Jim Kunstler at his absolute best!

 Peak Money    

November 12, 2007
 
      The multi-dimensional meltdown underway in the finance sector
 illustrates perfectly how the complex systems we depend on start to wobble
 and fail as soon as peak oil establishes itself as a fact in the
 public imagination. Mainly what it shows is that we don't have to run out of
 oil -- or even come close to that -- before the trouble starts.  Just
 going over the peak and heading down the slippery slope of depletion is
 enough.  Peak oil, it turns out, is also peak money.  Or should we
 say, peak "money?"

        First of all, what is finance exactly?  I'd bet that a lot of
 people these days don't know, including many working in the financial
 "industry," as it has taken to calling itself.  Finance, until very
 recently, was the means by which investment was raised for useful economic
 activities and productive ventures -- in other words, the deployment of
 capital, which is to say accumulated wealth. Historically, this
 accumulated wealth was pretty meager.  There wasn't a whole lot to deploy and
 the deployment was controlled by a tiny handful of people statistically
 greater only than the number of Martians in the general population.
 They operated as families or clans, and everybody knew who they were: the
 Medici, the Rothschilds. Even the Roman Empire was a kind of financial
 Flintstones operation compared to what we see on CNBC these days. Not
 having the printing press, the Romans had to inflate their currency the
 old-fashioned way, by adding base metals to their gold coins.

        Finance in the 200-odd-year-long industrial era evolved
 step-by-step with the steady incremental rise of available cheap energy.  More
 to the point, the instruments associated with finance evolved in
 complexity with that rise in energy.  It was only about two-hundred years
 ago, in fact, that circulating banknotes or paper currencies evolved out
 of much cruder certificates that were little more than IOUs.  Once
 printed paper banknotes became established, and institutions created to
 regulate them, the invention of more abstract certificates became possible
 and we began to get things like stocks and bonds, traded publicly in
 bourses or exchanges, which represented amounts of money invested or
 loaned, but were not themselves "money."
  
      Much of this innovation occurred during the rise of the
 coal-powered economy of the 19th century. It accelerated with the oil-and-gas
 economy of the 20th century, up into the present time.  So, for about 150
 years -- or roughly since the end of the American Civil War -- we've
 had a certain kind of regularized finance that enjoyed continual
 refinement.  Even in the face of cyclical traumas, like the Great Depression,
 currencies, stocks, and bonds retained their legitimacy if not always
 their face value.

        Russia was a bizarre exception.  Crawling out of the mud of
 medievalism relatively late in the game, Russia pretended to abjure
 capital while still faced with the need to deploy it in industry.  They
 solved this paradox conditionally by disqualifying the Russian public from
 participation in any part of the industrial economy except the hard
 work, and pretended to pay them in promises for "a brighter future," which
 never arrived as long as the Soviets remained in charge. (The Russian
 people repaid the system by only pretending to work.)

        In any case, finance for the purpose of deploying capital has
 prevailed as reality among people who use the implements of the dinner
 table, but something weird has happened to it in recent years.  It has
 entered a stage of grotesque, hypertrophic metastasis that now threatens
 the life of the industrial organism it evolved to serve.  Its current
 state can be understood in direct relation to the run-up to peak oil
 (peak fossil fuel energy, really, since coal and gas figure into it,
 too).  The oil age, we will soon discover, was an anomaly. Many of the
 things that seemed "normal" under its regime will turn out to have been
 rather special. And as the beginning of the end of the oil age becomes
 manifest, these special things are starting to self-destruct pretty
 spectacularly.

        For one thing, finance in the past twenty years has evolved
 from being an organ serving a larger organism to taking over the organism,
 becoming a kind of blind, raging dominating parasite on its former
 host.  Or to put it less hyperbolically, it has become an end in itself.
 That is what they mean when they say that the financial sector has been
 "driving" the economy.  A feature of this ghastly process has been the
 evolution of financial instruments into ever more abstract entities
 removed from reality-based productive activities.  Stocks and bonds were
 understood to represent direct investment in enterprise.  Sometimes the
 enterprise was a failure, and sometimes the people running it were
 swindlers, but no one doubted that common stock represented the hope for
 profit in a particular venture like making steel or selling laxative
 chemicals.  The new "creatively-innovated" financial "derivatives" of
 recent years are now so divorced from any real activities or product
 that often the people trafficking in them don't understand what
 they're supposed to represent.  I'd bet that more than half the people in the
 New York Stock exchange any given day could not explain  the meaning
 of a credit default swap if a Taliban were holding their oldest child
 over a window ledge across Wall Street.

        The innovation of mutant financial "products" is a symptom of
 the "crack-up boom" that characterizes society's response to peak oil.
  The main implication of peak oil for an industrial economy is that the
 200-odd-year-long expectation for continued regular growth in combined
 energy-activity-and-productivity at roughly 3 to 7 percent a year under
 "normal" conditions -- that expectation is now toast.  Under the new
 regime of peak oil and its aftermath, regular energy depletion, society
 can expect no further industrial growth but only contraction, and all
 the certificates, instruments, and operations associated with the
 expectation for further industrial growth lose their legitimacy.  Seen in
 this light, one can then understand the temporary value of these mutant
 financial derivatives. They allowed participants to conceal the fact that
 these "investments" were not directed at productive enterprise.  They
 also provided a cohort of sharpies with "vehicles" for converting
 the leftovers of the industrial economy into assets for themselves --
 a form of looting, really.  Hence, the employees of Bear Stearns,
 Goldman Sachs, and Merrill Lynch gave themselves $50-million Christmas
 bonuses for trafficking in these inscrutable non-productive financial
 gimmicks, and were able to acquire fifty-room Easthampton houses, Gulfstream
 jets, and impressionist paintings.

        Of course, the aftermath might not be so pretty for these guys,
 since the next thing they may acquire could be long prison sentences.
  If they flee prosecution in their Gulfstream jets, they will not be
 able to take their Hamptons estates aboard with them. Those who remain
 may live to see mobs with flaming torches outside their windows, as in
 the "Frankenstein" movies of their suburban childhoods.  But this has
 yet to play out.

        For the moment it appears that we have entered the climax of
 the crack-up. The slick and inscrutable derivative vehicles infesting the
 ledgers of the investment banks, are now being systematically revealed
 as frauds of one kind or another, and, self-evidently lacking in
 worth.  The process now underway is gruesome.  The sheer dollar losses
 involved are almost as incomprehensible as the phony operations and
 instruments that they are derived from -- twelve billion here, nine billion
 there.  As the late Senator Everett Dirkson once quipped, "sooner or later
 you're talking about real money...."  Or are we?  Is it money or
 "money."   And if it's "money," what will become of it?  And of us? How will
 it allow us to live?