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Sovereign Finance
Hosted by Rob Drummond · EN
Connect the dots between personal finance, global finance trends, and deep human history. Tune in every week to demystify the money puzzle, and protect your interests in a turbulent world.
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Going to Tehran
2w ago00:24:52Tap to summarizeRob’s comments below are in italics.Derek’s comments below are in normal font.You were telling me before we hit record that you’ve been reading a book called ‘Going to Tehran’. You were saying that if the people in the American establishment had read it, it would have saved everyone a lot of heartache!Yes, it’s called ‘Going to Tehran’. It’s by Flynt Leverett and Hillary Mann Leverett, obviously a married couple. They were policy advisors or analysts in both the Bush and Clinton administrations.When was this book written?The book came out in 2013, with a slightly updated edition since.It gives a very detailed, impartial description of what the Islamic Republican government of Iran has been through since it was created 47 years ago. It explains a lot about the experiences it’s had and why it’s taken the position that it does. It totally undermines the prevailing Western narrative that they’re all lunatics, fanatics and extremists.The religious regime may not be one we would choose, but it does seem that a large majority of the population are very happy with it. The events of the last year or so have led many younger people — particularly those who didn’t live through the Shah’s rule — to reassess. The Shah, of course, was installed by American and British intelligence services in 1953, overthrowing the democratically elected Mossadegh government. He then ran a very brutal tyranny with a great deal of torture and assassination of anyone who rose up against it.Didn’t the Shah go to boarding school in Switzerland or something? He was groomed and then put back into position.He was totally a Western puppet. He was installed because Mossadegh wanted to nationalise the oil extraction processes. Mossadegh wasn’t even going to restrict its use; he just didn’t want it sold off at a knockdown price. He wanted a fair return to the country for the resources being extracted. It’s the same old story.The recent events have caused many people who were looking to the West, thinking the grass might be greener, to reassess. Anyway, well worth a read. I’m only about 20% of the way through it myself at the moment.Just while we’re on books — you obviously read a lot. Do you read 20% of a book and then dip back into it later, or what’s your preference?Usually, if I decide it’s worth reading, I stick with it until I’ve got right through. How about you?I’m trying to get better at giving up on books that aren’t excellent. So I’m trying to get a bit smarter about it.I very often read the first page or so and the last page or so of each chapter to get an instant summary. It obviously depends on how they’re written, whether that’s a useful exercise. A lot of writers do open each chapter by giving a rough idea of what they’ll cover.A lot of them also finish with a brief summary of what they’ve covered, which is good presentation practice anyway. If they do that, you can get a pretty good idea of whether you want to go into the full depth and detail. Sometimes I do that exercise and conclude I’ve pretty much got the drift.Anyway, very interestingly, Robert Kagan — it’s very difficult to label him. I was inclined to say “right-wing,” but “right-wing” and “left-wing” no longer make much sense.‘Right-wing’ just means he says things the establishment doesn’t agree with, doesn’t it?Not in this case — he is the establishment. He’s the husband of Victoria Nuland, who was Assistant Secretary of State at the time of the 2014 overthrow of the Ukrainian government. So he’s a militarist, a warmonger.I remember her. He’s part of the swamp.In this article, he actually says that the Iran conflict is the biggest defeat in US history. So you’ve got somebody from the core of the American establishment effectively taking it for granted that the conflict is lost, whatever happens from now on.He says the only way it could be resolved is by a land invasion and occupation. I don’t know whether he’s saying this to strengthen the military’s resolve to go ahead and do that.It seems blindingly obvious that any attempt to do that would result in an even more humiliating defeat — and a more decisive one.Of course, Trump was probably hoping, with this visit to China, to get some sort of support in getting the Strait of Hormuz reopened. They gave a very polite reply without actually suggesting they do anything. Have you been following the China trip at all?I saw that he was there. To be honest, if something is really meaningful, I rely on you to tell me about it!Well, I’m glad I’m doing something useful.I don’t know what he expected. As somebody suggested, it was partly about stroking his ego — I’m sure it did that to some extent. There was a reception, flag-waving, bands, 21-gun salutes, a huge ceremonial banquet, and sycophantic speeches praising each other. What actually happened in any of the closed-door meetings, we don’t really know.There haven’t been any announcements of grand progress on any front, which is no surprise. China has been as robust as it could while remaining polite in laying out its position. Before it even started, they said they had four red lines: discussions of Taiwan, democracy and human rights, their political system, and any interference with China’s right to development. So if Trump had thought he was going to make any assertions about any of those, they were off the list to start with.In fact, Xi made a very coded reference to Taiwan and to the necessity of avoiding conflict. There are clearly very strong elements in the American political establishment that want some sort of proxy war against China to restrict its future prosperity and its ability to rival the United States, which is almost too late, I would say.Taiwan is to do with semiconductors, right?Well, the history of Taiwan is that the Kuomintang retreated there after losing the civil war against the communists in 1948. For quite a long time, the United States took the position that this rump of non-communist politicians in Taiwan was the actual legitimate government of China. At some point — possibly around Nixon’s visit — they had to abandon that and accept that mainland China was the real China.The position since has been what they call the “one-China” policy — that Taiwan is actually part of China. There are strong elements within Taiwan that want a clear separation. It’s quite a muddled situation. As long as they don’t cause any trouble, the Chinese are perfectly happy to sit it out and wait.Meanwhile, America has been selling increasing quantities of arms to Taiwan. In one light, that might be regarded as yet more profit for the military-industrial complex. By doing that, however, they’re plainly playing up to the separatist factions — there’s no point otherwise. Taiwan’s not going to have a fight with anybody except mainland China, so selling them weapons can definitely be seen as an invitation to pursue that.The American position is that they would intervene to protect the democracy of Taiwan if China attempted to take it over by force. I can’t see there’d be much appetite on either side for armed conflict, because there’s a great deal of kinship between them — literally. There are many mainland families with relatives in Taiwan, and many Taiwanese families with relatives on the mainland. It would really take something to stir things up to that point. But of course, this is the playbook we’ve seen everywhere.It’s too big a fish, basically. Xi’s message was that we should be careful not to fall into the Thucydides Trap, which surprised me. You don’t expect Chinese leaders to be versed in classical Greek history.What Thucydides was referring to was that when one powerful state was growing to the point of becoming comparable to another, war would be inevitable. Xi was saying as clearly as he could — without spelling it out further — that it would be far better if the US and China could avoid going to war with one another.He then went on to give a very diplomatic warning against any interference or provocation regarding Taiwan. We’ll see whether we get any more concrete announcements.The other thing is that not only have we got the Strait of Hormuz closed, but Ansar Allah — generally referred to in the Western press as the Houthis — have effectively closed the strait at the mouth of the Red Sea to US shipping. Most Western shipping companies have more or less abandoned the Suez Canal route because they simply can’t afford the very real possibility of losing a ship and its cargo.The insurance premiums for passing through that route for a fully laden container ship are now up to three-quarters of a million dollars.How much is the cargo worth if the insurance premium is three-quarters of a million dollars?A figure I heard was around 10 million. But that three-quarters of a million represents pretty much the entire net profit of the voyage, so it makes paying the premium uneconomical.Routing around the Cape of Good Hope adds an extra 14 days to the journey and an extra three and a half thousand dollars in fuel. All of that will feed through to the costs of anything imported into the Western world, which of course is most consumer goods and appliances from China, Vietnam, and various other places in that region.So there’s another front which has been somewhat eclipsed by Ukraine and Iran — the North African states: Mali, Chad, Niger, collectively referred to as the Sahel. These are all former French colonies, and there’s been considerable realisation in those areas of the extent to which they’ve still been economically subjugated even since nominal independence.Those governments are standing...
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Some Things The BBC et al Aren't Telling You
May 400:19:55Tap to summarizeRob’s comments below are in italics.Derek’s comments below are in normal font.Today is the first of May — the Celtic festival of Beltane. We’re at the halfway point between the spring equinox and the summer solstice. I mention it because, amid all the dark stuff going on, we need to remember to pay attention to what’s in front of us and around us.Right. I’ve made a similar adjustment myself. George Orwell wrote in one of his essays that whatever the bureaucrats, politicians and militarists do, spring is still spring and the earth is still going round the sun.The sun will still come up. Having said that, there’s been a lot going on over the last five days, and we feel like there’s plenty to talk about.There are many different threads, and they’re all interrelated. The first thing to note is that, despite the demonisation of Putin in the Western media, he is far more accommodating than any leader likely to replace him, as far as I can see.Something people must wake up to soon is that he is talking to everybody prepared to have a dialogue with him. The most notable example is the Iranian foreign minister, Arachi, who visited him. Putin gave him a substantial meeting and has since come out publicly saying they are standing with Iran. That’s pretty notable in itself.Apparently, Trump is now saying he had a 90-minute conversation with Putin. Given everything, it would be understandable if Putin had decided it was a waste of time talking to Trump. The criticism he’s getting from within Russia runs along the lines that he’s not proceeding fast enough in Ukraine and should be far more aggressive. There are also plenty of people inside Russian politics and the military saying that Germany, France and Britain — who are openly bragging about supplying Ukraine with drones attacking Russia — are effectively waging war and Russia should strike back.It’s an act of aggression, surely. We’ve been very lucky over recent years that the Russian leader appears to have a couple of brain cells to rub together, which cannot be said of our so-called leaders.Certainly not of anyone in the West, as far as I can see. The leaders of Britain, France, Germany, the Baltic States and probably Poland are all actively trying to talk their populations into contemplating war with Russia in the not-too-distant future. They seem to be actively promoting this.They’ve not read the room. It’s not going to happen.Well, Merz has just said he aims to rebuild the German military to a strength of 480,000. Who he thinks will sign up, I can’t imagine. If they try to conscript people on that scale, my reading is that there would be open refusal. Certainly, anyone of military age just doesn’t buy into it at all.These look like acts of desperation, but I also don’t think these leaders make their own decisions. They seem to take their orders from above. Keir Starmer has not made a single independent decision. You can see when something happens — he waits to be briefed and then sticks to that line.Somebody must have an enormous hold over them. One wonders what they’ll do with all those elderly pensioners the police were picking up for holding a placard.This is another thing, though. If you think they’ll stop at arresting pro-Palestine protesters, just wait until it’s something you do care about, because it’s coming.Yeah. Another thing: Kazakh oil has now stopped flowing to Russia. Not only are they not getting oil from the Gulf states, but they’re also not getting any from Kazakhstan, either, which has been a significant portion of their supply. The reason for the stoppage isn’t entirely clear.Germany has been in continuous economic and industrial decline for four years, arguably since the Nord Stream pipeline was blown up. What they’ve had to pay for energy since then — largely from the United States — is far more than before. We’re getting an object lesson in how much we depend on the energy sources and prices we’ve taken for granted.Did you see the Chris Hedges interview with Richard Wolff? Wolff was essentially saying this is the price of globalisation. He was talking about car manufacturing. In the early seventies, it was all based in Detroit; the supplier companies were small- to medium-sized firms located within about 50 miles. Everything was done within America.Whereas today production is spread across different parts of the world, so you rely on these shipping networks. As soon as those networks are disrupted, the whole thing becomes very fragile.Yeah. The population of Detroit has fallen from 2 million to 700,000, which is pretty dramatic. There’s an enormous degree of social unrest there as well.There’s a famous photo of the old railway station in Detroit — a huge building you can see from miles around. It’s a monument to what once was.Image: Derek Gauci, CC BY-SA 4.0, via Wikimedia CommonsThat’s interesting. The other thing about Kazakhstan is that many of the Ukrainian drone attacks on the Russian heartland have been routed through Kazakhstan. There must be intense diplomatic activity, with Russia pointing out that this constitutes a de facto act of war. If further drones come over and the Kazakh government doesn’t take responsibility for shooting them down, Russia will respond, which means a certain amount of debris will land in Kazakh territory.Getting back to failure to read the room: in Germany you wouldn’t have to try very hard. The AfD, Alternative für Deutschland, is now running at 28% to 30% in opinion polls — higher than the governing party. In the Western press they’re portrayed as far right, sometimes even accused of Nazi affiliations.I have reservations about whether party politics can solve any of this. These movements tend to get infiltrated. But it’s still an interesting read of public perception.Yeah, so do I. If you look at their manifestos and publications, one clear position is that they strongly favour renormalising relations with Russia, which seems only elementary common sense.You have to judge them by what they do, not what they say. That’s the proof of the pudding.Yeah. They’re also calling for cooperation rather than confrontation. Meanwhile, Zelensky keeps touring Europe, saying Ukraine should be the bulwark between Russia and aggression towards the rest of Europe. That’s not going to happen.Now that Orbán has lost the premiership in Hungary, the obstacle to the EU providing the 90-billion-euro loan to Ukraine is out of the way. However, apparently Zelensky will only receive 20 billion of it, and Ukraine’s economy is already 20 billion in deficit. The remaining 70 billion is supposedly being directed to European arms manufacturers, which clearly indicates what’s driving this.Yeah, just what we need.Meanwhile, Bulgaria has just had an election with a landslide victory for a party that wants to re-normalise relations with Russia. Once again, I share your scepticism about party politics and about what actually happens when people get into power versus what they promised.All political parties of any size get hollowed out by corporate interests. Those corporate interests are largely invisible in the background.Yeah. The United States has been shipping increasing numbers of troops and equipment into the Middle East. They’re now talking about deploying hypersonic missiles — the first time we’ve seen those from the United States. We’ll see how well they perform in reality and what difference they actually make regarding Iran.They’ll probably still get shot down by a hundred-dollar drone or something. That seems to be the pattern.Who knows? Anyway, I had a quick check on the BBC website yesterday, and I listened to Radio 4 news. None of those items I’ve mentioned so far were on the main one o’clock bulletin.Do you still pay a licence fee, by the way?I do, because we watch quite a bit on iPlayer.I really feel I should cancel it. It’s only the family that keeps me paying, but we really ought to stop funding them.There’s something in that. I’ll talk it over with Gina.Now, whatever you think of Trump, Putin is still prepared to talk to him. They recently had a 90-minute conversation. I have no idea what was said or agreed, or how much agency Trump actually has. Apparently, they discussed both Iran and Ukraine. One way or another, this will affect how things unfold, though exactly how is unclear.Apparently, all this movement in oil prices involves heavily manipulated futures contracts on paper. Anyone trying to buy real oil for delivery now is paying between $150 and $230 a barrel. The prices going up and down to placate American public opinion have nothing to do with what anyone in the real world is doing.With shale oil and fracked gas, it’s true that current US consumption is covered by domestic production, with a little left over. But even without that factor, the price of diesel there has doubled.The US companies will sell it abroad first, ahead of selling domestically at a lower price.Exactly. That was another point Richard Wolff made in the Hedges interview. The price has gone up anyway, and it’s going to go up a lot more. I wonder how much pain the average American will bear before it erupts into real trouble, bearing in mind the population is heavily armed.The problem b...
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Time to Stock Up?
Apr 1800:16:29Tap to summarizeRob’s comments below are in italics.Derek’s comments below are in normal font.It’s been about 10 days since we last spoke on the show. We thought we’d do a bit of a catch-up on what’s going on. We’ve had a ceasefire of dubious intent, some negotiations that were clearly theatre. What do we need to update people on?Well, let’s start with that. A lot of people breathed a sigh of relief when Trump said Iran had agreed to a ceasefire, that it was going to last a fortnight, and that they were going to reopen negotiations. He said that the Iranian 10-point plan seemed like a good starting point for discussion, though that sounded almost surreal to me. The Iranians’ 10-point plan is nothing new — it’s more or less what they’ve been saying from the outset: essentially a flat rejection of everything the Americans have suggested.It’s the same with Russia, isn’t it? If you look at the Russian demands, they’re just not compatible with the demands of the Empire.Yeah. Every single one of those 10 points is something it’s inconceivable to imagine America agreeing to without looking ridiculous, apart from any other considerations. Anyway, there were even public suggestions — in the Wall Street Journal, I believe — that the Iranian negotiating team should be assassinated. Mohammed Marandi said they fully expected to be sent to paradise on their journey back home. I hope they weren’t too disappointed to arrive in Iran instead!I’ve got the words of Hillary Clinton ringing in my ears, where she once said, “Can’t we just drone this guy?”Who was that in connection with?I’ve lost the specifics, but she was caught out saying something like that.Well, it’s fairly consistently what they’ve been doing anyway. I’m pretty sure everybody outside the US and its vassal states can see quite clearly that - although Iran was almost certainly not expecting anything useful to come out of the discussions - they did go into them seriously. They had quite a large negotiating team with specialists in all kinds of areas. They turned up fully briefed and fully authorised by the Supreme Leader to reach agreements.The first thing that happened, of course, was that Israel continued its absolutely brutal attacks on Lebanon, destroying whole blocks of apartment buildings in a dense city-centre area of Beirut. The BBC had the gall to describe these as Israeli strikes on Hezbollah command centres. That’s highly unlikely.Israel then said Hezbollah wasn’t part of the agreement. Trump said it wasn’t. The Pakistani mediators said it was. That immediately drew a question mark over whether the Iranian negotiators were going to leave the hotel in Islamabad and go to the actual negotiations.But, they got there. It turned out there were no face-to-face discussions at all. They sat in separate rooms while mediators carried messages back and forth. It went on for 21 hours. The US team consisted of JD Vance, who clearly had not been given the authority to decide anything or any clear briefing, because he had to keep ringing Donald Trump — and, according to some accounts, Benjamin Netanyahu too. He was accompanied by Witkoff and Kushner, both Zionists with no training as diplomats and not part of the US government.It’s not exactly the diplomatic dream team, is it?No. They’d already destroyed whatever credibility they might have had — not only in connection with Iran, but also in connection with Ukraine. So it was really doomed from the start. It was no great surprise when Vance came out and said they’d made progress on several points, but Iran had not agreed to their proposals, so it had gone nowhere. Which was entirely predictable.Then, as soon as they got back, Trump announced a blockade. He was not allowing any ships to pass through the Straits that had docked at Iranian ports. Quite apart from the fact that there’s no basis in international law to unilaterally make such a distinction, the Straits of Hormuz are of course territorial waters — either Iran’s or Oman’s. Territorial waters extend 12 miles from the coast. 12 plus 12 is 24, and they’re 21 miles wide. Every part of the Straits falls within the territorial waters of one or the other. Any stretch large enough for a ship to navigate is quite likely to be within 12 miles of the Iranian coast.So they’re entirely within their rights. There are many places in the world where a narrow waterway exists, and the adjacent sovereign state exacts some form of payment for passage through it under various pretexts. It’s not a particularly unusual situation.The Americans can’t bring warships close to the actual Straits because they’d almost certainly be attacked by Iran. The closest they could get is somewhere out in the mouth of the Gulf of Oman, which is far too large a stretch of water to supervise, even with the largest navy in the world. It’s completely impractical. We’re just about to start feeling the impact throughout the world of the shipping constraints that have been in place for the last six weeks.Yeah. It feels like the summer of 1940, doesn’t it?Exactly. I was just refreshing my memory of the Phoney War. The Second World War started when Germany invaded Poland on 1st September. Britain and France declared war on Germany on 3rd September 1939, in view of their treaty with Poland. It wasn’t until the following May that there was any actual fighting between the Allies and Germany. We were technically at war, but there wasn’t a war happening.The situation here — I’m amazed there haven’t yet been far more severe price rises than we’ve seen. The last time I looked, diesel was back to the two pounds per litre range. Petrol is considerably more expensive than it was six weeks ago. There’s been virtually nothing in the way of shortages, and people don’t seem to be taking it seriously.The reason there haven’t been any effects so far is that all current supplies were already en route when hostilities broke out. There’s been almost no passage through the Straits since then, and most of what has passed has been bound for China. China has issued some pretty robust warnings — couched in the usual general terms — against interference with its shipping on the high seas. A considerable amount of the ships allowed by Iran to transit have been bound for China, so it’s quite clear what they’re referring to.Incidentally, France actually joined China and Russia in vetoing the Bahrain proposal at the UN Security Council. The proposal was to censure Iran without providing any context whatsoever.I take at face value their position that they didn’t want this war in the first place. They didn’t start it. They’ve responded in a measured fashion, and the escalations have come entirely from the United States and from Israel.It’s how it gets framed in the media, isn’t it? All of these places “just happen to be under attack”.Yeah. So we’re about to start feeling the effects of that. The most immediate one is petrol shortages. Most of the world’s nitrogen fertiliser is either shipped from that region or dependent on natural gas shipped from there. There are going to be enormous price hikes in fertiliser, which are already occurring. We’re in the planting season in the Northern Hemisphere. This will feed through to food shortages and price rises in six to 12 months. That’s already baked in, regardless of what happens in the next few weeks.Regardless of the effectiveness of any naval action the United States takes, the major restriction on traffic in that area will be driven by insurance implications. London, European, and American-based insurers will either refuse to insure ships making those passages or vastly inflate the premiums for doing so. That alone will throttle the traffic, regardless of any naval action. Countries outside Western control won’t face the same restrictions — China, I’m sure, has its own insurance arrangements.The difficulty is that Trump’s ego won’t let him come out of this looking like a loser. He’s now put himself in a position where it’s very difficult to see how he can arrange anything else. He seems past the point of being able to provide any kind of window dressing. After all, the Vietnam War started with a contingent of 3,000 to 4,000 Marines landing. They were stuck with it for 10 years, suffered a catastrophic defeat, and lost over 50,000 American servicemen.This feels like Vietnam 2.0.It does indeed. That’s enough to be going on with, I think.The main message is: there’s a lot of chatter across various groups about prepping and being mindful of what’s likely coming, including potential price hikes and food and fuel shortages. So now’s a good time.Yeah. Stock up.Make sure you’ve got a few tins of beans as well. All right, thanks Derek.Thanks for reading Sovereign Finance! Subscribe for free to receive new posts. This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit sovereignfinance.substack.com
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Keep Standing In The Light
Mar 2900:19:56Tap to summarizeRob’s comments below are in italics.Derek’s comments below are in normal font.It’s the 27th of March as we record. We’re going to discuss what’s going on and what the likely impact will be.We’re now just at the end of the fourth week of the conflict in the Middle East — or Western Asia, as it’s increasingly being called.‘Middle East’ is a funny term anyway, isn’t it?It was obviously coined when London was the centre of the universe. So, we’re now at the end of the fourth week. The events of this week: last weekend, Trump gave a 48-hour ultimatum to Iran to open the Strait of Hormuz. He threatened to start attacking their power stations one by one if they didn’t comply.Iran replied that if he did that, they would systematically attack all the energy installations of the Gulf states — nominally American allies. Then, on Monday, he announced he was delaying the ultimatum for a further five days. Oil prices dropped on the markets at that point.It appears that a small number of people made hundreds of millions of dollars in profit on the trading that morning. There has been no attempt whatsoever to find out who was making those trades and how.Catch them and put them in prison.That would definitely be too much to hope for.That revised deadline was due to expire this evening. We were wondering whether there would be an invasion, given that these five days were enough for the marine contingents from the Singapore area to reach the Gulf of Persia.We were wondering whether there would have been dramatic events between recording this and its publication early next week. But apparently, this morning Trump extended the deadline by a further 10 days.This may or may not mean anything. Whatever Trump announces in any area, as we’ve all noticed by now, he’s quite likely to do something entirely different the very next minute — or even contradict himself.It seems that every time there’s any escalation from the Israelis or the Americans, Iran responds in a very measured way with an exactly similar answering strike.There’s some speculation that when the Marines arrive, they’ll try to invade Karg Island — Iran’s principal export terminal. If they do, they seem almost certain to be obliterated. They’d have to go through the Strait of Hormuz to get to Karg Island, which strikes me as the very least likely scenario. They’d almost certainly be sunk before they got there.That seems completely hypothetical, though there’s a great deal of speculation about it. Certainly, there have been attacks on Iranian refining and storage facilities.Both this war and the Ukrainian conflict are wasting incredible proportions of the limited petroleum stocks we have, along with processing facilities. Petrol prices around here have gone up 20 pence in the past four weeks — about a 15% rise.We’re going to see a lot more of that, and also supply difficulties. We have a much bigger problem with diesel than with petrol, certainly in Britain — and probably in the world as a whole.On the way here, at least two service stations on the motorway are now out of diesel. We’re going to be seeing shortages of pretty much everything.It’s a good time to make friends with your local farmer...A good time indeed — and not only that, to stock up on as many things as you can.The Ukrainians seem to be having rather more success with their missile and drone strikes on Russia, although they’re taking a pounding themselves as well. They’ve had substantial attacks on Russian refineries, storage facilities, and shipping facilities.Both of these events will substantially affect the global energy and delivery situation. This is also going to have a substantial effect on mining, because all mining machinery and haulage is diesel-powered. One way or another, this is going to torpedo the world economy in a completely unprecedented way.This underscores that you can’t disentangle energy from finance. We’ve talked a lot about energy on this podcast, and it’s for these reasons.One way to look at it: this appears to be a warning shot across the bow of the world economic community. Although this is a highly artificial shortage, the best way to see it is as a preview of what is coming over the next decade or two — or three at the outside — as we no longer have the bonanza of fossil fuels that has given us a couple of centuries of extraordinary economic growth and development.I still maintain some optimism that, before the century is out, the human race will have made the necessary adjustments to power society with solar energy. There are plenty of technologies available to capture that. China is, of course, leading the way, with about 50% of its energy needs coming from renewable sources.Have they localised the generation of electricity from solar?I don’t know the details of their structure, but they have enormous solar energy capacity. Because there’s such an enormous geographical area, it’s widely distributed — so when conditions aren’t conducive in one part of China, they will be in another. These feed into the Chinese grid.When you said ‘localise’, were you thinking in terms of what we’ve discussed before about distributed generation to supply the immediate area?Yes — so the electricity would have been generated closer to your home, with more of these facilities dotted around.I don’t know the details of how they’ve done it in China, but I would imagine they’ve covered as many possible bases as could be imagined.Otherwise you get the situation where entire woodlands are being chopped down to make way for solar panels. It’s mind-melting. Attaching these things to a building is something else entirely.As far as the Middle East conflict goes, there seems to be no way this ends other than as a complete humiliation for the United States. Every conflict it has had — which has been continuous since the end of the Second World War — has ended that way.In fact, for the entire period of its history, apart from a handful of years, the United States has been in some form of armed conflict.Same for Israel.The two sides have both publicised their terms for ending the conflict, and there’s absolutely no overlap whatsoever between them. Iran has made it clear over and over again that it doesn’t want a cessation which is going to be started up again in another six or twelve months — understandably so.Even if the United States said it was giving up, it would be up to Iran whether to reopen the Strait of Hormuz. All the signs are that it won’t. Even if it opened tomorrow, it would apparently take at least four months to restore fuel shipments to pre-war levels — and that might not be possible at all, depending on how badly the refining and distribution facilities have been damaged.The Gulf states have been paying enormous sums to the United States for weaponry, and have been providing them with bases on the grounds that the United States would protect them. It must be obvious to everybody that it’s had exactly the opposite result. Not only has there been no attempt whatsoever to protect the Gulf monarchies from Iran’s attacks, but the fact that the bases are there has simply made them a target.Bahrain appears to be on the verge of a revolution. Bahrain and Qatar have said they’re not getting any more involved in the conflict, for what it’s worth. The United Arab Emirates and Saudi Arabia both appear to be cooperating with any forthcoming American strike. If they do, I’m sure they’ll live to regret that decision.Meanwhile, the annual production of Patriot missiles is 750, and Israel has used 800 in the last month — or perhaps even the last week, I’m not sure. That has evidently not prevented a great deal of Iranian missiles from getting through.In many cases, they fired three or four Patriots — at somewhere well north of a million dollars each — at one incoming missile, and they haven’t even hit it. We don’t know the scale of the damage in Israel. They have hit the town near the nuclear development site. They didn’t actually hit the nuclear installation itself, but they’ve shown that even one of the most heavily fortified sites in the country cannot defend itself.More American aircraft are getting shot down, so they clearly don’t have the control over the skies they pretended to have. Iran has also made it absolutely clear that they’re in for the long haul and will continue to pursue this as long as it takes. Aside from the use of a nuclear weapon — which is a truly horrifying possibility — it seems that absolutely nothing can be done about it. Interesting times, indeed.It’s like Vietnam 2.0.It will be interesting to see what the reaction of the American public is once we start getting significant numbers of military casualties. There have probably been far more than have been publicly admitted, as it stands.That’s my outline summary of where we stand. The other development in the Ukraine-Russia conflict: in the attacks last night, or the night before, they routed their flights — presumably cruise missiles — over Poland, Estonia, and Latvia, on the way to attack Russian ports in the Baltic Sea.This puts Russia in a dilemma. If it shot them down, the debris would fall on those countries, and they would likely claim it as a Russian attack. If it doesn’t, those countries are co-belligerents in the conflict. That’s another alarming expansion of the conflict.Any further thoughts?My main thought is that it’s pretty obvious we live in a highly militarised society with a thin veneer of civilisation papered over the top — and you’ve only got to scratch it. The veneer has been ripped back. The...
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Revolutions Always Seem Impossible Before They Happen...
Mar 2500:19:41Tap to summarizeRob’s comments below are in italics.Derek’s comments below are in normal font.Today is the 20th of March — the spring equinox, halfway between the shortest day and the longest day. I like to mark these things. Lots are going on in the world, and we thought we’d do a bit of an update.Yes. In the last couple of days, I came across a couple of quotes that, in different ways, were very pertinent to the current moment. One was J.P. Morgan — the original J.P. Morgan, founder of the banking dynasty. He’s credited with the remark that “The only real money is gold and everything else is credit.”We’ll see how that relates to the current situation, if it’s not blindingly obvious. The other was from Hannah Arendt, who said “Revolutions always seem impossible before they happen and inevitable afterwards.”Ain’t that the truth.Because I don’t know what shift is going to happen, but it’s plain that the current way of dealing with affairs at a global level is becoming more and more obviously untenable as the days go by. In this context, I thought I’d have a quick review of the book I wrote four years ago.It’s almost exactly four years this month since I published it — The Letter from 2100 — which is obviously a work of imagination. The first bit I’d like to share is from page 25, the beginning of the second chapter, which I called ‘Unravelling’. What I wrote then was:As the era of domination drew to a close, it became increasingly obvious to growing numbers of people that the entire global system was about to unravel. The only question was what form this unravelling would take. Would it be possible to preserve the positive accomplishments of human progress, or would it all be lost?Would the generation currently passing from childhood to adulthood live to a comfortable old age, still able to enjoy the comforts and amenities of industrial civilisation? Or would they — the small proportion who survived at all — see a return to the harsh feudal lifetime of back-breaking toil to scratch a bare meagre living from the soil?If the knowledge of our technology were to be lost, would it be possible to regain and reconstruct it, even in a dozen generations, or ever? As the multiple crises escalated, people reacted in various ways. Most commonly, it was denial. Many simply refused to acknowledge that the life they’d been born into really could vanish utterly, and immersed themselves in the daily struggle to get by. Many sought certainty in the dogmatic embrace of simplistic belief systems.It’s almost like you’re looking over my shoulder, Derek!Well, there we go. Then, towards the end of the book, on page 68, after running through various pillars of activity in the world as it stands — plainly not going to be sustained for very long — I asked:If none of these are possible, what are the options for human society?Other than something along the lines of the optimistic scenario I laid out, the previous seven chapters or so sketch a world that would truly serve humanity and which is, I assert, physically attainable by the end of the century. So, if that didn’t work out, what are the alternatives?One would be a complete collapse of the industrial technological system and the loss of the knowledge and know-how to create our machines and global communication systems. This would entail an order-of-magnitude drop in world population and a return to a more primitive and onerous lifestyle.Perhaps this would take the form of feudal agrarian communities governed by local warlords, rather like European society in medieval times. If some isolated communities of scholars managed to preserve enough of our scientific and technological knowledge, perhaps an eventual rebuilding of systems providing abundance, comfort and convenience would be possible — maybe in the course of a thousand years or so.If the collapse were more drastic, the fall in population more extreme and the loss of literacy total, the reversion might be to the level of Neolithic village life 12,000 years ago. Because we’ve now exhausted the easy pickings of minerals and energy, a reconstruction of technological civilisation would be far more challenging than it has been this time, even over the course of several millennia.A still more depressing possibility is the actual extinction of the human race. Finally, there’s the fantasy of a new world order envisaged by the World Economic Forum, where a global elite of a few thousand billionaires preside over the rest of the population, reduced to penury.Does that seem like an exhaustive list of possibilities — unless we can manage to navigate a return to sanity in pretty short order?Unless we take the reins fairly promptly. I wonder as well if this loss of knowledge hasn’t happened before. If you look at sites like Göbekli Tepe in Turkey, or ask how Stonehenge was built? We can only speculate.Yes, even Stonehenge or the pyramids. Or Great Zimbabwe, or Angkor Wat. Angkor Wat was built during this era. But the various pyramidal structures are plainly difficult to explain on conventional timelines.Yeah, it feels like the timelines are wrong, or the history is wrong. Something’s not right. So I wouldn’t rule out that this is something that has happened before — and could happen again, but on a bigger scale.That’s a whole other topic. We need to prepare for a proper discussion on that. Human beings appear to have been anatomically and cerebrally pretty much as they are now for two or three hundred thousand years. That’s possibly time for several cycles, considering it’s only taken 12,000 years to get from the Neolithic Stone Age to present technology.The fact that we’ve managed to exhaust the geological capital so thoroughly is a real challenge when considering whether possible high-tech societies have arisen and declined. Because if they’d done it the same way we have, there wouldn’t be any oil, coal, or readily accessible copper and other minerals. We’ve taken all the easy pickings.That’s another whole story. The relevance of the J.P. Morgan quote about gold is underscored by the fact that central banks have bought around 1,000 tons of gold in each of the last three years. That’s what is available on the public record — there are probably far larger figures below the counter.Against this backdrop, the Fed has been quietly creating $40 billion per month out of nowhere to buy short-term Treasury bonds that are either expiring or being dumped onto the market. That’s per month. These go down in the books under the heading ‘reserve management purchases’ — whatever that means.The point is that, in this year alone, the United States needs to roll over $9.2 trillion in expiring Treasury notes into new loans. That’s almost a quarter of the total of around $40 trillion. Every time we talk about the total US government debt, it seems another trillion has been added. Of course, they won’t be able to replace these at the same interest rates as those that expired.That will put further pressure on. The Federal Reserve has actually lost $245 billion in the last three years. They have various accounting and reporting policies which obscure this fact, but any other organisation with deficits on that scale would obviously be out of business.If you or I arrived with those numbers, we’d be in trouble!Yes, with a lot smaller numbers. Against this background, one can’t help thinking about the way the Iran war is unravelling. Quite apart from anything else, at some point the United States may simply not be able to afford to carry on. It’s a rather frightening prospect — what they might do in desperation, given the stockpiles of various weaponry they hold.Can we just elaborate slightly on how it does appear to be going at the moment, regarding the US potentially not being able to afford to participate in the long term?Well, they’ve got to pay all those servicemen for a start. The arms manufacturers are obviously delighted to be running at full capacity, although that capacity doesn’t seem to be as great as some of their adversaries, as far as we can tell. To do that, they need to be paid.At some point, printing money at an ever-faster rate will reduce its value in real time. We’ll be in a total hyperinflation scenario. So even if they are paying their servicemen and suppliers, they’ll be paying them with increasingly worthless currency.Those wages obviously don’t mean anything in real terms.Across the world, other countries which have been happy to hold US dollars are increasingly unwilling to continue doing so. They’re either dumping their treasuries for whatever they can get now, or simply refusing to repurchase when they mature.That is yet another aspect of the unworkability of the present situation. Plus, of course, there’s the credibility of the US government itself. The rest of the world, aside from its allies — or vassals, whichever you prefer — has obviously been highly sceptical of the US for a long time.As we close the third week of this conflict with Iran, apart from the economic damage inflicted — which we’ll look at in more detail in a moment — this cannot fail to be anything other than a total erosion of the illusion of United States supremacy. To have taken on a smaller third-world country and failed to achieve a quick, strategic, decisive victory is itself a complete failure.The negative consequences are increasingly felt throughout the world. We’ve hardly really started, but another month or so of this and it’s difficult to see...
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How Many Tomahawk Missiles Would It Energetically Take To Run Your Car?
Mar 2400:20:22Tap to summarizeRob’s comments below are in italics.Derek’s comments below are in normal font.We were talking last week about the outbreak of war in Iran. There’s going to be an economic knock-on effect, and we thought we’d speculate about what it might look like.Well, I wanted to cover one or two events from last week. We’re now March 13th, which is day 14 of this war in Iran. In many ways, it has continued to develop in the predictable fashion it has so far, without any sign of sanity breaking out.Apart from summarising some of the key features of the last week, I also wanted to look at the likely economic effect. There’s also the more fundamental issue of what I see as a foretaste of things to come — patterns of energy consumption over the next few decades, which still don’t seem to have been taken seriously by those in positions of power, despite the fact that the writing is clearly on the wall for the energy consumption we’ve been taking for granted in recent decades.The public discourse around the closure of the Strait of Hormuz seems to focus mainly on the likely effects on oil prices. Even the less optimistic mainstream estimates seem to me to vastly understate the possible downsides if this situation persists for any length of time.The main point is that the Strait of Hormuz has remained effectively closed. The Iranians are letting their own tankers through, which would suggest that reports of mining are probably inaccurate. They have complete control over the strait and are not allowing any other vessels through. A cargo ship was attacked, and the last time I checked, six vessels had been badly damaged — the cargo vessel and five oil tankers.There were two very dramatic destructions of American-owned oil tankers off the coast of Iraq, which appeared to have been fully loaded. They spectacularly went down in flames, triggered by unmanned naval drones against which there seem to be very few effective defences. Trump has been saying that his forces destroyed the Iranian Navy. He may well have destroyed a lot of large, possibly obsolescent warships, including one that was completely unarmed and returning from a joint peaceful exercise with India.Trump made a couple of announcements in the last day or two, which temporarily reversed the climb in oil prices. One was that he was relaxing sanctions on Russia exporting its oil, which has enraged those who hoped to starve Russia of funds to force an end to hostilities in Ukraine. These events have now provided Russia with a massively larger income. There doesn’t seem to be much joined-up thinking in their policymaking.The other announcement was that Trump said they’d be releasing 172 million barrels of oil from the strategic reserves. Those reserves are already at their lowest level in 30 years, so this further depletes them. The easing in crude oil prices caused by those announcements has been very short-lived, and prices have bounced back up. As of this morning, the price of Brent crude has exceeded $100 per barrel.Looking at the energy implications of all this destruction and the energy consumed in running a war, it really does seem that warfare is reaching the point where it truly becomes a losing proposition any way you look at it. With modern weaponry, it is clearly much easier to destroy things than to make them. The costs of going into conflict are likely to outweigh any conceivable benefits. This has been obvious to many people for the best part of the last century, but unfortunately not to those controlling whether we embark on these adventures.Ultimately, it benefits Raytheon, BlackRock, Lockheed Martin, and various other weapons manufacturers.Yes, on a very short-sighted view.So we’re going to be looking at vastly increased petrol prices, which is what most people focus on. The implications of cutting the flow of oil and natural gas go way beyond that.It’s not just about filling your car, is it?It’s not just about filling your car. It’s about the whole way our industrial and economic system is configured, and the assumptions underlying it. A huge use of natural gas, beyond the obvious heating and energy production, is as a major component in the manufacture of fertilisers. A considerable amount of fertiliser is produced in the Gulf States and shipped out. Already, there has been a near doubling of fertiliser prices in the United States in just these two weeks. That will have long-term effects on farmers’ economic viability, their ability to produce food, and food prices.We rely on fertilisers because of big farm consolidation, which has made it more efficient to paper over soil degradation with more fertiliser. With smaller farms and regenerative farming, this wouldn’t be as much of an issue.Yes. If there is a human race at all by the end of this century, we will have to return to fully regenerative, fully organic farming. This isn’t some fanciful hippie idea — it’s simply an acknowledgement of reality.There’s another thing I learned in the last few days. A significant byproduct of refining the heavy grades of crude oil produced in these regions is a great deal of sulphur. Sulphur is an important industrial feedstock for several reasons, most notably in the manufacture of sulphuric acid. Sulphuric acid is itself a major feedstock for a number of industrial processes, most particularly for the extraction of copper and manganese.Worldwide copper production is already struggling to keep up with demand — another factor to consider when trying to re-engineer our energy supply to be more electric, since there is really no substitute for copper as an electrical conductor.A similar story for silver, perhaps. There isn’t enough silver in the world for everything they want to do.Exactly. Another factor in the Strait’s closure is that the Gulf states are almost entirely dependent on imported food, given that most of them are desert. Not only can no oil be exported, but no food supplies can be delivered if the Strait is closed. There will be a severe crisis across all those states.The other strategic implication is that the deal with the Gulf states was that America would place all those bases there to guarantee their protection. As we’ve seen, it has had quite the opposite effect.That’s going well, isn’t it?It has made them a target. Iran has said a couple of things — one being that it will open the Strait to shipping from nations that have expelled their Israeli and American ambassadors.That’s not likely to happen, is it?Spain, as I understand it, has already withdrawn its own ambassador to Israel. Under normal diplomatic protocols, if any country withdraws its ambassador, the other country is obliged to reciprocate. The Israeli ambassador in Spain should therefore be recalled soon. It would be a very serious reversal of a well-established diplomatic understanding if that didn’t happen.Another development this week is that Saudi Arabia has apparently rescinded the agreement made in secret between Kissinger, Israel, and Saudi Arabia in 1974. As we’ve discussed, Nixon withdrew the dollar from the gold standard. To limit the damage, they entered into an arrangement with Saudi Arabia: the Saudis would not repatriate the dollars paid for oil in return for gold, but would instead purchase American treasury bonds with those dollars. This has given the United States a free ride for the last 50 years.It’s an amazing thing to pull off. If you had something someone wanted to buy, you could say: “You can buy it on the understanding that you’ll lend me back the money you’ve just paid me.” A pretty gross diversion from normal economic operations.I wanted to look at the underlying energy implications of warfare. The most typical oil tanker today is what they call a VLCC — a very large crude carrier — which holds two million barrels of oil. One barrel of oil is equal to 159 litres and has an energy content of 1,700 kilowatt hours.To put that in perspective, your annual household electricity consumption might be around 5,000 kilowatt hours. That’s the equivalent of three barrels of oil. A tanker with 2 million barrels is equivalent to three and a half gigawatt hours — the equivalent of running a top-end nuclear power station for two hours. Every time one of those tankers is destroyed, that’s literally gone up in smoke.In the first 100 hours of the conflict, America launched 168 Tomahawk missiles. Each Tomahawk contains a half-tonne warhead and carries 2,200 litres of jet fuel. If you fill your car tank once a month and the tank holds around 50 litres, you might use roughly 600 litres of petrol a year. So by comparison, there is about four years’ worth of fuel in a single Tomahawk flight.Then there’s the warhead, which is half a tonne. A tonne of TNT has an energy content of 1,200 kilowatt hours, which is equivalent to 133 litres of petrol. So the warhead alone contains the energy equivalent of running your car for three months. That energy has to come from somewhere. These explosive manufacturing plants are chemical engineering establishments that start with a fossil fuel, pass it through a series of processes, and produce the explosive at the end. At each stage, energy is lost due to the laws of thermodynamics.Then there’s all the material that went into it — the steel, the aluminium, the electronic circuitry. Every single warhead exploded on any side represents a quantity of energy consumed purely for destructive purposes. The point is that we will clearly have to adjust to a way of life much less energy-intensive than what we’ve grown accustomed to. I’d like to do another session going through in practical terms what that might look like.Just buying local and making local goes a...
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Thoughts on War in Iran
Mar 1100:18:27Tap to summarizeRob’s comments below are in italics.Derek’s comments below are in normal font.Today, as we record, is the 6th of March. The war in Iran that has long been predicted broke out on Saturday?It was the day after we recorded our last piece. In the last episode I made a few remarks about the fact that it was looking increasingly likely that the United States was talking itself into open conflict with Iran.A number of fairly obvious consequences followed from that. Lo and behold, within a matter of days, the invasion did indeed go ahead, and it had almost exactly the immediate responses I predicted. We’ll go through that in a bit more detail.How many White House insiders happened to invest in oil and military companies right before these things happened?There is that. Although Robert Anton Wilson made a remark on a number of occasions, more or less to the effect that the more powerful an individual is, the less they are in touch with reality. The reason being that they are increasingly surrounded by people who are either too frightened to contradict the powerful actor, or are simply sycophantic by nature.They are trying to advance themselves by ingratiating themselves. The consequence is that they get no objective advice about anything and retreat further into a world of their own imagination.Catherine Austin Fitz recently said this in a conversation with Tucker Carlson. She said she has lived it all — having been very wealthy, moderately wealthy, and completely poor. She reckons that as you go higher up the wealth spectrum, people are less in touch with reality, with what is going on, and with what people think of them.Quite apart from Donald Trump’s obvious lack of intellectual strength, he has surrounded himself with similar intellectual mediocrities. He has also surrounded himself with people who seem utterly devoid of any moral principles. The most extraordinary thing to me is that events of this consequence can be set in motion without any coherent notion of the strategic goals you are trying to achieve.I wonder if World War I was instigated in the same fashion.Probably. There does not seem to be any clear definition of what the end of this exercise is intended to look like.It has all the hallmarks of “two weeks to flatten the curve”, hasn’t it?Absolutely. Another thing is that the negotiations going on with Iran were utterly cynical. There was no sign of any good faith — it was simply lulling them into a false sense of confidence ready for the attack.Ever since the 12-day war last June, it is pretty clear that Iran had been expecting this.If we were expecting this, surely Iran was expecting this.Not only that, they were well prepared in any number of ways. For instance, by comparison, if somebody had succeeded in assassinating Hitler, it would obviously have brought an end to the Second World War because pretty well everybody else had a more realistic grasp of the situation than he did.In Iraq, Saddam Hussein obviously had a very tight top-down grip on the country. In Libya, you could say the same of Gaddafi. Regardless of what you think of their policies, the intervention clearly did destabilise those countries.If you look at all of these attempts at regime change, there is not a single one you can point to that resulted in replacing a dictatorship with a healthy democratic liberal society. They either replaced it with another dictator, or more often, Syria being the most extreme case, it resulted in the total destruction of civil society in any form. Whether that was the United States’ intention in Iran, I don’t know. It almost certainly is Israel’s endgame. Although how they imagine they are going to have a safe little bubble of a society to their liking, surrounded by people they have spent decades antagonising and wreaking destruction on, I cannot imagine.One of the almost certain consequences that was easy to see in advance was that the Strait of Hormuz would be closed. This is exactly what happened. There have been seven tankers hit and either sunk or severely damaged. Fully loaded tankers are now apparently stranded in the Persian Gulf, valued at something like 10 to 20 billion dollars, which has already been paid by traders around the world to the authorities in the Gulf monarchies.The arrangement is that the contract is set up several months in advance and the funds transferred at that point. The buyers of the oil on those tankers have already paid for it. They are not going to get the oil, and I should think they are extremely unlikely to get their money back. The damage to American bases within the Gulf monarchies is obviously considerable.None of us can know exactly how much that damage is. It has obviously been far more severe than any of the American military personnel responsible for this decision could have imagined. It is going to go on. There is plainly no coherent political opposition inside Iran.Regardless of the humanity or otherwise of the murder of Ayatollah Khamenei, it was a tactical and strategic blunder of the highest order. Rather than decapitating the country and giving the population space to rise up against the government, it had exactly the opposite effect. The street demonstrations in Iran following that assassination are absolutely massive and clearly in support of his memory.Once again, the projection of him as some kind of evil ruthless dictator appears to be a highly partisan judgement.He wasn’t exactly carpet bombing cities in America, was he? Or ripping school children to shreds with military explosives?On the first or second day, one of the immediate targets was next to a girls’ primary school. There has been no sign of any remorse or apology, no explanation that it was not actually the intended target. That was an act of sheer barbarism.I don’t know to what extent the population of our country, or of any of the other supporters of America, goes along with this. Even within our own populations, there is increasing alienation from these actions and from our government’s spineless support of them. What’s your take?It is so difficult to know how much we live in our own echo chambers. From my home office here, what do I actually know? You try to triangulate different things you have read or seen. A lot of people just go with whatever is on the news.I think there is quite a big age divide here. Increasingly large proportions of the under-40s just don’t slavishly absorb the mainstream news media. They might get it from social media, which can be an echo chamber of its own.We certainly don’t buy newspapers and things like that.No, but I am heartened by the quantity and quality of independent journalism online. Without even going onto Substack, Rumble, and fully alternative channels, even on YouTube — which is obviously censored to a significant degree — there is a huge amount of content against the official narrative.There is a huge amount of really high-quality journalism of the sort that, a few decades back, we could get on the BBC. It has been a long time since there has been anything of that impartiality or intellectual rigour.The consequences of the closure of the Strait of Hormuz will be absolutely devastating for the world economy. Last Sunday morning I went out at about nine o’clock to fill the car up. It was completely normal and petrol at the local station was still 134 pence a litre. There were no queues.Going out this morning, it has only gone up by three pence in the last week. But we are going to be back to two pounds a litre of petrol any day soon. We are also going to be in the situation we seem to have already forgotten about a few years ago, when large numbers of forecourts were simply closed and the ones that were open had cars queuing up along the street. That is only the most immediate effect. It will have a knock-on effect on the availability and prices of everything else.The liquefied natural gas plant in Qatar, which was the main supplier, has now been shut down. Even when it starts up again, it will take a great deal of time to stabilise that situation. There is also an aluminium smelter there that has been shut down, and that can take anything up to 12 months to get operational again. Aluminium smelting is a continuous process — once it is interrupted, the entire factory is full of solidified aluminium.It is not like a tap.No. We have not even really begun to see this, nor the knock-on effects on public sentiment once we all start to be affected personally.What I was saying about the assassination of Khomeini being a strategic blunder is that it not only rallied the entire Iranian population in a unified show of national solidarity. He was also the second-most senior cleric in the Shia religion for all Shia Muslims worldwide. Whatever misgivings they may or may not have had about America have immediately aroused their implacable enmity against the United States and its allies. How we come out of this is anybody’s guess, but it is not going to be to any of our advantage.No, that much is fairly obvious.The only hope I have is that the consequences of this move will lead the entire population of the planet to a wholehearted rejection of these methods for resolving disputes. We’ll have to see how that goes.Shall we leave it there for this week?Yes. As usual, we sign off by saying watch this space, and we’ll see where we are next week.The other thing I would say about that assassination: it was trumpeted as a major intelligence coup to locate his position. Of co...
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A Critique of Bitcoin
Mar 600:20:00Tap to summarizeRob’s comments below are in italics.Derek’s comments below are in normal font.You were just about to launch into a long spiel about Bitcoin and some reservations about it before we started recording. This has stemmed from some revelations about the Epstein files. Shall we start there?Yeah. There was a very interesting interview released today by James Corbett with Aaron Day. It’s an hour-long conversation that goes into great detail. Anyone who wants that level of detail, I thoroughly recommend it. It also provides quite a lot of clarity about the whole principle of Bitcoin — what it was originally set up to do and what it has evolved into.Aaron Day has dredged up a whole lot of material from the released Epstein files. It’s really interesting, the range of different things revealed in those files. With three million pages published, even with the redactions, it’s a huge amount of material. There’s a massive open-source collaboration of people going through it to tease out the information, because it’s not at all well organised or indexed.The area he was focusing on was Epstein’s involvement with Bitcoin — essentially the attack to derail it from its original intention as a fully transparent, peer-to-peer payment method that enabled people to sidestep banks.Yeah, something you could actually use to buy coffee with.Yeah, in the early days, it really was possible to do that. There were many traders taking it in various places. It was very strong in Canada, for example, probably in the States as well. It was fast, and there were low transaction fees.Personally, I had misgivings for reasons of the indirect experience I’d had. My son Leo had the idea of becoming a Bitcoin miner. He was fairly early into it, but not early enough to make it viable.Originally, the generation and verification of transactions could be done by anybody with a laptop in the early days. If you were the one who verified the latest tranche of transactions, you were rewarded initially with 50 bitcoins, which would of course be worth millions now.Every so often, the number of coins the miners received as a reward for completing a block decreased. This was touted as a virtue in that the number of bitcoins would eventually be capped. The argument was that this gave it a guaranteed rarity value, unlike pounds, dollars or euros, which can be created by banks and central banks on a whim.After a while, the amount of computation required grew. Although it was, in principle, possible to do it on any general-purpose computer, it moved to specialised hardware. My son Leo bought one of these pieces of equipment with a view to becoming a Bitcoin miner.Unfortunately, it took about a year or 18 months to arrive. In the interval between when he bought it and when he received it, the computation needed to stand any chance of verifying a block had escalated greatly. He ran it out in the shed, 24 hours a day. It used so much electricity that it heated the entire shed. As I recall, he attempted this for a few months, during which time he never verified a single block. So he used up a lot of electricity without any benefit.This is why you get mining pools, isn’t it — where pools of miners share the rewards between everyone in the pool.Yeah. Now, of course, it’s got to the point where you only receive a fraction of a Bitcoin if you do succeed. Miners can no longer support themselves from the Bitcoin they earn, so they have to charge transaction fees to people using it for purchases.This has made it extremely expensive. Rather than being much cheaper than using a credit or bank card, it’s become enormously more expensive and therefore impractical for small transactions. Then in 2017, there was a distinct shift towards promoting it not as a regular means of payment, but as a speculation. As we’ve said before, it’s essentially like any other currency exchange speculation — some winners and some losers.Two things might have evolved Bitcoin into a viable operation. One is if there was such substantial use of it in normal trade that it didn’t get swamped by the wild swings that occur when most transactions are purely speculative. Another thing that might have validated it would be if someone had set up a solid arbitrage system between Bitcoin and gold, which could also have stabilised it.But to cut to the chase, this interview explained in great detail how Epstein was involved in funding the MIT group of developers, which solidified it in a way that it was no longer going to be what had originally been hoped for. This is definitely something to bear in mind.Once you’ve separated it from the likelihood of becoming a replacement for fiat currencies — which is what early enthusiasts claimed — it becomes purely a speculative bubble. Just like any other bubble, it’s fuelled by people buying in the hope of selling later at a higher price. This works until people no longer believe the price will continue to rise, at which point it’s likely to plummet.What I’ve always said is that it may well be worth having a speculative flutter with an amount that is small relative to your overall wealth, which you actually own and haven’t gone into debt to fund. As with any other speculation, it should be smaller than the amount that would cause real pain in the event of a total loss. That remains my position, subject to our usual disclaimers — I’m not making financial advice.No financial advice here, yes.So, having said that, that remains the position, even more so having discovered this. My own view of its viability was coloured by observing my son attempting to mine it — this was probably ten years ago, before the shift in emphasis towards purely speculative or store-of-value usage.The interview with Stephen Keen, the Australian economist, was essentially stating the same thing. He said there was no real solidity to it. The amount of energy used to run the computers was enormous and only going to get larger. That is why the analogy with mining breaks down.After all, if you sink a gold mine, it takes a lot of energy to dig the hole, excavate it, carry the material out and sort the slag from the gold.The energy in true mining is front-loaded, isn’t it?Yeah, but once you’ve done that, if the mine is successful, you have the gold and don’t have to keep piling energy into it. With Bitcoin, energy is indefinitely required to maintain the integrity of the chain. That, in itself, summarises the essential weakness of the whole system.So once again — if you want a flutter, feel free, but don’t expect to retire on it.We’ve talked in earlier episodes about the need for money that actually works, money that isn’t just created out of nowhere by a central bank that doesn’t have your interests at heart. So Bitcoin does tick some of those boxes. I also wonder whether Bitcoin has let a genie out of the bottle and got a bunch of people interested in making something work that will actually function as money. It might not be Bitcoin in its current form.The idea is correct, though: anyone should be able to trade with anyone anywhere in the world using the same unit of measure, whether you’re in the UK or Kenya. You should be able to transact easily and quickly without intermediaries. So there are elements of it that are right.Yeah.When the dust settles — assuming society hasn’t destroyed itself in the meantime — before the end of this century, we will have a single global currency. In my opinion, that currency will very likely be calibrated in gold.That’s what’s been used for thousands of years. There’s a principle called the Lindy Effect, which holds that something that’s been used for a long time is likely to be used for a long time in the future. Whereas something fairly new is unlikely to last far into the future.The reasons why gold has been a perennial form of money are very sound. There’s a finite amount of it. The rate at which the world’s gold stock changes is small and fairly predictable. It’s universally attractive, durable, divisible and easily verifiable in terms of quality.The downsides are that it’s hard to take self-custody, and it doesn’t scale well — you can’t go to a shop and hand over a gold bar. So you end up creating derivatives of value, a tokenisation of it. That system is then open to abuse, which is what happens with every single currency ever. They all end up worthless.Yeah.So what’s the solution? If we end up back on a global gold-backed system, how do we avoid this tokenisation making it worthless?It obviously requires somebody to hold the gold securely, with that holding linked to the transactions conducted. For this to work, there needs to be some form of real-time, transparent auditing of the ledger. This is possible in principle. I’m not going to sit here and design a definitive global trading system, but those are the features it would need.Also covered in that interview was an indication of Epstein’s involvement in setting up the Tether cryptocurrency. Tether is a form of cryptocurrency guaranteed to be backed by dollars. This means the Tether company is required to hold dollars, which they hold in the form of short-dated United States Treasury bonds.The forces within the US Treasury and the Federal Reserve see this as a way to sell short-dated Treasuries to the Tether Company to back its cryptocurrency. They’re talking about raising two or three trillion through bond sales. They’re hoping this will rake their chestnuts out of the fire as countries around the world, which have been holding Treasury bonds fo...
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The (Quite Serious) Shortcomings of Economics
Mar 500:17:54Tap to summarizeRob’s comments below are in italics.Derek’s comments below are in normal font.As we record it’s Monday, 23rd of February. I want to comment on what seems to me the most critical cliffhanger in the world at the moment — the movement of two American battle groups closer and closer to Iran, along with lots of threatening rhetoric. It’s difficult to know what will happen. It seems quite suicidal to attack Iran.They’re unlikely to destroy its retaliatory capabilities with the opening salvo. The retaliation — probably on Israel, certainly on American bases, and probably on the American fleets — is likely to be utterly devastating. How America would respond, and what that means for Israel, is anybody’s guess. Many of those things could be very hazardous to all of us. It’s difficult to view any of that with equanimity.I’ve come to the assessment that they basically just do whatever’s most profitable. If it’s most profitable to go to war, they’ll go to war. If it’s more profitable to have peace, they’ll have peace. War would appear to generate trillions of dollars.Well, as we’ve said before, in terms of the amount of real wealth at the end of the process, it’s a lot less than it was at the beginning.Anyway, on the topic of putting together our Sovereign Finance worldview—if we’re looking at the money system, the obvious place to start would be the academic discipline that supposedly deals with these matters. That’s called economics, sometimes called the ‘dismal science’. That’s a misnomer, because in real terms it’s not a science at all.The main reason I say it’s not a science is that we don’t discredit paradigms or theories when they fail to make accurate predictions. That’s what happens with any of the so-called hard sciences. To take one example: there was a time when the theory of combustion held that a substance within the material called phlogiston was emitted during burning. On the face of it, it looks obvious. If you set fire to a piece of wood, flames come off — it appears to be emitting something. So it was a reasonable theory.But when people looked into it experimentally in a controlled, sealed environment, they found that at the end of the burning process, once everything had cooled down, some of the air had been consumed. It wasn’t that anything within the fuel was emitted. Rather, it was combining with something in the air, which they eventually discovered was oxygen. That’s the way a real science progresses. It makes predictions based on a theory or hypothesis.It’s hypothesis, then evidence, then a new hypothesis. Plus no hypothesis can ever be beyond question. If you can’t question it, it’s not science.Yeah, exactly. That alone rules economics out as a science. There are also various dogmas which appear to be sacrosanct. There’s the image of the rational actor who is trying to improve his own circumstances at everybody else’s expense, essentially motivated by egocentric considerations.That’s probably where the adjective “dismal” comes in — it’s a very dismal view of human nature, that everybody’s trying to do everybody else down. There might be plenty of people who do that, but there are also plenty of people who are motivated by all kinds of things other than selfishness. That obviously needs to be taken into account in any model of human behaviour we’re trying to construct.There’s another facet of economic theory: the idea of things seeking equilibrium in the marketplace. This is a complete fiction. The marketplace is in a continuous state of flow, and in particular, it requires a constant input of energy for anything to happen at all — something that is largely ignored. I’ll come back to that in more detail.Market fundamentalists, as George Soros described them, hold up Adam Smith as a poster boy for modern capitalism. That wasn’t really the point he was trying to make at all. His writings are predominantly ethical, promoting upright moral behaviour rather than dog-eat-dog competition.I’ll link back to the episode we did on Adam Smith and the various other economists, because a lot of these people are partially represented by a small number of things they said.Yeah, exactly. When he spoke about the marketplace, he had in mind a literal market where people met once a weekI have a lot of issues with the word “marketplace” anyway. What on earth is this fabled marketplace that I’m supposed to be in?Yeah. Even 50 years ago, the stock exchange was a real marketplace where the same people met each other every day. You’d only survive in that if you were regarded as trustworthy. Now it’s become a complete abstraction. Many people never even meet those they’re conducting transactions with. It’s all done - not even over the telephone - but through a computer screen.The danger for sovereign entrepreneurs as well is that “the marketplace” implies you’re just a vendor — just another supplier of a commodity. That isn’t what most of us are doing.Yeah. In Adam Smith’s time, the marketplace was where people actually met. They were all part of the same community. Establishing a bad reputation for honesty or quality of goods would be self-defeating very quickly.It was also a predominantly Christian society. Even if people weren’t deeply motivated by the golden rule — do unto others as you’d have them do to you — they’d have to make at least a reasonable show of it, or they’d be ostracised. None of those factors applies to the theoretical modern global economy.Many early economists regarded the economic process as involving labour, capital, and land. After the Industrial Revolution, when the agricultural part of the economy became less dominant relative to the factory economy, the discussion narrowed as though only labour and capital were involved, and what might be an equitable or practical distribution of rewards between them.Marx felt that labour was entirely responsible for the addition of value and should therefore receive a larger share of the rewards. In fact, all of these analyses ignore one critical thing: without energy flowing through the system, none of this happens. Labourers can’t do anything unless they’ve had enough energy — in the form of food — to provide the muscle power for whatever work is involved.Empty sacks don’t stand up, as my dad would say.Yep. Capital, in terms of industrial machinery, doesn’t do anything until you put the coal into the furnace, or whatever source of energy you have. This means it’s not an equilibrium system — it’s what’s called an open system.Ultimately, it’s powered by the flow of energy from the Sun to the Earth, then released as lower-quality energy after whatever operations have been performed. It’s a continuous flow. It’s been supplemented for the last two or three hundred years by energy that came from the sun millions of years ago, stored in the form of fossil fuels. We’ve burned through those at a great rate, and still — as we’ve noted elsewhere — failed to properly account for the fact that as they become more exhausted, they’ll become increasingly expensive in energy terms to harvest.Finally, an important part of the analysis, almost entirely missing from mainstream economics, is the insights of system dynamics. This is the study of complex systems with multiple interacting feedback loops. Some of those loops are reinforcing, creating increasingly large results as output increases. Others are stabilising ones, bringing things back into balance by feeding output back into the system — the classic example being the thermostat. If the room gets too hot, the heating turns off, and vice versa.The equilibrium framing is mistaken. Energy flows through the system and must be replenished to keep it going. That’s why we need to bring these other factors in, if we’re going to build an economics that really reflects how things work and provides useful tools for strategising and selecting tactics.It sounds to me like economics, as it stands today, largely just serves the existing power structure.Exactly. Economists know which side their bread is buttered. They can’t afford to rock the boat, or they won’t get promotion and tenure. Those employed by banks or financial institutions are obviously there to serve the interests of the people paying their salaries.Economic theory also has nothing to say about the role of banks and how banks create money.That’s another major missing factor.The other thought I had on the subject of energy — we’ve discussed in the past that money in its purest form is energy, assuming it represents people trading for goods and services rather than speculating. Most transactions going on at the moment are the latter. But that movement also implies energy moving around.Yeah, exactly.It feels to me like if you fix the money, you solve a lot of the problems. There’s just a lot of vested interest against fixing it.Yeah. I was thinking about this the other day. We’ve talked at times about pensions and how far short they’re falling of how they’re supposed to work. It occurred to me that a major factor in the failure of the pension system is inflation.If you imagine a world of stable purchasing power — as existed in this country for 300 years before the disruption of the two world wars undermined Britain’s financial position — the theory of pensions makes sense. You accumulate a fund over a lifetime by paying in regular amounts, which grows via compound interest into a sum large enough to provide an income in your post-work years.The earliest payments into the account have the most effect o...
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The Great Global Transformation
Feb 2500:12:08Tap to summarizeRob’s comments below are in italics.Derek’s comments below are in normal font.We’re talking about a book you’ve been reading today. What is it, and what do we need to know?It’s called The Great Global Transformation, written by a chap called Branko Milanovic. I got it on a whim when Amazon recommended it — people who bought this also liked that — which, apart from being a clever upselling technique, is actually pretty useful at times.Anyway, this author was a former economist with the World Bank. He’s an economics professor at City University of New York and also a visiting professor at the London School of Economics.It’s a very data-heavy book, but the statistics are extremely well presented. There are plenty of good graphs and tables. One thing that drives me mad is when a book would really benefit from visual presentation and it’s just solid text. This author is clearly a very good communicator.The main thrust of it is something we’ve discussed before — the shift in wealth and productivity, particularly to Asia, predominantly China, but also many other parts of the region.I noticed at lunchtime that the honey I was using was made in China… It’s not like we don’t have bees here!Yeah, that is ridiculous.Well, I do get it — it’s cheaper to exploit people on the other side of the planet and ship it over to sell in Aldi.Our village shop sells locally produced honey from a man just down the road who has 200 beehives. How you run an operation like that, I can’t imagine.You have thick skin!In more ways than one! Anyway, one interesting statistic in this book was the increase in the share of global production in China versus the United States. Measured in purchasing power parity, the two actually crossed over in 2015 — eleven years ago.How do we define purchasing power parity?It’s the opposite of measuring currencies at market exchange rates. According to exchange rates, the U.S. produces significantly more than China—about 1.5 times as much. However, if one dollar’s worth of renminbi buys you twice as many goods in China as a dollar would in America, then purchasing power parity adjusts the statistics to allow for that.It also buys you twice as much honey, apparently.Yes. So it’s obviously a more accurate measure of actual goods produced, rather than just a numerical figure.The other interesting thing about the two graphs is that on the purchasing power parity version, the curves are essentially smooth — a steadily rising production rate in China and a steadily declining share in America. Whereas on the market exchange rate version, there are fairly wild zigzags. Throughout the 1980s, it appeared that America’s share of world production was climbing rapidly, and similarly in the latter half of the 1990s.That’s highly artificial. It’s not reflecting anything happening in the real economy — it’s a reflection of the dollar appreciating rapidly on the currency exchanges. This shows how loose the coupling is between the real world of factories, farms, and work on the one hand, and financialised measures on the other.It also surprised me that the gap is so large, since there should be arbitrage opportunities when currencies are misaligned with their actual purchasing power. The whole idea would be to bring those into line with one another. Of course, the reason the dollar has such strength is that it remains the world reserve currency — for now. As we’ve said several times, that could change extremely rapidly.I’ll go through the book further, and perhaps next week I’ll have a few more insights to summarise. The other thing I was slightly sceptical about is that many of these statistics are expressed in terms of GDP. As I’ve said previously, I’m sceptical of GDP as a real measure of wellbeing, and we’ve given a number of reasons for that.In this context, though, whilst I’m confident in my scepticism of it as a measure of wellbeing in developed, prosperous economies: GDP is often inflated by ever-faster obsolescence. The faster your washing machine wears out and has to be replaced, the higher the rate at which currency flows through the economy. That’s plainly not a serious advantage to anyone.You get whatever you incentivise. If you incentivised longevity, your washing machine would never break — you’d just replace parts. But that’s not what’s incentivised or measured.Absolutely. On the other hand, if you take a poverty-stricken part of the world where many people lack clean water, sanitation, indoor bathrooms, or anything beyond the most basic appliances, there is obviously enormous scope for improving their material circumstances. That improvement would correlate fairly well with GDP as a measure.So perhaps the higher up Maslow’s hierarchy of needs you go, the less important GDP becomes?Exactly. Those were the main points on that. As for world events, did you pick up on the scale of the police brutality in suppressing demonstrations against Herzog’s visit to Australia?Yes.It’s remarkable to me that such indiscriminate government-sponsored violence can be unleashed in what we consider a civilised country. What surprises me too is that they felt there might be some advantage to it.Just shows their true colours, doesn’t it?Even if they dislike people demonstrating against Israeli war criminals visiting the country, the far more astute response would have been to sit it out, wait for it to blow over, and let people forget about it the following week — rather than going out and clubbing and pepper-spraying inoffensive elderly people.It’s worth remembering that Australia was founded by prison guards, not by convicts.Yes. Anyway, those are my comments for this week — we’ll pick up a few more threads next week.Thanks for reading Sovereign Finance! Subscribe for free to receive new posts. This is a public episode. If you would like to discuss this with other subscribers or get access to bonus episodes, visit sovereignfinance.substack.com
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