Socialist Technology

One of the great myths during the Cold War was the belief that Russia had more advanced technology than the West. With hindsight we saw that this was not the case. Russian people during the time didn't have personal computers, mobile phones they didn't even have fitted clothes or adequate food to eat.

During the rule of state planners Russia became a complete basket case. Russia is one of the most resource rich countries in the world, this factor helped Socialism go on for so long. People forget that Russia are the number one oil producer ahead of even Saudi Arabia. Before it became Communist, Russia was ruled under an absolutist monarchy, the Tsars. Despite this dated social system Russia exported grain and agricultural produce to Europe. During Communism this went into reverse where the country became so desperate that during the 1960's Khrushchev had to sell huge Gold holdings just to prevent starvation. 

Most of the technology Russia had was stolen from the West. They stole the H-Bomb, they stole Rocketry, they stole what little knowledge they had on computers. They had a network of spies in the West whose sole responsibility was to steal knowledge of the latest technology. However as we all know technology in a free market moves fast. The spies used to joke that as soon as they stole the technology, sent it back to Russia and allowed engineers to study the ideas, it was already out of date and obsolete. 

The space race was a classic example of how the free market was able to land people on the moon. Russia had no hope, they were no where near as they didn't have the expertise in microcomputers that were crucial to the moon landings. The Rocketry they had was stolen from WWII and crudely refined. They never really got past the point of firing a rocket into space. The Americans were able to fire a three man crew, perform lunar obits and land a small craft on the moon with the help of early computers. 

As the video states the Russian car industry again used free market ideas. They used Fiat as a model and basically made it worse. Russia was never short of great engineers and mathematicians - they were short on giving these people the freedom to express themselves. Startups are formed by individuals having ideas and having the capability to try them, away from the frustrations of big bureaucratic organisations. Some ideas fail, some succeed. There is a saying, 'The person who never makes a mistake, never tries anything new'. Free markets allow people to try different ideas and to innovate. We all know of failed concepts but without these failures we can not learn from them and make the new technology that helps human prosperity. Any innovator will tell you their greatest success were what they learnt from their failures. Prosperity always has and always will come from the bottom up, not a top down central planning approach. The do-ers need the freedom to use their talents in order to make all our lives better.

Where is the deflation?

"The Chinese government is expecting its economy to expand around 8% of gross domestic product in 2011, same as in recent years, but it has raised its inflation target to around 4%, indicating Beijing isn't willing to sacrifice growth even though fighting inflation is a top priority.

State television reported the new numbers Tuesday, citing Zhang Ping, the head of the National Development and Reform Commission. Next year's inflation target is a full percentage point higher than this year's target of 3%."

News that China will raise its Inflation target

If you were to believe the experts it is deflation we have to fear. Its just round the corner. Its a battle we must win. A depression must be avoided which apparently is caused by deflation. In the real world people are seeing costs rising all the time. Not just in the West but in emerging economies also. The Chinese authorities have raised their inflation targeting metrics in order to keep their bubble, sorry growth, moving up. A rule of life is governments always bend the rules. Its sets them. Free markets allow people as individuals to set the rules. Participants mutually trade with one another under an amicable agreement. The state takes at will and by force. Inflation is one such example, it benefits no one in society in the long run, only the government over the short term.

The fact that the target has been moved upwards should not be a surprise. This is what's going to happen everywhere, across the globe. Here in the UK our Inflation has risen yet again. Its now been above the target for over a year now and what are the "inflation fighters" (that is Mervyn King and his MPC comrades) doing about it, Nada. Zilch. They have already raised their inflation targets, they just haven't told the unsuspecting public. There's more price increases in the pipeline:

The increase in VAT from 17.5% to 20% that will come into effect next month will be used to "mask" more extensive price rises according to accountants at KPMG.

They claim almost two thirds of retailers and consumer product manufacturers plan to increase their prices by more than the planned VAT hike in January.

Martin Scott from KPMG told the BBC why he believed retailers would raise prices by more than just the VAT hike next month.

All this inflation is causing Government bond prices to stay high. Well I say high, but we haven't seen anything yet. They will go double digit over the course of this state induced disaster. Double Digit may seem high in today's environment buts that's what you would have thought when Interest Rates were single digit back in the seventies. In the US they eventually went above 20%. Ouch!

Well at least the banks are ok now. They were small fry. We have moved on to more impressive bailouts like, err, countries? Ireland, Portugal - what about when Italy and Spain need assistance? They in turn get bailed out by Germany or France or even the UK. Hang on, aren't we bust also? Yep. Fractional reserve banking, fiat state monopoly money, you have to admire it. The Governments legalised ponzi scheme. No one has the money for any of these bailouts. Deflation will never happen because Governments know this would be the end and a collapse of the system. Therefore they will print money. They will raise inflation targets. They won't even tell people they are doing this. Oil is at record high once more. Just like with any unwarranted inflation, peoples living standards are falling. Prices rise and real wages don't keep pace. 

Through all the bailouts and enlightened interventions, nothing has been solved. Its worse than before the crunch. Its the quiet before the storm, just like prior to the market collapse of 2008. Everything was fine until it happened. That's the problem with economic collapse caused by government mismanagement. You can't predict it, you just know it will come. And when it comes its always too late to act. We won't hit bottom until the market is allowed to cleanse itself, but that isn't going to occur. Until then, just know that inflation will always be there, always rising, even when it may seem its not. Deflation is just the Governments smoke screen.

Thoughts on Oil, Gold and Bonds

The economic news has been quiet of late in comparison with the events we witnessed over the Autumn and Winter in 2008. However there are some interesting developments taking place in the markets. No one can know for certain what will happen in the short term, but I have some opinions of what I think will happen in three key assets, Oil, Gold and Bonds.

Oil

We have seen a recent rally in the price of oil for the past couple of months, with it hovering around the $70 mark. This has pushed up the price at the pump here in the UK to around a £1 a litre. Is this the beginning of a new rise to $100? I doubt it. It's just a rally to accompany the green shoot theories we are all been told or the reports stating that emerging markets are set to grow, but the world has serious issues and we are not going to get a new global boom any time soon. All these imbalances that were created over the past have to be addressed. Someone has to take the pain, but that has yet to happen. Investors such as Jim Rogers have stated they don't see anything worth buying, anywhere in the globe.

Over the long term I'm sure oil will hit new highs - in fact it has too. $200, $300, $400 dollars a barrel, I'm sure we will hit all these milestones in the coming decades. But as the globe enters what seems like a global depression demand just won't be strong enough. If people don't have jobs or incomes then people don't travel as much, and buy products that get transported as demand dries up. Over the long term we will get an oil drilling bonanza, as supply will not be able to keep up with the expanding industrialisation of the globe. When America peaked back in 1971, that decade brought about the biggest investment the US had ever spent on oil exploration and extraction, more money than its entire history. My father was one of the people who lived out there for a while as a young Chemical Engineer back during the oil shocks as the US scrambled to produce more oil (if he had stayed I would have been a Texan). We will have the same in the future only on a global scale. As the oil price climbs, green technology or alternatives will also have significant amounts of money poured into it, a possible future bubble, and if you know the sector there may be some good buys in the next couple of years, but not yet in my opinion.

There is only one reason that would cause the oil price to shoot up in the short term and that is war or civil chaos in the nations that produce oil. The west now relies on its energy from unstable regions of the world. There have been disruptions to a pipeline in Nigeria recently. The recent civil unrest in Iran is a further sign of rumblings in a nation that has potential to prosper, but has a regime intent on not allowing its large young population from obtaining wealth. Unemployment has been a hallmark there for years as the nation can not attract foreign expertise and capital to develop further. Iran has a lower per capita income by a third since 1978, which shows the declining living standards the people have had to put up with. Hostilities towards the west still exist, Persia in the past was a strategic location for oil for the UK which led to the downfall of the shah as resentment grew. With the wests support for Saddam in the Iran-Iraq war, diplomacy became even more strained.

Central Asia and Russia are other regions we obtain oil and gas from in order to diverse our supplies from the middle east, but that doesn't mean the region is anymore stable, its just a hedge between the two. Countries surrounding the Caspian sea such as Kazakhstan not only supply oil to Europe but have also made deals to Asia with China, South Korea and Japan picking up any slack that Europe doesn't use. All of Europe's domestic supplies are in decline. North sea oil and gas, be that from Norway, Holland or Britain are all past their peak. Algeria, which is another energy hub for Europe is also in decline. The EU is expanding beyond 'conventional' geographic Europe for this reason, trying to annex strategic nations such as Turkey or Azerbaijan.

Throughout history all great civilisations and societies have been built on increasing their energy inputs. From the Neolithic age where the domestication of animals increased food production, right the way through to the fossil fuel industrial revolution, society always requires energy to sustain and increase its living standards. Its no different to the age we now live in. Remarks about 'Black Gold' may have been made in the past, but for this century it really will be the case.

Over the long term I believe we will see price controls in energy. The media are already demonising the energy companies and oil companies for the price of such commodities. As long as we have prices set by market forces, supply and demand, then we have direction of how to live our lives and no shortages will occur. In a price based system you can never have shortages. It's always a common myth regarding markets, usually used to justify bubbles, that shortages will create rising prices forever. No matter how scarce a good is it will have a price. Only sentimental value can ignore price. For example there may have been a limited production of a certain type of car, but it will have a price, for example if you have to pay £10 million for it there will be a seller who will sell.

The problem is that price controls are always a popular policy, if the price of a common good has risen quickly in a short period of time. The is where the shortage begins. As the government sets a below market price, supply dries up - why bother selling a product for a loss? As the price is now cheaper then people can afford to buy more of it. With falling supply and rising demand you can see how much havoc this causes. During the 1970's oil shocks this happened when Nixon set price controls, and gas stations ran out of petrol. If prices float freely you can never get this situation as prices control supply and demand. If there is a high price it creates incentives to increase supply. It also creates incentives for people to demand less.

In the UK diesel prices were a lot higher than unleaded petrol a year ago, in fact I was paying around 20-25p more per litre, but I wasn't worried as prices existed. Now they are both the same due to the above concept - prices. Now what if the government had implemented price controls at the time to bring down the price of diesel to petrol? First of all there would have been no increase in production, there would be no incentive to build new processing capabilities. Demand would have kept increasing too as people could be careless in their use. Both would lead to shortages. I posted about price controls back in October last year and from what I've seen I think history will repeat at some time in the future. Again, just not yet.

Gold

Gold I feel is also overbought. Its done its job during the collapse in asset prices last year, it held firm in fact increased depending on what currency you base it on. But I now feel it is due for a downtrend. The IMF is trying to sell a lot of its gold, and has had recent approval from US congress. There has been record buying over the past six months and I think this is beginning to fizzle out. Again over the long term, like oil it will no doubt rise in price, but things correct in the short term and this correction may flush out a few investors and scare some people away. Like oil there is a wild card - are you confident with your domestic currency? As Iceland showed, its no good waiting for moves in the price of gold in say Dollars when your currency collapses. As a citizen of the UK this is the only thing that worries me, but in the short term I think the pound should be able to hold out. Over the long term, I'm very bearish on it. For the past Century in particular after the second world war my country has continually debased, lowering the pounds value, once the reserve currency of the world. It was oil and gas that saved its value in recent times, but this is not going to be the case going forward. The US looks to be repeating the same mistakes of history as we did.

There's a great quote by Hugh Hendry, a hedge fund manager, who is occasionally on the various business channels. It goes something like this as I can't find original version;

"I can't get gold coins right now, there is record demand for them. The current events we are going through is like a book, and everyone has jumped to the last chapter where currencies collapse and its the end of fiat money, but everyone has missed the story inbetween. During the seventies gold halved in price from the 1973 credit crunch until 2-3 years later. This is the part of the story we have yet to see and when this happens then you fill your boots with the stuff."

He also has some interesting views on government bonds which is my next asset I wish to discuss.

Government Bonds

So as Governments deficits were rising last year, with stocks and commodities rising in value until the great collapse of September and October what was Hugh Hendry buying? Government Bonds (specifically he recommended German Bonds). Of course it proved to be an excellent move. As the year went on rates dropped to reach a low round in January of this year or so, increasing the value of the ones he was holding (compared with the losses that the stock market and commodities would have provided). However since then we have seen dramatic moves on the upsides in places such as the US. Interest rates on the governments debts have been rising, which has since wiped out any gains. However I still see a fall to come over the next 6-12 months. We are not out the woods in this crisis and we will get another flight into cash again as events unfold. When this occurs then the so called "flight to safety" trade happens, into governments bonds.

There will be more QE to come, which will create the artificial demand needed for bonds, expanding the bubble further. This won't immediately result in inflation as like with any inflationary boom, the market begins to try and undo these credit excesses during the bust. Prior to WW2 this always resulted in falling prices and a healthy deflation. In recent times however it has been stagflation. Inflation or rising prices accompanied by a recession. Due to the excesses of the credit boom there is a lot more deleveraging to come, therefore the free market contracting money. However in the long term this will be countered by the governments printing money, which is why I believe inflation will happen.

There were comments from a reader in a past post regarding how will the government counter these market forces with such strong deflationary pressures. The answer is simple. The Central bank is an institution who can lend an infinite amount of money, and the Government can borrow as much money as it likes. With such an arrangement it becomes easy to combat these market forces. A loss of $500B, no worries wait while I type that number into the computer. It's that simple. They just call it QE and give it more structure.

Coming back to Hugh Hendry's bond comments, why specifically German Bonds? This is where I suspect Hugh was using history as a guide (It amazes me when people tell me how useless history is, when many individuals use it for investing purposes among many other uses). For the past half century Germany has been one of the hardest money countries around. It didn't experience high inflation during the seventies unlike the UK because it realises debasement never works. When there have been discussions regarding QE for the Euro, who has been staunchly opposed? The German Block, the old Bundesbank. Recent political bills have been passed in German Parliament to set limits on government debt over the coming years to balance the budget in a few years time. Angela Merkel has been critical of US policies and deficit spending, with many of the German political establishment demanding government spending restraint. It's this rhetoric that gains it the credit on the market that it will be the most likely nation to honour its debts, rather than default through inflation. We will have to see if history holds up for these extraordinary times we are going through.


Markets move in mysterious ways over the short term, but I am sure we will get bubbles in all of the three above at different points in time. I do not make investment recommendations in this blog however for the short term, I'm still in cash. I think there are still some more great buying opportunities to come.

Riots, Protests and Revolutions

The video above has some interesting comments made by futurist Gerald Celente in the past few years, along with future predictions of what he thinks is to come. I want to expand on some of what he says in this post as there are various topics worthy of discussion.

Inflation Index

The video includes a scathing attack on Americas CPI index and with justification. Statistics are always open to manipulation and to exclude food and energy in peoples living costs is simply not representative of the average persons consumption patterns. The current monetary system we have then uses this index to target what level to set interest rates at, and how expansive monetary policy should be. A centralised monetary planning board, known as central banks, periodically modify this index in an attempt to represent peoples buying habits.

Why do they set targets of 1-2% for these indexes? Why not 5% or 10%? Why not set monetary policy based on population growth? Or on how fast GDP growth is? Why not any random figure. My point is that the current system is no different to Communisms version of centralised quotas, which had no relationship with fundamental market forces, specifically supply and demand.

As I have mentioned in a past post the market should take control of producing money. Karl Marx was right, money was the key, he was just wrong on everything else. Governments monopoly of this product means that people have no choice but to use their national currency. This in turn creates artificial demand, as I can't buy food in Euros or US Dollars here in the UK. Therefore there is no check in the short term on what the government can do, especially if all governments are following the same policies. In a free market of competing currencies they would all compete with one another, based on supply and demand of consumers desires. If people preferred a certain type of money, then the market would increase supply of that currency based on demand. If people chose not to use a currency, then a contraction in the supply would occur in order to match up with consumers needs. If money was oversupplied, as has been the case with the current government monopoly that exists today, then it would cease to exist as there would be no demand.

The above is not experimental either. Before Kings monopolised money (in recent times the government) money was always a spontaneous creation by the free market in order to overcome barter. Money originated from the market, the authorities just mearly copied it's conception. In fact fiat money like the system we use today has only ever existed when it has been enforced on the people by governments.

There are many currencies in danger due to the above supply and demand dynamics. If we take for example the US Dollar the worlds reserve currency, there are currently many overseas holders. The problem over the last couple of decades has been the increasingly amount that has been printed and the existence of deficits. Many major holders have expressed their concern, Brazil, Russia, Japan, China etc. In fact these nations are already moving away from the Dollar for example Brazil and China have discussed conducting trade in RMB, along with Malaysia and various African nations. Indeed China has been shifting its wealth into commodity's, Gold, Oil or companies and nations associated with these assets.

The problem occurs when everyone heads for the exit. This is a situation where all foreigners sell their dollars. Then we come into the supply demand dynamic above, with no buyers but lots of sellers the price of the dollar will obviously decline. With the government in fiscal overstretch it becomes near impossible for them to do anything about it. Over the long term China, Russia or whoever deals with dollars have no interest in the US. They are currently slowly planning their exit strategies exiting first on the trading currencies they use and keeping their reserves for the time being so as not to put too much downward pressure on the dollar.

Latvia is another worthy example of this currency supply and demand dynamic at work. With the recent IMF loan the country has received (fiscal strings attached) the government needs to rapidly cut current spending due to IMF fiscal constraints. With the economy already in a deep depression, this will further hit growth in the short term. This should create strong devaluation conditions as the market has less demand for the currency of an economy that is in a perilous condition compared with other nations (as its prior perceived productivity decreases). The IMF loan is nominated in another currency, and due to the authorities not wishing for the value of the loan to increase if their currency was to devalue along with the further credit rating downgrades which would result from such a devaluation, they have begun trying to defend their currency with their currency reserves by buying up the domestic currency to create artificial demand. Of course the market is placing positions that the authorities attempts will be useless so are putting it under further pressure as the market believes a devaluation has to occur. This is a prime example of how market forces can't be beaten. Latvia will eventually have to devalue and abandon it's peg (they only have so much reserves), it's just the politicians don't want to face the pain. This is what George Soros did when he broke the BoE and made a billion. He was simply getting the government to face reality sooner than they wanted (in the process the UK government wasted billions of taxpayers money for nothing, however it would have been more costly in the long term if the market hadn't forced their hand earlier).

Price Stabilisation

If we come back to the concept of the price index representing a price stabiliser, some economists believe that markets forces can operate better if prices are 'stable', and have chosen a rate between 1-2% as an optimal range to target. We can take two simple items priced in Sterling to illustrate the fallacy behind this 'price stability' concept, houses and DVD players. Ten years ago a DVD would have cost you around £400, now they sell for £20. A house during the boom went up around 200-300% priced in pounds. If you look around there are many other items that either went drastically up in price, or drastically down in the price.

People don't think that if house prices or stock prices rise in price that this is inflation, but it is. It's priced in pounds or whatever the domestic currency is and these new pounds have to be created either from private banks or by the government. Due to the fact that they are usually an asset for many voters this is deemed as good inflation, despite the fact that it is the same as any other type of inflation. You just don't buy these on a daily basis like food and energy, that's the real reason its accepted.

If you look into the data used you have to wonder the reasoning behind what items appear in the CPI/RPI algorithms. If we take the UK index for example, last year they removed Parmesan cheese and put in its place Cheddar cheese (presuming you buy cheese). Why the change? Could it be to do with that we import Parmesan and with the pounds recent devaluation this good has gone up in price? Could it be some Bureaucrat somewhere wishing to look busy so swapped the specific cheese that is used? To take another example they have also substituted DVDs for Blueray discs, "to represent consumers move away to newer technologies". Would this be due to the fact that new technology has greater potential to fall in value, thus creating a lower inflation value for the headline press releases to give the illusion that we have no inflation?

Neither 'price stability' or 'inflation targeting' makes any sense when you start to analyse it and think critically (they have to create inflation in order to combat market forces that increase purchasing power by making goods and services more plentiful). In the years to come I'm sure these statistics will be heavily fudged in order to try and fool members of the public, trying to maintain the illusion of prosperity.

There were a plethora of amusing quotas that Communist Russia used to try and replace the free markets pricing mechanisms, by using measurements of produced materials rather than prices (prices which are determined by supply and demand). An example would be steel production based on measuring tonnage produced per year. The managers aim was to try and produce enough to meet his target (so he didn't get shot or sent to Siberia by under producing) but to not overproduce in case they increased next years quota too much. Due to the fact that it was based on tonnage there was no incentive to produce good quality steel that was of any use to industry.

So then we come onto say the state controlled oil sector, where they would require drilling equipment made from such steel. Due to it's poor quality it would make drilling laborious as the drilling equipment would keep breaking requiring more effort and time to drill into the well (a classic hallmark of state planned economies is where labor intensive techniques are used over productivity improvements). When they eventually got to the oil, there is usually a natural gas cap on the top, as is the case in many oil wells. As they only had a quota for oil production the gas would be burned off, creating huge environmental damage along with the waste of a precious and non-renewable resource.

Can you imagine the above in a capitalist economy? A company burning off millions of pounds worth of natural gas? A company wasting time buying poor quality steel and then continually having to re-drill? Despite the myth that capitalism overuses the planets resources, capitalism actually makes the most effective use of them compared to all other economic systems. Its only that it supplies us with such a luxurious lifestyle that we use more resources. Compare this with a regime such as North Korea where half the population suffer from basic malnutrition, despite the fact that South Korea supplies aid. There we contrast how well free market forces treat us.

Sub Prime

Celentes comments on sub prime are very true, as many people still think this is the cause of the current crisis when it just a symptom of easy monetary policies. There is far more downward pressure than just sub prime to come in housing. The next stage is prime mortgages as people loose their jobs and can't find new incomes. For those in the UK don't feel too smug, we have sub prime too, we are just behind the US curve. In fact UK home delinquencies are now worse than US sub prime. It just takes time for the banks to write these loses off.

In the US there is Alt-A, Option ARM mortgages which will be the next wave of defaults. Mortgages where the person could pay less than the rate of interest on the loan. As more of these deals are worth more than the value of the asset there will be little incentive for these individuals to continue with such arrangements.

What happens when the central banks have to raise interest rates to defend their currencies? Central Banks will be very reluctant to do this which comes to the next issue, the inflation that they will create. When prices of staple goods such as food and energy are rising how will people pay their mortgage. Would you choose to eat or default on your home loan?

Population demographics are another factor, with many looking to retire in the coming decades won't these people be looking to downsize, to supplement their pensions (presuming they have one or that it hasn't closed/collapsed etc).

Still people talk about the next housing boom in the news. The TV and papers are still full of articles. Denial is still all around with many talking about houses as a great long term investment. We will see what these opinions are at the end of this bear market, but we are a long way off.

Tax revolts, Food riots, Crime and Revolution?

California has already experienced a tax revolt as the people chose for state spending to be cut rather than face higher taxes. With inflation down the road, food will always rise in price as money ripples through the economy. It's one of those goods that you can't avoid not to buy. As unemployment rises along with the general disillusionment of people trying to re-enter the workforce, many will resort to crime. Then with the deficits many nations are running up, will there be cuts in crime enforcement? With protests and riots distracting the police will there be enough resources to cope? Ever wonder why the military is returning from Iraq?

We are living in extraordinary times, indeed a revolutionary era. All the conditions are present, government overstretch, money printing, plutocracy as the rich are bailed out, economic instability and so on. Will the traditionally strong liberal democracies such as the US and UK survive? I suspect so, but it will feel like a revolution in the years to come. When the currency and bond bubbles burst, then we will have a real crisis, not the banking crisis last autumn that was just a warm up, as Celente has remarked "The Bailout Bubble". The real crisis is yet to come.

“Every generation needs a new revolution.”
Thomas Jefferson, American 3rd US President

UK Bubble RIP

"The City of London is pretty much finished ... and if you're alarmed by the recent slump in sterling, you ain't seen nothing yet. In a decade, you're going to be importing oil again - what's going to hold sterling up when you're a net importer of oil? You've already got a balance of trade deficit. I've sold all of my sterling ... there are no fundamentals to support sterling as far as I can see"
Jim Rogers, Chairman Rogers Holdings

"But if investors no longer think the UK's banks are at risk of collapse, they then look at our other vulnerabilities - such as public sector borrowing which is rising very sharply because of the costs of the bank rescues, dwindling tax revenues and the need to spend our way through the economic downturn ... If international investors fear our credit isn't what it was and are selling pounds, we should hardly be surprised."
Robert Preston, BBC Journalist

Since the end of the First World War, Britain had been in a state of terminal decline. Recently, however, the worlds financial markets were loosing confidence in Sterling as the Treasury could no longer balance the books, with ever increasing government spending that could no longer be paid for. By Autumn the pound was plunging, inflation was rampant and the Prime Minister was trying to keep his party together after just recently obtaining the job. The year was 1976. The UK in the end had to go cap in hand to the IMF to avoid economic collapse, the first Western Nation to do so, and only Western nation up until Iceland's recent decline. It ushered in a wave of right wing Thatcherist economic policies which prevailed up until the present day and changed British politics and society forever. The Labour party after the crisis subsequently split between the old left who remained, and the Social Democrats, who later abandoned the Labour party and joined forces with the Liberals to form the Liberal Democrats. Labour also morphed in subsequent years, from the early eighties the 'loony left' politics of Michael Foot, all the way to 'New Labour' a 'Third Way' led by Tony Blair, who won power in 1997 and for the first term emulated Tory spending plans.

Without North Sea Oil and Gas as the seventies came to an end, the UK could have become an economic wreck, and Margret Thatchers monetarist policies in all probability would have failed putting the final nail in the coffin. The UK's trade of balance would have collapsed without the support from the Oil and Gas revenues. In the end, the UK experienced a renaissance and shook itself out of the terminal decline it had found itself in. However in 2008, the UK again showed strains with investors questioning a new generation of Labour Politicians, wondering if history was repeating itself again. Expansive fiscal measures had been announced, with huge government deficits being forecast and the balance of trade in once again, a perilous state. The UK bubble had burst and with it, she resumed her long decline after the illusionary reprieve of the last 25 years.

Over the past 11 years the Labour government has won successive elections, which no other Labour government in history could achieve. Tony Blair won a historic third term and with it, the party had gained the trust of the people regarding economic affairs. It was no surprise that there was a reversal in opinion regarding the economic competence between the Conservatives and Labour which had once favoured the former, now favoured the later. 'New' Labour was nothing more than a Thatcherist project, one that the Iron Lady herself would jokingly remark was her greatest achievement. Labour had increased the Plutocracy that was seen under Thatcher, with little change in the social apparatus of the country. They continued with Tory Policies, such as PFI, the selling of state assets or Privatisation and the push towards the services industry, in particular the over zealous belief in financial services. Yet this 'Third Way' obtained some false perception among the British public, that social responsibility or progress was greatly enhanced under 'New Labour policies', even though it was evidently Thatcherism but under these new false social pretensions. Of course like all socialist governments they were tied to their socialist dogmas, with the incessant need to 'help' people under the guise of the states apparatus. Their spending deficits became more prominent after the honeymoon period, with needless spending and increasing bureaucratic waste. As the global economy began its historic downturn, the government was now exposed for all its true colours. Relative poverty was as bad as ever, hospital deaths from new super bugs had increased with some of the worst standards in Western Europe. The decline in state pensions had not been reversed since Thatcher pegged them to CPI rather than average earnings, which had now become officially the worst in Western Europe. No real social progress had been made, and the economy had become even more imbalanced with government finances in a dire shape with all the one time privatisation cash cows now all but gone. It would soon be 1976 all over again.

So why did the UK have such an extraordinary post 1970's renaissance? The biggest free gift which gave a healthy revenue stream was the North Sea Oil and Gas that had been discovered during the Sixties. This in effect saved the UK from a perilous plight. It enabled Thatcher to follow in the lead of Federal Chairman Paul Volcker and implement Monetarist Policies in order to contract the money supply and cut government spending, suppressing inflation that was causing havoc in the UK's ability to conduct trade. Without the Oil and Gas revenue stream it is very hard to say if she would have been successful, as even with this, there was still huge unemployment and civil unrest. With sound monetary policies Thatcher could then next turn her attention to the Unions who had held successive governments to ransom during the stagflationary seventies. A move towards a more dynamic workforce was critical in positioning Britain for the global challenges that would evolve over the coming decades. The battle against the 'Shock trooper' Union, specifically the miners lead by Arthur Scargill, was subsequently won by Thatcher and meant that the Unions were subdued. The reformation of tax, meant external capital was once again flowing back into Britain, fueling further economic expansion. With tax cuts came the problem of raising sufficient government revenues and Thatchers solution was privatisation, the selling of state assets for dirt cheap prices giving the government a once only large cash flow. Without getting into the flaws or the advantages of privatisation, this is what happened in the UK, but it is a once and once only money machine. The state was slowly selling off its family estate. In 1986 the 'Big Bang' policy deregulated the financial markets and in came the all conquering US Investment Banks, along with further external flows of capital. Thatcher had begun reinvigorating London as the financial center of the World once more, like the bygone age of British hegemony at the turn of the century.

Manufacturing was in solid decline, indeed recession, for the subsequent two decades. The turn towards services was deemed to be Britain's area of strength after the fiasco of Nationalising the Car Industry during the seventies which ended in disaster. An age of retail had begun, consumerism ruled Britannia, with Marks and Spencer becoming the darling of British Retail. Margret Thatcher had a very conservative childhood with strong family values and thrift. Ironically she presided over Britain's largest credit boom of its day, a new consumerism had taken over the nation. Of course all credit induced booms end in bust and this was no different. After unpopular polices such as the Poll tax, and mutiny within the party, Thatcher was ousted and replaced by John Major. As the bust continued Sterling collapsed as it was ejected from the ERM. The subsequent years of 'Tory sleaze' and their old tired public image lead to the publics rediscovery of the opposition. Under Tony Blair Labour had become 'respectable' once more and with amendments to the party manifesto, mainly the abolishment of Clause IV regarding nationalisation, and a pledge not raise income taxes, Labour were voted in on a landslide.

Once in power Labour initially adhered to the policies of Tory tax and spend. They continued with further privatisation of state assets. They ramped up the PFI projects they had once opposed while in opposition, with further increase in off book government debts. During their time North Sea Oil and Gas reached its peak production, with the UK exporting it in ever greater quantities. With the abandonment of Coal during the political clashes of the eighties, the UK drew more of its power now from Gas fired power stations rather than turn to Nuclear options like the French. While in Norway they kept a substantial portion of their Oil and Gas revenues in the Government Pension Fund, for future generations to enjoy and to smooth out the coming decline, Britain in typical Anglo Saxon consumerism spent it all. Debt began its exponential climb upwards as the UK reached its economic peak, as people racked up further debts just at a time the UK would be ill equipped to pay them in the future. More external investors flooded the island with capital, from Russia the Middle East or Asia, London was the nations financial artery, directing more money into a heavy debt laden economy. This further fueled more credit expansion, with the need for less internal savings. The financial liberalisation of the 1980's from the Big Bang came to a pinnacle as British banks expanded more and more, with traditional conservative Building Societies moving into the realm of risk. Northern Rock, with 125% mortgages, or the 'Together Plan', became the dynamic dynamo of London, what would soon be the Enron of the UK.

During this time the Labour government had been increasing spending ever more, running continual budget deficits, with ever more rosy growth projections from the 'prudent' chancellor Gordon Brown. As Oil and Gas production began to decline and with ever increasing reliance on imports, Britains trade of balance deteriorated further. Warning signs were there, but few wanted to acknowledge them. This was after all the new dynamic Britain, who its people believed had become a strong economy with solid foundations. However as the American housing market bubble began to unwind, so did many financial instruments and institutions. Britain had uniquely positioned itself precariously reliant on finance, only Iceland had an even more foolish model. With the global slowdown, came a collapse in the main British Industries, finance, housing and retail. The service economy where we could all become sales people, skills and trades had been outsourced, with everyone getting cuts and no real value being created, was beginning to unwind. Sterling was beginning its decline. Unfunded government borrowing was beginning to occur once more. The UK was not bankrupt, but began on the path towards it.

Just like the seventies where key manufacturing industries were nationalised, the UK government had once again made the same costly errors, this time with the Banking system. RBS, Bradford and Bingley, Northern Rock and further shareholdings in other banks will paralyse the sector for years to come. Without the luxury of being the worlds reserve currency or a major currency such as the Euro, Sterling can't afford to be exposed the way it has. Even with Sterling falling week on week the politicians continue to make more mistakes, recently with the policy of paying the nations mortgages if there is personal loss of income. This will Compound the issues with the battered banks they have nationalised. More money will be needed to pay peoples mortgages and as the banks can't liquidate their assets, will need further government capital injections - a double disaster as the economy tailspins out of control. Indeed, the UK is even beginning on the road to loosing its triple A credit status. It will just be a matter of time before it does. External capital flows are drying up, with Sovereign Wealth Funds questioning their Investment strategy in the once 'dynamic' island. Rather than waiting for the Pound to collapse, Gordon Brown has begun looking for alternatives to try and shelter the UK from the coming decay.

The current government, just like the populace, are in a state of denial. Over optimistic growth forecasts are continually used, with Growth projected to rebound sharply to 2% at the end of 2009. A quite fundamentally flawed figure. I'm not sure the leaders truly appreciate the risks they are currently running with increased government debt, and a further deteriorating economy with no credible plans to reverse these current conditions. The suggestion that they won't be able to balance the books until 2016, shows what a mess we are in, as it uses these optimistic forecasts. With ever decreasing options the Bank of England has begun with suggestions of the nuclear option, namely the printing press, as the options addressed above used by previous governments have all been exhausted. The media are under the illusion a Japan like scenario could occur, however we are not the worlds largest creditor nation like Japan was then, and do not have a trade surplus. Japan tried to inflate like we are now, but failed due to these reasons. We however will succeed and face years of stagflation once again, just like the seventies. The governments are continually propping up the private sector, but no one is asking the real questions. Who will prop up the government? Even mainstream commentators understand the implications, as Robert Preston states just before the Nuclear Option was announced,

"Some analysts see this as the start of the money printing-presses being turned on with a vengeance, a deliberate attempt to stoke up inflation to reduce the real value of all those excess debts. I'm not sure we are there yet - though it's probably only a matter of time."

UK Government debt is set to explode over the next few years, with off book debts being realised as unfunded pension liabilities, Bank Loans, PFI and declining energy revenues further impair Britain's finances. Central Banks and governments have begun explaining the false dangers of deflation, however they know perfectly well they are preparing for inflation, one that will make the seventies mild in comparison. The reduction of interest rates is further evidence of this, by giving no incentives to save, just the further encouragement to spend and upkeep the velocity of money. Victorian thrift has long gone.

Of course there are no economic fundamentals to support the UK, as the quote at the start states. All of the above, PFI, nationalised finance, unfunded government spending, privatisation, pension liabilities and off book debts, will now go into reverse. Just as they exacerbated the boom on the way up, they will exacerbate the bust on the way down, all compounding with one another over the coming decade.

However, when history is examined Britain has a long and successful functioning liberal democratic system, one that was able to survive the excessive debts obtained during the wars with France, and with it rose as the global power. With debts in excess of 200% of GDP, the UK did not default like many other nations did. It instead paid all the bond holders even in a period of extraordinary deflation during the pioneering phase of the Industrial Revolution. She rose to become the greatest creditor nation the world had seen, spearheading what we now associate as modernity. As Europe succumbed to Fascism during the crisis in capitalism throughout the 1930's, Britain maintained its traditional liberal democracy. These historical factors alone won't prevent the decline of Britain. It involves a painful transitionary period, which politicians are notorious for preventing. Even with this there are no guarantee's as Britain is not what it once was in 1815 and the world is a much different place. We may have seen a high in the UK in our lifetimes. We may be witnessing the beginning of terminal decline.

Taxes and OPEC

"The hardest thing in the world to understand is the income tax."
Albert Einstein

"In this world nothing can be said to be certain, except death and taxes."
Benjamin Franklin

As the world descends into the synchronised Global recession, Keynesian fiscal policies are being used to try and counter market forces. Like pushing on a piece of string, our institutions and leaders will still not admit that we have been living in a bubble, and continue trying to spend money they don't have. Deficit spending has never worked and never will and government intervention has never worked either, but yet this is exactly what we are doing. Governments are increasing their debts, meaning more interest payments are being made to just cover the debt repayments. Money is being poured into overpriced assets such as finance and houses, rather than being spent on infrastructure, hospitals and schools. All this extra debt leads to one thing as time goes on - higher taxes. In my opinion this will happen. With the US presidential election taking place in a matter of days, both candidates are as clueless as each other of how to solve the current problems. Barack Obama is on a mission of change, one of redistributing wealth or to put it bluntly, he seems to be edging towards raising income taxes. In the UK, the pound is sinking and capital is fleeing, with the worst deficits since the Second World War, and coinciding with declining Oil and Gas revenues. The government should be cutting spending at times like these, however this is never a politically popular policy so they borrow. With further borrowing comes further taxation later.

One policy that made the Great Depression so Great, was when Hoover raised income taxes to try and fund the governments deficits. In my opinion we will see this again in the not too distant future. If we take the US for example, they have over $10 trillion of debt on the books, and around $50-$60 trillion of future liabilities, which will more likely increase as time goes on. You can't pay these vast numbers without tax increases, and this will put further strains on Western economies. Ireland and Spain boomed when they joined the EU as they benefited from the generous EU subsidies. Ireland in fact had their first housing boom in their history due to this extra income, but it was all a short term illusion. The Celtic tiger is due for a long decline, with emigration rather than immigration, occurring again. Spain too has issues, reliant on selling foreigners overpriced holiday homes. As air travel becomes more expensive over the years to come there will be further collapse. Italy has huge debts and is in complete denial. With a retirement age of 58, and a lethargic economy it is only being protected by its membership of the Euro. The UK after amounting huge debts, the biggest seen in the west proportionally per head, and with huge external liabilities seems to have run out of time. The plug could be pulled at any moment on any of these. IMF bailout talks have begun. Pakistan, Hungary and Iceland are a few, that have become unwound.

Increasing taxes are the worst thing a government can do during a downturn. This further compounds the problem, taking money out peoples pockets and thus the economy so the government can use it for their own inefficient consumption. If more taxes are implemented then expect very hard times indeed. I feel we have boxed ourselves into this position due to all the waste that has occurred over the previous years and we will have to pay more taxes, and I've been saying this for some time. They will either be taken from income or other indirect forms, or maybe a combination of the two. Governments will look to this to try and re-balance the books, rather than admitting the social system is too extended and cutting spending.

Income tax - Do we need it?

There are some people who feel that we shouldn't need to pay income tax at all. I always find this an interesting concept. Can you imagine getting all your salary with no tax deductions? We used to have no income tax in the UK a long time ago. It was in 1798 when William Pitt introduced income taxes in order to pay for the wars with France. This is essentially how it began. By Governments running up debts that they needed to fund, so turned to the working people to take some of their pay to subsidise their spending. So how could we survive without income taxes? Well we would use our newly untaxed income to pay for stuff ourselves, rather than the government spending our money for us. Schools and hospitals, for example, can function without the need for state systems. The best schools and hospitals are already private institutions. This system would in fact be incredibly efficient despite what people tell you that we need government. Income could be raised by taxing consumption, land etc. The working people who produce wealth for the economy, by expending energy should be the least taxed sector of the economy.

There is a problem with the above. It relies on people making the right decisions and being in control of their own lives. I and many others could manage our own affairs and ensure we had medical insurance and paid for schools etc. However a lot of people can't manage themselves, thus making the wrong decisions and taking the incorrect measures. A lot of people still need to be spoon fed and can not take responsibility for the actions.

OPEC and the Oil Barron's

OPEC have announced that they are going to cut supply and surprise, surprise, the uninformed governments and media have repeated the common mantra that the greedy cartel are responsible for high oil prices and they want the price to remain as high as possible. Nothing could be further from the truth. OPEC are simply trying to keep supply in line with demand and ensure a greater longevity in their oil fields. If they kept forcefully pumping their oil fields the way they have been, oil supplies would collapse within the next decade inducing worldwide collapse and a breakdown of society worse than anyone could imagine. Over pumping a field leads to a steeper decline, the best examples are the Russia's fields which during the eighties the Russians began overproducing them as it was the only way to get hard currency to support the collapsing Communist system. The curve of these fields is a very sharp increase in production, followed by an equally sharp decrease in decline as the field becomes depleted. Contrast that with the fields in Norway that have been well maintained and gradually extracted, the production gradually ramps up and peaks but the decline is gradual and thus the field yields more oil in the long run.

Saudi Arabia the worlds biggest oil producer have already damaged their oil fields, with various technical issues being reported by the Saudi Aramco engineers over time, as early as the sixties and seventies. During the oil spikes in the seventies Saudi Arabia ramped up production to cover the short term shortfall to ensure the west didn't enter a terrible depression, or try and find alternatives. Oil fuels Saudi Arabia's economy along with other OPEC members economies. The last thing they want to do is send the price sky high, thus destroying world economies with economic collapse and destroying their number one export industry. They are simply hinting to the world that this once abundant resource has ceased to be cheep and abundant. It is becoming increasingly hard to extract and more energy is required to get the remaining oil. High hydrocarbon prices are here to stay and countries need to adapt and accept this fact.

It's also amusing when the media mentions that the oil companies are making obscene profits, at the expense of the public. Again its all uninformed dribble, something that has become common in modern journalism (read any of John Pilgers work as he details the decline of journalism, I would personally recommend Heroes as a starting point). For a start oil companies are public listed companies. If they make huge profits profits, compared with other stocks then buy shares in them and reap the dividends. However there is nothing stellar in that aspect and they are like any other tradable company. Profits for big oil companies seem huge, but this is only because they work in huge volumes of the product they sell. Compared with other industries, oil companies actually work on lower margins. Oil company share prices are based more on their oil reserves rather than their profits, as a company without oil has a pretty weak business model, hence the fairly recent fiasco with Shell. The fact that oil is so volatile in price compounds their problem, which brings me onto the next issue of the recent oil price collapse.

This price collapse was to be expected. As with all markets, speculators got involved and drove the price of oil too high and subsequently as oil is bought in 6 month futures contracts these positions were unwound as the delivery date got closer. I predicted to my dad a few months ago that I thought they would fall to around $70-$80 a barrel, with them now around $67 so a tad below. I don't know how low they will fall or when they will begin to rise again, I'll leave that to the technical analysts amongst us. I like to focus on the fundamentals as short term markets behave irrationally, and $67 is cheap. While the public think this is great news, this is in fact setting up a future disaster in the next few years. Future oil projects are being cancelled as the price has collapsed, which means lower oil production for the future which will lead to a greater oil price spike. Projects that were producing, are now being shut down as the oil price has dropped below economic viability recently. It's not like setting up an Internet company. Getting oil projects set up along with the distribution network takes time, years in fact. That's why the looming crisis has the potential to be catastrophic. When it will hit I don't no. If the world collapses then never, but I think the world will go on and continue to grow. The above applies to all commodities. Similar projects are being cancelled as prices drop and projects become less commercially viable. The lack of credit compounds the problem too as money is not available to finance these projects.

I will end with a graph that I found regarding world oil production and projected demand. As can be seen, there's been no substantial increase for the past few years. If the predictions are to be followed as detailed on the graph have a look at how the population demand increases as supply keeps declining. It looks pretty scary 5-10 years from now, just when the next boom should begin. We may be looking at a complete disruption of the business cycle for years to come until we adapt the way we use energy.

The Run on the Global Financial System

The systematic liquidation of the financial system has truly gripped the worlds attention this week, as fear has spread to all facets of society. Global Stock markets have been crashing. As prices fall, margin calls are being made ensuring further deleveraging of positions. Comparisons with the Great Depression have become widespread in the mainstream media. World leaders and Central Banks have been meeting to try solve the issues, with co-ordinated interest rate cuts and monetary packages. Iceland, a whole country, is on the verge of collapse. Citizens everywhere have been withdrawing savings from banks, feeling safer holding cash themselves. Physical precious metal dealers are running out of gold and silver. The American mint has stopped issuing certain gold coins. All assets are in free fall with no place to go, apart from cash. Libor is rising, the Fed's balance sheet has exploded, talk of the CDS meltdown has begun as positions at Lehman, the recently collapsed investment bank, are unwound. The US debt clock in New York has run out of digits. The UK has part nationalised it's remaining banking system, after the full nationalisations of Bradford and Bingley and Northern Rock. If the general public didn't realise the severity of the situation before, they do now, after a week of paralysis and sheer terror caused by decades of high finance prominence, as savings and production were side lined for the new age. The public will pay dearly for the misallocation of capital, the loss of private savings and the end of cheap energy in the years to come. To illustrate what an unusual week it was, we saw Gordon Brown making banking jokes. It was a week of many surprises.

The years to come will be more of the same with many mini crisis to come. And in times of crisis, history has always shown there is great change. Politicians and governments always intervene in a panic stricken manner when all around them seems to be crashing and failing. Emergency laws are enacted for the 'good' of the nation. Normality of the past, has been replaced with the normality of the foreseeable future. This brings me to the point of what could possibly happen over the next decade. There are many interesting and viable possibilities that could occur and I will explain my thoughts on what actions could be taken, in order to try and stem the future crisis that will take place.

• Confiscation of gold is more than plausible or the suspension of moving from paper assets into gold and silver. Precious metals are always seen as a safe haven when finance is in trouble. As the mistrust of paper based money becomes more prevalent after years of financial incompetence, people will start looking for tangible assets, ones outside the system. It would be an irrational decision and make no sense, but our leaders always seem to endorse those types of ideas.
  
  
• I still believe in inflation in medium to long term. Prices may be falling currently but this is deleveraging not deflation. The governments and authorities are embarking on the great reflation, slashing interest rates, pumping future earnings into the system. Therefore I can see certain key commodities becoming very expensive and price controls at some point seem likely. Of course an idiotic policy, but they did it in the seventies.
  
  
• Rationing is also a policy I can see been implemented at some point in the future. Food and energy rationing may become standard.
  
  
• Further nationalisation of the system. The banks are gradually relying heavily on governments, but it won't stop in the finance sector. You will probably see airlines, car makers, other key industries handing out the begging bowl for government intervention. If we begin drinking vodka and producing fine cigars, then we know we really are in trouble.
  
  
• Higher taxes sometime in the future are inevitable in my opinion. We are accumulating huge amounts of debt, more future promises to pay based on future earnings, with no current capital now. Western governments can't manage the books, and were running deficits well before the slowdown in the global economy. All of these future earnings may be severely impeded by our ageing populations and the end of cheap energy. I think Colin Campbell, a prominent proponent on the peaking of Oil, summarises it well in a speech he gave to Parliament in 2004 about the coming oil depletion, where only 3 MEPs bothered turning up.
  
  "The perception of looming decline may be worse than the decline itself. There will be panic. The market over-reacts to even small imbalances. Prices are set to soar in the absense of spare capacity until demand is cut by recessions. We will enter a volatile epoch of price shocks and recessions in increasingly vicious circles. A stock market crash is inevitable."
  
  And this from a geologist, someone not specialised in the details of economics and finance.
  
  
• Further government borrowing will have further consequences on how much money our governments can keep borrowing, and if they can find a buyer. As Robert Preston, a mainstream journalist states:
  
  "Possibly the biggest risk for the US is that in bailing out the finances of the private sector, Paulson would dent international investors' confidence in the American government's balance sheet - which could ultimately undermine the dollar, push up inflation even more and raise the cost of servicing debt for the US authorities."
  
  What happens if the Saudis, Japanese and Chinese don't want to keep lending money to the West? We have little capital in our own societies. The prices of government bonds will go up, as investors suddenly realise certain institutions have no intent on making good on their promises as the currency devalues further.
  
  
• Interest rate cuts have been used progressively over the past year. The trend will continue. They will fight the inflationary boom, that has just occurred, with more inflationist policies during the bust. Don't expect to be living on easy street though. Debt is far too high and the last thing banks are thinking about are more risky loans, just as defaults are rising and capital is being destroyed at a rapid rate.
  
  
• I heard recently that bonuses in the city this year are due to decline 60-70% this year. As I have said in a previous post, finance will be in big decline for years to come. The age of excessive rewards are over, and in my opinion finance will become a middle earning job, with places like New York and London, that were heavily reliant on high finance to be in a state of terminal decline. For how long who knows. We may have seen a top, for the rest of our life times.
  
  
• It may be all hands to the pump, co-ordinated action, on the current events, but this may turn as time goes on. Protectionist policies and the hoarding of certain assets will become more and more common between countries.
  
  
• Regarding the above, if the flight of investors from certain countries does occur then governments may freeze assets to try and keep them within their borders, enacting emergency laws.
  
  
• Wars regarding resources are bound to become more prominent. We have already had the invasion of Iraq and Afghanistan, which was the establishment of a middle east police station for the West. With more shortages to come, these areas will be of critical importance to many economies, with countries organising themselves into coalitions. China has already been in agreements with Venezuela regarding Oil supplies to name one of many relationships that are being formed. Water will become more important, with the potential for conflict between Israel and Palestine, Pakistan and India to name a couple. The Twentieth Century was the most bloody Century in human history, with the second half involving more deaths. I expect the first half of the twenty first century to continue this trend and be even more bloody, although I do hope I'm wrong on this point.

I suspect there will be a rally in the markets next week. The governments should be able to calm investors fears in the short term. More runs and panics will happen over the following years. With these events will come great changes. We are all in uncharted waters. Governments have the buckets at hand, but will it be enough to save the sinking ship? Or is the ship destined to sink as the damage done so far, is irreversible?

Oil - Our Deadly Addiction

"Now the only thing that saved the U.K. was the North Sea oil fields, even though Prime Minister Margaret Thatcher likes to take credit, but Margaret Thatcher has good PR. Margaret Thatcher came into office in 1979 and North Sea oil started flowing and the U.K. suddenly had a huge balance-of-payment surplus. You know, even if Mother Teresa had come in [as prime minister] in ’79, or Joseph Stalin, or whomever had come in 1979 – you know, Jimmy Carter, George Bush, whomever – it still would have been great. You give me the largest oil field in the world and I’ll show you a good time, too. That’s what happened."
Jim Rogers, Chairman Rogers Holdings


Since the modern world began to industrialise we have seen huge advancements in all aspects of technology and living standards in the West. Since the application of fossil fuels into our industries we have been able to grow our material wealth immeasurably compared to any other point in human history. Most of human history is marked by an agrarian focused system with closely knit communities that did not produce much of an economic surplus, other than to feed itself, a basic civil service, taxation system and law and order. But over the course of the last 200 years that has changed. Society suddenly began producing increasing amounts of labour surplus. Jobs became ever more specialised and productive leading to a feedback process of more productive surplus in society. There seemed to be no limits to the growth of the modern world as it embarked on the experimentation of modern globalisation into the next millennium. But where and how did all this wealth get created along with the extra productivity gains? People had not evolved significantly for thousands of years, yet their economies and populations had grown exponentially. The answer lies in the fossil fuel revolution that began roughly 200 years ago.

Rule Britannia

Beginning around the end of the 18th and the early 19th Century, a technological revolution was underway. The invention of the steam engine allowed the production of powerful machines that could do huge amounts of work and this meant large factories could be built on a massive scale. With the introduction of iron founding, railways and steam powered ships could be built and thus a mass haulage system was built to move the goods that were being produced in significant volumes by the new factories. The Coal age had arrived and with it a revolution in the way modern society would function. People would migrate from rural areas into the urban towns and cities to further produce more goods which in turn generated wealth that had never been seen before.

Land of Plenty

Oil had been known for hundreds of years however it was not until the mid and late 19th Century that it became used for productive purposes. It was originally used for lighting domestic homes due to the shortage of sperm whale oil, that was used before it. America was beginning to rise as a prosperous industrial nation spurred on by home grown technical innovation. As a resource rich nation it did not need a vast empire like Britain to grow. The turn of the 20th Century marked a great transition from coal to oil, something America possessed in abundance. With the advent of flight by the Wright brothers and the Model T Ford in 1908, new applications were found that required Oil, a hydrocarbon substance that was packed with energy. Demand for oil increased as the 1920's came along with increased use in agriculture and the start of Amercian's romance with suburbia as the motor car became more affordable. Further uses of energy became increasingly common with domestic labour saving devices running off electricity powered by various fossil fuels, creating further productivity gains in the economy. The Great Depression ushered in an era where the fossil fuel economy had simply being too over productive as people began to stop buying these new devices that had drove the unsustainable boom. A Second World War erupted in Europe, marking industrial countries reliance on oil. The Germans had ensured oil supplies from the start of the war with Russia in signing the Molotov-Ribbentrop pact. Hitler would later conquer western Europe - well almost. Later he would try to take Russia by surprise in an attempt to capture their oil reserves, that Hitler so desperately needed to sustain an efficient war machine. He simply didn't trust Stalin or Communism. Like Napoleon, over 100 years before him, he was beaten by the harsh Russian winter and the vastness of its terrain.

After the war America emerged as the new superpower of the world and its people over the course of the next two decades would enjoy some of the biggest improvements in living standards in human history. Oil is by far the most energy rich and versatile fuel humans have every come across and learned how to use successfully. The abundance of domestic cheap oil meant the American economy was powering ahead.

Dr M King Hubbert

In 1956 a geoscientist named Marion King Hubbert gave a talk proclaiming that American oil production would peak somewhere around 1965 - 1971. He was laughed at, as America had huge amounts of Oil, enough for many years and generations to come. Then in 1970, the US hit peak oil production. They would never again in history produce more domestic oil then they did in that year. Dr Hubbert had been proved right and suddenly America was now a net importer of Oil as demand continued increasing with domestic supply embarking on a long decline.

The Oil Shocks

1973 and the Yom Kipper War erupted in the middle east, in which an Oil embargo on the west would coincide. Overnight the price of Oil rocketed and the price went from roughly $3 a barrel to $5. With it the western economies suddenly began to break down, as everything was either made or transported with oil. Panic buying began with prices rising. Amercians and Europeans woke up to the fact that their economies could not function without Oil. This set off a decade of stagflation and general discontent. A Second Oil Crisis was to erupt in 1979 as the Shah was overthrown in Iran thus creating another Oil price spike (one of the reasons that the Americans would later bank roll Saddam Hussein against Iran).

North Sea Oil and the Alaskan Oil fields - The false illusion

Around the end of the seventies North Sea Oil and the Alaskan Oil field slopes had been discovered, giving Western Governments control over their own supplies once more. This extra supply along with improved middle eastern relations would bring prices back under control and bring in the illusion that the seventies was a false alarm, there would always be plenty of oil. During Britain's long decline since the First World War they had become the basket case of the West on the verge of going bankrupt and resorted to begging the IMF for money just before North Sea Oil began to come to the market. As Jim Callagahan would say, whoever won the 1979 election would retain power, the revenues from Oil would see to that. Thatcher won and had the full benefits of north sea oil and gas, the real Thatcherism was in fact surplus energy. Oil began two decades of stagnant prices and was as low as $10 a barrel in the late nineties. I remember my dad at the time having to announce a lot of redundancies in his industry and his remarks at how low the price of Oil was. It was not to last. Alaska peaked around 1988 while North Sea oil peaked around the turn of the millennium. The West was running on empty again.

A New Age of Price Shocks

The Globalised economy was beginning to take shape. Factories and jobs had been relocated to Asia with the emerging far east economies being titled as 'Tigers'. The mass investment of capital from West to East spurred forward further demand for oil and coal. China had once been a net exporter of oil. Now it had become a net importer with an insatiable appetite. Geological Analysts began reviving Dr King Hubberts work suggesting we were near worldwide peak oil. Again they were laughed at or denounced, just like Hubbert was 50 years ago. Meanwhile Countries began peaking in oil production. Mexico, Oman, UK, Indonesia all past their peak. The Saudis told us there was no problem they could cover the demand, however for years they had been pumping their oil wells with seawater to sustain the output. Some say the Saudis are now pumping at peak or will reach peak soon. From the turn of the millennium prices began a slow and long climb upwards, supply seemed to be hitting limits yet the further industrialisation of Asia demanded more. Americans and Europeans had been consumming, buying bigger cars with a 4x4 culture further increasing demand. The end of cheap oil and energy had come. A new era of price rises and economic turmoil had been ushered in. The first significant price spike occurred over the course of late 2007/2008 with Oil reaching just under $150 a barrel. Gordon Browns Solution - go ask the Saudis to pump some more. The price dropped to sub $100 prices as the global economy began to slow. People thought the earlier price spike was driven by speculators and oil companies and cheap energy would soon return with oil prices collapsing. In reality the price had been driven by the most simple economic dynamic - supply and demand. A new period of Oil Shocks was only just beginning with the potential to cause chaos in the industrialised economies of the world.

There's plenty of Oil still left

Of course there is plenty of Oil left. Estimates of proven oil reserves are around 1 trillion barrels of oil. Humans have currently used to date around the same amount, 1 trillion barrels. However the oil we have already used has been the easiest to access. Oil was first discovered on parts of the earths surface, you didn't even need to drill to get the stuff. Then to get further reserves you had to drill, but this was on land and there was little energy expended for the amount of energy returned. In the first part of the Twentieth Century you could expect to get 30 barrels of Oil for every 1 barrel you used in energy for getting the stuff out of the ground and to the market. This ratio has been going through a slow decline as time has gone on. Oil fields were routinely left with half the oil still there as it was not economical to extract the remaining amount. No doubt in time as prices rise these will be re-drilled. As oil in the reservoir declines so does the pressure therefore you have to expend more energy to pump the stuff out. As Oil became more scarce offshore drilling was used, however this is a lot more expensive to do than drilling on land and I don't mean economically but the return on the energy. Those offshore rigs have to be constructed and built through the burning of more fossil fuels. The early oil that was discovered and extracted was also the best quality oil, with little refinement costs, but as there has become less and less there has become more and more refinement costs.

The point is we may have lots of oil left. Everyone accepts this. The point is we have run out of cheap and easily accessible oil. Most of the oil in the world would be so hard to get that you would get negative energy returns. There's no point extracting a barrel of oil if it took 2 barrels to get it. Oil fields extract following a very exact pattern, following a bell shape curve. Production ramps up ever more until it reaches a peak. Once this peak is hit, you can never get more Oil at any given time again. This means even if there is lots of oil in the reservoir it can only flow at a specific rate, thus if demand increases supply can not. The oil field follows a set pattern, one of decline (see age of growth post for graph pattern). It doesn't matter how hard you pump, extra drilling, it will always never yield the same daily return.

We will just transition nicely onto the alternatives

Did we prepare for when Western Oil production peaked in the early seventies? Only a crisis brings about change within human society. Then we get onto the question of what alternatives? If there are more economical alternatives then wouldn't we be using them already? The bottom line is that oil is still dirt cheep and convenient compared with all other energy sources we know of and can exploit. It comes back to energy expended during extraction, compared with energy returned.

So what about hydrogen fuel cell technology thats in the news? When someone starts to go through the practicalities it becomes laughable. First you have to make the hydrogen, which is not like drilling oil that naturally occurs. It's an expensive operation using techniques such as electrolysis. Then you have to compress the gas in order to try allow it to be delivered to the refueling stations, yet it will still not contain any where near the same amount of energy as a tanker of oil would contain (in fact it barely becomes economical after the distribution network has expended energy in delivering the tanker). Then you need to unload it at the refueling stations, a highly explosive gas when combined with air (Hindenburg), into a high pressure container. Then the car would need to be fitted with a high pressure tank with high pressure connectors to put the pressurised gas into the car - a feat just to engineer all this. After which the user would be able to drive around in a car of highly flammable gas at which the piping system could burst in a crash or even just leak due to Hydrogen's corrosive properties over time. And the fuel making all this possible is of course fossil fuels which produces the hydrogen in the first place as things currently stand.

That leaves electric which is just not as energy dense as oil. First you have to make the electricity. Then you have to charge your battery powered car for hours, not like oil where it takes a few minutes to refill a tank. Then when fully charged the electric car still gives no where near the same mileage as oil. What are lorry drivers going to do that deliver goods over long distances (plus you are going to need some serious batteries). You could have an electric car running on an electric grid based road, but this is not going to happen overnight. Plus western government finances are already in a mess - do you really think they have money to retrofit our roads.

Hybrid is the other car being discussed, but again it still uses oil and merely dampens demand and the car itself is expensive for the majority of people. Renewables such as solar, wind and hydroelectric etc will never be able to meet our high energy demanding economies and our transportation network. Plus what do you think makes these viable at the moment? Again its Oil, Gas and Coal that are used to build and deploy the equipment. We could burn ethanol just at a time when the there will be huge demands on corn as the globe is becoming more affluent, aggravating global hunger (plus the energy yields again on ethanol are poor). Nuclear fusion is just a pipe dream along with lots of other futuristic technologies leaving just fission as the proven alternative. In the coming years political sensitivity will be ignored for the sake of increasing energy demands and narrowing alternatives.

Our whole transport infrastructure is based on Oil

It's not just cars that rely on oil. Its agriculture machinery, ships and lorries that transport goods, building equipment, mining trucks etc. If oil is becoming more expensive then guess what, your food will be more expensive as the tractors become more expensive to keep running. If the food you import is from overseas then the ship or aeroplane trip becomes more expensive. The supermarket van that delivers the goods near to where you live becomes more expensive. More of your income, your economic productive surplus gets consumed by higher energy costs leaving you less money to spend on other goods in the economy, thus starting the feedback process in reverse from the advent of the industrial revolution. Jobs become less specialised, reversing Adam Smiths theory's of increasing job specialisation (look at the back of a £20 note). The division of labour goes into reverse as you can no longer afford all your shopping so decide to grow your own vegetables leaving you less time to go to that gym you pay £30 a month for, to name one of many plausible permutations. It's the division of labour that has drove economic growth at such a rapid rate in the past two hundred years which has been accelerated abundant supplies of cheap energy and a technological ability to exploit it. Society has in fact been living off an invisible form of slave labour, machines powered by oil have done jobs and tasks that were typically done by many. There may be some wonderful future power source which may be much more convenient, efficient and cheaper than oil however they are just ideas or theories and I like to look at the current situation we face now. Claims of future scientific and engineering brilliance doesn't answer the current problem we have.

Oil Shale, Oil Sands and Synthetic Oil

With the recent discoveries of the oil sands and shale in Canada there has been great belief that this will flood the market with oil. However this is not conventional crude oil of the liquid type. First it has to be processed which is a very energy intensive process. Then there are all the environmental costs as a lot of toxic waste is produced that will be opposed by many environmental groups (which will probably be ignored when demand for oil becomes so desperate). All this extra processing means that for every 3 barrels of oil you produce, you use 2 barrels of energy to extract it. Sure there may be technological improvements and innovations but there are limits, specifically the laws of thermodynamics and it will never be as easy as it has been in the twentieth century.

You can create a synthetic oil from coal. Germany used the process during Hitlers time in power, as Germany had no oil reserves of their own. Again though there are costs, specifically the processing of it hence why Hitler still wanted access to the conventional liquid oil. It was out of necessity that they were processing oil from coal. People have made claims that it can be done as long as the price of oil is around $50 a barrel. I'm yet to see these huge coal synthetic processing plants, as oil long ago went beyond $50 a barrel.

Coal and Gas

The other two fossil fuels are Gas and Coal. We are told we have hundreds of years of coal but yet if we dig a bit deeper the practicalities remain to be seen. We have already used the best burning, high energy and easily accessible coal. We are already using lower quality grades of coal that do not yield the same energy performances as coal did 50 years ago. There's also the practicalities of getting it. We are having to dig deeper and further, expending more energy in order to extract it. If we believe the estimates that say we have hundreds of years of coal remaining, do you know that these estimates include certain grades of rocks. Gas is similar to oil in that it will be exhausted within the century. The problem with Gas fields is that unlike Oil where it slowly declines, gas just suddenly drops off when fields become empty giving little warning. With North Sea Gas in decline the UK is having to rely on the pipelines from Russia for the delivery of its energy needs, last in the western European chain except for Ireland. Can we really trust Russia? A nation that is still suffering from decades of internal decline with a corrupt political system.

Where from here?

It will be interesting that is for sure. Our leaders are still in denial and will still not face up to the realities of a transition occurring in human history. If history is any guide US peak discoveries occured in 1930, with peak production occuring in 1970, 40 years later. Worldwide discoveries peaked in 1965, so have we passed peak? We will only know in hindsight. All I do know is that our society is ill prepared for a world with ever increasing demand for a finite resource that is critical to our economy and the modern lives we lead. This could well be the biggest challenge we face in the near term future. We currently have an economic system that demands growth. We are so obsessed with growth that when our economies contract we call it negative growth. There are some people that believe China will never be able to fully industrialise and they arrived just as the party was ending. Our financial system has been stretched to its limits, our ageing population is due to retire, we have record levels of debts that are becoming more expensive to service, savings are at record lows thus we have no store of capital to pay for investments, just future promises to pay other nations. All this would be a big enough challenge as history I have looked at has no parellels, however our main source of energy that has powered all of the above to historic highs is now running out. The credit crunch could evolve to become the energy crunch.

This is why I'm such a beliver in higher commodity prices over the comming decade. Oil is used in all parts of bringing products to the market, agriculture is dependant on it, mining of base metals is dependant on it and so on. If materials and basic staples such as food increases then this leads to more inflation. In another 5-10 years if you want to add value to your house you won't be adding a conservatory or granite worktops in the kitchen, you will be adding solar panels or wind turbines (in fact you will be knocking down the conservatory). That is what will happen. The UK has been too caught up in the hysteria of North Sea Oil and Gas, and failed when it had the chance to invest in its decaying public transport infrastructure which will inhibit mobility in the future. The US experiment with suburbia will come to an end and with it the billions (more likely trillons) of dollars that was put into the unsustainable American dream.

I am a believer in technology and the ingenuity of people. I studied Physics, Computing and Mathematics during my A-levels. But I also studied history, and for all humanties brilliance there are always times of sheer stupidity. We could be ushering in a new dark age, a collapse of order, governments falling and widespread anarchy. If the world leaders allow peak to pass, there is no going back and we will be racing against the clock to find alternatives while our oil infrastructure is expossed for its reliance on a finite resource and how dependant we have all become on it. The world will become smaller once again. There will be no one left to turn up the pumps.


"Through our inattention, we have wasted the years that we might have used to prepare for lessened oil supplies. The next ten years are critical."
Kenneth S. Deffeyes, Author of Beyond Oil: The View from Hubbert's Peak

"Oil depletion and climate change will create an entirely new context in which political struggles will be played out. Within that context, it is not just freedom, democracy, and equality that are at stake, but the survival of billions of humans and of whole ecosystems."
Richard Heinberg, Powerdown