[extropy-chat] Fwd: Countdown to a Meltdown (Part 1)

Jeff Davis jrd1415 at yahoo.com
Wed Jul 6 16:08:25 UTC 2005


Extropes,

I found this piece interesting.  So I'm forwarding it
for your consideration.

Best, Jeff Davis

   "Everything's hard till you know how to do it."
                           Ray Charles

                 ********************

COUNTDOWN TO A MELTDOWN 
BY JAMES FALLOWS

Part 1
 
America's coming economic crisis. A look back from the
election of 2016
 
January 20, 2016, Master Strategy Memo
 
Subject: The Coming Year—and Beyond
 
Sir: 
. . . . . 
It is time to think carefully about the next year. Our
position is uniquely promising—and uniquely difficult.

The promise lies in the fact that you are going to win
the election. Nothing is guaranteed in politics, but 
based on everything we know, and barring an act of God
or a disastrous error on our side, one year from 
today you will be sworn in as the forty-sixth
president of the United States. And you will be the
first 
president since before the Civil War to come from
neither the Republican nor the Democratic Party.1 This
is 
one aspect of your electoral advantage right now:
having created our new party, you are already assured
of its 
nomination, whereas the candidates from the two legacy
parties are still carving themselves up in their 
primaries.2
 
The difficulty, too, lies in the fact that you are
going to win. The same circumstances that are bringing
an end 
to 164 years of two-party rule have brought tremendous
hardship to the country. This will be the first time 
since Franklin Roosevelt took office in 1933 that so
much is demanded so quickly from a new 
administration. Our challenge is not just to win the
election but to win in a way that gives us a chance to

address economic failures that have been fifty years
in the making.
 
That is the purpose of this memo: to provide the
economic background for the larger themes in our 
campaign. Although economic changes will be items one
through ten on your urgent "to do" list a year from 
now, this is not the place to talk about them in
detail. There will be plenty of time for that later,
with the 
policy guys. Instead I want to speak here not just as
your campaign manager but on the basis of our 
friendship and shared efforts these past twenty years.
Being completely honest about the country's problems 
might not be necessary during the campaign—sounding
pessimistic in speeches would hurt us. But we 
ourselves need to be clear about the challenge we
face. Unless we understand how we got here, we won't
be 
able to find the way out once you are in office. 

Politics is about stories—the personal story of how a
leader was shaped, the national story of how America's

long saga has led to today's dramas. Your personal
story needs no work at all. Dwight Eisenhower was the 
last president to enter office with a worldwide image
of competence, though obviously his achievements 
were military rather than technological. But we have
work to do on the national story.
 
When it comes to the old parties, the story boils down
to this: the Democrats can't win, and the Republicans 
can't govern. Okay, that's an overstatement; but the
more nuanced version is nearly as discouraging. 
 
The past fifty years have shown that the Democrats
can't win the presidency except when everything goes 
their way. Only three Democrats have reached the White
House since Lyndon Johnson decided to leave. In 
1976 they ran a pious-sounding candidate against the
political ghost of the disgraced Richard Nixon—and 
against his corporeal successor, Gerald Ford, the only
unelected incumbent in American history. In 1992 they 
ran their most talented campaigner since FDR, and even
Bill Clinton would have lost if Ross Perot had not 
stayed in the race and siphoned away votes from the
Republicans. And in 2008 they were unexpectedly saved 
by the death of Fidel Castro. This drained some of the
pro-Republican passion of South Florida's Cuban 
immigrants, and the disastrous governmental bungling
of the "Cuba Libre" influx that followed gave the 
Democrats their first win in Florida since 1996—along
with the election. But that Democratic administration 
could turn out to have been America's last. The
Electoral College map drawn up after the 2010 census 
removed votes from all the familiar blue states except
California, giving the Republicans a bigger head start

from the Sunbelt states and the South.
 
As for the Republicans, fifty years have shown they
can't govern without breaking the bank. Starting with 
Richard Nixon, every Republican president has left the
dollar lower, the federal budget deficit higher, the 
American trade position weaker, and the U.S.
manufacturing work force smaller than when he took
office. 
The story of the parties, then, is that the American
people mistrust the Republicans' economic record, and 
don't trust the Democrats enough to let them try to do
better. That is why—and it is the only reason 
why—they are giving us a chance. But we can move from
electoral to governmental success only with a clear 
understanding of why so much has gone so wrong with
the economy. Our internal polls show that nearly 90 
percent of the public thinks the economy is "on the
wrong track." Those readings should hold up, since
that's 
roughly the percentage of Americans whose income has
fallen in real terms in the past five years. 

The story we will tell them begins fifteen years ago,3
and it has three chapters. For public use we'll refer
to 
them by the names of the respective administrations.
But for our own purposes it will be clearer to think
of 
the chapter titles as "Cocking the Gun," "Pulling the
Trigger," and "Bleeding."

1. COCKING THE GUN 

Everything changed in 2001. But it didn't all change
on September 11. 
Yes, the ramifications of 9/11 will be with us for
decades, much as the aftereffects of Pearl Harbor 
explain the presence of thousands of U.S. troops in
Asia seventy-five years later. Before 2001 about 
12,000 American troops were stationed in the Middle
East—most of them in Kuwait and Saudi Arabia. Since 
2003 we have never had fewer than 100,000 troops in
CENTCOM's theater, most of them on active 
anti-insurgency duty. The locale of the most intense
fighting keeps changing—first Afghanistan and Iraq, 
then Pakistan and Egypt, now Saudi Arabia and the
frontier between Turkey and the Republic of 
Kurdistan—but the commitment goes on.
 
Before there was 9/11, however, there was June 7,
2001. For our purposes modern economic history began 
that day.

On June 7 President George W. Bush celebrated his
first big legislative victory. Only two weeks earlier
his 
new administration had suffered a terrible political
blow, when a Republican senator left the party and
gave 
Democrats a one-vote majority in the Senate. But the
administration was nevertheless able to persuade a 
dozen Democratic senators to vote its way and
authorize a tax cut that would decrease federal tax
revenues 
by some $1.35 trillion between then and 2010.
 
This was presented at the time as a way to avoid the
"problem" of paying down the federal debt too fast. 
According to the administration's forecasts, the
government was on the way to running up $5.6 trillion
in 
surpluses over the coming decade. The entire federal
debt accumulated between the nation's founding and 
 
2001 totaled only about $3.2 trillion—and for
technical reasons at most $2 trillion of that total
could be paid 
off within the next decade.4 Therefore some $3.6
trillion in "unusable" surplus—or about $12,000 for
every 
American—was likely to pile up in the Treasury. The
administration proposed to give slightly less than
half 
of that back through tax cuts, saving the rest for
Social Security and other obligations.
 
Congress agreed, and it was this achievement that the
president celebrated at the White House signing 
ceremony on June 7. "We recognize loud and clear the
surplus is not the government's money," Bush said at 
the time. "The surplus is the people's money, and we
ought to trust them with their own money." 
If the president or anyone else at that ceremony had
had perfect foresight, he would have seen that no 
surpluses of any sort would materialize, either for
the government to hoard or for taxpayers to get back.
(A 
year later the budget would show a deficit of $158
billion; a year after that $378 billion.) By the end
of 
Bush's second term the federal debt, rather than
having nearly disappeared, as he expected, had
tripled. If 
those in the crowd had had that kind of foresight,
they would have called their brokers the next day to
unload 
all their stock holdings. A few hours after Bush
signed the tax-cut bill, the Dow Jones industrial
average 
closed at 11,090, a level it has never reached again.5


In a way it doesn't matter what the national
government intended, or why all forecasts proved so
wrong. 
Through the rest of his presidency Bush contended that
the reason was 9/11—that it had changed the budget 
as it changed everything else. It forced the
government to spend more, for war and for homeland
security, 
even as the economic dislocation it caused meant the
government could collect less. Most people outside the

administration considered this explanation misleading,
or at least incomplete. For instance, as Bush began
his 
second term the nonpartisan Congressional Budget
Office said that the biggest reason for growing
deficits 
was the tax cuts.6 

But here is what really mattered about that June day
in 2001: from that point on the U.S. government had
less 
money to work with than it had under the previous
eight presidents. Through four decades and through 
administrations as diverse as Lyndon Johnson's and
Ronald Reagan's, federal tax revenue had stayed within
a 
fairly narrow band. The tax cuts of 2001 pushed it out
of that safety zone, reducing it to its lowest level
as a 
share of the economy in the modern era.7 And as we
will see, these cuts—the first of three rounds8—did so

just when the country's commitments and obligations
had begun to grow. 

As late as 2008 the trend could have been altered,
though the cuts of 2003 and 2005 had made things
worse. 
But in the late summer of 2008 Senate Republicans once
again demonstrated their mastery of the basic feints 
and dodges of politics. The tax cuts enacted during
Bush's first term were in theory "temporary," and set
to 
expire starting in 2010. But Congress didn't have to
wait until 2010 to decide whether to make them 
permanent, so of course the Republican majority
scheduled the vote at the most awkward moment possible

for the Democrats: on the eve of a close presidential
election. The Democratic senators understood their 
dilemma. Either they voted for the tax cuts and looked
like hypocrites for all their past complaints, or they

voted against them and invited an onslaught of "tax
and spend" attack ads in the campaign. Enough 
Democrats made the "smart" choice. They held their
seats in the election, and the party took back the 
presidency. But they also locked in the tax cuts,
which was step one in cocking the gun.9 
 
The explanation of steps two and three is much
quicker: People kept living 
longer, and they kept saving less. Increased longevity
is a tremendous human 
achievement but a fiscal challenge—as in any household
where people outlive (May 2005) 
their savings. Late in 2003 Congress dramatically
escalated the fiscal problem 
by adding prescription-drug coverage to Medicare, with
barely any discussion 
of its long-term cost. David M. Walker, the
government's comptroller general 
at the time, said that the action was part of "the
most reckless fiscal year in the 
history of the Republic," because that vote and a few
other changes added roughly $13 trillion to the 
government's long-term commitments.
 
>From the archives: The evaporation of personal savings
was marveled at by all economists but 
explained by few. Americans saved about eight percent
of their disposable 
income through the 1950s and 1960s, slightly more in
the 1970s and 1980s, 
slightly less and then a lot less in the 1990s. At the
beginning of this century 
they were saving, on average, just about nothing.10 
  
The possible reasons for this failure to
save—credit-card debt? a false sense of personal
saving without 
wealth thanks to the real-estate bubble?11 stagnant
real earnings for much of 
the population?—mattered less than the results. The
country needed money to 
run its government, and Americans themselves weren't
about to provide it. 
This is where the final, secret element of the
gun-cocking process came into 
play: the unspoken deal with China. 

The terms of the deal are obvious in retrospect. Even
at the time, economists discussed the arrangement 
endlessly in their journals. The oddity was that so
few politicians picked up on what they said. The heart
of 
the matter, as we now know, was this simple equation:
each time Congress raised benefits, reduced taxes, or 
encouraged more borrowing by consumers, it shifted
part of the U.S. manufacturing base to China. 
Of course this shift had something to do with "unfair"
trade, undereducated American workers, dirt-cheap 
Chinese sweatshops, and all the other things that
American politicians chose to yammer about. But the 
"jobless recovery" of the early 2000s and the "jobless
collapse" at the end of the decade could never have 
occurred without the strange intersection of American
and Chinese (plus Japanese and Korean) plans. The 
Chinese government was determined to keep the value of
its yuan as low as possible, thus making Chinese 
exports as attractive as possible, so that Chinese
factories could expand as quickly as possible, to
provide 
work for the tens of millions of people trooping every
year to Shanghai or Guangzhou to enter the labor 
force. To this end, Chinese banks sent their extra
dollars right back to the U.S. Treasury, in loans to
cover the 
U.S. budget deficit; if they hadn't, normal market
pressures would have driven up the yuan's value.12
This, in 
turn, would have made it harder for China to keep
creating jobs and easier for America to retain them.
But 
Americans would have had to tax themselves to cover
the deficit. 
 
This arrangement was called "Bretton Woods Two," after
the regime that kept 
the world economy afloat for twenty-five years after
World War II. The 
question economists debated was how long it could
last. One group said it 
could go on indefinitely, because it gave each
country's government what it 
really wanted (for China, booming exports and
therefore a less dissatisfied 
population; for America, the ability to spend more
while saving and taxing 
less). But by Bush's second term the warning signals
were getting louder. 
"This is starting to resemble a pyramid scheme," the
Financial Times warned 
early in 2005.13 The danger was that the system was
fundamentally unstable. 
Almost overnight it could go from working well to
collapsing. If any one of the Asian countries piling
up 
dollars (and most were doing so) began to suspect that
any other was about to unload them, all the countries 
would have an incentive to sell dollars as fast as
possible, before they got stuck with worthless
currency. 
Economists in the "soft landing" camp said that
adjustments would be gradual, and that Chinese
self-interest 
would prevent a panic. The "hard landing" camp—well,
we know all too well what they were concerned 
about. 

2. PULLING THE TRIGGER
 
But by dying when he did, at eighty-two, and becoming
the "October surprise" of the 2008 campaign, 
Castro got revenge on the Republicans who had for
years supported the Cuban trade embargo. 
Better yet, he got revenge on his original enemies,
the Democrats, too.14 Castro couldn't have 
planned it, but his disappearance was the
beginning—the first puff of wind, the trigger—of the
catastrophe 
that followed.
 
Or perhaps we should call it the first domino to fall,
because what then happened had a kind of geometric 
inevitability. The next domino was a thousand miles
across the Caribbean, in Venezuela. Hugo Chavez, 
originally elected as a crusading left-winger, was by
then well into his role as an outright military
dictator. 
For years our diplomats had grumbled that Chavez was
"Castro with oil," but after the real Castro's death
the 
comparison had new meaning. A right-wing militia of
disgruntled Venezuelans, emboldened by the news 
that Castro was gone, attempted a coup at the
beginning of 2009, shortly after the U.S. elections.
Chavez 
captured the ringleaders, worked them over, and then
broadcast their possibly false "confession" that they 
had been sponsored by the CIA. That led to Chavez's
"declaration of economic war" against the United 
States, which in practice meant temporarily closing
the gigantic Amuay refinery, the source of one eighth
of 
all the gasoline used on American roads—and reopening
it two months later with a pledge to send no 
products to American ports. 
 
That was when the fourth—and worst—world oil shock
started.15 For at least 
five years economists and oilmen alike had warned that
there was no "give" in 
the world oil market. In the early 2000s China's
consumption was growing five 
times as fast as America's—and America was no slouch.
(The main difference 
was that China, like India, was importing oil mainly
for its factories, whereas 
the United States was doing so mainly for its big
cars.16) Even a temporary 
disruption in the flow could cause major dislocations.
 
All the earlier oil shocks had meant short-term
disruptions in supply (that's 
why they were "shocks"), but this time the long term
was also in question. Geologists had argued about 
"peaking" predictions for years, but the concept was
on everyone's lips by 2009.17 
The Democrats had spent George Bush's second term
preparing for everything except what was about to hit 
them. Our forty-fourth president seemed actually to
welcome being universally known as "the Preacher," a 
nickname like "Ike" or "Honest Abe." It was a sign of
how much emphasis he'd put on earnestly talking about 
faith, family, and firearms to voters in the
heartland, in his effort to help the Democrats close
the "values 
gap." But he had no idea what to do (to be fair, the
man he beat, "the Veep," would not have known either) 
when the spot price of oil rose by 40 percent in the
week after the Chavez declaration—and then everything 
else went wrong.
 
Anyone who needed further proof that God is a
Republican would have found it in 2009. When the price
of 
oil went up, the run on the dollar began. "Fixed
exchange rates with heavy intervention—in essence,
Bretton 
Woods Two] have enormous capacity to create an
illusory sense of stability that could be shattered
very 
quickly," Lawrence Summers had warned in 2004. "That
is the lesson of Britain in 1992, of Mexico in 1994, 
of emerging Asia in 1997, of Russia in 1998, and of
Brazil in 1998." And of the United States in 2009. It 
didn't help that Hugo Chavez had struck his notorious
then-secret deal with the Chinese: preferential future

contracts for his oil, which China needed, in return
for China's backing out of Bretton Woods Two, which 
Chavez wanted. 

There had been hints of how the falling dominoes would
look as early as January of 2005. In remarks made 
at the World Economic Forum in Davos, Switzerland, Fan
Gang, the director of China's nongovernmental 
National Economic Research Institute, said that "the
U.S. dollar is no longer seen as a stable currency."18

This caused a quick flurry in the foreign-exchange
markets. It was to the real thing what the World Trade

Center car bomb in 1993 was to 9/11. 

When we read histories of the late 1920s, we practi-
cally want to scream, Stop! Don't buy all that 
stock on credit! Get out of the market before it's too
late! When we read histories of the dot-com 
boom in the late 1990s, we have the same agonizing
sense of not being able to save the victims 
from themselves: Don't take out that home-equity loan
to buy stocks at their peak! For God's sake, 
sell your Cisco shares when they hit 70, don't wait
till they're back at 10!
 
In retrospect, the ugly end is so obvious and
inevitable. Why didn't people see it at the time? The
same 
clearly applies to what happened in 2009. Economists
had laid out the sequence of causes and effects in a 
"hard landing," and it worked just as they said it
would. 

Once the run on the dollar started, everything seemed
to happen at once. Two days after the Venezuelan oil 
shock the dollar was down by 25 percent against the
yen and the yuan. Two weeks later it was down by 50 
percent. By the time trading "stabilized," one U.S.
dollar bought only 2.5 Chinese yuan—not eight, as it
had 
a year earlier.19 

NOTES:

1. The last one was Millard Fillmore, a Whig. We will
not emphasize this detail.
 
2. Also, though I never thought I'd say it, thank God
for the Electoral College. In only two states,
Michigan and Maine, are 
you polling above 50 percent of the total vote—in
Michigan because of the unemployment riots, in Maine
because that's what 
they're like. But you will probably have a strong
plurality in at least forty other states, yielding a
Reagan-scale electoral-vote 
"mandate." 

3. Nothing in history ever quite "begins." Did
America's problems with militant Islam begin in 2001?
Or twenty years earlier, 
when we funded the anti-Soviet mujahideen in
Afghanistan, who later turned their weapons against
us? Or sixty years before 
that, with the breakup of the Ottoman Empire after
World War I? Or during the Crusades? Similarly,
warning signs of today's 
economic problems were apparent in the mid-1960s. But
the big change started fifteen years ago, at the
beginning of this 
century.
 
4. The federal debt consists of bills, notes, and
bonds that come due at different periods—thirteen
weeks, five years, twenty 
years. The main way to retire debt is to pay off
holders on the due date. Only $2 trillion worth of
debt would have matured 
within a decade, so only that much could be paid off.
That is why the Bush administration's first budget
message said, 
"Indeed, the President's Budget pays down the debt so
aggressively that it runs into an unusual problem—its
annual 
surpluses begin to outstrip the amount of maturing
debt starting in 2007." 

5. In 2005 Ben White, of The Washington Post, noted
the coincidence of the Dow's peak and Bush's signing
of the tax-cut 
bill. 
 
6. Late in January of 2005 the CBO calculated that
policy changes during Bush's first term had increased
the upcoming year's 
deficit by $539 billion. Of that amount about 37
percent could be attributed to warfare, domestic
security, and other 
post-9/11 commitments; 48 percent resulted from the
tax cuts; and the rest came from other spending
increases. 

7. This CBO chart illustrates the pattern. The big
dive is the result of the 2001 and 2003 tax cuts. 
>From 1962 to 2002, when federal revenues were low they
were around 17.5 percent of GDP, and when they were
high they 
neared 20 percent. Once, they went even higher: to
20.8 percent in Clinton's last year, driven there by
higher tax rates and 
by capital-gains revenue from the bubble economy. The
2001 changes pushed tax receipts down toward 16
percent—the 
lowest level since 1959. 

8. In 2003 Congress approved a second round of tax
cuts. In 2005, after a fifty-fifty deadlock, the
Senate failed to enact a 
"pay as you go" provision, which would have required
the administration to offset any tax cuts or spending
increases by 
savings in the budget.
 
9. Through the early 2000s the Government
Accountability Office issued warnings about the
consequences of extending the 
tax cuts. This chart, from 2004, showed what would
happen to the budget if the tax cuts were locked in. 
Its main point was that the basic operating costs of
the federal government (interest payments, Social
Security, and 
Medicare and Medicaid—the unglamorous long-term
payments it is legally committed to make) were
growing, and the money 
to cover them was not. As the GAO had predicted, our
tax revenue in 2015 left only a small margin after
covering fixed 
costs. From that remainder comes the Pentagon, the
national parks, and everything else. Soon revenues
won't cover even 
the fixed costs.
 
10. "In the last year, the net national savings rate
of the United States has been between one and two
percent," the 
economist and then president of Harvard Lawrence
Summers said in 2004, a year before the rate hit its
nadir. "It represents 
the lowest net national savings rate in American
history and, I believe, that of any major nation."
Summers gave the speech 
five years after his appointment as Treasury secretary
and five years before his nomination as chairman of
the Federal 
Reserve Board. 

11. Robert Shiller, an economist at Yale, was ahead of
most other observers in predicting the collapse of the
tech-stock 
bubble of the 1990s and the personal-real-estate
bubble a decade later. In a paper for the National
Bureau of Economic 
Research, published in 2001, he and two colleagues
observed that the housing boom intensified the savings
collapse. Every 
time homeowners heard that a nearby house had sold for
an astronomical price, they felt richer, even if they
had no 
intention of selling for years. That made them more
likely to go out and spend their theoretical
"gains"—and not to bother 
saving, since their house was doing it for them. "The
estimated effect of housing market wealth on
consumption is significant 
and large," Shiller and his colleagues concluded. If
people felt rich, they spent that way. 

12. As background for the speechwriters, here is the
longer version of what was happening. 
In normal circumstances economic markets have a way of
dealing with families, companies, or countries that
chronically 
overspend. For families or companies that way is
bankruptcy. For countries it is a declining currency.
By normal economic 
measures the American public was significantly
overspending in the early 2000s. For every $100 worth
of products and 
services it consumed, it produced only about $95 worth
within our borders. The other $5 worth came from
overseas. 
Normally an imbalance like this would push the dollar
steadily down as foreigners with surplus dollars from
selling oil or cars 
or clothes in America traded them for euros, yuan, or
yen. As demand for dollars fell and their value
decreased, foreign 
goods would become more expensive; Americans wouldn't
be able to afford as many of them; and ultimately
Americans 
would be forced to live within the nation's means. 
That is in fact what happened in America's trade with
Europe—and to a large extent with the oil-producing
world. The euro 
skyrocketed in value against the dollar, and oil
prices—which until the crisis of 2009 were fixed in
dollars—went up too, 
which preserved Saudi and Kuwaiti buying power for
European goods. 
It didn't work this way with China. Americans bought
and bought Chinese goods, and Chinese banks piled up
dollars—but 
didn't trade them back for yuan. Instead China's
central bank kept the yuan-to-dollar exchange rate
constant and used the 
dollars to buy U.S. Treasury notes. That is, they
covered the federal budget deficit. (Since Americans,
on average, were 
saving nothing, they couldn't cover it themselves.) To
a lesser extent Korean and Japanese banks did the same
thing. 
This was different from the situation in the 1980s and
1990s, when foreigners earned dollars from their
exports and used 
those dollars to buy American companies, real estate,
and stock. In those days foreigners invested heavily
in America 
because the payoff was so much greater than what they
could get in Frankfurt or Tokyo. In an influential
paper published in 
2004 the economists Nouriel Roubini, of New York
University, and Brad Setser, of Oxford University,
demonstrated that this 
was no longer the case. Increasingly it was not
individuals or corporations but foreign governments—in
particular, 
state-controlled banks in Asia—that were sending money
to America. And America was using it to finance the
federal budget 
deficit. 

13. The paper used this chart to show how foreign
money was supporting U.S. 
spending. 

14. We now know from the memoirs of his eldest son,
Fidelito, that Castro never 
moderated his bitter view of the Kennedy brothers—Jack
for authorizing the Bay 
of Pigs invasion, Bobby for encouraging the CIA to
assassinate Castro—and, by 
extension, their Democratic Party. Castro told his
children that if the United 
States and Cuba ever reconciled, he dreamed of doing
two things: throwing an 
opening-day pitch at Yankee Stadium, and addressing a
Republican convention in 
prime time. (From Mi Papa: The Castro I Knew, Las
Vegas: HarperCollins, 2009.)
 
15. The first one, starting in 1973, transformed the
world more than most wars 
do. It empowered OPEC; enriched much of the Middle
East; brought on five years 
of inflation, slow growth, and stock-market stagnation
in the United States; 
pushed Japan toward a radically more energy-efficient
industry; and more. The 
second, after the Iranian revolution of 1979, caused
the inflation that helped 
drive Jimmy Carter from office, and spilled over into
the recession of Ronald 
Reagan's first two years. The third, after Iraq's 1990
invasion of Kuwait, 
disrupted world trade enough to lay the groundwork for
Bill Clinton's "It's the 
economy, stupid" attack against George H.W. Bush. And
seven years after the 
shock of 2009 began, we are still feeling its effects.


16. After the first oil shock U.S. oil consumption
actually fell in absolute terms. In 1973, as the first
shock began, Americans 
consumed 35 "quads," or quadrillion BTUs, of oil. Ten
years later, with a larger population and a stronger
economy, they 
consumed only 30. But from that point on total
consumption moved back up. In 2003 Americans consumed
39 quads—and 
two thirds of that oil was for transportation.
Consumption for most other purposes, notably heating
and power generation, 
actually went down, thanks to more-efficient systems.
Industrial consumption was flat. So bigger cars and
longer commutes 
did make the difference.
 
17. Every oil field follows a pattern of production:
Its output rate starts slow and keeps getting faster
until about half the oil 
has been pumped from the field. Then the rate steadily
declines until the other half of the oil is gone.
Since total world 
production is the aggregate of thousands of fields, it
is presumed to follow a similar pattern. In 2005 the
research and 
engineering firm SAIC released a report commissioned
by the U.S. government on best guesses about the
worldwide peak 
and what would happen when it came. "No one knows with
certainty when world oil production will reach a
peak," the report 
said, "but geologists have no doubt that it will
happen." Of the twelve experts surveyed for the
report, six predicted that the 
peak would have occurred before 2010, and three more
that it would happen by 2020. 

The world was not going to "run out" of oil—at least
not immediately. Even at the peak, by definition, as
much as had ever 
been pumped in history was still there to be
extracted. But the rate of production, barrels per day
and per year, would 
steadily lessen while the rate of demand kept
increasing. The report was released when oil crossed
$50 a barrel; we are long 
into the era of oil at 30 euros, or $90.

18. That turned out to be the next-to-last convening
of the Davos conference, before the unproven but
damaging 
accusations that it was a front for the A. Q. Khan
combine. 

19. What happened to America almost exactly repeated
what had happened ten years earlier to Thailand,
Indonesia, and 
other countries during the Asian panic of 1997-1998.
South Korea lost 50 percent of the value of its
currency in two months; 
Indonesia lost 80 percent over the course of a year.
As in America, the collapse of each currency led to
equally deep 
stock-market declines. The Asian crash also turned
into a foreign-policy nightmare for the United States,
with Prime Minister 
Mahathir of Malaysia leading the denunciation of
U.S.-based financiers, including the "moron" George
Soros, for the 
"criminal" speculations that destroyed the economies
of smaller nations like his. Since Malaysia and
Indonesia are largely 
Muslim, and the financiers could be cast as part of
the great shadowy U.S.-Zionist cabal, the crash
worsened U.S. relations 
with the Islamic world. 



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