Kaplan on West Africa

Posted on February 11, 2014 by

Preface. This article interest me because I want to understand what collapse from energy decline will be like where I live.  The same patterns appear over and over in this category of collapsed and collapsing nations.

Alice Friedemann  www.energyskeptic.com  Author of Life After Fossil Fuels: A Reality Check on Alternative Energy; When Trucks Stop Running: Energy and the Future of Transportation”, Barriers to Making Algal Biofuels, & “Crunch! Whole Grain Artisan Chips and Crackers”.  Women in ecology  Podcasts: WGBH, Planet: Critical, Crazy Town, Collapse Chronicles, Derrick Jensen, Practical Prepping, Kunstler 253 &278, Peak Prosperity,  Index of best energyskeptic posts

The Coming Anarchy Shattering the Dreams of the Post Cold War. Robert D. Kaplan. 1994. New York Times.

The minister said that in 45 years he had never seen things so bad. Today there is the revenge of the poor, of the social failures, of the people least able to bring up children. The boys who took power in Sierra Leone come from houses like this, pointing at a corrugated metal shack teeming with children. In three months these boys confiscated all the official Mercedes, Volvos, and BMWs and willfully wrecked them on the road.

Tyranny is nothing new in Sierra Leone or in the rest of West Africa. But it is now part and parcel of an increasing lawlessness that is far more significant than any coup, rebel incursion, or episodic experiment in democracy. Crime was what my friend, a top-ranking African official whose life would be threatened were I to identify him, really wanted to talk about. Crime is what makes West Africa a natural point of departure for my report on what the political character of our planet is likely to be in the 21st century.

The cities of West Africa at night are some of the unsafest places in the world. Streets are unlit, the police often lack gasoline for their vehicles; armed burglars, carjackers, and muggers proliferate.

When I was in the capital, Freetown, last September, eight men armed with AK-47s broke into the house of an American man. They tied him up and stole everything of value. Forget Miami: direct flights between the United States and the Murtala Muharnmed Airport, in neighboring Nigeria’s largest city, Lagos, have been suspended by order of the U.S. Secretary of Transportation because of ineffective security at the terminal and its environs. A State Department report cited the airport for “extortion by law enforcement and immigration officials.” This is one of the few times that the U.S. government has embargoed a foreign airport for reasons that are linked purely to crime.

In Abidjan, effectively the capital of the Cote d’Ivoire, or Ivory Coast, restaurants have stick- and gun-wielding guards who walk you the 15 feet or so between your car and the entrance, giving you an eerie taste of what American cities might be like in the future. An Italian ambassador was killed by gunfire when robbers invaded an Abidjan restaurant. The family of the Nigerian ambassador was tied up and robbed at gunpoint in the ambassador’s residence. After university students in the Ivory Coast caught bandits who had been plaguing their dorms, they executed them by hanging tires around their necks and setting the tires on fire. In one instance Ivorian policemen stood by and watched the “necklacings,” afraid to intervene. Each time I went to the Abidjan bus terminal, groups of young men with restless, scanning eyes surrounded my taxi, putting their hands all over the windows, demanding “tips” for carrying my luggage even though I had only a rucksack. In cities in six West African countries I saw similar young men everywhere—hordes of them. They were like loose molecules in a very unstable social fluid, a fluid that was clearly on the verge of igniting.

“You see,” my friend the Minister told me, “in the villages of Africa it is perfectly natural to feed at any table and lodge in any hut. But in the cities this communal existence no longer holds. You must pay for lodging and be invited for food. When young men find out that their relations cannot put them up, they become lost. They join other migrants and slip gradually into the criminal process.

“In the poor quarters of Arab North Africa there is much less crime, because Islam provides a social anchor: of education and indoctrination. Here in West Africa we have a lot of superficial Islam and superficial Christianity. Western religion is undermined by animist beliefs not suitable to a moral society, because they are based on irrational spirit power. Here spirits are used to wreak vengeance by one person against another, or one group against another.”

Many of the atrocities in the Liberian civil war have been tied to belief in juju spirits, and the BBC has reported, in its magazine Focus on Africa, that in the civil fighting in adjacent Sierra Leone, rebels were said to have “a young woman with them who would go to the front naked, always walking backwards and looking in a mirror to see where she was going. This made her invisible, so that she could cross to the army’s positions and there bury charms … to improve the rebels’ chances of success.”

Finally my friend the Minister mentioned polygamy. Designed for a pastoral way of life, polygamy continues to thrive in sub-Saharan Africa even though it is increasingly uncommon in Arab North Africa. Most youths I met on the road in West Africa told me that they were from “extended” families, with a mother in one place and a father in another. Translated to an urban environment, loose family structures are largely responsible for the world’s highest birth rates and the explosion of the HIV virus on the continent. Like the communalism and animism, they provide a weak shield against the corrosive social effects of life in cities. In those cities African culture is being redefined while desertification and deforestation-also tied to overpopulation-drive more and more African peasants out of the countryside.

A premonition of the future West Africa is becoming the symbol of worldwide demographic, environmental, and societal stress, in which criminal anarchy emerges as the real “strategic” danger. Disease, overpopulation, unprovoked crime, scarcity of resources, refugee migrations, the increasing erosion of nation-states and international borders, and the empowerment of private armies, security firms, and international drug cartels are now most tellingly demonstrated through a West African prism. West Africa provides an appropriate introduction to the issues, often extremely unpleasant to discuss, that will soon confront our civilization.

There is no other place on the planet where political maps are so deceptive. Start with Sierra Leone. According to the map, it is a nation-state of defined borders, with a government in control of its territory. In truth the Sierra Leonian government, run by a 27-year-old army captain, Yalentine Strasser, controls Freetown and part of the rural interior by day. In the government’s territory the national army is an unruly rabble threatening drivers and passengers at most checkpoints. In the other part of the country units of two separate armies from the war in Liberia have taken up residence, as has an army of Sierra Leonian rebels. The government force fighting the rebels is full of renegade commanders who have aligned themselves with disaffected village chiefs. A pre-modern formlessness governs the battlefield, evoking the wars in medieval Europe prior to the 1648 Peace of Westphalia, which ushered in the era of organized nation-states.

As a consequence, roughly 400,000 Sierra Leonians are internally displaced, 280,000 more have fled to neighboring Guinea, and another 100,000 have fled to Liberia, even as 400,000 Liberians have fled to Sierra Leone. The third largest city in Sierra Leone, Gondama, is a displaced-persons camp. With an additional 600,000 Liberians in Guinea and 250,000 in the Ivory Coast, the borders dividing these four countries have become largely meaningless.

Even in quiet zones none of the governments except the Ivory Coast’s maintains the schools, bridges, roads, and police forces in a manner necessary for functional sovereignty. The Koranko ethnic group in northeastern Sierra Leone does all its trading in Guinea. Sierra Leonian diamonds are more likely to be sold in Liberia than in Freetown. In the eastern provinces of Sierra Leone you can buy Liberian beer but not the local brand.

In Sierra Leone, as in Guinea, as in the Ivory Coast, as in Ghana, most of the primary rain forest and the secondary bush is being destroyed at an alarming rate. I saw convoys of trucks bearing majestic hardwood trunks to coastal ports. When Sierra Leone achieved its independence, in 1961, as much as 60 percent of the country was primary rain forest. Now 6 percent is. In the Ivory Coast the proportion has fallen from 38 percent to 8 percent. The deforestation has led to soil erosion, which has led to more flooding and more mosquitoes. Virtually everyone in the West African interior has some form of malaria.

Sierra Leone is a microcosm of what is occurring, albeit in a more tempered and gradual manner, throughout West Africa and much of the underdeveloped world: the withering away of central governments, the rise of tribal and regional domains, the unchecked spread of disease, and the growing pervasiveness of war. West Africa is reverting to the Africa of the Victorian atlas. It consists now of a series of coastal trading posts, such as Freetown and Conakry, and an interior that, owing to violence, volatility, and disease, is again becoming, as Graham Greene once observed, “blank” and “unexplored.” However, whereas Greene’s vision implies a certain romance, as in the somnolent and charmingly seedy Freetown of his celebrated novel The Heart of the Matter, it is Thomas Malthus, the philosopher of demographic doomsday, who is now the prophet of West Africa’s future. And West Africa’s future, eventually, will also be that of most of the rest of the world.

Consider “Chicago” — not the one in Illinois, but a slum district of Abidjan, which the young toughs in the area have named after the American city. (“Washington” is another poor section of Abidjan.) Although Sierra Leone is widely regarded as beyond salvage, the Ivory Coast has been considered an African success story, and Abidjan has been called “the Paris of West Africa.” Success, however, was built on two artificial factors: the high price of cocoa, of which the Ivory Coast is the world’s leading producer, and the talents of a French expatriate community; whose members have helped ran the government and the private sector. The expanding cocoa economy made the Ivory Coast a magnet for migrant workers from all over West Africa: between a third and a half of the country’s population is now non-Ivorian, and the figure could be as high as 75% in Abidjan. During the 1980s cocoa prices fell and the French began to leave. The skyscrapers of the Paris of West Africa are a facade. Perhaps 15% of Abidjan’s population of three million people live in shantytowns like Chicago and Washington, and the vast majority live in places that are not much better. Not all of these places appear on any of the readily available maps. This is another indication of how political maps are the products of tired conventional wisdom and, in the Ivory Coast’s case, of an elite that will ultimately be forced to relinquish power.

Chicago, like more and more of Abidjan, is a slum in the bush: a checkerwork of corrugated zinc roofs and walls made of cardboard and black plastic wrap. It is located in a gully teeming with coconut palms and oil palms, and is ravaged by flooding. Few residents have easy access to electricity, a sewage system, or a dean water supply. The crumbly red laterite earth crawls with foot-long lizards both inside and outside the shacks. Children defecate in a stream filled with garbage and pigs, droning with malarial mosquitoes. In this stream women do the washing. Young unemployed men spend their time drinking beer, palm wine, and gin while gambling on pinball games constructed out of rotting wood and rusty nails. These are the same youths who rob houses in more prosperous Ivorian neighborhoods at night. One man I met, Damba Tesele, came to Chicago from Burkina Faso in 1963. A cook by profession, he has four wives and thirty-two children, not one of whom has made it to high school. He has seen his shanty community destroyed by municipal authorities seven times since coming to the area. Each time he and his neighbors rebuild. Chicago is the latest incarnation.

Fifty-five percent of the Ivory Coast’s population is urban, and the proportion is expected to reach 62% by 2000. The yearly net population growth is 3.6%. This means that the Ivory Coast’s 13.5 million people will become 39 million by 2025, when much of the population will consist of urbanized peasants like those of Chicago.

Chicago, which is more indicative of Africa’s and the Third World’s demographic present-and even more of the future-than any idyllic junglescape of women balancing earthen- jugs on their heads, illustrates why the Ivory Coast, once a model of Third World success, is becoming a case study in Third World catastrophe.

President Fe1ix Houphouet-Boigny, who died last December at the age of about 90, left behind a weak duster of political parties and a leaden bureaucracy that discourages foreign investment. Because the military is small and the non-1vorian population large, there is neither an obvious force to maintain order nor a sense of nationhood that would lessen the need for such enforcement. The economy has been shrinking since the mid-1980s. Though the French are working assiduously to preserve stability, the Ivory Coast faces a possibility worse than a coup: an anarchic implosion of criminal violence-an urbanized version of what has already happened in Somalia. Or it may become an African Yugoslavia, but one without ministates to replace the whole.

Because the demographic reality of West Africa is a countryside draining into dense slums by the coast, ultimately the region’s rulers will come to reflect the values of these shantytowns. There are signs of this already in Sierra Leone-and in Togo, where the dictator Etienne Eyadema, in power since 1967, was nearly toppled in 1991, not by democrats but by thousands of youths whom the London-based magazine West Africa described as “Soweto-like stone-throwing adolescents.” Their behavior may herald a regime more brutal than Eyadema’s repressive one.

The fragility of these West African “countries” impressed itself on me when I took a series of bush taxis along the Gulf of Guinea, from the Togolese capital of Lom6, across Ghana, to Abidjan. The four-hundred-mile journey required two full days of driving, because of stops at two border crossings and an additional eleven customs stations, at each of which my fellow passengers had their bags searched. I had to change money twice and repeatedly fill in currency-declaration forms. I had to bribe a Togolese immigration official with the equivalent of eighteen dollars before he would agree to put an exit stamp on my passport. Nevertheless, smuggling across these borders is rampant. The London Observer has reported that in 1992 the equivalent of $856 million left West Africa for Europe in the form of “hot cash” assumed to be laundered drug money. International cartels have discovered the utility of weak, financially strapped West African regimes.

The more fictitious the actual sovereignty, the more severe border authorities seem to be in trying to prove otherwise. Getting visas for these states can be as hard as crossing their borders. The Washington embassies of Sierra Leone and Guinea the two poorest nations on earth, according to a 1993 United Nations report on “human development”-asked for letters from my bank (in lieu of prepaid round-trip tickets) and also personal references, in order to prove that I had sufficient means to sustain myself during my visits. I was reminded of my visa and currency hassles while traveling to the communist states of Eastern Europe, particularly East Germany and Czechoslovakia, before those states collapsed.

Ali A. Mazrui, the director of the Institute of Global Cultural Studies at the State University of New York at Binghamton, predicts that West Africa-indeed, the whole continent-is on the verge of large-scale border upheaval.

In the 21st century France will be withdrawing from West Africa as she gets increasingly involved in the affairs [of Europe). France’s West African sphere of influence will be filled by Nigeria-a more natural hegemonic power… It will be under those circumstances that Nigeria’s own boundaries are likely to expand to incorporate the Republic of Niger (the Hausa link), the Republic of Benin (the Yoruba link) and conceivably Cameroon.

THE FUTURE COULD be more tumultuous, and bloodier, than Mazrui dares to say. France will withdraw from former colonies like Benin, Togo, Niger, and the Ivory Coast, where it has been propping up local currencies. It will do so not only because its attention will be diverted to new challenges in Europe and Russia but also because younger French officials lack the older generation’s emotional ties to the ex-colonies. However, even as Nigeria attempts to expand, it, too, is likely to split into several pieces. The State Department’s Bureau of Intelligence and Research recently made the following points in an analysis of Nigeria:

Prospects for a transition to civilian rule and democratization are slim…. The repressive apparatus of the state security service … will be difficult for any future civilian government to control…. The country is becoming increasingly ungovernable…. Ethnic and regional splits are deepening, a situation made worse by an increase in the number of states from 19 to 30 and a doubling in the number of local governing authorities; religious cleavages are more serious; Muslim fundamentalism and evangelical Christian militancy are on the rise; and northern Muslim anxiety over southern [Christian] control of the economy is intense … the will to keep Nigeria together is now very weak.

Given that oil-rich Nigeria is a bellwether for the region—its population of roughly ninety million equals the populations of all the other West African states combined-it is apparent that Africa faces cataclysms that could make the Ethiopian and Somalian famines pale in comparison. This is especially so because Nigeria’s population, including that of its largest city, Lagos, whose crime, pollution, and overcrowding make it the dich6 par excellence of Third World urban dysfunction, is set to double during the next twenty-five years, while the country continues to deplete its natural resources.

Part of West Africa’s quandary is that although its population belts are horizontal, with habitation densities increasing as one travels south away from the Sahara and toward the tropical abundance of the Atlantic littoral, the borders erected by European colonialists are vertical, and therefore at cross-purposes with demography and topography. Satellite photos depict the same reality I experienced in the bush taxi: the Lome-Abidjan coastal corridor-indeed, the entire stretch of coast from Abidjan eastward to Lagos-is one burgeoning megalopolis that by any rational economic and geographical standard should constitute a single sovereignty, rather than the five (the Ivory Coast, Ghana, Togo, Benin, and Nigeria) into which it is currently divided.

As many internal African borders begin to crumble, a more impenetrable boundary is being erected that threatens to isolate the continent as a whole: the wall of disease. Merely to visit West Africa in some degree of safety, I spent about five hundred dollars for a hepatitis B vaccination series and other disease prophylaxis. Africa may today be more dangerous in this regard than it was in 1862, before antibiotics, when the explorer Sir Richard Francis Burton described the health situation on the continent as “deadly, a Golgotha, a Jehannum.” Of the approximately twelve million people worldwide whose blood is HIV-positive, eight million are in Africa. In the capital of the Ivory Coast, whose modem road system only helps to spread the disease, 10 percent of the population is HIV-positive. And war and refugee movements help the virus break through to more-remote areas of Africa. Alan Greenberg, M.D., a representative of the Centers for Disease Control in Abidjan, explains that in Africa the HIV virus and tuberculosis are now “fast-forwarding each other.” Of the approximately four thousand newly diagnosed tuberculosis patients in Abidjan, 45 percent were also found to be HIV-positive. As African birth rates soar and slums proliferate, some experts worry that viral mutations and hybridizations might, just conceivably, result in a form of the AIDS virus that is easier to catch than the present strain.

It is malaria that is most responsible for the disease wall that threatens to separate Africa and other parts of the Third World from more-developed regions of the planet in the twenty-first century. Carried by mosquitoes, malaria, unlike AIDS, is easy to catch. Most people in sub-Saharan Africa have recurring bouts of the disease throughout their entire lives, and it is mutating into increasingly deadly forms. “The great gift of Malaria is utter apathy,” wrote Sir Richard Burton, accurately portraying the situation in much of the Third World today. Visitors to malaria-afflicted parts of the planet are protected by a new drug, mefloquine, a side effect of which is vivid, even violent, dreams. But a strain of cerebral malaria resistant to mefloquine is now on the offensive. Consequently, defending oneself against malaria in Africa is becoming more and more like defending oneself against violent crime. You engage in “behavior modification”: not going out at dusk, wearing mosquito repellent all the time.

And the cities keep growing. I got a general sense of the future while driving from the airport to downtown Conakry, the capital of Guinea. The forty-five-minute journey in heavy traffic was through one never-ending shanty-town: a nightmarish Dickensian spectacle to which Dickens himself would never have given credence. The corrugated metal shacks and scabrous walls were coated with black slime. Stores were built out of rusted shipping containers, junked cars, and jumbles of wire mesh. The streets were one long puddle of floating garbage. Mosquitoes and flies were everywhere. Children, many of whom had protruding bellies, seemed as numerous as ants. When the tide went out, dead rats and the skeletons of cars were exposed on the mucky beach. In twenty-eight years Guinea’s population will double if growth goes on at current

rates. Hardwood logging continues at a madcap speed, and people flee the Guinean countryside for Conakry. It seemed to me that here, as elsewhere in Africa and the Third World, man is challenging nature far beyond its limits, and nature is now beginning to take its revenge.

AFRICA MAY BE as relevant to the future character of world politics as the Balkans were a hundred years ago, prior to the two Balkan wars and the First World War. Then the threat was the collapse of empires and the birth of nations based solely on tribe. Now the threat is more elemental: nature unchecked. Africa’s immediate future could be very bad. The coming upheaval, in which foreign embassies are shut down, states collapse, and contact with the outside world takes place through dangerous, disease-ridden coastal trading posts, will loom large in the century we are entering. (Nine of twenty-one U.S. foreign-aid missions to be closed over the next three years are in Africa-a prologue to a consolidation of U.S. embassies themselves.) Precisely because much of Africa is set to go over the edge at a time when the Cold War has ended, when environmental and demographic stress in other parts of the globe is becoming critical, and when the post-First World War system of nation-states-not just in the Balkans but perhaps also in the Middle East-is about to be toppled, Africa suggests what war, borders, and ethnic politics will be like a few decades hence.

To understand the events of the next fifty years, then, one must understand environmental scarcity, cultural and racial dash, geographic destiny, and the transformation of war. The order in which I have named these is not accidental. Each concept except the first relies partly on the one or ones before it, meaning that the last two-new approaches to mapmaking and to warfare-are the most important. They are also the least understood. I will now look at each idea, drawing upon the work of specialists and also my own travel experiences in various parts of the globe besides Africa, in order to fill in the blanks of a new political atlas.

THE ENVIRONMENT AS A HOSTILE POWER

FO R A WH I LE the media will continue to ascribe riots and other violent upheavals abroad mainly to ethnic and religious conflict. But as these conflicts multiply, it will become apparent that something else is afoot, making more and more places like Nigeria, India, and Brazil ungovernable.

Mention “the environment” or “diminishing natural resources” in foreign-policy circles and you meet a brick wall of skepticism or boredom. To conservatives especially, the very terms seem flaky. Public-policy foundations have contributed to the lack of interest, by funding narrowly focused environmental studies replete with technical jargon which foreign-affairs experts just let pile up on their desks.

It is time to understand “the environment” for what it is: the national-security issue of the early twenty-first century. The political and strategic impact of surging populations, spreading disease, deforestation and soil erosion, water depletion, air pollution, and, possibly, rising sea levels in critical, overcrowded regions like the Nile Delta and Bangladesh-developments that will prompt mass migrations and, in turn, incite group conflicts-will be the core foreign-policy challenge from which most others will ultimately emanate, arousing the public and uniting assorted interests left over from the Cold War. In the twenty-first century water will be in dangerously short supply in such diverse locales as Saudi Arabia, Central Asia, and the southwestern United States. A war could erupt between Egypt and Ethiopia over Nile River water. Even in Europe tensions have arisen between Hungary and Slovakia over the damming of the Danube, a classic case of how environmental disputes fuse with ethnic and historical ones. The political scientist and erstwhile Clinton adviser Michael Mandelbaum has said, “We have a foreign policy today in the shape of a doughnut-lots of peripheral interests but nothing at the center.” The environment, I will argue, is part of a terrifying array of problems that will define a new threat to our security, filling the hole in Mandelbaum’s doughnut and allowing a post-Cold War foreign policy to emerge inexorably by need rather than by design.

(C) 2000 Robert D. Kaplan All rights reserved. ISBN: 0-375-50354-4

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Ashvin Pandurangi: A Probabilistic Assessment Of Short-Term Inflation, Deflation, Hyperinflation And Serious Deflation

Posted on February 7, 2014 by

A Probabilistic Assessment Of Short-Term Inflation, Deflation, Hyperinflation And Serious Deflation. Nov 3, 2010. Ashvin Pandurangi.

 
The blogosphere has been rife with debates over whether the U.S. economy will experience inflation or deflation over the next year or two. Typically, those on either side of the debate believe that, regardless of the specific outcome, it will be severe and destructive, but there are some who believe it will be a milder process. It has also become clear that those on either side of the debate are almost certain that we will experience the outcome they advocate. I am of the view that the best we can do in our complex financial economy (which is highly inter-connected to the global economy) is discuss the broad factors that make one or the other more likely to occur. It appears to me that there are at least three critical questions which should be answered to determine probabilities of outcomes in the controversial inflation/deflation debate:

  1. What do the financial elites want to happen given the current economic circumstances?
  2. Will the Administration (includes Congress for this discussion) and/or Federal Reserve  attempt to pursue policies that accommodate the elites’ preferences?
  3. If the answer is “yes” to #2, can the Administration and/or Fed be successful in achieving these goals.

After considering how much wealth is controlled by the elites (top 1% holds 43% of financial wealth) [1], and therefore how much political influence they exert, we can assume the answer to #2 will almost always be “yes”. This answer is further reinforced by past political experience and a bit of common sense. That leaves us with #1 and #3, which are difficult questions to answer with high levels of certainty. However, many insightful analysts have attempted to answer these questions using facts, data, trends and experience, and have produced very plausible predictions.

Many people may criticize the following analysis for leaving out many different factors that could potentially affect the likelihood of inflationary or deflationary outcomes. However, when too many variables are included, the analysis required to determine chances of specific outcomes grows disproportionately more difficult. This article has attempted to use broad strokes to sketch a general picture of the probabilities involved, sacrificing detailed calculations for targeted clarity. It is somewhat of a perturbation approach, where a few primary factors are used to create a “ballpark estimate”, and then this estimate can be later refined by including smaller, more detailed factors. For example, when physicists attempt to predict the motion of the Earth within the solar system and through the universe, they cannot factor into their calculations every gravitational force that acts on the Earth. Instead, they focus first on the Sun’s gravitational effect, since it is the most influential force by a large factor. After making this relatively simple calculation, they can gradually add in the effects of the next most influential bodies, but they will never arrive at an exact prediction of the Earth’s motion because the calculations eventually become too complex.

Before delving into the discussion, I must note that it will be based on several different assumptions for the sake of simplicity. Instead of mentioning them within the discussion, I will just list them up front and let the readers decide whether they are reasonable or not:

– The financial elites do not want severe deflation or hyperinflation, since these outcomes would wipe out the value of their numerous debt assets or wipe out the value of all their dollar- denominated holdings respectively.

– The Administration/Fed will almost always attempt to pursue the policies that the elites want them to (95% of the time for inflation; 90% for deflation)

– The financial elites cannot unilaterally (without Administration/Fed) make decisions that will affect the probabilities of inflation or deflation (we will assume they will make self-interested lending decisions).

– The Administration/Fed’s attempts to inflate, if they choose that option, will not be significantly counter-acted by currency devaluations of other countries. They may have a temporary effect, but financial/militaristic incentives to work with the American power elites and threats of protectionism will balance this dynamic out.

– Hyperinflation will only occur when financial elites prefer inflation, and severe deflation will only occur when elites prefer deflation.

– Issues associated with peak oil/resources will not be a factor within the next few years.
The following definitions of inflation and deflation, borrowed from The Automatic Earth, will be used [1]:

  • Inflation – Marginal increases in the amount and velocity of credit money relative to goods/services.
  • Deflation – Marginal decreases in the amount and velocity of credit money relative to goods/services.

What do Power Elites Prefer – Policies Supporting Mild Inflation or Mild Deflation?
            Mild Inflation (25%)

The argument for power elites preferring mild inflation is perhaps the most intuitive. Inflation of the money (credit) supply to devalue the currency should lead to rising asset prices, as more money is chasing the same supply of assets. Financial elites have large investments in real estate, stocks, bonds and commodities and should therefore benefit from higher prices and interest rates. If consumer prices are also supported, then there could be a resumption of hiring by various businesses, which would certainly help restore some confidence in the economic structures of the status quo elite. In a more general sense, inflation manufactured via another credit bubble would return the economy to a state of consistent growth, allowing power elites to continue playing their cruel games. However, this argument contains the following assumption, which may simply be incorrect: that creating a modest amount of growth in the money supply, by getting debt-money to investors and consumers, will actually lead to higher prices.

The prominent blogger Charles Hugh Smith (“CHS”) has provided a very insightful argument for why the elites would not prefer mild inflation [2]. To understanding a key part of this argument, it’s important to note that the economic situation now is unlike it has ever been in the last 60-70 years and also that the elites are aware of this fact. There has been an enormous, decades-long credit bubble in the private sector (~300% Debt/GDP in 2008), and now the consumers, who make up 70% of GDP, are buried beneath a mountain of debt. Despite the Administration and Fed’s programs to inject trillions into the economy via stimulus and quantitative easing, the velocity of money has remained stagnant as investors, small businesses and consumers hesitate to lend, invest or borrow. It is very plausible that a modest increase in money supply will simply lead businesses and consumers to pay down some debt and hoard any remaining cash in the face of future uncertainty. We certainly see a version of this dynamic in the stock market, where institutional investors continue pulling money out of equities despite the recent rallies [3].

For the above reasons, the economy will most likely be in a prolonged period of low growth and subdued asset price inflation despite modest amounts of further stimulus or monetary easing. Even some of the major investment banks (financial elites), such as Goldman Sachs, have predicted a negative GDP print in Q4 2010. [4]. The current dynamic for elites is much different than the one existing after the Great Depression, where losses on cash holdings from consistent devaluation of the dollar via inflation were more than offset by returns on asset investments. CHS points out that the dollar has lost more than 95% of its value since 1913, but the Dow Jones Industrial Average has actually risen at about seven times the rate of dollar depreciation over the same time period. It would be prudent to assume that the elites have learned their lesson from 1966-1981, when a period of “stagflation” (low growth coupled with high price inflation) wiped out much of the value in their stock and bond holdings. [5]. The last thing the elites would want is a period of inflation in consumer prices, which eats up the value of their debt assets, but doesn’t contribute to high returns on financial investments.

Elites prefer Mild Deflation (75%)

CHS explains that mild deflation, on the other hand, would increase the purchasing power of elites holding cash, money market instruments and short-term treasuries, while also increasing their returns on debt assets. When inflation is negative, the real interest rate paid on debt (= nominal IR – rate of inflation) is higher than the nominal rate. As long as the deflation doesn’t become too severe and wipe out heavily indebted consumers, businesses and governments, the financial elites can continue making decent returns while setting themselves up to buy various assets for pennies on the dollar in the future. [6]. By maintaining their wealth and political control, the elites can also ensure that any new regulations or fiscal/monetary policies continue to be in their favor (backstops of the housing market, monetization of treasury debt, higher taxes on the middle class to pay interest on public debt, welfare benefits to quell social unrest, watered down “reform”, etc.). Therefore, on whole, it seems significantly more likely that power elites would prefer a path of mild deflation above all else, but the question of whether it is even possible to maintain this Japan-style malaise still remains.

What can the Administration and/or Fed Accomplish?

Mild Inflation (10%)

It would appear that the Administration and Fed have been completely geared towards creating inflation up to this point in time. The former attempted to re-capitalize major banks with TARP and mark-to-fantasy accounting, promote consumer spending with stimulus and stabilize housing prices through Fannie, Freddie and the Federal Housing Administration. It has also provided billions in jobless benefits and other aid to struggling citizens. The Fed has attempted to stabilize the housing market and banks’ balance sheets through asset purchases of mortgage-backed securities and zero-interest rate policy. The latter, along with the direct monetization of treasury bonds by the Fed, also serve to finance the Administration’s deficits at low interest rates (banks borrow at 0% and lend to the government at 1-4%).

Despite all of these measures, consumer price inflation remains close to 0% (excluding energy/food) [7], unemployment remains close to 22% [8] and consumer credit continues to contract [9]. Of course, the stock and bond markets have benefited greatly from these policies since the beginning of 2009. The former, however, has become increasingly unstable this year as retail investors continue to opt out in large numbers and robots with synchronized time horizons are left to buy and sell to each other. [10], [11]. The bond market, however, is much bigger than the stock market and its stability is significantly more crucial for the power elites and politicians. It appears at this time that, although it is in a huge bubble, the bond market will remain relatively stable due to investors’ preferences for “safe havens”, the desire of external creditors’ to support our consumer economy, and, of course, the permanent open market operations (“POMO”) of the Fed.

            Hyperinflation (30%)

Many commentators involved in the inflation/deflation debate believe that, in pursuit of inflation, the Administration/Fed will inadvertently jump start a process of hyperinflation. This argument typically follows the following logic: every time the economy renews its deflationary pressure, the politicians and central bankers will keep spending/printing money to fight it off, and eventually we will reach a tipping point of confidence in the U.S. economy and its currency as a reliable means of exchange. History certainly seems to suggest the first part of this argument is accurate, but the sociopolitical dynamics involved have significantly changed in the last few years. Both the public and politicians who pander to them have expressed much disdain for further spending or printing, and on top of that, its unclear how many trillions would even be necessary to combat the deflationary pressure. As mentioned above, the elites must maintain relative stability in the bond market to protect their holdings and the current power structure, and another $5-10 trillion in printed money would be counter-productive to this goal. For these reasons, it seems unlikely that the government will print enough money to spark hyperinflation, but that certainly does not mean we can rule it out.

A blogger named Gonzalo Lira has produced a series of articles presenting a unique perspective on how hyperinflation could occur. [12]. To summarize, he believes that a temporary spike in commodity prices (such as oil) will lead to institutional asset managers selling a portion of their large treasury holdings (paying artificially low yields) to buy into the ramp. This small sell-off will occur before a somewhat large treasury auction, and so the Fed will step in and buy to stabilize yields. Similar to what we currently see during the POMO operations, asset managers and primary dealers (“PDs”) will start unloading larger amounts of treasuries onto the Fed to turn a quick profit and reinvest proceeds into the commodity space. Asset managers will then begin to dump huge portions of their holdings, since they see the PDs selling and the Fed buying a large volume of treasuries at a time when they are already on edge about the precarious nature of the economy and bond markets. This cycle represents a classic positive feedback, where asset managers dump treasuries for liquidity, causing the Fed’s buying to stabilize yields, causing even more managers to dump while there is still a willing buyer with unlimited cash. All of this action will occur within a few hours at most, and the managers will turn to commodities as a relatively safe and perhaps quite profitable place to invest their cash.

Mr. Lira believes that physical commodities will be perceived as the only sure store of value, and will therefore shoot up between 150-250% by the end of this panicked week. Once this spike translates into significantly higher gas prices at the pump, average consumers will begin selling all of their paper assets and buying hard commodities out of fear of prices continuing to rise in the future. [13]. It is easy to see how this process will eventually translate into a self-reinforcing spiral, where almost all discretionary assets will be swapped for energy, food and other essentials, eventually leading to skyrocketing prices and hyperinflation. What’s even more frightening is that the Administration and Fed will be practically helpless to do anything about it at this point, since their limited tools will be woefully inadequate once the consumer has lost complete confidence in the currency.

Although it presents a very interesting hyperinflation scenario, the problem I see with Mr. Lira’s argument is two-fold:

(1) A large, temporary spike in oil prices is unlikely to occur or lead to a treasury-dumping spiral – The spark for a short-term spike in oil prices would have to be a major disruption of Middle East supply through a military conflict or a voluntary embargo by exporting nations. In contrast to 1973, when OPEC nations decided to place an embargo on oil exports due to Western support of Israel in the Yom Kippur War [14], the U.S. now has strategic military bases throughout the Middle East and would not allow such an embargo to even take place. [15]. Any further military conflicts that take place in this region will have the U.S. military directly involved, and it will certainly do everything it can to make sure America’s share of oil supply is not disrupted. In fact, a prerequisite for any military action would be to have a solid plan for securing production facilities in the region.

If the supply of oil to America is disrupted by military action in the Middle East, then the Administration will most likely institute price controls on gas at the pump. Mr. Lira states that these controls would simply create a black market for goods and do nothing to reverse the underlying hyperinflation, but he is assuming these controls would only occur after there is a run on treasuries and hyperinflationary concerns reach the average consumer. It is more likely that the government will immediately cap the price of oil, perhaps through an executive order in the name of “national security”, which will destroy the incentivize for asset managers to dump large amounts of treasuries for commodities in the first place. When the potential upside gains of commodity plays can be artificially limited, it would be very risky for investors to bet against the federal government.

(2) The outstanding debt obligations of consumers/businesses are still excessive – The major reason why the U.S. economy naturally faces a deflationary depression is because there is too much private debt outstanding, and the need to destroy this debt suppresses aggregate demand for consumer goods or financial assets. Currently, when the price of oil gets significantly above $85/bbl, consumers are priced out of the market and demand destruction ensues, since demand is still relatively elastic to price changes. A temporary spike in oil prices would most likely lead asset managers to sell off stocks and commodities as well, since they are worried that consumers will heavily cut back on spending and pay off debts. This process is what the U.S. experienced in 2008 after oil hit $140+/bbl, and although the circumstances have changed since then, the underlying realities of excessive debt and artificially high consumer demand are still present. From this perspective, a temporary spike in oil prices would actually trigger a deflationary collapse rather than hyperinflation.

Mild Deflation (30%)

According to analysts such as Dr. Steve Keen, “Mish” Shedlock and Nicole Foss, the Fed is simply “pushing on a string” when it sets to generating inflation in the economy. [16], [17], [18]. Without any desire of consumers to borrow or creditors to lend at affordable rates, the trillions printed by the Fed will simply lay dormant as excess reserves or, at best, help keep the financial markets relatively stable. As for the Administration, it would have to give away a whole lot more “free money” before consumers and businesses begin spending/investing again in any meaningful manner. The best the government can do at this point is pump liquidity into asset markets and continue handing out benefits to the unemployed and poor among us. As CHS explains, the main goal here is to keep consumers paying off credit cards and mortgages, tax revenues flowing, financial markets somewhat stable and the general population placated, while economic actors continue to deleverage. [].

If the goal of power elites and the government is to manage this process of mild deflation, then perhaps the Fed is not pushing on a string at all. CHS has produced another piece which clearly shows that the government’s policies since 2008 have merely served to keep the system alive by transferring wealth from taxpayers to the top 10% of the population. Specifically, the Fed has blown more speculative bubbles in stocks, real estate and commodities, which mostly benefits the owners of financial wealth and also reduces the purchasing power of the bottom 90% through artificially high energy/food prices. Much of the toxic mortgage debt has been removed from the elites’ balance sheets and handed to the taxpayer through various government programs. [19]. This path has not been one to sustainable inflation, but rather one that keeps the power elites in business while cash flows in the general economy slowly dry up and investment capital relocates to emerging markets.

Severe Deflation (60%)

As mentioned before, however, the political capital for further deficit spending and monetary easing is drying up quickly as well. The Republicans have taken back the House of Representatives, picked up a few seats in the Senate and will certainly oppose further stimulus by the Administration. John Taylor has suggested that the Fed will also be on a much tighter leash when Congressman Ron Paul becomes head of the sub-committee overseeing its operations. [20]. Although the Fed will most likely shovel out another $500B-$2T in treasury purchases via “QE2” (waiting for the announcement as I write this), it is becoming clear that there are diminishing returns to its efforts. A QE2 package that is smaller than the initial QE program, and only targets treasury bonds, will only serve to keep interest rates low and perhaps give a small, temporary boost to equity markets. It will certainly fail to stave off further deleveraging in an economy worth ~$14 trillion that also has trillions more in unserviceable debt.

So the question becomes whether the Fed’s incremental liquidity programs can at least maintain modest deflation. The best answer to this question seems to be “not too likely”. The Fed actually has little ability to counter-act the debt deflation in the consumer economy, since it cannot print money and give it directly to small businesses and consumers, and Congress will also have its hands tied after the elections. What the fiscal conservatives fail to realize is how fast the economy will unravel once government subsidies are drawn down. Dr. Keen points out that the trillions spent and printed by the government after 2008 helped to decelerate the rate of credit contraction in the private sector, and this deceleration actually reduced unemployment and projected the illusion of an economic recovery. For this deceleration to continue, the private debt to GDP ratio would soon have to begin increasing again, and this is extremely unlikely to occur in an economy with ridiculously high levels of debt. [21]. If and when housing prices begin falling again, pushed along in no small part by the “fraudclosure” crisis, we can be certain that the acceleration of debt destruction will turn positive. The excessive debt, inventory and over-capacity of American consumers, businesses and markets will reveal itself in full force, and the economy will be caught in a deflationary spiral once again.

The Guesstimated Probabilities of Each Outcome

In the perturbation sense, the strongest influences governing inflation or deflation are the natural state of the economy, the preferences of American power elites and the policy tools of the Administration and Fed. We can express the results of the simplistic inflation/deflation analysis by translating the qualitative discussion above into percentage probabilities, based on general conclusions regarding the likelihood of each outcome. To summarize, power elites would prefer mild deflation over mild inflation at a ratio of about 3 to 1, when considering the current economic circumstances. Similarly, the Administration/Fed will be able to achieve mild deflation over mild inflation at a ratio of about 3 to 1. Hyperinflation will occur three times as often as mild inflation when power elites prefer inflation (mainly due to Mr. Lira’s scenario), and severe deflation will occur twice as often as mild deflation when elites prefer deflation. The following table lists these percentage probabilities along with the chance that the government will agree to pursue the power elites’ preferred policy, and multiplies down each column to acquire a resulting probability of each outcome.

 

Mild Inflation Hyperinflation Mild Deflation Severe Deflation
Preferences of PE 25% 25% 75% 75%
Government Ability 10% 30% 30% 60%
Chance of Agreement 95% n/a 90% n/a
Resulting Probability 3% 8% 21% 45%

**probabilities are rounded to nearest whole number

The resulting probabilities above add up to 77%, which leaves another 23% for outcome combinations and also further refining of the stated outcomes’ probabilities. Perhaps the initial assumptions could be modified to make the analysis more realistic. Some readers may feel that I have derived faulty probabilities from the discussion, or even that the discussion itself contains flawed logic. I encourage readers to take the framework and general discussion points that are presented in this article and generate their own probabilities for specific outcomes. The analysis could also be refined by including the next most influential factors that have been left out for purposes of simplified calculation (i.e. European sovereign debt crisis, global currency devaluations, coordination by international elites, geopolitical factors, etc.). Personally, I believe that the probabilities listed above are at least a ballpark estimate of potential outcomes over the next year or two. Of course, without extensive data-mining and the use of computer-simulated dynamic models, we may have to simply rely on time to eventually tell the tale.

Posted in Inflation or Deflation | Comments Off on Ashvin Pandurangi: A Probabilistic Assessment Of Short-Term Inflation, Deflation, Hyperinflation And Serious Deflation

Nicole Foss: Notes from videos, radio shows, newsletters

Posted on February 7, 2014 by

FSN Top Interviews 2010: Nicole Foss & Richard Russell at Financial Sense.

Rural areas will be the first to lose access to electricity,with  less priority than cities in a deflation, plus there’s no money to build up the grid, which has to be done first before you can build other power generation facilities. Also, nuclear and all other alt Energy has too low an EROEI (which means they are not profitable), so they are unlikely projects for investors in a credit crunch.

The cycle: Eventually oil prices go up, demand drops, oil prices fall, demand not enough to fix the oil infrastructure and increase oil production, people don’t have the money to buy it.  Oil price goes down, there’s a supply crunch.  At worst: resource wars.  At best: party to party (i.e. nation to nation contracts) to directly purchase oil by countries.  At some point, people won’t be able to get oil at any price

ASPO peak oil review May 30, 2011

“We need to start addressing the cause of our problems – the hierarchal structure of out political-economic system that we generally take as a given – rather than continue to focus in isolation on the many symptoms of this structure.

In my opinion, commodities (including oil, metals, agricultural commodities etc.) are in another speculative bubble, which I would expect to resolve as the last one did in 2008 – with a very sharp speculative reversal crashing prices in a matter of months. Bubbles form as positive feedback loops where the anticipation of higher prices in the future drives momentum chasing, creating a self-fulfilling prophecy in the relatively short term. Speculators jump on the bandwagon and drive prices far in excess of what would be justified by the fundamentals, then they take their profits, dump the sector and short it, creating a price crash (i.e. a self-fulfilling prophecy in the other direction). This financial gaming can overwhelm, and wreak havoc with, sectors of the real economy. We may or may not have seen the high for the year, but I think the high is not far off, and when the reversal comes I expect that high to stand for perhaps a few years.

As supply and demand become tight, what one typically sees is not a one-way price escalation, but an exaggerated boom and bust cycle with very high price volatility. We have seen this play out for the last several years. It is also part of the general topping process of the credit bubble, with moves in many markets governed by the general ebb and flow of confidence (and therefore liquidity), so that many prevailing trends (i.e. stocks, commodities, bond yields, the dollar etc) turn at similar times. Such a turn is rapidly approaching in my view, and with it will come a resumption of the credit crunch, but more powerful this time. A notable casualty could well be the European monetary union.

I would expect the speculative reversal to be the initial stage of finance impacting on energy prices. As we move into depression, the price crash should be followed by a dramatic weakening of aggregate demand, and therefore price support. Purchasing power will be falling due to credit contraction and spiking unemployment, undermining demand, which is not what you want, but what you can pay for. Even as prices fall, affordability is likely to get worse for most, as purchasing power may fall further (and perhaps faster) than price. I think we could see oil reach $20/barrel, but this would not be cheap oil for most people under depression conditions.

In my opinion, oil will bottom early in this depression. As depression leads to escalating conflict, I think resource wars will intensify. Conflict, and the lack of investment that depression would ensure, set up the conditions for a supply collapse down the line. In a few years I think low prices could give way to a veritable moon-shot, continuing the exaggerated boom and bust cycle. Against a backdrop of deflationary depression (i.e. the collapse of the global credit bubble, which is deflation by definition), this would render oil products completely unaffordable for many.

While I think the next few years will be remembered as a time of financial crisis, an energy crisis is clearly coming. Financial crisis can delay it, but at the cost of making it worse a few years later.”

June 6, 2011 KBOO community radio, Portland 90.7 FM http://kboo.fm/node/28987

  • much less credit at high interest in future
  • those who “rescued” system after 2008 won’t look so good after next crash
  • more businesses laying people off
  • recession, then depression
  • the rate of growth needs to be larger than rate of debt
  • we’re going to have NEGATIVE growth. you never have a steady state economy, you either grow or don’t, and our system depends heavily on growth. Very significant rates of negative growth. government, business, people can’t service their debts.
  • we’ve outstripped the underlying real wealth, the collateral, taking on more debt makes it worse.
  • a lot of debt default, it’s a Ponzi economy, assets bid up thru speculation.
  • money supply declines, what do you do if you have no money? all is exchange of money, all the time.
  • barter, local currencies will be very difficult, and bottom up depending on where you are, not a government saying here’s a new currency

October 23, 2010 October 23 2010: Jim Puplava interviews Stoneleigh

This is only part of the interview, read it all at the link above

Jim Puplava:   I want to talk about a recent article you wrote about “Renewable Power? Not in Your Lifetime”, You don’t believe we’re going to see that in our life time in terms of replacing fossil fuels, do you?

Stoneleigh: Oh, absolutely not. It really is physically impossible. We aren’t going to have the money for one thing, because it’s not going to be very long until we realize that we are actually in a depression. People don’t build things in depressions, on the whole, so they live with the infrastructure that they have, and they make do. And it’s hard enough even to maintain what you have, let alone do any kind of enormous build out. A lot of renewable energy is intermittent, it’s mediated through electricity, it depends on the grid. The grid is not in a good state of repair, it’s been under invested in for a very long time. There would have to be an enormous amount of money ploughed into grids, merely for them to continue doing what they do now. And if you look at trying to plug a whole lot of renewable energy into the existing grid, you’re going to run into a lot of problems very quickly.

Renewable energy is very dispersed, it’s not concentrated, typically. There are places where you can have larger concentrations of it, but still it’s not going to be a large source of energy in comparison with say an enormous nuclear plant or coal plant or something like that. So you’re having to bring in this power from a lot of places; you’re going to have to have a lot of infrastructure for that. The problem with trying to run power backwards, down low voltage distribution lines, which is typically what you would have to do, if you are putting small amounts of power in very distributed places, the losses are proportional to the square of the current. The current is going to be high of the voltage is low; you’re going to find that the losses are very high when you do that. If you’re trying to carry power over long distances, you may actually find that not very much of it actually gets to where you need it, because there is enormous mismatch between renewable resource intensity, demand and grid capacity.

The feed in tariff program they introduced recently in Ontario, where I live, the grid capacity that was available was over-subscribed during the launch period. Anyone else who’s trying to bring on projects and there are an enormous number of them, could find themselves having to wait for grid build out. This could be years – the projects won’t survive that long. And by the time we get to the point where there could conceivably be the grid capacity, people are not going to be able to finance the projects, because we are moving into a credit crunch. So we are not looking at a scenario where we are suddenly going to invest enormous amounts of money in renewable energy. We don’t even have the productive capacity for wind turbines and solar panels and various other alternatives at this point. We would have to build the factories first, then we would have to build the renewable energy infrastructure, then we would have to plug it into the grid; we’d have to build the grid out.

The amount of money and the amount of time are absolutely staggering. And a lot of these technologies have a very low energy returned on energy invested anyway, so you are not talking about something where you can create an enormous surplus of energy beyond what you are having to put in to create the capacity in the first place. So net energy is a very important concept; if your energy returned on energy invested is maybe 3:1, you’re not producing much of a surplus beyond the energy you had to put in to build the infrastructure. So this is no panacea. I’m a tremendous fan of renewable energy, I have solar panels in my back field , but that helps me, it doesn’t run society and that really is the problem that we have. A lot of these things work tolerably well in niche applications, and they can help at a small scale, but you are not going to run an industrial society on them. That really is the problem.
Jim Puplava: Where does that leave the big cities then, because like here in California, I think the United States has about 20, a little over 20% of the world’s operating nuclear power plants. In India, China I believe has 20 power plants under construction, their goal is to have 90 by the end of the decade. What about nuclear power?

Stoneleigh: Nuclear power doesn’t have the most wonderful energy returned on energy invested, so it is a very expensive technology, not just in financial terms, but in energy terms, with everything in the life cycle from uranium mining to building the plants, and the regulations for nuclear safety require for instance, as the last time I looked, three separate mechanisms, each capable of shutting the system down and they must have no common parts, so that there are no common mode failures, because they do not want to have another Three Mile Island, or something worse. So all of that adds to the cost, both in financial terms and in energy terms. I think there are also going to be a lot of issues with waste, potentially.

We do not have a centralised waste repository. Nobody wants one anywhere near them. So storage is on site. And you tend to have nuclear material stored in what is effectively a swimming pool. You have to look after that for a long period of time. It’s going to produce heat and radio-activity for a long period of time. I think this could be a significant problem. There are also environmental issues as well. It simply requires vigilance over hundreds of years and human beings are not good at that. We don’t have a time horizon that long, so while we might be able to look after it for a certain period of time, what happens to it after that is really the question. And there are going to be safety issues. Nuclear power is not particularly compatible with social upheaval, to put it mildly.

Now when I was a research fellow, at the Oxford Institute for Energy Studies, and I was working on nuclear safety in eastern Europe, in the context of the Soviet collapse, looking at what happened to their nuclear power industry and how it actually operated. And so if you start adding in factors like not paying people, or paying them months late, and then people having to drive taxis, to moonlight as taxi drivers or vodka salesmen, and then people living lives that are not what they had hoped to live and that they’re not enjoying, so that they turn up to work drunk; this is what happens in the Soviet nuclear power industry.

And to add to that, the technology they used of course, they cut a lot of corners and they didn’t have the safety systems that we have, but the risks you take when you run a nuclear power plant in an environment where there’s nowhere near enough money, it’s hard to get spare parts, it’s hard to find the money to maintain the infrastructure, and you’ve got people working there, assuming you can afford to pay them; you’ve got people working there who may have to worry about where their next meal is coming from. Their minds might not be on the job, might not be on the task at hand. So you can create tremendous risks operating nuclear power plants under circumstances of social upheaval. You know, if it’s a question of do that or freeze in the dark, people will do it, but the risks will increase. And I think we need to be aware of that.

Jim Puplava: Nicole, there’s been studies, they’re coming out on almost a monthly basis now about Peak Oil. First of all, do you think most major governments; we started out our conversation by talking about New Zealand’s parliament, just issued a report out this month called ‘The Next Oil Shock’. Are governments aware of it, and if they are, what steps are they taking to prepare for this.

Stoneleigh: Governments are aware of it. Oil is effectively liquid hegemonic power. Governments are thinking that way now. But to express an opinion that is generally very unpopular with the Peak Oil people, I think the reason you’re seeing so many reports come out now, is because we are seeing a parabolic rise in the oil price, that I think does not reflect the situation at this point. Yes, oil will be scarce in the future, but I think right now we’re seeing prices get ahead of themselves because prices are set by perception not by reality. And we saw an enormous parabolic rise and then a crash in prices in 2008 into 2009. When oil was at $140 a barrel, I was trying to explain to the Peak Oil people that this was a speculative bubble; prices had got ahead of themselves and the next move was going to be very sharply down. My message is the same today. That I think we have seen a parabolic rise, I think we are seeing oil top, not just oil, but gold and agricultural commodities and stocks. I think we’re seeing a top. I think the next move will be down, but I think people are writing about, writing oil reports at the moment because commodities top on fear.

So there is a fear that shortages are in the short term. I would argue they’re actually not, because I think the effect of financial crisis is going to have a very significant affect on the way Peak Oil plays out. I think what’s actually very likely to happen, first you would see oil prices move into reverse on a reversal of speculation. The hot money has moved in, overwhelmed the indexes, made the profit, chased momentum and then it abandons the sector, when it’s wrung all the profit out of it in the short term. So I think speculation moving into reverse will be the beginning of oil prices falling. Then I think because we are moving into depression, we’re going to see a fall in demand. And what a fall in demand does, it undercuts price support even further. So you then see a tremendous fall in prices. If you have a scenario where the price is low but the costs are high because you are doing business in these very difficult areas, like the deep off-shore or maybe in the arctic in the future, if you are looking at a high cost structure and low prices, there’s no business case for that particular endeavor. So your demand collapse sets up a supply collapse, and then you have no investment in drilling and exploration and production.

You don’t even have the money to maintain your production infrastructure. And a lot of oil infrastructure is already not in a good state. It needs a lot of investment just to keep doing what it currently does. We’re not going to have that money and I think nobody’s going to be making investments in energy at a point where prices are low and there’s really no profitability in it. You could see oil prices fall to approximately the cost of the lowest cost producer. And given that some production costs will be falling, like labor costs for instance, in a depression, that lowest cost producer could be at a lower cost than the current lowest cost producer. So I think we have a scenario where initially oil prices fall, and not just oil but many other things: electricity and gas, simply because in a deflationary scenario, nobody has any money, so they can’t afford to buy the stuff, production is at the previous level of demand, the demand falls you have a temporary glut.

But then you have this supply crunch that comes down the line; I think that’s when reality bites, so although the reports are being written now, because we are seeing a peak I would argue in oil prices, I think those reports are still incredibly important because oil is a long term prospect. And just because the price is going to fall in the short term doesn’t mean that we don’t need this information for the longer term, we absolutely do, and in the longer term, under conditions of supply collapse, you are very likely to see an enormous price spike, and a resource grab. Whether countries do that by sending in the tanks, or whether they send in the contract negotiators, and buy up all the production of a field, that tie it all up in bilateral contracts, either of those will take oil off the open market.

The open market is where you really have the price of oil, you can actually see oil lose fungibility. And under those circumstances it’s going to be very difficult for ordinary people to get access to any oil products at all. Even with oil at a low price, at the nadir of where I think prices are going, just because the price is low does not mean something will be cheap, because deflation drops purchasing power faster than prices. So even if oil were to fall to $20 a barrel, $20 a barrel is not cheap oil when you are in a depression; when nobody has any money. And if $20 a barrel is expensive, they move five years down the line to a supply collapse, and you’re looking at $500 a barrel, and that’s absolutely out of reach. So I think finance is going to rewrite the energy debate over the next five years, probably. And we’re going to see tremendous amounts of upheaval, that people who are coming at it purely from a Peak Oil perspective, from geology and engineering, are not seeing because they don’t understand finance, and the finance people typically don’t have enough background in the science of the energy production, you absolutely have to have both. And that’s very much what we try to do at The Automatic Earth. We are a Big Picture site; we’re integrating all the factors that people need to understand.

Jim Puplava: You know, Nicole, you hit upon something that really changed as a result of the oil embargo in the 70’s. The United States and Great Britain moved to create what I call the Virtual Oil Pool, where all of this oil was moved to the spot markets, so that for example in 2005, when Katrina and Rita hit the United States, and our refinery capacities were shut down, we could go into this Virtual Oil Pool, and have products show up on our shores within 30 days. But you talk about China. One thing that I have been watching that is alarming, that we’re seeing China, India and other countries start to lock up oil production in these long term contracts oil, if they give money to Brazil, or they give money to Venezuela, that is oil that is being taken off the global market. It’s not coming back. And I don’t know if many governments have woken up to this fact. But it seems to me, at least, the Chinese understand it, at least they seem to be reacting in a rational way, trying to lock up resources that could be scarce.

Stoneleigh: They are doing that, and they do it par excellence. And they have been doing it for a long time. I think we underestimate the Chinese at our peril. They have an enormous pile of dollars, and they are the party – as I was saying earlier, you can either send in the tanks or you can send in the contract negotiators – the Chinese send in the contract negotiators, tie it all up in bilateral contracts. They have this enormous pile of dollars, they know at some point that they will not be worth something, because all fiat currencies die in the end. They don’t die in the short term, and I’ve said elsewhere that I actually think the dollar could do well for a couple of years, but if you’re China and you’re sitting on a staggeringly large number of them, you can’t play games like timing. You just have to turn those dollars into hard assets as fast as you possibly can.

And it’s not just energy; they’re buying up farm land in Canada, and all sorts of things. And they’re not just taking ownership: they’re also sending people there, and taking it beyond ownership to de facto control, which is the sort of structure that’s likely to survive even when times are hard, when otherwise if you only had ownership, you might expect that to revert to the country that the asset is in, where possession can be nine tenths of the law. But you know if you have de facto control, because you have your people there and you’re managing it; the Chinese are absolutely going to be economically colonising large parts of the rest of the world. They are going to be tying up their energy supplies. Now I would argue that China is also in a massive bubble; they are going to take a major hit over the next few years, very much like America did at the dawn of the American century. That’s what the Depression was of the 1930’s: the set back at the dawn of the American century.

I think what we’re looking at now is, from a Chinese perspective, is the set back at the dawn of the Chinese century. But I think they will continue to be the empire in the ascendancy. That is their trajectory at this point. Don’t expect the Chinese century to look like the American century because there’s not going to be anything like the energy to do it. But by saying they’re the empire in the ascendancy, I think there will come a point where they’re the most significant hegemonic power in a much more multi-polar, low energy world. But never-the-less, they are still the empire in the ascendancy. So I think we are going to see the same kind of fall in demand for oil that we are. I do think they will see a fall in demand as their economy takes an enormous hit. I don’t think it will be as big a fall as ours and I think it will recover faster. So, speaking to Jeffrey Brown, for instance at ASPO, he was pointing out that oil in the Depression, bottomed in 1931. I have said multiple times in various places, I think oil will bottom early in this Depression.

And one of the reasons for that is that I think demand will start to pick up again in places like China and India much more quickly than it will pick up for us. So I think what we’re looking at is the western developed countries actually losing out in comparison with the developing countries that are taking on this ’empire in the ascendancy’ role. I think they will come out of this with a much larger share of oil production tied up and oil is liquid hegemonic power. So I think we are looking at, over the very long term of a decade, at a shift in hegemonic power. But I don’t think that the US is going to take that lightly, by any stretch of the imagination. So I think there is going to be a great deal of upheaval. I think we’re also going to see a lot of very nasty proxy-wars in resource rich areas. This is the way the Great Powers typically play the Great Game. You know, they will pick a client-state, in a resource rich region, pump it full of guns, and then perhaps inflame some local hostilities, of which there are usually plenty to go around.

And then some of these areas go up in flames, and I’m certainly thinking this could happen in the Middle East, perhaps the Caspian, or the South China Sea, where there are going to be a number of parties, that are looking to secure supplies in the same area, and their areas of influence overlaps, the areas they claim, especially areas of the sea floor: sea floor claims are going to be a major problem going forward. These overlapping claims are going to be a source of conflict. And if you have conflicts between client-states, proxy-wars between client-states in resource rich regions, you could actually see quite a large amount of the resource that still exists being destroyed. Or at least if not the resource, then the infrastructure necessary to extract it; I mean very much like Sadam Hussein setting fire to the reservoirs in Kuwait, before he left. I think we could see a lot more of that. I think we could see a lot of instability in Saudi Arabia, where half the population is under 15; very radicalized young people, there’s not enough employment and they despise their own government. So I think you’re going to see a lot of upheaval in some of these places, very much aggravated by the Great Powers playing the Great Game of resource extraction. And I think we’re going to see a great deal of conflict over energy, among all manner of other resources going forward.

Jim Puplava: It’s almost Michael Klare’s contention: resource wars. Nicole, another thing that strikes me about is, you know, from the start of discovery of a new oil field, to the time you bring it into production is a long process. So as we move from Peak Oil to alternative forms of energy, whether it’s you know, trying to get the tar sands, whether… whatever it is, that we’re going to be doing this whole process, even if we start changing and electrifying our transportation fleet, all of this stuff takes decades. You know, if I look at your scenario, Nicole, I think of what I just watched on the History Channel: the Dark Ages.

Stoneleigh: It’s possible. I think we are looking at decades of upheaval. I think something less than the Dark Ages, because the Dark Ages were centuries of upheaval. I think we’re looking at decades. That’s what happened after the bursting of the South Sea Bubble, in 1722, that was the next largest bubble we’ve seen in human history and that was decades of upheaval culminating in a series of revolutions including yours. So I think we are looking at a long term structure. You know the point about the tar sands and various other things, the tar sands is not going to save anybody. There is no way you are getting 5 million barrels a day out of the tar sands, because you cannot scale it up. The energy returned on energy invested is extremely low, and essentially it’s an arbitrage between natural gas and syncrude. So the energy you’re putting in, in the form of natural gas, is not that much less than the energy you’re taking out in the form of liquid fuels. So yes, you are creating liquid fuel from gaseous fuel, but it’s really not an energy source.

Plus it exists in an extremely water constrained environment, where you’re simply not going to be able to continue doing what you do now in the tar sands for reasons of water scarcity, and of course the environmental impacts are staggeringly large as well. A number of other things don’t scale up; bio fuels have an incredibly low net energy: energy returned on energy invested. Some of them are less than one: in other words, if you create ethanol, you’re actually losing energy in the process of creating ethanol. This makes no sense whatsoever. And bio-diesel is slightly better. But a lot of these technologies absolutely do not scale up. And there is no way they can act as a substitute. There is no way that a United States, at its current level of demand could ever conceivably be energy self-sufficient; it is not physically possible.

What you can do, is drop your demand an awfully long way, all developed countries waste staggeringly large amounts of energy, and if demand was a lot more realistic, you would bring it back, much more in line with what you could hope to supply. This is how people who work in renewable energy constantly think; you drop demand, you supply what’s left at a much more realistic level and you’re very careful with what you use. But Business as Usual is not an option. Mr Cheney said, not so many years ago, that the American lifestyle is not negotiable, to which I would say that’s perfectly true because reality is not going to negotiate with you. It will dictate. And you cannot have what you currently have. Nobody will be able to. We’re going to be moving into a different scenario; it doesn’t have to be a dark age.

There’s a lot we can do, and there’s a lot we can do specially at a local level. Working together with people to build structures on a human scale that actually make sense.

Debt seems to be a large part of the problem. How large?

A massive debt bubble is the heart of the problem. It has been building for decades and is now far larger than any previous debt bubble in human history. Humanity periodically rediscovers leverage on a grand scale, after the lessons of the previous episode have mostly passed out of living memory. Expansions of credit and debt create the appearance of great wealth, but it is illusory (virtual). The obligations created are real though. People have expectations of being repaid, and they will not be, which will set up a grab for the underlying real wealth (collateral) which is nowhere near enough to go around. This is deflation, and its effects are very significant. Money will be scarce for a very long time.

Stoneleigh October 2009 

[Nicole doesn’t get the timing right on inflation below, but perhaps after the next downturn she’ll be right…]

The market will turn when confidence does, and I believe that will be soon. As I have said before, this will not lead to an imminent bond market dislocation. First I would expect a flight to safety and record low nominal interest rates. IMO a bond market dislocation, where rates shoot up into the double digits, is perhaps a year away, at an initial guess. When it happens it will be because everyone will be trying to borrow (this being a global crisis) and few of the very small number of parties still able to lend will wish to do so, due to tremendous (and entirely understandable) risk aversion.

The global economy is not a machine that can be directed with appropriate levers. It is a messy, subjective and thoroughly irrational human construct. Crowd psychology is the most important element to understand in predicting what it will do next. As stocks fall, we should see the US dollar rise, the Canadian dollar and the Euro fall, gold and silver fall, and oil fall. We should see nominal interest rates fall to record lows (perhaps even moderately negative nominal rates), although the on-going collapse of credit will mean high interest rates in real terms, so that the central bankers will still be ‘pushing on a string’. As bond yields fall, prices should rise.

A bond market dislocation (where interest rates spike up and government spending is slashed to the bone) comes further down the line. As to the limits placed on the Fed in regards to printing:

The bond market will prevent printing. Debt junkie economies are dependent on access to international debt financing, and that will not be available to nations that print. There will be far more nations trying to borrow than willing to lend, and that is a recipe for much higher rates (once the initial panic, flight to safety and record low rates are over).

All the Fed is doing is adding to the huge number of excess claims created by the credit hyper-expansion. The underlying real wealth pie is still the same size, but more and more mutually exclusive claims are being produced, and these surplus claims are destined to be extinguished en masse in a deflationary collapse.

??? how do you cash out? The Fed is granting these additional excess claims to the very people who were instrumental in causing the problem in the first place, and who are in the best position to know that claims to real wealth will only be worth anything if they are cashed in before the herd tries to cash in. Essentially, the claims of the public are being actively subverted to an even greater extent, as by the time they try to cash out there will be nothing left. The little guy never gets an even break. TAE agree with Chris that we are heading for a bond market dislocation and funding crisis.

We will eventually see a default. It is simply inevitable. You just can’t keep kicking the can down the road indefinitely. However, just because a default is inevitable does not mean it is imminent. A flight to safety is a knee-jerk reaction to threat. It is not a rational response and does not look at the reality of the dollar’s position. A rush to the dollar is something people will do on an emotional imperative, and it will push up the value of the dollar substantially. Betting on a dollar carry trade is therefore a sucker play – evidence of an imminent dollar bottom in fact.

The dollar should first rise and then collapse in value. I would expect the rising phase to last perhaps a year. When the collapse happens it will probably coincide with the coming bond market dislocation. However, the value of the dollar relative to other currencies will be much less important in practice than the value of cash in relation to available goods and services domestically.

And finally, one more point regarding the negative emotions we’ll have to deal with on this next leg down and on our need to focus:

The anger and recrimination that are coming this time will be something almost none of us have any experience with, and it will be terribly easy to be caught up in it. Don’t do it, as that kind of vengeful and punitive mindset will drain energy and resources from what you need to do to help yourself and your loved ones. Ultimately it fractures the trust that holds society together at a time when cohesiveness matters most. While this is inevitable at a national scale, it need not be at a very local level where a few individuals can make a difference.

summary of Oct 30, 2009 interview “The case for deflation”

SUMMARY: I think the market will fall hard (intervening short rallies notwithstanding) for perhaps 18 months. This was the length of the first leg down (October 2007-March 2009) and so represents a reasonable first guess at how long the next leg at the same degree of trend might last.

I think we will see falls of thousands of points in a series of cascades. I don’t see the markets reaching a lasting bottom until probably the middle of the next decade (2015), and even then I don’t expect it to be a final bottom. This has been the largest credit bubble in history, and the aftermath of a major bubble always undershoots where it began before any kind of recovery begins.

The aftermath of the last major mania – the South Sea Bubble in the 1720s – lasted decades and culminated in a series of revolutions. We are still relatively near the beginning of our own crisis, but already it compares with the Great Depression.

Although we could initially see a large glut in energy supply as demand falls off a cliff, this is likely to lead to supply collapse as investment dries up, hence I expect energy prices to bottom early in this depression.

Both financial and physical risks to energy exploration are likely to increase substantially in a destabilized and capital constrained world, and even maintaining existing assets could become very difficult. This is a recipe for much greater state involvement in ownership and exploitation of (probably deteriorating) energy assets, with increasing conflict over those assets as supply gets dramatically tighter with lack of investment.

As for gold, I expect it to fall initially as people sell not what they would like to, but what they can, in order to raise the cash they need for living expenses and debt servicing. Owning gold is likely to become illegal again (as it did in the Great Depression) in my opinion.

This wouldn’t necessarily stop you owning it, but would stop you trading it (at least without taking major risks) for other things you might need. Owning gold now therefore only makes sense if one is confident of being able to sit on it for a very long time, as it will hold its value over the long term as it has for thousands of years.

While there will be a huge surplus of labour, and the few who retain purchasing power will be able to hire anyone they want for very little, most people will have to do everything for themselves, as poor people have done throughout history and as most of the population of the world does now.

Not only will we lose access to the paid labour of others, but we will lose our virtual energy slaves as well. This will represent an enormous fall in the standard of living for the vast majority.

Whereas inflation can conceal a fall in purchasing power, so that people may not even realize it is happening, deflation brutally exposes it. Wages would have to fall just to keep purchasing power the same, but keeping it the same will not be an option for cash-strapped employers. In addition, with a large surplus of labour, workers will have no bargaining power.

This is a recipe for exploitation the like of which we have not seen for a very long time, but in the intervening adjustment period it is likely to lead first to war in the labor markets.

I would expect general strikes and a breakdown in the reliability of centralized services such as healthcare, education, power systems, water treatment, garbage (and snow) removal etc. This will be exacerbated by plunging tax revenues for all levels of government, which governments will try to compensate for by raising taxes, on anyone still capable of paying, to punitive levels. We would thus expect rapidly deteriorating services at much higher cost.

Many people are at risk of being eventually priced out of the market for goods and services, and particularly the essential ones, entirely.

Posted in Economic Decline | Comments Off on Nicole Foss: Notes from videos, radio shows, newsletters

40 ways to lose your future

Posted on February 7, 2014 by

Nicole Foss on 40 ways to lose your future.  June 17 2009  theautomaticearth.com

  1. Deflation is inevitable due to Ponzi dynamics (see From the Top of the Great Pyramid)
  2. The collapse of credit will crash the money supply as credit is the vast majority of the effective money supply
  3. Cash will be king for a long time
  4. Printing one’s way out of deflation is impossible as printing cannot keep pace with credit destruction (the net effect is contraction)
  5. Debt will become a millstone around people’s necks and bankruptcy will no longer be possible at some point
  6. In the future the consequences of unpayable debt could include indentured servitude, debtor’s prison or being drummed into the military
  7. Early withdrawls from pension plans will be prevented and almost all pension plans will eventually default
  8. We will see a systemic banking crisis that will result in bank runs and the loss of savings
  9. Prices will fall across the board as purchasing power collapses
  10. Real estate prices are likely to fall by at least 90% on average (with local variation)
  11. The essentials will see relative price support as a much larger percentage of a much smaller money supply chases them
  12. We are headed eventually for a bond market dislocation where nominal interest rates will shoot up into the double digits
  13. Real interest rates will be even higher (the nominal rate minus negative inflation)
  14. This will cause a tsunami of debt default which is highly deflationary
  15. Government spending (all levels) will be slashed, with loss of entitlements and inability to maintain infrastructure
  16. Finance rules will be changed at will and changes applied retroactively (eg short selling will be banned, loans will be called in at some point)
  17. Centralized services (water, electricity, gas, education, garbage pick-up, snow-removal etc) will become unreliable and of much lower quality, or may be eliminated entirely
  18. Suburbia is a trap due to its dependence on these services and cheap energy for transport
  19. People with essentially no purchasing power will be living in a pay-as-you-go world
  20. Modern healthcare will be largely unavailable and informal care will generally be very basic
  21. Universities will go out of business as no one will be able to afford to attend
  22. Cash hoarding will continue to reduce the velocity of money, amplifying the effect of deflation
  23. The US dollar will continue to rise for quite a while on a flight to safety and as dollar-denominated debt deflates
  24. Eventually the dollar will collapse, but that time is not now (and a falling dollar does not mean an expanding money supply, ie inflation)
  25. Deflation and depression are mutually reinforcing in a positive feedback spiral, so both are likely to be protracted
  26. There should be no lasting market bottom until at least the middle of the next decade, and even then the depression won’t be over
  27. Much capital will be revealed as having been converted to waste during the cheap energy/cheap credit years
  28. Export markets will collapse with global trade and exporting countries will be hit very hard
  29. Herding behavior is the foundation of markets
  30. The flip side of the manic optimism we saw in the bubble years will be persistent pessimism, risk aversion, anger, scapegoating, recrimination, violence and the election of dangerous populist extremists
  31. A sense of common humanity will be lost as foreigners and those who are different are demonized
  32. There will be war in the labor markets as unempoyment skyrockets and wages and benefits are slashed
  33. We are headed for resource wars, which will result in much resource and infrastructure destruction
  34. Energy prices are first affected by demand collapse, then supply collapse, so that prices first fall and then rise enormously
  35. Ordinary people are unlikely to be able to afford oil products AT ALL within 5 years
  36. Hard limits to capital and energy will greatly reduce socioeconomic complexity (see Tainter)
  37. Political structures exist to concentrate wealth at the center at the expense of the periphery, and this happens at all scales simultaneously
  38. Taxation will rise substantially as the domestic population is squeezed in order for the elite to partially make up for the loss of the ability to pick the pockets of the whole world through globalization
  39. Repressive political structures will arise, with much greater use of police state methods and a drastic reduction of freedom
  40. The rule of law will replaced by the politics of the personal and an economy of favors (ie endemic corruption)

The highlights above are mine, not Nicole’s

June 17 2009: 40 ways to lose your future

Posted in Other Experts | Comments Off on 40 ways to lose your future

Treasury Bills

Posted on February 7, 2014 by

Short-term treasury bills are the safest place to put money now.  See my book review of “The Ultimate Depression Survival Guide.  How to Protect Your Savings, Boost Your Income, and Grow Wealthy Even in the Worst of Times” by Martin Weiss for why I think so.

July 2012 Nicole Foss

There is a risk with treasury bills at treasurydirect.gov, as with everything else.

It is one of the least worst options at this point, but that doesn’t in any way mean risk free, or a long term bet.

The point is that it is liquid, and that you could extract it fairly quickly if risks increase.

Warning signs will be evident in advance if you know what to look for.

Keep your eyes open for rising interest rates on short term US debt, because when those yields start to go parabolic, it’s the endgame.

Short term treasuries and cash under your own control are both means of preserving capital as liquidity. Each option has its own risks.

In the case of short term government debt, the risk is that at some point the government will probably convert short term debt to long term then default on it later.

I would argue that we are nowhere near that point right now, hence in the relatively short term the risks are lower than for most other things. Be careful though, because risks will be everywhere no matter what you do.

Posted in Investing advice | Tagged , | Comments Off on Treasury Bills

How to preserve your wealth in the worst depression ever

Posted on February 7, 2014 by

A book review by Alice Friedemann, June 17, 2009, of:

Weiss, Martin D. 2009. “The Ultimate Depression Survival Guide.  How to Protect Your Savings, Boost Your Income, and Grow Wealthy Even in the Worst of Times”. Wiley.

The economic crisis we’re in now was predictable and inevitable – too much debt has accumulated since 1977.  In 2008, 41% of the nation’s wealth was flowing into the most corrupt financial industry in history (historically banking and other financial institutions comprised at most 15% of economic activity.  The don’t produce anything, they’re like a toll-taker sucking off wealth from the system).

For 10 years, I’ve been following the debates at investment forums about whether there’d be deflation, inflation, or stagflation after the crash.  Most predicted inflation, and although most agree that may be the ultimate outcome, Weiss was one of the few to predict deflation would come first, along with a strong dollar.

You’d think that the trillions being pumped into the economy by the government would cause inflation, but the cash isn’t creating new loans, investing, or jobs – it’s building capital at the institutions that caused the crisis – so you probably won’t see inflation for a while, but in these volatile times, anything could happen — you have to keep paying attention.

Weiss thinks there will be inflation eventually, but first there’s so much credit to unwind, that the trillions the government throws at the mess go into a black hole (there’s $600 trillion in derivatives alone).  If the government chooses to try to get out of the mess by monetizing the debt and creating inflation, there will only be a worse, harder crash later on.

In a deflation, cash is king.  But just having cash isn’t enough – you need to stash it in a safe place so that in the event of a financial meltdown, the institution you have your savings at will still have your cash.

The FDIC guarantee is a promise that will be broken for sure — they’re already in the red.  Very likely, your account will be frozen at bad banks while the FDIC tries to sort out the mess.  More about this later.

Since the timing of when inflation will hit is uncertain, it’s best to put your cash into short-term vehicles such as 4-week, 13-week, 3-month, or 6-month treasury bills.

I lost much of my savings in the 1980s because of investments at Prudential Bache, as did half a million others in the biggest securities fraud of the 1980s (see Eichenwald’s “Serpent on the Rock” or Kathleen Sharp’s “In Good Faith” for details).

At some point I became aware of Weiss Reports, because the U. S. Congress had the GAO investigate why Weiss was the only rating agency to give First Capital Life a poor rating (D-) while large rating firms such as the Standard & Poors, Moody’s, and A.M. Best gave this company “superior” to “excellent” ratings (foreshadowing the role these rating agencies played again in 2008).  First Capital Life and similar companies who owned mostly junk bonds failed. Investors lost over $21 billion dollars.

Weiss Ratings was the only honest rating agency because they don’t accept money from the companies they rate.  So I trust Weiss more than most financial experts, but I trust him most of all because he was one of the few who was predicting the 2008 crash many years ahead of time, and even more importantly, one of the few who predicted it would be a DEFLATIONARY crash (and there are only two others who expected deflation that I know of: Nicole Foss at theautomaticearth.com and Gail Tverberg at ourfiniteworld.com).

Bonner and Wiggins over at dailyreckoning, who I also like, were predicting INFLATION so buying gold and silver, but the prices of commodities crashed, just as they will in the next financial crash.  Yes, inflation may come back, though how that could happen short of dropping money out of helicopters isn’t clear to me, given that half of Americans would have a hard time borrowing $2,000, 10% or more are unemployed, 1 million new immigrants arrive every year to compete with the millions of high school and college graduates plus the unemployed still trying to find work, and the unions are mostly gone, so they can’t drive wages up either.

But the world is complicated and full of Black Swans, which Weiss is well aware of, so although he’s betting on deflation, he knows inflation is still possible in the future, and shows you how to hedge your portfolio for sudden inflation as well.

Weiss’s father was a very successful investment adviser, who told his son he didn’t think that Greenspan and others were right that the government could nip a depression in the bud by acting quickly and aggressively.  It may appear his father was wrong, but all that happened was the can was kicked down the road, which will make the next crash even worse.  Weiss’s father was on Wall Street during the Great Depression and watched the Fed try to stop the panic in the 1930s by pumping billions into banks, until the government finally realized they couldn’t save everyone.

Now history repeats itself, all over the world, as governments try to bail out banks and markets.   But clearly this can’t go on forever in the USA because

1)      There’s too much debt, far more than had built up before the Great Depression (170% of our economy in 1929, now it’s over 350%):

$294 trillion in derivatives (I find estimates of 600 to 1,200 trillion now in 2014, but it’s unregulated, who knows)

$  52 trillion in corporate, municipal, and federal debt; mortgages, credit cards

$  60 trillion for SSN, Medicare, etc

What good does a mere $16 trillion do in the face of that amount of debt?

2)      Who’s going to pay for the bailout? The government has to sell treasuries to raise the money, which hogs most of the available credit, which drives up interest rates, which increases mortgage rates, which leads to more foreclosures, less credit.  The Chinese and other nations are discussing setting up an alternative global currency, and have cut back on their purchase of U.S. securities.

3)      Lack of public confidence. Which led to less consumer spending, which led to corporate cutbacks, tightening of credit

4)      Vicious cycle of debt and deflation. Debt alone is tolerable if the borrower has an income to make payments.

Deflation alone makes everything more affordable.  But debt plus deflation equals depression. Foreclosures cause home price declines. Corporations and banks run out of capital, can’t pay debts, go bankrupt, so investors sell shares, forcing stocks lower, so then companies can’t raise capital and go bankrupt.  This downward spiral also has consumers, small businesses, city and state governments, hospitals, and schools caught in this vortex of slashed spending and layoffs.

The biggest mistake you can make is to assume that the prices of your stocks, home, and commodities are as low as they can get.  All assets kept going down in price during the Great Depression – and only stopped going down when the bad debts were cleaned out.

The goal now is to hang onto what you’ve saved – not to make money.

There’s a saying that the market can remain irrational longer than you can remain solvent – this sort of business downturn can last for 20 years – a long time to wait for your stocks to get back to the value they have now.  [An aside: here’s where I part ways with Weiss, he seems unaware of peak oil and everything else. Stocks are never going to go back up again.   Richard Heinberg explains this better than I can in his outstanding book “The End of Growth”].

Weiss thinks we’re headed for much worse times than we’ve already experienced.  Consider that by 2008 one in ten Americans had already defaulted on their mortgages and four in ten owed more than their home was worth – that’s worse than what happened in the Great Depression, and this happened before the usual triggers of high unemployment, high interest rates, and companies going bankrupt occurred.

Housing Bubble

Weiss points out that in all the bubbles in history, investors had to put up some of their own money.  But in the housing bubble, millions of people bought homes with zero money down, with no collateral or evidence of income.  Many of these loans were predatory with outrageous hidden fees and teaser rates that lasted just a few months.  Lenders made bad loans and handed off the responsibility to faraway investors resulting in the biggest debt build-up in history.

On top of that, you had the corruption, fraud, and cover-ups of Fannie Mae and Freddie Mac, inflated appraisals, balloon payments, and prepayment penalties.

The bottom line is that no matter how far home prices have fallen, prices could still fall a lot more, because more and more homes remain unsold, abandoned properties are falling apart which lowers the value of homes nearby, there are millions of ARMS about to be reset at higher rates, increasing unemployment, and increasing numbers of people with home values below the balance owed.  Weiss concludes that if you need or want to sell your home, don’t wait and gives 10 steps on how to sell in a sinking market, or to hang on to your house if you don’t want to sell it.

In Chapter 3, Weiss makes the case that in a deflationary depression, buying and holding is a disaster.  If you owned stocks in companies in the 30’s and all of them survived (not likely), it wasn’t until 1954 that you’d have recouped your losses.  The same goes for 1965 to 1980, and the Japanese Neikkei average is down 82% from its 1990 highs.

Don’t be fooled by temporary rallies.  In the great depression, there were seven major rallies before the bottom was reached in 1932.  These rallies can happen suddenly and last for months, but keep in mind that until the fundamental causes are resolved, the market usually crashes after a rally to new lows.  Use rallies as selling opportunities.

On page 49 he warns how and wyy your broker will try to talk you out of selling your stocks.  Don’t listen to the broker or your financial analyst if they do this.

Although owning stocks, commodities, and real estate will eventually be a good idea, right now the name of the game is the preservation of capital.  Then you’ll have the cash to buy whatever you want, cheap.  So where do you park your cash that’s safe?

Weiss says the government can’t bail the banks out forever:

1)      Bank runs are very likely and could be the final trigger of a systemic meltdown.  It’s not individuals who would cause this, but large, uninsured institutions running for cover, which is why Washington Mutual lost $16 billion in deposits (and also Wachovia Bank).

2)      The underlying causes of risk taking and bad assets haven’t been resolved.  In fact, the opposite is happening: bad assets are being shuffled from one bank to another, which encourages banks to resume taking risks.

3)      There are too many banks at risk – the FDIC listed 117 in March of 2008, but Weiss looked at 9,000 banks and found 1,673 with $3.2 trillion in trouble (as of June 2009 it’s gone up to 2,025 bad banks)

4)      The government can’t stop shareholders from panicking and selling their shares, which would make uninsured depositors afraid and likely to take their money out.

If your bank fails and you’re a shareholder, you’ll lose all or most of your investment.  If you have an insured FDIC account, and there’s a meltdown, the FDIC will be too busy sorting the mess out to let you have your money any time soon.  By the time you do get your money back, you may have suffered losses.   Nor does the FDIC have enough money to bail everyone out – they have about $1.25 for every $100 in deposits.

Most likely scenario in a major banking crisis with FDIC insured accounts

You will have to make one of these choices:

A) Leave some or all of your funds on deposit for a long time earning below market interest rates so your bank can recoup its losses and build capital with income that should have been yours.

B) Withdraw your funds with a loss that corresponds to the banks loss.  Those in stronger banks come out whole or almost whole, those in weaker banks suffer the largest losses.  That’s why it’s so important to keep your money in a safe bank rated B+ or higher (see thestreet.com to find one).

The government may try to discourage people from withdrawing their funds by charging an additional penalty for immediate reimbursement.  There is precedence for this – this is how the large insurance failures of the early 1990s were dealt with.

C) The government uses inflation and fires up the printing press, devaluing the U.S. dollar.  You’ll get your money back, but the money won’t buy much.

D) If the losses are too large the FDIC will have no choice but to break its promise.  Everyone will have to take a loss, be paid with devalued dollars, or both.

My take on the 64 million dollar question: how should you preserve your wealth? 

Weiss recommends finding a safe bank.   I don’t think there are any 100% certain-to-be-safe banks.   But you’ll still need to find the safest bank possible.

Because the safest place to park your savings is in a treasurydirect.gov account in SHORT-TERM TREASURY BILLS (4-week to 1 year).  Weiss also recommends you do this.  The richesst 1% also park some of their money in t-bills every time the stock market looks shaky.

You need an A rated bank to push money up to treasurydirect to buy treasury bills with, and for the money to flow back to when you need it.   If there aren’t any banks open after the next crash, perhaps treasurydirect.gov will cut you a check and send it in the mail.  Perhaps.  I don’t know if that is already possible or will be after the next crash.

If you have an IRA you can do this via Fidelity (sad to say, but Vanguard doesn’t offer this), nor does any other trustworthy brokerage that I know of.  It is not worth buying a treasury bill money market fund or equivalent — the fees are higher than the interest you can earn.

Remember: you are trying to hang onto your money, not make money. 

If there’s a crash and most people lose half their wealth in the stock market, you are now twice as wealthy.  You can make an enormous amount of money by not losing it.

Also consider cash.  I just read that more and more people are using cash after the Target credit card scandal, and that’s certainly a good option.  If there’s a crash and all bank accounts are frozen, you’ll be glad to have some cash on hand.

Treasury bills are the safest place now, but long-term probably won’t be

Nicole Foss and Gail Tverberg believe that the government is likely to convert your short-term bills to long-term bonds that you can’t cash in as the financial mess spirals downwards.  The government must remain solvent to function.  As unemployment grows, there will be less and less taxes collected, the money has to come from somewhere, and probably the wealthiest people will have off-shored their money or put it into solid goods like real estate, land, sailboats, etc., leaving ordinary people like you and I to foot the bill.

Why are treasuries safer than bank CDs?

You’re probably thinking the FDIC is also backed by the U. S. government, and CD’s pay a higher yield.  Well, the yield wouldn’t be higher if the risk weren’t higher.  The governments first priority are U.S. Treasury securities, second are securities of U.S. government agencies such as Ginnie Mae, and third is the FDIC.  In a meltdown, the FDIC deposits will not be first in line, which they may deny, but the differential in yields between CDs and T-bills tells the real story.

Weiss says that the government can be trusted because the USA has the world’s largest economy, strongest military, and has to support defense, homeland security, and emergency responses – the Treasury will do whatever it takes keep the nation running, which means they can’t default on treasury securities.

When inflation does appear, you should still keep some of your money in the safety and liquidity of treasury bills, but also buy hedges like gold, oil, and foreign currencies.

Hedging

Rather than selling short with options, futures, and so on, Weiss recommends buying Exchange-Traded Funds (ETFs).  He likes them because there’s a wide variety, no loads or hidden fees, leverage, and flexibility.

So if have a lot of energy stocks, you should own some ultrashort oil and gas ETFs.  There’s a reverse, or ultrashort, ETF out there for every possible investment you have – against the Nasdaq index, gold, Russell 2000, etc.  You can find them by going to http://moneycentral.msn.com/investor/partsub/funds/etfperformancetracker.aspx and selecting a category.  Within each one you’ll see words like Short or Bear, which indicates this is a reverse index.

DO NOT BUY AND HOLD THESE. You’ve got to become a day trader to use these, if you buy one and keep your money in, it will be eaten away as the market swings back and forth (you only win one direction).  Sell inverse ETFs when there’s a burst of optimism and a rally in the market.  No one can time this right. You can’t expect to make money all the time, so inverse ETFs are strictly to be used with money you can afford to lose.  Wait for good news during a bear market to drive stock prices up, then buy the inverse ETF in anticipation of another decline while the economy is still contracting.  Diversify across several stock sectors.

Currencies

Weiss likes currencies because they’re separate from the stock market, and they’re easy to invest in with currency ETF’s.  The trends in currencies are more consistent and longer term than stock market rallies and dips.

One reason the dollar is so strong in a deflation is that it’s the reserve currency, and looks prettier than all the other currencies, because many nations are lending even more than we are to their banks and financial institutions.

So one way to make a currency bet, as long as deflation continues, is to bet against other currencies, or bet with the U.S. dollar.  If inflation returns, do the reverse.

What to invest in when the bottom is reached

First, you’ve got to know we’re at the bottom by signs like debt liquidation, the government stops bailing everyone out, rating agencies downgrade companies, wall street analysts call most stocks worthless, everyone you know is extremely pessimistic, and finally some sort of watershed event (or follow Weiss at moneyandmarkets.com)

At the bottom, if you don’t have cash to buy whatever it is you want, you’ll have trouble getting any cash by selling your house, gold, or stocks – there are few buyers out there.  Nor will you be able to borrow the money, there will be almost no credit.

At the bottom, Weiss recommends switching a large amount of your short-term treasuries into long-term treasury bonds to lock in high interest rates, and another chunk into high-grade corporate bonds and stocks that pay dividends.

Chapter 12 is devoted to why dividend paying stocks are so great.

Inflation vs deflation

Consequences of hyper-inflation: pain of debtors eased temporarily, the illusion that the “crisis is over”, only a privileged few benefit, any benefits don’t last long, and if they do, it’s in the form of another bubble and another bust and an even worse depression. You end up with even more bad debt, speculators being rewarded, savers punished, the dollar destroyed, retirement nest eggs and pensions worthless.

Consequences of deflation: bankruptcy, high unemployment, financial losses – which are unavoidable anyway.  Debts are paid off or liquidated and you’re back to a clean slate.  Speculators suffer the biggest losses – the same people who caused the problem, and savers are rewarded.  The U. S. dollar gains in purchasing power, so people will work harder to own them and sacrifice for their community and nation.

Although deflation is winning now, the government thinks that gives them the leeway to bail out companies with no restraint, lower interest rates to zero, and print all the money they want.  Yet this same strategy after the dot.com bust produced the housing bubble.  Inflation does not cure deflation and deflation does not cure inflation.

Weiss thinks the inflation scenario is less likely and would look like this: The government continues to shuffle toxic assets between companies, nationalizes banks, and tries to postpone the day of reckoning with more and more bailouts. There are more bubbles and busts.  Unemployment surges to the highest level in history. In some of the worst areas, overcrowded tent cities spring up, and there’s not enough food to feed the hungry.  The middle class migrates to places of opportunity, starvation strikes the poor, every city suffers a “financial Katrina, and pandemics sweep the nation.

The danger of inflation remains, and once unleashed, can not easily be stopped.  So in case inflation wins, consider buying gold as insurance – up to 5% of your assets.  Later, after a long period of deflation buy more.  But gold is generally a bad investment in deflationary times, regardless of some theories to the contrary.

Hyper-inflation: not

Weiss thinks we’ll avoid this because ultimately bond holders can dump government securities, so it’s the bond holders with the power, not the government.  The U.S. can only borrow money by selling bonds to investors.  Most of these investors are overseas.  Some are banks, pension funds, insurance companies, cities, and states.

The governments’ huge deficits mean either higher taxes or interest rates, which leads to lower stock prices and more economic destruction.

Weiss says we papered over the savings and loan crisis in the 1980s, and life insurers in the 1990s, resulting in more easy money and debt, but now we’re at the end of the line.  The quantity and toxicity of debt so great it’s driving us into a depression.

Conclusion

Because of depleting energy, water, topsoil, forests, phosphorous, minerals and increasing populations, I don’t think that long term there can ever be anything but a Great Depression until resources are in line with population, but there are still a few good years left, so make the most of investing and gaining skills while you can.

Once there’s a recovery, it won’t be long before the continuing declines in oil production will knock the price of oil sky high again, and the economy back down again, because high energy prices will stop any recovery from lasting very long.  And there won’t be any credit for companies to borrow to start new oil-drilling projects, so even if there is geologically available oil, it’s not financially available.

I know it must seem like I’ve told you everything there is in the book, but there’s more in the 206 pages than I can possibly mention, especially the lists of what to buy and the nuts and bolts of investing in treasuries, ETFs, and so on.  See these topics in the book for details: pages 59-60 corporate and municipal bonds, 65-66 how to find safe insurance, 74-75 how to save, 76-83 why and how derivatives could lead to a global financial meltdown, 96-100 treasury only money market funds, 116-122 ETF investing, 130 currency ETFs, 138-139 what to buy at the bottom of the market).

Safest place to put your money from best to worst for now (p50-51)

1)   Short term treasuries via  treasurydirect.gov  

2)      For your IRA, get short-term ETF’s like BIL or SHV which have much lower management fees than the brokerage treasury only money market funds http://seekingalpha.com/article/137330-the-dollar-may-be-dirt-but-cash-isn-t-trash

http://www.marketoracle.co.uk/Article10822.html

3)      Treasury only money market fund (Fidelity and Vanguard have closed their treasury only money market funds)

4)      Government-only money market fund

5)      Standard money market fund (but risky since nearly all have some corporate and municipal bonds)

6)      Income or bond fund that invests only in U.S. government notes and bonds and nothing in corporate bonds

7)      Income or bond fund like above with as little as possible in corporate bonds

 

Keep adding to your 401K, IRA, 529 college savings and other tax-protected plans.

Get out of debt, get out of debt, get out of debt!

Cut up all your credit cards.

Pay off all of your credit cards and don’t get new ones.

Pay down all of your loans and mortgage.

Build up your cash savings.

Protect your job.  If the company you work for is in a good financial position, work hard to make yourself essential, constantly learn new job skills. Otherwise stay on top of the job market, other ways to make money in a home business, and how to market your skills.

 

Page 201: 5 golden rules

1)      keep your priorities straight. #1 is savings and capital preservation, #2 growth, #3 speculative profits

2)      Control risk.  Use stop-loss orders so you don’t lose everything in a meltdown

Diversify beyond the stock market, mainly in treasury bonds (short now, long

later), and when the bottom is reached, other assets

3)      If you speculate, use only money you can afford to lose

4)      Keep your emotions in check, investing is a business, not a game.  Categorize and keep track of your expenses and review your financial position monthly. Don’t hesitate to change your strategy as needed.

5)      If you trade actively, reduce your commission costs to the bone (switch brokers).

 

 

 

 

 

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Nicole Foss – Links to best posts

Posted on February 7, 2014 by

Although I have links to just a few of my favorite posts below by Nicole Foss (aka Stoneleigh) to get you started, the most valuable way to get up to speed  is to buy one or both of her DVD sets.  These clearly explain the crisis and what you can do to cope.

Start with “A World of Change” and then get “Facing the Future” which you can purchase at her blog.

You can figure out much of this information from her posts, but it will take you months, and the puzzle pieces won’t be in a logical order.  She’s writing for a very sophisticated audience who’ve followed her for years. The DVD’s (or videos) are clear and focused with great graphs, charts and other visuals that make her message easy to understand.

If you do want to get up to speed, this is a fantastic primer:

August 13 2011: The Bigger Picture: Primer Guide Update

Keep up with the latest information at: http://www.theautomaticearth.com/

Feb 7 2014: Debt Rattle  Why Is Up Always Good And Down Always Bad?

 

July 18, 2012. Jeff Rubin and Oil Prices Revisited

Jan 30, 2012.  Petroplus – the Tip of an Iceberg (scroll down to see it)

Dec 5, 2011: Look Back, Look Forward and Look Down. Way Down.

October 3 2011: Commodities and Deflation: A Response to Chris Martenson

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We’ve taken over too much of the planet for pasture and crops

Posted on February 6, 2014 by

In the article “Primeval planet: What if humans had never existed?” by Christopher Kemp in NewScientist, these charts of increasing intensity of pasture and crop land from 5000 BC (18,000,000 population) until 2000 (6,150,000,000 people) show that humans are laying waste to the very ecosystems that keep us alive, world-wide, and driving other species extinct.

Cropland increasing use from 5000 BC to now Pastureland increasing use 5000 BC to now

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Gail Tverberg: Collapse may have already started

Posted on February 6, 2014 by

Limits to Growth–At our doorstep, but not recognized

ourfiniteworld.com   February 6, 2014 by

How long can economic growth continue in a finite world? This is the question the 1972 book The Limits to Growth sought to answer. The computer models the team of researchers produced strongly suggested that the world economy would collapse sometime in the first half of the 21st century.

I have been researching what the real situation is with respect to resource limits since 2005. The conclusion I am reaching is that the team of 1972 researchers were indeed correct. In fact, the promised collapse is practically right around the corner, beginning in the next year or two. In fact, many aspects of the collapse appear already to be taking place, such as the 2008-2009 Great Recession and the collapse of the economies of smaller countries such as Greece and Spain. How could collapse be so close, with virtually no warning to the population?

Continue reading –> Limits to Growth at our doorstep

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Preparing for a Nuclear Terrorist Attack on an American City: Report from the National Academy of Sciences.

Posted on January 28, 2014 by

[ I think cities may be the “best” place for a while. Cities have always been richer than rural areas since wages for farmers, loggers, and mining are much lower than the wages of workers who make “value-added” products from them.  But at some point cities will have to be abandoned as supply chains break from lack of diesel and other issues  discussed in 3) Fast Crash. 

I’m just back from Belize, where the Mayans declined because most of the trees were cut to make limestone for the temples and to cook and build with. This led to topsoil washing away, and the ensuing drought is likely the result of all this.  Those who survived fled to the highlands of Guatamala. Even today the population is 10% of what it once was.  About 60% of the food is produced by a small number of Mennonite and Amish farmers who’ve moved down there. 

Alice Friedemann   www.energyskeptic.com  author of “When Trucks Stop Running: Energy and the Future of Transportation”, 2015, Springer and “Crunch! Whole Grain Artisan Chips and Crackers”. Podcasts: Practical Prepping, KunstlerCast 253, KunstlerCast278, Peak Prosperity , XX2 report ]

Davis, M. et al. 2013. Nationwide Response Issues After an Improvised Nuclear Device Attack: Medical and Public Health Considerations for Neighboring Jurisdictions. National Academy of Sciences.

Our nation faces the distinct possibility of a catastrophic terrorist attack using an improvised nuclear device (IND), according to international and U.S. intelligence (Jenkins, 2008). Detonation of an IND in a major U.S. city would result in tens of thousands to hundreds of thousands of victims and would overwhelm public health, emergency response, and health care systems, not to mention creating unprecedented social and economic challenges.

An IND is a nuclear weapon bought illicitly, stolen from a nuclear state, or fabricated by a terrorist group from illegally obtained nuclear weapons material (e.g., plutonium or highly enriched uranium). An IND explosion on the ground yields the same physical and health effects as detonating a nuclear weapon in the air, similar to the hydrogen bombs dropped during World War II.

Although it is generally accepted that larger U.S. cities likely represent the highest-risk targets for an IND terrorist attack, the ripples from an IND detonation would overwhelm the surrounding communities and spread nationwide.

An IND is not to be confused with a radiological dispersal device (RDD), informally known as a “dirty bomb.” An RDD is a weapon that combines explosives with radioactive material. The explosion vaporizes or aerosolizes radioactive material, propelling it into the air, but the explosion does not trigger a fission reaction that releases the mammoth amounts of energy or fission products that are associated with a nuclear detonation. The effects of an RDD extend over an area the size of multiple city blocks, whereas the consequences of an IND detonation extend for miles. Buddemeier explained that most of the nuclear hazard of an RDD attack is due to people breathing radioactive dust in the immediate area of the explosion (although there is some external radiation), whereas with an IND attack, most of the nuclear hazard is from fallout, which emits radiation of sufficient strength to burn or penetrate the skin and travel into the body cavity to trigger acute radiation syndrome. Fallout particles, though, are too large to become a breathing hazard.

Fallout is generated by thousands of tons of debris—from collapsed buildings and other structures destroyed by the blast—combined with radioactive fission products and catapulted upward by the extreme heat of detonation. The radioactive debris-filled cloud rapidly ascends through the atmosphere up to 5 miles high for a 10-kiloton (kt) device. Highly radioactive particles coalesce and drop back down to earth as they cool to form fallout. Within 10 to 25 miles of the detonation, fallout particles are the size of table salt or sand as they fall back to earth, contaminating all surfaces, including clothing, skin, and hair. The particles give off penetrating radiation—primarily gamma and beta radiation—that can injure people inside cars or in inadequate shelters. The path of fallout depends on wind direction and speed and other environmental conditions (e.g., terrain and weather). Fallout’s radioactivity decreases with distance and decays rapidly with time, with the greatest danger occurring within the first few hours after the detonation. A ground-level detonation produces more fallout than one exploded above ground, as was the case for the atom bombs dropped on Hiroshima and Nagasaki. Fallout is the primary source of radiation exposure in outlying communities. The best method of reducing radiation exposure from fallout is to remove outer clothing and remove particles from hair when entering a safe shelter.

In the case of a 10-kt detonation in Washington, DC, it is likely that 45,000 people would perish immediately and 100,000 would be at risk of death. An additional 320,000 people would be likely to be seriously injured, and another 175,000 would likely have minor injuries.

Being unaffected physically, outlying communities are likely to be in the best position to save lives following an IND attack. However, these communities will experience an unparalleled number of evacuees who will need emergency medical care for blast, burn, and radiation injuries; screening for contamination and acute radiation syndrome; and provision of radiation countermeasures, shelter resources, and mental health and material support. Yet, most outlying communities have not considered the potential burden they may experience and so have not undertaken planning for an IND detonation in a nearby city, making them drastically underprepared. The influx of tens of thousands of displaced victims will require dedicated command, control, and resource capabilities from across the region and nation to ensure a successful response.

Areas that could positively influence state and local planning progress:

  • High-level political support and direction to supplement available guidance
  • Translation of federal guidance into actionable local tools
  • “Socializing” preparedness—getting the public to take personal responsibility for being prepared—to increase resiliency and decrease public dependency on already taxed services
  • Need for education of first responders, local leadership, and health care providers on types of radiation attacks and different vulnerabilities
  • Coordinating transport systems: Radiation Injury Treatment Network, National Disaster Medical System, Civil Reserve Air Fleet, and regional/local transports
  • Robust risk communication, including pre-event messaging if possible
  • Expanding health care coalitions to include a wider, more diverse range of partners
  • Integration of public health and medical services into command and control infrastructure, emergency operations centers, and unified command
  • Core capabilities that receiving communities should focus on related to an IND—and corresponding commonalities with the Public Health Emergency Preparedness/Hospital Preparedness

There is a lot more to this 257-page report which is free at:

http://www.nap.edu/catalog.php?record_id=18347

 

 

 

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