The Automatic Earth

Detroit Publishing Co. Milk Runner 1903 “New Orleans milk cart”

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Ilargi: Thought it might be wise to insert a little warning: if you think it wise to disagree with Stoneleigh on the following essay, and we do encourage discussion, do make sure that you do come prepared. She’s an expert on this issue too. It’s very close to her heart, and will undoubtedly prove to be highly controversial. But do your homework before chiming in!

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Stoneleigh: We often write, at least in the TAE comments section (link at the bottom of the page for those who have yet to find it), about elements of preparedness. One of the topics that has often sparked heated discussion is food. Since people need to be thinking about what they can grow and store, and what nutrients they need, I thought I would address the issue in an intro.

There are very many misconceptions about food, as about many other aspects of life where the received wisdom is fundamentally wrong (including our usual topic, finance). As in other cases, this institutionalized misinformation harms real people every day, yet it is almost impossible to mount a challenge from within the system because the system protects its entrenched doctrines from scrutiny.

Research is funded by vested interests (for whom the status quo is highly profitable), which shapes the questions asked and the answers obtained. Fundamental contradictions and inconvenient data are ignored. We here at TAE are contrarians in the habit of shining light in dark places, so this seems a natural place to challenge received wisdom on a new front.

I was once a biologist, hence reading through the scientific literature on nutrition was not a problem. Also, I have personally lived this particular story. I know first-hand the harm (both physical and psychological) that misinformation in this field has caused to so many people.

For those who would like vastly more detail than I intend to provide, I strongly suggest that they read Good Calories, Bad Calories by Gary Taubes. It is the most exhaustive, and simply the best nutritional review out there. The CBC Radio documentary The Heart of the Matter and the CBC TV documentary My Big Fat Diet are also very much worth your time. As it happens, the latter production highlights the important health research of a TAE reader who I have met on my travels.

In the developed world, we have seen an explosion in the incidence of the ‘diseases of civilization’ – heart disease, cancer, hypertension, chronic inflammation, diabetes and obesity. The incidence of all of these is vanishingly small in populations eating a traditional diet (or paleo-diet), but once such people arrive here, and begin consuming the same industrial food-like-substances that developed world populations eat, their incidence of morbidity of all kinds increases dramatically.

There are clearly common factors at work, which affect newcomers, and a large percentage of the population born in the developed world, but not the whole population. This is an important point to note, because our metabolisms are not all the same, as the received wisdom would have us believe. Some of us possess tolerances that others do not, and it is all too common for those who possess such tolerances to be highly critical of those who do not, and who therefore suffer the consequences of a modern lifestyle.

We are told that diet-related health problems are the result of eating too much fat and too little fibre, while doing too little exercise. We are told to limit the consumption of fat, especially saturated fat, substitute more carbohydrate and eat more fibre. If we are carrying stored mass that we are not comfortable with, we are told that we should restrict calories, especially fat, and burn off excess through exercise.

If we fail to burn off the excess in this way, we are told that we must be either greedy, or lazy, or both. Moral judgements are very common in the field of nutrition, yet these are uninformed and highly unfair.

The clearest factor showing a huge increase in consumption paralleling the increase in the incidence of the ‘diseases of civilization’ is not fat, of which paleo-diets contain substantial percentages, but sugar and other refined carbohydrates. In the developed world we commonly pump vast quantities of these cheap substances into everything we eat, especially the prepared foods that we eat so much of. Virtually all prepared foods contain large quantities of high-fructose corn syrup for instance, which is cheap thanks to financial subsidies to corn production.

We need to understand why the consumption of these substances has the dramatic effect that it does in so many people. To start with, sugar is highly addictive. Since sweet foods are so rarely poisonous in the wild, we evolved a taste for them. Since they were rare, we had no need to evolve an off-switch for them either.

Now we are surrounded by sugar in a myriad forms. Adding it to so many foods makes them more palatable, and hence more profitable. Sugar, especially fructose, disables our satiety mechanism, so that if we are eating something sweet, we tend to eat more of it without realizing that we have consumed enough.

The food industry cashes in selling us addictive foods, and then cashes in again by feeding on our insecurities about the resulting health effects, especially weight gain. As over-consumption of carbohydrates promotes a state of chronic inflammation, to which the body responds by producing cholesterol, the pharmaceutical industry can also profit by promoting cholesterol-controlling drugs. These attack the symptom, not the disease, leaving us just as prone to heart disease as before, but poorer. The status quo is highly profitable in all ways. No wonder it has been so difficult to challenge.

Our bodies exist in a life-sustaining state of homeostasis, meaning that they must maintain physical and chemical parameters within certain boundaries. One of these factors is our blood-sugar level. If our diets chronically interfere with this factor, our bodies must constantly act to bring it back under control. This means producing high levels of insulin, especially in response to a rapid spike in blood-sugar. A high level of insulin causes blood-sugar to crash and packs away the excess as fat in adipose tissue.

For many people, chronic consumption of sugar leads to chronic over-production of insulin – hyperinsulinemia, or metabolic syndrome. At this point, a carbohydrate intolerance has been developed. The person will likely gain weight, while being hungry most of the time (specifically craving sugars) and lacking in energy. Essentially, the body cells are being deprived of nutrition as the excess insulin packages away what is consumed before it can be used. The body then lowers its activity level in response to what it perceives as state of starvation.

Continuing to eat carbohydrates will have different effects depending on the person. Either the adipose tissue will develop insulin resistance (cease to be sensitive to insulin), in which case the person will eventually develop type II diabetes, or the adipose tissue remains sensitive to insulin, in which case the person continues to gain weight. Rather than being over-weight because they do little exercise, they do little exercise because the vicious circle of their diet deprives them of the energy to exercise, as well as making movement uncomfortable in extreme cases.

Some populations are much more susceptible to developing metabolic syndrome than others, with First Nations people being among the most sensitive of all. In contrast, many people from northern Europe are much less sensitive than most, and can therefore get away with consuming a modern diet without paying the same price. This is luck, not a justification for moral superiority over those with different metabolisms, but all too often the prevailing approach is unjustifiably judgmental. A modern diet simply poisons a large number of people.

Getting out of the vicious circle necessarily involves no longer eating the substances which cause insulin spikes, in other words eliminating the vast majority of carbohydrates from the diet, especially the simple sugars and refined carbohydrates. It means no bread, pasta, cereals, rice, potatoes, desserts and not too much fruit (especially very sweet fruits like apples and grapes). Since these foods are addictive, the withdrawal process will be uncomfortable, but it does not last forever. Eventually the taste for sugar disappears.

The sweetness receptors are reset, so that many things taste pleasantly sweet which did not before, and truly sweet things taste revoltingly sweet. Taking this step, and sticking to it permanently, breaks the cycle of morbidity. It keeps insulin levels under control, thereby stabilizing appetite at a much lower level. As body cells are now adequately nourished, there is energy available for exercise, and likely to be a desire to exercise as well.

Excess weight falls off in the absence of high insulin levels. In normal people, stored fat typically cycles in and out of adipose tissue. In people with metabolic syndrome, the high insulin levels make that a one-way trip in, but drastically lowering insulin levels makes it a one-way trip out, almost independent of calories consumed.

One can eat bacon and eggs, cheese, cream, vegetables and many other very satisfying foods – losing pounds without being hungry. This is a diet that is much easier to stick to than most because people who eat like this are not hungry. As it is a necessary lifetime lifestyle shift for them, this is just as well.

It is important to note that treating metabolic syndrome cannot be done on a vegan diet, as difficult as that will be for some to hear. A vegan diet is necessarily far too high in carbohydrates for those who cannot tolerate them. Vegetarianism may be possible, but would be more difficult than being an omnivore (see the book The Vegetarian Myth by Lierre Keith).

We will all need to be physically tougher than we are now in order to cope with a future that will entail much more physical activity than we are used to, hence we need to exercise and develop the necessary musculature and fitness. Those with metabolic syndrome, which is a large percentage of the population, cannot do this if they do not address the diet issues that constantly undermine their efforts. Exercise is not a major component of weight loss, but it is nevertheless essential for a healthy life.

We all need to think about what foods we have available near where we live, what we might be able to grow and what we can store. Dried carbohydrates are easy to store, so there is a temptation to concentrate on them for food storage options. Food preservation can also rely very heavily on sugar or vinegar as preserving agents.

For people with metabolic syndrome, these would be a terrible choice to make, as relying on such supplies would leave them chronically hungry and tired. We need to think about storing nutrition in traditional forms, as our ancestors would once have done (pemmican for instance), and about producing or acquiring food with the nutrients we genuinely need.

We do not need carbohydrates, but we do need proteins and fats. Proteins will be an issue for many, especially those who try to live a vegetarian or vegan lifestyle in an area with a short growing season. The further north one lives, the greater the traditional reliance on animal products. Many ecosystems require grazing animals, and these are areas that cannot easily produce food that humans could eat directly. The use of animals does not in these cases increase the human energy footprint.

What does increase the footprint in this way is feeding animals grains, which they did not evolve to eat and which therefore make them ill. We currently cope with this by feeding them large quantities of antibiotics, and destroying the effectiveness of these medicines in the process. If we are going to rely on animals for food, we must do so in a way that works with the animals’ own metabolism and with natural ecosystems. If we grass-feed cattle, for instance, we produce animals which are themselves healthier, and which are much healthier for us to consume.

Dietary fats will be a major issue going forward. We require a balance of omega 3 and omega 6 essential fatty acids, but most of us eat a diet far too high in omega 6. Consuming too much omega 6 is an additional risk factor for chronic inflammation and therefore heart disease. Animals fed on an appropriate diet for them will have the right balance of omega 3 and omega 6 fatty acids in their tissues, whereas grain-fed animals (whether beef or chickens or farmed fish) will have far too high a level of omega 6.  We should also consider nut crops, although woody agriculture has its own challenges.

Providing for our own nutritional needs is going to be  a major undertaking in a period where we are vastly over carrying capacity as a species. As a start, we need to stop thinking of all calories as equal, because a body is not a simple calorimeter. We are creatures with complex metabolisms, and we are not all created equal. Trying to work with own own bodies and with the ecosystems in which we live are incredibly important factors.

Carl Mydans Homesteader February 1936 “Young homesteader, Westmoreland Homesteads. Mount Pleasant, Pennsylvania”

Stoneleigh: Relationships of trust are the glue that holds societies together. Trust takes a long time to establish, and much less time to destroy, hence societies where trust is wide-spread, particularly for long periods of time, are relatively rare. In contrast, societies where trust does not extend beyond the family, or clan, level are very common in history.

The spread of trust is a characteristic of expansionary times, along with increasing inclusion, and a weakening of the ‘Us vs Them’ divide. Essentially, the trust horizon expands, both within and between societies. Over time it can encompass higher levels of organization – from family to community to municipality to region to nation and beyond – so long as the expansionary dynamic continues to support it.

Within societies this leads to relatively stable and (at least temporarily) effective institutions, and bolsters the development of the rule of law. The rule of law means that law constrains the powerful (more than usual), and there is a reasonable degree of legal transparency and predictability, so that people are prepared to trust in the fairness and accessibility of justice. Naturally, the ideal is never reached, human nature being what it is, but it can be approached under the most favourable of circumstances.

Within societies, trust also confers political legitimacy (ie a widespread buy-in as to the right of rulers to rule). Where there is legitimacy, there is relatively little need for surveillance and coercion. A high level of trust (all the way up to the level of national institutions) is thus a prerequisite for an open society.

Between societies, an expansion of the trust horizon tends to lead to political accretion. Larger and more disparate groups feel comfortable with closer ties and greater inter-dependence, and are prepared to leave past conflicts behind. The European Union, where 25 countries with a very long history of conflicts have come together, is a prime example.

However, all expansions have a limited lifespan, as do the benefits they confer. They sow the seeds of their own destruction, especially when they morph into a final manic phase and begin to hollow out the substance of social structures. Institutions, whether public or private, retain the same outward form, but cease to operate as they once did. For a while it is possible to maintain the illusion of business as usual (or effectiveness and accountability as usual), but not indefinitely. Everything is subject to receding horizons eventually, and trust is no exception.

Over time institutions become sclerotic, unresponsive, self-serving and hostage to vested interests, at which point they cannot be reformed, as the reform would have to come from those entrenched individuals who have benefited most from the status quo. Institutions become demonstrably less effective, while consuming more and more of society’s resources. Corruption, abuses of power, lack of accountability and the loss of the rule of law become increasingly evident, exactly as we have seen with unauthorized wire-tapping, extra-ordinary rendition and many other actions undermining the open society. Once this happens, trust is living on borrowed time. That is very clearly the case in many developed societies today.

Trust in existing organizational structures does not disappear overnight, but ebbs away as institutions decay or the extent of their corruption is revealed. The loss of trust from higher levels of organization undermines the fabric of a society now operating beyond the trust horizon. When trust contracts, socioeconomic contraction is just around the corner. Bank runs are a particularly good example of this. People are currently waking up to the extent of the recklessness, irresponsibility and self-serving short-termism of the banking system, and realizing that reliance on top-down human promises is far riskier than they had supposed. When they cease to trust in those promises, they will are very likely to vote with their feet.

Societies in this position lose a critical pillar of support – the collective acceptance of their people. Governing institutions lose legitimacy, at which point the cost of governance increases significantly, because where there is no trust, resource-intensive surveillance and coercion develop instead. Our societies in the developed world, where institutional decay is well underway, stand on the brink of such a transition.

Where resources are scarce, as they will be soon enough, the diversion of a larger percentage of what remains towards this purpose will aggravate that scarcity considerably. This will further anger people, which is likely to lead to a downward spiral of mutual provocation and recrimination. Most of us have not seen this vicious circle of human sentiment to any great extent, but this is the natural consequence of the collapse of trust.

On the way down, as on the way up, there are effects both within and between societies, as the ‘Us vs Them’ dynamic sharpens once again. ‘Us’ becomes ever more tightly defined, and ‘Them’ becomes an ever more pejorative term. The result is division between disparate groups of people within a society, for instance the unionized and non-unionized, the haves and the have-nots, or different religious or ethnic groups. When there is a paucity of trust, and not enough resources to go meet highly inflated expectations, the risk of conflict is very high. Previously formed political accretions are at a high risk of coming unglued as they will no be longer supported by trust. The European Union should take note.

Between societies, where the existing range of divisive parameters is likely to be much larger, and where there may be a past history of conflict, the risk of conflict flaring up again rises significantly. This is especially likely if societies attempt to deflect blame for the situation they find themselves in towards other nationalities.

We are already seeing evidence of the growing anger, and the change it will usher in as the trust horizon shrinks. In the US, the Tea Party movement is the most obvious example. All major change comes from the ground-up, where the power of the collective is expressed in ways that either support or undermine the actions and intentions of central authorities. It is the interaction between the power of the collective and central authority that determines where a society will head.

The Tea Party movement is a ground-swell of public anger, very much in the tradition of major transformative grass-roots initiatives. It is exactly what one would expect to see at the brink of a collapse in the trust horizon – a movement grounded in negative emotion that both stems from a loss of trust and in turn acts to aggravate it in a self-reinforcing positive feedback loop. The danger with such a movement manifesting such powerful negative emotions is that it will precipitate a major over-reaction to the downside, commensurate with the irrational exuberance we saw to the upside. The anger is largely unfocused, and where it is specific, it is not fully-informed.

The primary target of the Tea Party is big government, but this ignores a major part of the big picture. The abuses of power we have seen are not purely a manifestation of metastatic public authority, but an expression of corporate fascism – the blending and merging of public and private interests in social control. One look at the revolving door between the banking system (where banking law is written) and the US treasury should be enough to demonstrate this.

The Tea Party movement represents largely (but not solely) the unfocused anger of people who know they have suffered, or are about to suffer, substantial losses, but do not (typically) understand the system well enough to understand why. The movement is casting about for someone to blame, as such movements always do on the verge of a trust collapse. The danger is that someone with facile populist answers will come along, offering a target for the urgent desire to blame someone for what has happened and is happening.

This is already happening, as powerful funding sources and nascent populists circle around and seek to tap into the trend for their own purposes. It is absolutely to be expected that existing top-down power structures, or political opportunists with their own agenda, will seek to hijack bottom-up movements as they develop. My primary concern is that in doing so they will lay the foundation for a society attempting to live far beyond the trust horizon, and where there is no trust, and consequently no political legitimacy, there will be surveillance, coercion and repression instead.

It will be easy for movements grounded in negative emotion to gain a foot-hold in the coming environment, as this is very much where the collective mood will lie in the aftermath of a Ponzi collapse. Blame-games will be very tempting (and populists have their own prejudicial ideas as to who should be blamed). However, this would not be compatible with maintaining the constructive and cooperative mindset we need if we are to have a hope of avoiding an over-reaction to the downside that has the potential to magnify the impact of what is coming enormously.

Personally, I would like to encourage the development of a different kind of grass-roots momentum for change, along the lines of what is being developed (albeit not nearly quickly enough so far) by the Transition Towns movement and other comparable initiatives. The key advantages that this kind of approach has are two-fold – the scope of its component activities, based on relocalization, match where the trust horizon is headed, and its driving force is the desire to build rather than to tear down.

Working within the trust horizon is important, as it means individual small-scale initiatives can benefit from the same kind of social support at a local level that larger-scale ones once did at a societal level, when trust was more broadly inclusive. Local currencies work for exactly this reason. While the task will still be difficult, it has a chance of being achievable, especially where the necessary relationships of trust have been established before hard times set in. It is very much more difficult to build such relationships after the fact, but relationships built beforehand may actually strengthen when put to the test.

Trying to maintain a positive and constructive focus at the local level, where trust has a chance to survive, and perhaps even thrive in hard times, and to avoid being drawn into a blame-game, will be an uphill battle. It is nevertheless something we need to do as a society, if we are to have a chance to preserve as much as possible of who we are through what is coming.

Russell Lee Trade and Transport February 1939 “Gas station, Edcouch, Texas”

Stoneleigh: As the world has become a smaller and smaller place over the last few decades, we think less about the differences between locations. Global trade has allowed us to circumvent many local constraints, evening out surpluses and shortages in a more homogenized world.

We have a just-in-time world built on comparative advantage, in the name of economic efficiency. Under this economic principle, every location should specialize in whatever activity it executes most efficiently and the resulting products from all areas would then be traded. The idea is that all will then be better off than they would have been had they attempted to cover all bases themselves for reasons of self-sufficiency.

Where countries had been inclined towards more expensive self-sufficiency, market forces have often made this approach untenable, as large cost differences can make countries or industries uncompetitive. Local production has been progressively out-sourced as a result.

By ‘better off’, economists mean that goods will be cheaper for all, thanks to global wage arbitrage and economies of scale. Globalization has indeed delivered falling prices for many consumer goods, particularly electronics. In an era of massive credit expansion (effectively inflation), such as we have lived through for decades, one would normally have expected prices to rise, as a lagging indicator of money supply expansion, but prices do not always follow money supply changes where other major complicating factors exist.

In recent years, the major complicating factors have been the ability to produce goods in places where wages are exceptionally low, the ability to transport those goods to consumer markets extremely cheaply and ready access to letters of credit.

For nominal prices (unadjusted for changes in the money supply) to fall during an inflationary period, real (inflation adjusted) prices must be going through the floor. This has been the effect of trade as we have known it, and it is all many of us have known. What we are not generally aware of is the vulnerability of the global trade system, due to the fragility of the critical factors underpinning it.

By producing goods, particularly essential goods, in distant locations, we create long and potentially precarious supply lines. While relative stability reigns, this vulnerability does not cause trouble and we enjoy cheap and plentiful goods. However, if these supply lines are disrupted, critical shortages could result. In a very complex just-in-time system, this may not take very long at all. Such as system is very brittle, as it has almost no redundancy, and therefore almost no resilience. When Jim Kunstler refers to efficiency as “the straightest path to hell”, it is this brittleness he is referring to.

The most ephemeral critical factor for trade is the availability of letters of credit. These became scarce during the first phase of the credit crunch in 2008, and the result was goods stuck in port even though there was robust demand for them elsewhere. Goods simply do not move without letters of credit, and these can dry up extremely quickly as a systemic loss of confidence results in a systemic loss of liquidity. In a very real way, confidence IS liquidity.

The Baltic Dry shipping index fell 96% in 2008 as a result, meaning that shipping companies were suffering. Although the index has recovered slightly during the recent long rally, it is still very depressed in comparison with its previous heights. Now that the rally appears to be over, on the balance of probabilities, letters of credit for shipping will come under renewed pressure, and goods will once again have difficulty moving. As demand also starts to fall, due to the loss of purchasing power in the depressionary era we are moving into, this will get far worse.

 

In a depression, trade is very adversely affected. One reason for this a highly protectionist beggar-thy-neighbour economic policies. For instance, the Smoot-Hawley Tariff Act of 1930 in the US, which drastically raised tariffs on imports, lead to retaliation by trading partners, and the resulting trade war dropped global trade by 66% between 1929 and 1934.

 

Thanks to globalization, we are much more dependent on trade than people were in the 1930s. The combination of credit drying up on the one hand and global trade wars on the other is an extreme threat to our vulnerable supply lines. Add to that the general upheaval created by severe economic disruption, which can easily lead to increased physical risks to transporting goods, and the longer term potential for much higher energy prices, and we could see an outright collapse of global trade in the approaching years.

The benefits of self-sufficiency will be seen in places where it still exists. So long as the whole supply chain is local, localized production means being able to maintain access to essential goods at a time when obtaining them from overseas may be difficult or impossible. It is currently more expensive, but the relative security it can provide can be priceless in a dangerous world. The ability to produce locally does not arise overnight however, especially where there are no stockpiles of components. In places where it has been lost, it will take time to regain. There is no time to lose.

We will be returning to a world of much greater diversity as we lose the homogenizing effect of trade. That means the existing disparities between areas will matter far more in the future than they have in the recent past. We will need to think again about the pros and cons of our local regions – what they can provide and what they cannot, and for how many people. Some areas will be in a great deal of trouble when they lose the ability to compensate for deficiencies through trade. As the global village ceases to exist, the world will once again be a very large and variable place.

Dorothea Lange Ennui 1939 “One of Chris Adolph’s younger children. Farm Security Administration Rehabilitation clients, Washington, Yakima Valley, near Wapato”

Stoneleigh: Since we at The Automatic Earth generally tell people to hold cash or cash equivalents, it makes sense to expand on that a little, and to point out some of the location-specific risks of doing so. We tell people to hold cash because that is what they will need access to in order to make debt payments and to purchase the essentials of life in a society with little or no remaining credit. The value of cash domestically – in terms of goods and services in your own local area – is what matters most.

Domestic currency value relative to other currencies internationally will be very much a secondary concern for most people, as the ability to exchange one currency for another is not likely to last far into the coming era of capital controls. Currency risk is likely to become very large, and almost everyone will be better off holding whatever passes for cash wherever they happen to be.

As the price of goods and services fall, thanks to the destruction of purchasing power brought about by collapsing money supply, what cash you still have will go a lot further in terms of, say, milk and bread. Capital preserved as liquidity will go a long way. However, there are no no-risk scenarios. Apart from the obvious risks of fire, flood and theft, other risks to holding cash will grow over time. Liquidity can be as hard to hold on to as it sounds.

One particular risk is the reissuing of currency. Russia did this during the economic collapse of the Soviet Union, and made it so difficult for ordinary people to convert old currency into new that much of the middle class lost their life-savings. In Russia trust in relation to banks was not particularly high, hence there was a lot of money under the beds of the nation that the powers-that-be were attempting to flush out. That is not the case in present day industrialized countries, where people generally believe that banks are safe and deposits are publicly guaranteed in any case.

On top of that, few people have savings, having become dependent on access to cheap credit for their rainy-day funds. There is virtually nothing under the beds of the Western nation, and so essentially nothing to flush out.

Although that particular rationale for currency reissue does not really exist (the flushing out of hidden wealth), there may be other reasons for doing so, and these will be locational. The risk of currency reissue in the US is likely to be low for some time. The US is likely to benefit from capital flight from other places, on a knee-jerk flight to safety.

In addition, dollar-denominated debt deflation will increase demand for dollars, and hence increase their value. This should reduce pressure for any kind of radical currency reform for a while. If the US does eventually reissue its currency, I would imagine them doing so in order to deprive foreign holders of dollars of purchasing power. There are very large numbers of dollars held overseas, and these would not be able to be exchanged in a currency reissue. At some point this may serve the interests of the US, but not soon.

The situation in Europe is far more complex, and the risk is likely to vary between European countries. The reason is that the euro is less of a single currency than it is a strong currency peg. Whereas in the US the primary loyalty is to the political unit that issues the currency, in Europe the primary loyalty is to a lower level political unit. Currency values are grounded in relationships of trust, and the disparity between primary loyalty and currency control suggests that this essential component is weak in Europe. Where trust is weak, common currencies are also weak and my have a limited lifespan.

I think it very likely that the eurozone will decrease in size over the next few years, as the countries of the periphery find the austerity measures they are forced to live with increasingly intolerable. The social divisions that will widen as austerity measures are applied locationally will have greater and greater effects. Europe has a long history of conflict, with each country feeling that the natural extent of its own sphere of influence is whatever is was at its maximum past extent. This means that they all overlap on a continent with a long history of imperial rise and fall.

Emotional responses to past events still run very deep in Europe, even where those events were hundreds of years ago. This is a recipe for balkanization once there is no longer enough to go around. Witness for instance the ridiculous marching season in Northern Ireland, which exists to rub the noses of the catholic population in a defeat (the Battle of the Boyne) from several centuries past. That sort of behaviour is grotesque and should be an outright anachronism in a modern Europe, yet it persists, and there are other comparable examples (see for instance the reaction of Serbian people to the anniversary of the Battle of Kosovo Polye).

All common currency zones define zones of predation, that is: define the regions that feed an imperial centre. The current European periphery includes such nations as Greece, Spain, Portugal, Ireland and all of Eastern Europe. It may also include Italy and the Netherlands, as both of these areas have major debt issues (housing bubbles and national debt). It would also include the UK in a sense, despite the fact that the UK is not part of the single currency. The UK is an international financial centre of considerable stature, but has an enormous debt problem and very few visible means of support going forward, once North Sea oil and gas cease to provide revenues and the City of London takes an inevitable knock-out blow.

I would expect the eurozone to be composed of a much smaller number of countries in the future than it is now, as peripheral countries are driven to the brink and beyond. The risk of currency reissue in these countries is therefore significantly elevated in comparison with the US, for instance. Where that risk is higher, there will be greater impetus for moving from cash to hard goods sooner rather than later. In places where that risk is smaller, one may wait longer for the price of hard goods to fall and therefore spend less on them. Where that risk is larger, the wait should be shorter, even though that would mean paying more, so long as debt is still not part of the equation.

Short term bonds (the primary cash equivalent) are not really an option in Europe the way they are in the US. The shortest term available is measured in years rather than months, which could easily be too long. This means that Europeans will face harder choices on this front as well. I would suggest that Europeans afraid of facing a currency reissue should consider the value of hard goods sooner rather than later. As always, pooling resources can get you further own the list of recommended priorities than you could possibly hope to achieve on your own (ie hold no  debt, hold cash and cash equivalents and gain control over the essentials of your own existence).

Everyone will need to make the transition from cash to hard goods at some point. Cash is what you need to navigate the great deleveraging, but over the time the risks to cash will rise and you will need to think of the next phase, which is addressing the risk of the kind of economic upheaval that breaks supply lines. That will come first, and inflation (ie actual currency printing) will come much later. Inflation is only a risk once the power of the bond market has been broken, and that is not today’s risk, nor tomorrow’s.

That is something to consider much further down the line. Deflation and depression are mutually reinforcing in a spiral of positive feedback. That is not a dynamic that will end quickly, but end it will some day. At that point, or well before depending on where you live, you will want to be fully invested in hard goods.

Lewis Wickes Hine Boys keep swinging August 1908 Game of craps, Cincinnati, Ohio

Ilargi: One more time (could this be the last?), we delve into the notion that energy, and oil in particular, might have caused the financial crisis. We’ve done this more times at The Automatic Earth than we should have already, if you ask me, but Stoneleigh, who has far more patience than I do, has this Q and A with a TAE reader. My view: oil and oil prices as a causative agent for the credit crunch remains a non-starter for all but the peak oil religious fanatics.

The most obvious issue to address in the reader’s statements below is the idea that if we had $20 oil today, there would be no financial crisis. I don’t think I even see the possible relevance here. For example. one of the main and most obvious symbols of this crisis so far has been Bernie Madoff. He’s not Lehman, AIG or Goldman Sachs, and he’s not the government of Greece, or Britain, or America, but his spiel, his schtick and his scheme are the exact same. The key word is Ponzi. Not oil.

But no, neither Madoff, nor AIG, nor Goldman nor any of the governments did what they did because of oil, or oil prices. All these schemes started out when oil was still dirt cheap, and it never factored in. Really, hard as it is to fathom or accept, the financial crisis has fed simply and only off itself, though non-existent regulation and the ensuing opportunity for endless greed. It never needed anything else. Ponzi schemes are like those secret service messages: self-destructing.

Which is not to say that oil couldn’t bankrupt BP, but that’s a whole other story. Here’s Stoneleigh:

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Stoneleigh: Let me try to resolve the apparent contradictions by answering some questions from a TAE reader:

Q: In 1933 there was a shortage of everything. Commerce had been dead for enough years – killed by gold- buggery – that there was shortages except for crops that were rotting in the fields (and petroleum that was wasted, according to Jeffrey Brown, who I believe.) No money meant no production = shortages = no commerce = no new money in the system in a self- reinforcing cycle….

….citizens hoarded paper dollars as they had hoarded specie. Paper dollars were still worth more than (pauperish) 1930’s commerce.

Stoneleigh: Exactly. The lack of money led to shortages because without it one could not connect buyers with sellers, so production died. But not for want of raw materials. Farmers threw milk they couldn’t sell in ditches while down the road people were starving. That is what I have been saying will happen again.

Money is the lubricant in the economic engine. Trying to run an economy without it is like trying to drive your car with the oil light on. The vast majority of the effective money supply consists of credit, and deleveraging will take care of that. As for the small amount of money left, people will be hanging on to it with both hands because they won’t know when they’ll be able to earn any more.

The fall in the velocity of money will aggravate credit collapse dreadfully. The result will be an unbelievably severe liquidity crunch, worse than the 1930s because the scale of the hangover is proportionate to the scale of the party that preceded it.

For a while it will look like we have surpluses, merely because production will be set to meet a level of aggregate demand that will no longer exist due to a collapse of purchasing power. Then production will disappear as well.

We tell people to make sure they have preserved capital as liquidity, as dollars (and other currencies) will indeed be worth a great deal in relation to available goods and services. Those who still have money will be the only ones with purchasing power.

Q: 1933 = Diff’rent times, less people, less demand and less production in (all) aggregates.

Stoneleigh: Quite so. This time there are far more people with far fewer skills and far higher expectations. Moving into the same kind of crunch scenario will hurt far more this time. This is why I tell people that they have to build relationships of trust now to carry them (hopefully) through hard times. I don’t say this because it’s any kind of guarantee of success, but because it’s all they can do and one has to do something. The big picture can look so awful as to be paralysing, so people need to keep taking one step at a time. It’s far better to do that than to lie down and die, or drink one’s self to death as many Russians did after their smaller collapse.

Q: If we have $20 oil there will be no crisis, guaranteed. $20 oil and we have lots of credit/money expansion. Multipliers working and inflation/growth. We would have commerce. We would all be buying shit from (low- wage/cheap coal) China.

Stoneleigh: I disagree. I think we will see $20 oil, but only because of a massive fall in aggregate demand due to the evaporation of purchasing power. $20 oil will not be cheap oil. On the contrary, it will seem very expensive to most people.

That is what deflation does – prices fall but purchasing power falls faster, making almost everything less affordable. As a much larger percentage of a much smaller money supply will be chasing the essentials, they will receive relative price support, meaning that their price will fall less than everything else, so the essentials will be the least affordable of all.

As with many things, demand collapse sets up a supply collapse and a resource grab, so we could see oil go from $20 to $500, if in fact there is any oil left on the open market at all by that point. Since oil IS hegemonic power in a very dangerous world, that may not be the case.

Prices can rise in a deflation if there is a sufficient shortage of a critical good (just as they can fall in inflationary times if there is a sufficient surplus or production costs are falling rapidly). If prices are rising in nominal terms, they are going through the roof in real terms against a backdrop of a collapsing money supply.

Q: Oil shortages (relative to credit- fueled demand) force an allocation regime on a ‘super- size me’ economic model of ‘all of the above, please!’

Stoneleigh: By the time we have oil shortages, we won’t have any credit-fueled demand because there will be no credit. First we lose the credit, which cripples purchasing power, then we lose demand (where demand is not “what you want”, but “what you can pay for”). We’ll have a temporary glut of oil, which will kill investment.

The lack of investment in new production, and lack of money for maintenance of existing equipment, and potential sabotage of existing equipment by those with nothing left to lose, set up a supply crunch. By that point very few have any purchasing power at all, and none of it credit-based, but governments and their militaries will be chasing down whatever is available for their own use (and hoarding where possible).

Q: Look around you … everything you see, that you will see tomorrow and the next day … what you eat and wear and sleep under … the computer you write on … is a product of cheap oil. Where would finance be without it?

Stoneleigh: There was a primitive derivatives market in Holland in the 1630s (at the time of the Tulipmania). Bubbles of ‘financial innovation’ (ie the rediscovery of leverage) do not depend on fossil fuels. They have happened time and time again in history and are a product of human nature.

Energy, in one form or another, absolutely is a key driver of expansion, although one can build a ponzi scheme on surprisingly little of it because ponzi wealth is virtual wealth. It takes energy to build real things, but much less to build imaginary value.

Once a ponzi scheme has been created, it will collapse, as these structures are inherently self-limiting. Finance becomes a key driver to the downside, even where energy is still available.

Q: Maybe I’m wrong and maybe I’m an idiot but the confluence between you and I is where the US dollar becomes a proxy for crude oil rather than the proxy for commerce/business that was once upon a time leveraged from it.

Stoneleigh: I am not convinced we will see the dollar become a proxy for oil. I think the dollar will rise substantially as dollar-denominated debt deflates (creating demand for dollars), and people make a knee-jerk move into it on a flight to safety. However, I don’t think this will last more than a year or two at most.

I think we are headed into a chaotic currency regime where floating exchange rates are dropped, currency pegs instituted in an attempt to ‘beggar they neighbour’, and those currency pegs fail. I can’t see any fiat currency coming that’s being backed by hard goods, in that time. I can imagine a true hard currency down the road a few years, but I very much doubt it will be a currency that exists now.

Q: Nobody seems to have any idea what the hard dollar is going to do to them, their families, loved ones, dogs, goldfish, etc. Almost nobody alive has ever experienced hard currency. The deflationary power of the hard dollar is going to hit this country like the hammer of Thor. It’s conservation by the back door.

Stoneleigh: Much of that will happen just by taking the credit out of the system, and if we do see a true resource-backed currency down the line, then it would be very much worse. It would amount to far more than conservation by the back-door though. It would be brutal deprivation with no regard for the most basic needs, let alone wants.

Q: Conservation isn’t an issue unless there is something vital that needs conserving! It’s not finance, Stoneleigh … there is no limit to finance that is credit- based. There are only limits to finite natural capital!

Stoneleigh: There is a limit to credit expansion, as there is to every ponzi scheme. Eventually the debt created can no longer be serviced, the biggest sucker has been fleeced, expansion can no longer continue and we see the implosion of the structure, where the excess claims to underlying real wealth are messily and rapidly extinguished. The virtual wealth disappears. That is deflation.

Q: If cheap, accessible oil was available (still) it would be drilled, no?

Stoneleigh: It might well be left in the ground for later if there was already an excess of production relative to demand at the time.

Q: Take away oil and we have what we have … a finance world without anything to leverage but rioting Greeks.

Stoneleigh: People have managed to leverage the darnedest things in human history. I’m not suggesting they do it in the absence of energy, but as I said before, the creation of virtual wealth through leverage takes much less energy than the creation of something real. Energy is required to fuel the necessary socioeconomic complexity of course, and it can be energy in many forms – food surpluses, wood or cheap/slave labour from colonies for instance.

Fossil fuels have enabled the largest increase in socioeconomic complexity in history, and financial innovation is part of that. But finance is not purely a passive consequence. It is a key driver in its own right, especially during contractionary times, or maybe we should say: THE key driver both during Ponzi growth times and Ponzi contraction (collapse) times.