The China Syndrome was a 1970s metaphorical idea highlighting the danger of a catastrophic nuclear reactor meltdown. It was imagined that a uranium reactor core going supercritical would melt its way through the floor of the containment building and on through the Earth, evetually emerging on the other side of the planet, ie in China, for a reactor situated in the United States. The whole idea is bad physics combined with bad geography because the antipodes of the USA is, in reality, the Indian Ocean rather than China, any material which did succeed in burning its way to the Earth’s core would stop there under the force of gravity and in fact, supercritical uranium would be able to dig a hole of only a few metres before the heat was dissipated away into the Earth. None of this prevented a good film being made out poor science in 1979.

Today, to speak of the China Syndrome is to move from nuclear physics to economics and from geology to geopolitics. In 2010, China became the world’s number exporter, overtaking Germany. In the near future, it is expected that China will nab the number two spot from Japan in terms of absolute economic weight. Of course, economic development is not set in stone, trends can change and in any case some aspects of China’s economy are distorted by an undervalued Yuan, held artificially low by the Chinese government to favour exports.

The real China Syndrome however, is not the emergence of an economic superpower. This is only to be expected of the world’s most populous nation, (though India is set to overtake China on this measure sometime in the next ten years). The real syndrome is the transition to a more open, democratic political system, which will inevitably come one day as wealth spreads across Chinese society. The day is coming, inexhorably. The only question is when and how much blood will be shed in the process.

Looks like a global climate deal is not within reach of a multilateral system counting hundreds of participants and wildly diverging interests. The world disorder is beginning to look more and more like the US polity struggling to achieve universal health care, something that everyone wants and should be possible but which the system does not permit to come to pass.

The US Bureau of Labor Statistics offers the possibility to create graphics from databases and some of the series now go back almost 100 years. You can get an overview of the Consumer Price Index since 1913, which looks like this:

The CIA was charged with accurately assessing the threat to national security posed by enemies of the United States, principally the Soviet Union. The agency was staffed by professionals whose careers were served by having to confront a powerful enemy, armed with lots of tanks. But neither their training nor their general perspective on life equipped those in the so-called intelligence services to see the real weaknesses of the Soviet system, such as the impossibility of finding a decent hairdresser or car mechanic. So they were unable to predict the fall of communism.

The financial services industry in the Anglo-Saxon countries is the most lightly regulated across all the developed economies. The public authorities allowed the leaders of this industry to opt for a self-serving approach dignified with the epithet of “self-regulation.” In fact it amounted to turning a blind eye to imprudent practices which were making many punters obscene amounts of money. Everyone, including the regulators, were riding the same bull market, cashing-in on the same up-escalator, blowing up the same unsustainable bubble. Nobody stopped Bernard Madoff before he had defrauded billions of dollars using the oldest trick in the book. Nobody thought to point out that lending money to people who would not be able to pay their mortgages could only lead to tragedy. Are you surprised therefore that the financial services industry triggered a global crisis which led to the worst economic downturn since the Great Depression?

When you rely for information and clear judgement on those who have a material interest in looking at the world in a particular way, would you expect to get good advice? Why then ask the International Energy Agency to be the guardian of truth when it comes to figures about oil production and reserves.? Who stands to gain from pedalling inflated figures for future oil production and “proven” reserves? Oil companies? Leading oil-producing countries. Dominant oil-dependent economies? So take more than a pinch of salt when you try to digest predictions from the International Energy Agency. And get ready for the downturn now. We only need a few quarters of falling production when demand is rising to give us a clear picture. The oil ecomony is over the hill and we are very soon going to be treated to a terrifiying ride on the downside.

http://www.guardian.co.uk/environment/2009/nov/09/peak-oil-international-energy-agency

Free (financial) markets have brought us to the brink of disaster. The current crisis is largely of our own making. The next will be all the more so. If we continue in the mistaken belief that free energy markets can smoothly manage the Great Weaning from oil, then we are in for a major shock. A shock which will certainly push our societies over the brink. No one can say where they will end up.

Until the middle of 2008, despite clear evidence that the financial cummunity had screwed up on a monumental scale, oil was still trading at around $140 per barrel. Since then, the price has collapsed to about $40 per barrel, due to the economic cirsis. This price fall may be of some help to struggling consumers but it is a catastrophe for the Great Weaning. Alternative energy sources, which were economic at $140 are simply impossible at $40. The price of oil has little to do with its real value or the strategic role it plays in modern economies. Unless we rectify this market blindness, we will all pay an extraordinarily high price.

 

There is only one way out of this mess, the price of oil has to be administered on a global basis. Agreement needs to be reached by 2010 at the latest, to set the global price of oil at $100 per barrel. Each year it would be increased by 10%, giving under 8 years for the price to double to $200. In fact, the price should not be set using any individual currency. Its price should be set using a common basket of currencies, which reflects the national share of gloal GDP.

Nobody enjoys an economic crisis, apart from the vulture professions of liquidators and receivers, the undertakers of the business world. But the current crisis is not only the worst since the 1930s. It also comes at the worst possible time. And for two reasons. The first is that governments are borrowing heavily from the future to support economic activity now. Funds are being channelled particularly into the automobile and banking industries, largely to compensate for past failings in terms of strategy and regulation. Public deficits are ballooning. The margin for manoeuvre is tightening for the years to come and little of what is being done now will help us through the massive structural change we will have to make over the coming decade. The bet is that recovery will arrive in the next year or two, allowing debts to be repaid. But what if recovery does not come? What if today’s economic crisis drags on for years, even decades?

The flustered retort of conventional wisdom is that this kind of thing has never happened in the past. Market economies have always rebounded from recession with renewed growth. Well perhaps so, but growth in industrial economies was underwritten throughout the past couple of centuries by cheap energy, largely fossil fuels. This era has now come to an end. Don’t be fooled by the collapse of the price of crude since the middle of 2008. This is the result of the slowdown in economic activity and the bursting of a speculative bubble that was anticipating oil at $200 per barrel. And why was a market populated by the people who know most about oil supply expecting oil to stay dear? Because for the first time in history we are confonted with the immediate prospect of a decline in the supply of oil which is structural, not circumstantial. No one can say with any certainty when exactly oil production will peak and begin its inexhorable descent. But the earliest possible date is February 2008, when oil production hit its previous peak at just over 80 barrels per day. The current crisis may be be obscuring the fact that oil production is already in decline. This unfortunate conjunture of events will make the necessary adjustment even harder to achieve.

So in any case, we are in for the long haul, the tunnel that may one day see us emerge from our dependence on cheap energy. Or not. If decline is oil output is now structural, then it is already too late to begin the trainsition in any coherent manner. The process will be chaotic at best. At worst, the future does not even bear thinking about. Which should please a large number of people who are already adept at living this way.

Human infants are evolved to feed on mother’s milk for the first crucial months of life. Once they cut their teeth, they largely leave liquids behind, moving on to something a bit more solid. This transition is known as weaning. It is a huge physical and psychological shock for the growing child. Everything up to that point had been easy. After the break, things will never be the same again. Our modern, industrial societies are pretty much in an analogous position. Their early and spactacular growth has been driven by a liquid resource, very high in energy content. Oil production is about at its peak right now. Mother Earth cannot furnish more. The future will witness an ineluctable decline. This coming transition I call The Great Weaning.

 

The shock will be terrible. We know we have to go down this road. But we are about as prepared to manage it as the startled rabbit in the lane at night, dazzled by the oncoming headlights.

The G20 conference in Washington to be held this weekend will amount to little. George W. Bush is not just a lame duck president; he hasn’t got a leg to stand on, webbed or otherwise. And his successor, Barack Obama has decided rightly, to stay away from the meeting, as he has no legal authority to intervene, on any subject until January 20th. Without the man who will run the United States for the next four years, at the very least, no meaningful discussions can take place. The conference will no doubt be masssaged to announce some measures to further stabilize the financial crisis, but nothing of real importance will be decided.

Some time early in 2009, another attempt will be made, this time with all the players who are in power. But nothing much will come of such an attempt either. Yes, the worst excess of the finance sector will be prevented in the near future. That is, until the next speculative bubble emerges and finds a way round the barriers that have been put in place. If generals are always preparing to fight the last war, financial regulators are always looking for better bolts for their stable doors.

But the real problems of the global ecomony are insoluble. They stem from the fact that markets have globalized but political power has not. And this is unlikely to change any time soon. Forty years of progress in European integration did not permit a co-ordinated response of European political leaders to the financial crisis. At the global level, nothing comparable is even imaginable. Free trade is part of the problem, but collapsing back to protectionist blocks would be even worse. Welcome to the frying pan of globalization.

We are condemned to crisis, it is not a bug in the system. It is a feature.

The ghost at the capitalist feast, (or one of the most frequent presences, in any case), is the roller-coaster of boom and bust. Also known in polite circles as the business cycle. This pest plagues even the best-run economies. There is no way round the problem, because investment leads growth, which in turn gives rise to growing confidence, exhuberance, hubris and thus eventually slump. Virtuous circles inevitably turn vicious in time.

 

Overlain on top of the normal beating of the economy’s heart, there are the errors of particular policy-makers in particular contexts. We are currently living through a disasterous mix of mis-calculation, cupidity, greed and outright lunacy. To understand how difficult it will be for the global economy to dig itslef out of the present hole, it is worthwhile taking a brief historical trip through the great Japanese deflation of the end of the twentieth century.

 

Just to recap. On December 29th 1989, the Nikkei stock index in Japan reached its all-time high of 38,957.44. Real estate prices in Tokyo’s Ginza district reached the dizzy highs of US$1.5 million per square metre. It would be more than 13 years before the stock index eventually bottomed out in April 2003 at 7603.76. Tokyo is still, neraly twenty-years later, one of the most expensive places in the world to buy property, even if prices have become much more reasonable.

The victory of BarackObama in the US Presidential election has inspired an immense wave of hope which continues to reverberate around the world. The achievement is historic and no matter what transpires in the future, it can never be erased from the record of history. What Obama himself styled as America’s original sin has been forgiven by history. The immense suffering inflicted in the past can never be undone. Racism will continue to cause hurt in the present, generating resentment and conflict. The struggle for equality will go on too, but is can no longer be said that the American political process is incapable of representing all its citizens. That era is gone forever, buried by hope become reality.

What an incredible lesson in democracy the country has demonstrated over the past year. A primary battle for the Democtaric nomination which has never been equalled and will live long in many memories. A perfect campaign to bring a young, dynamic, brilliant, charismatic candidate to the most powerful public position. The contrast with Obama’s predecessor could not be greater. And herein lies the biggest challenge.

We have become accustomed to expecting nothing but the worst from the world’s leading nation. Now the very opposite is the case. It is not really possible to imagine a better president of the United States. We will see over the coming weeks what kind of team he will build around him. But the challenges have never been greater, neither. George Bush failed miserably when challenged by the Al Caida terrorist attack attack in 2001. He misread the situation, fell into the trap of declaring a War on Terror, dragged his country via lies, fear and duplicity into a disasterous war in Iraq, from which Obama has vowed to extract the United States within 16 months.