, there is another model that is rising to confront it -- Islamic fundamentalism.

The opening battle of this new war began with the bombing of the World Trade Center on American soil. This new war has just begun and is entering its second and deadliest phase. The next phase of the war is likely to be against nation states like Iraq or possibly Iran. The growing power of a fanatical theocracy in Iran is another time bomb on a short fuse, capable of joining other conflicts in the region and turning them into a wider conflagration. The Iraqi dictatorship of Saddam Hussein is of immediate concern. Without the resolution to the Iraqi threat and Saddam’s potential to use weapons of mass destruction, instability in the region will only increase. The growing clash between Israelis and Palestinians is yet another unresolved conflict in this new war. Added to the mix are the issues of the unstable monarchies of Saudi Arabia, Kuwait and other Gulf States. At the same time, there is an arms race within the region that has the potential to destabilize and turn the current Israeli-Palestinian conflict into a much wider scale war. These are just a few of the ticking time bombs in the Middle East that could change the existing order and power within the world.

For Americans, this will be a different kind of war. This war will be personal, viewed up-close and experienced first-hand. The opening battle began on American soil. The vast oceans that surround the U.S. no longer afford the country protection. In the age of travel and mobile missiles, the world has become a much smaller place. Geography is no longer a defensive advantage. In fact, our open borders and freedom only make us more vulnerable. In this new war, the antagonists refuse to play by our rules. America will have to fight this war on two fronts --one on the battlefield and the other in the diplomatic arena. Both are necessary to prosecute this war. At times the burden of power and fighting this war will be experienced alone. At other times, it will mean working with friends as well as adversaries. It is a responsibility from which this nation cannot retreat, if American power is to endure. Unlike the last century, there is no other power to replace it.

The Challenges America Will Face in the 21st Century

Our resolve is about to be challenged. Our commitment to the successful prosecution of this war will be tested by the absence of constant conflict and economic uncertainty. Excluding Osama bin Laden, this war will be fought against an faceless enemy. There isn’t a country, a national leader, an immediate threat or a grand prize on which to focus our attention. For this reason, the memory of September 11th is quickly fading from American consciousness. This makes it more difficult for the Bush Administration to keep the public’s attention focused and in support of the war's efforts. That is why the next phase of the war will be against nation states -- an enemy with a more visible face.

The other test will come from economic uncertainty. Our country is currently in recession. During periods of recession, government expenditures rise as unemployment and transfer payments increase. At the same time, tax receipts shrink as profits decline and unemployment rises. This creates deficits. There is already talk in Congress of reducing our military commitments in favor of domestic consumption, an argument that is now being made as an alternative solution to combating the current recession. The threat of danger recedes with each new week that passes by. For many there is nothing but confusion over foreign policy and defense issues. This is heightened by the fact that the media has trouble understanding it since it is invisible and can’t be televised.

Make no mistake: America is in danger. The major cutbacks in America’s armed forces over the last decade and in particular by the past administration have only encouraged our enemies. The last decade has seen the rise of hostile states and powerful coalitions that threaten America’s peace and security. There are many in power who advocate appeasement and negotiation as the only instruments of conducting foreign policy. However, foreign policy, if not backed by sufficient military force, is doomed to failure. The price of peace is eternal vigilance. There can be no alternative course for keeping the peace than an engaged foreign policy that is backed by an overwhelming military force. It is the equivalent of preventive medicine in that it is far cheaper than the cost of war.

The world we now live in has become a more dangerous place. There are many states and would-be dictators with grand illusions and the need to do great things. The air of despotism is in the air. Each new week brings more evidence of a world that is becoming destabilized. Columbia seems to be plunging into civil war. Neighboring Venezuela, the fourth largest exporter of oil within OPEC, is undergoing a major political crisis. In Iran there is internal dissent between the governed and those who govern them. India and Pakistan are still at odds with each other, while the Israelis and the Palestinians are locked in mortal combat.

These are the matters of immediate political concern. But destabilization is not confined to the political realm. On the economic front, Argentina’ crisis threatens to turn into another Latin American brushfire spilling over into other states. In Asia, you can feel the tremors of a major earthquake coming from Japan, where an already bad situation could spread and become a worldwide contagion.

It appears at the moment that crisis and instability are everywhere. The destabilization process is intensifying and expanding from countries to continents. Economic turmoil has spread like brushfires from the currency markets to the stock and bond markets, while military conflict seems to be cropping up everywhere. There doesn’t seem to be an end in sight to the regional wars that keep on proliferating. Unlike past crises, they are not localized. They can now be found erupting on every continent including North America with the United States. They represent signs of a Powershift that is taking place -- rooted in oil and money and resolved by war.

The events and conflicts that are described in this essay may not unfold in the manner that has been written. The future is unpredictable and is full of twists and turns. History teaches us that terrible storms can appear with little or no warning and when they do they can cause great harm. This Perspectives series is based on my own observations and experience following the financial markets and as both a reader and student of history.

The installments that follow will build on the premises outlined in this introduction. As in previous Perspectives, I hope to stimulate new thoughts on events that are emerging. It is my belief that to prosper in this age of destabilization and economic turmoil, it will be necessary to think in historical terms. In the upcoming segments on oil, I will discuss its importance in the twilight of the petroleum age, the economics behind it, its key role in war, and why I believe it will be a profitable area for investing over this next decade. In the section on money, I will lay out a case why the present monetary system is doomed to collapse, the role that gold and silver will play in restoring stability to the financial system, and the upcoming bull market for precious metals that has already begun. I will also expand on my rogue wave thesis and the danger that derivatives pose to the financial system. Finally, in the section on War, I will talk about future conflicts and the revolution in military affairs (RMA), why this war will be different than any others we have fought before, and the investment opportunities it presents. I leave it to the reader to decide whether it is prudent to stay with the trends of the past or to start thinking outside the box.

-- James J. Puplava, CFP