Cascajun

Leo Linbeck III (aka L3) theorizes, via the Belmont Club, about the recent roller coaster ride the oil markets have taken.

Oil troubled waters 2

All of this goes back to the mortgage debacle, in which Jack and Jill went up the hill to fetch a big new home. Eased underwriting standards drove up home values (money flowing into housing faster than supply expanded); rising home values created phantom equity; phantom equity was converted by consumers into cash through additional debt; consumers spent that cash on stuff made overseas, driving down the value of the dollar and increasing global energy demand; the falling dollar and rising demand drove oil prices into the stratosphere.

Then Jack fell down and broke his crown, and Jill came tumbling after. Debt markets seized up; mortgage underwriting standards dramatically tightened; home prices fell as buyers left the market, unable to borrow on the same terms; existing mortgages went “under water”; mortgage equity withdrawals fell to zero (or negative); with no cash to spend, and lots of debt to pay off, demand for goods fell; falling demand led to falling production and the threat of deflation; the threat of global recession and deflation led to a financial flight to quality; the flight to quality led to a dramatic strengthening of the dollar; the strong dollar and falling demand led to plummeting energy prices.

It might be more satisfying to believe oil prices have been manipulated by the malevolent hand of Soros, Faisal, or Putin that pulls the puppet strings.

But it seems to me that the only hand manipulating all this is the invisible hand of Adam Smith, with the assistance of Frank, Dodd, and Raines.

And that, my friend, is the rest of the story.

Nick Gillespie writes at Hit & Run: We’ve Got Phoney-Baloney Jobs Up the Ying-Yang, Say America’s Mayors! All We Need Is the Money To Pay For Them!

When the history of this awful moment of bailout hysteria is written, there’ll be a chapter or 20 on the complete bogosity of what might call “the infrastructure flim-flam”—the idea that government can boostrap the economy out its funk by hiring two guys to dig a hole and a couple more to fill it in.

Amid the discussion of the NIC 2025 Project Leo Linbeck III gives a lesson on the creation of wealth in the comments of a post at the Belmont Club.

So, I haven’t read the entire report, and I doubt I will. Why? I started reading the executive summary, and on the first page, I read this:

In terms of size, speed, and directional flow, the transfer of global wealth and economic power now under way—roughly from West to East—is without precedent in modern history.

This sentence betrays, in one sentence, a level of historical and economic ignorance that should cast doubts upon the quality of everything that follows, indeed the 2025 effort itself, and the entire intelligence community. [Ed: to our readers, that’s a bit much, but don’t stop him, he’s on a roll…]

Let’s start with the economic. The idea of “wealth transfer” makes no sense. Let’s say I purchase a new Chinese-made drill press for $500. At the close of this transaction, I have the drill press, and the Chinese manufacturer has my $500. (I’m ignoring retail markups, distribution costs, taxes, etc.) Strictly speaking, there is no transfer of wealth. My personal balance sheet has $500 less cash, and $500 more PPE (property, plant, and equipment). My wealth, measured in either assets or equity, is unchanged.

Now, if the CIA report said that there had been a transfer of currency, that would be correct. But they could have characterized this as a transfer of equipment, and been equally correct. Neither is particularly meaningful in itself.

Wealth is created, not transferred. Strictly speaking, wealth is only transferred through gifts, like inheritances or charity. So the question is: what do we each do with our new asset? The Chinese probably put their $500 in the bank, which turns around and buys US treasury debt. So they get a whopping 0.5% return on their asset.

What about my drill press? Well, there are two things I can do with it: make something with it, or consume it. In the first case, let’s say I use it to make specialized parts for oilfield equipment. To make these parts, I need $10 worth of material, and I can sell the part for $25. Without the press, I can make 1 part per hour. With the press, I can make 2 parts per hour. I can make 5,000 parts before the drill press breaks. So, I’ve increased my hourly pay from $15 to $29.80 ($30 of profit, less 20 cents of drill press cost, or 10c per part times 2 parts in an hour). I have created a lot of wealth in the process: if I work 2,000 hours, I’ve created $29,600 per year of L3 wealth. Nice.

My other choice is to consume the drill press. I do this by smearing it with elephant dung and bolting it onto a picture of the Virgin Mary, and hanging this in my 20-month-old’s room. This way, I can enjoy the profound message radiating from my modern art installation every time I change his diaper.

So, the problem we’ve got is not “wealth transfer.” The problem is that we’ve been consuming our assets at a faster rate than we’ve been creating the wealth that feeds our consumption. The result is a correction, commonly called a recession. For a while, we consumer fewer assets and create more wealth. Eventually, things get back into balance. That’s bad for struggling artists, but it’s good for wealth creators. But if we use the recession as an excuse for taking away the newly created wealth from its creators and give it to artists through a generous NEA grant so that they can “spread it around” in the form of pachyderm poop, well, the recession will last a lot longer. But I digress.

Bottom line: the “wealth transfer from West to East” notion is intellectually sloppy. What they should have said was there there is enormous wealth creation taking place in low-income, highly-populated countries in the developing world. But this probably would sound too positive to make it past the thought police in charge of this document.

If we take the CIA report as saying that there has been a huge “currency transfer” instead of a “wealth transfer” (a notion I attacked above), their claim might make some sense. But to claim it is without precedent in human history is ridiculous.

The right way to measure currency transfer is to think about it in terms of the transfer of liquid assets. These are assets that can quickly and easily be converted into other assets. These days, we use national currencies for this purpose, but historically the liquid assets of choice were precious metals like gold.

Over the past 5 years, it has been claimed in the Washington Post that oil-producing countries and companies have received $2 trillion. Let’s use this number, although it does not account for any costs. During that same period, the total global economic production has been more than $250 trillion, so this means the transfer has amounted to less than 1%. This is, well, not a big number.

But maybe they meant a transfer of relative wealth. Sorry, that doesn’t work any better. In terms of relative wealth, from 1970 to 1998, the US share of world GDP fell from 22.0% to 21.9%. By 2007, it had risen to 25.3%. Oops! Wrong direction. It’s getting better!

Still, let’s look at another change in relative wealth from history (from Angus Maddison):

The British Empire, from 1820 to 1870: 5.2% to 24.1%
China, same time period: 32.9% to 17.2%

This is the obvious example. There are probably others.

Unprecedented? I do not think that word means what they think it means.

The causes of the current financial crisis are complicated, just wait until we start trading carbon. Lawrence Solomon writes about risk in the carbon allowance trading markets:

The ‘marketplace’ for carbon allowances will be one in which both supply and demand are set by governments, in which intense corporate lobbying for changes to both supply and demand is all but certain, and in which moral hazard — in the form of an expectation of a government bailout — is an absolute certainty. Valuing the toxic instruments created by Fanny Mae and Freddy Mac, that corrupted the pool of debt securities, will seem like child’s play in comparison.”

Hat tip: Belmont Club

I’ve called or written to my Congressman, Rick Larsen, four times regarding the bailout legislation that has been proposed over the last two weeks. I received an email response from his office today, which I’ve posted below. You can find my reply immediately below Congressman Larsen’s message.

Dear Mr. Arabie:

Today I made the difficult decision to vote for the financial rescue package. I would like to take this opportunity to explain my decision to you.

Over the past five days, I have heard from many of you concerned with the financial rescue package. I have read the messages you left with my staff. I have talked with constituents visiting my DC office. I have read your emails. I have spoken with local banks and small business owners, students, and families.

Many of you have said you were worried about the huge cost of this bill. Others thought we should not act to help the Wall Street investment firms whose irresponsible choices led us to this terrible situation. Some of you were concerned that this bill helped Wall Street but did nothing to help families struggling with foreclosure and the economic downturn.

I have heard your concerns and have worked to address them.

Our nation faces an economic crisis that has the potential to impact every family in the country. The Bush Administration responded to the crisis by requesting a $700 billion blank check with no oversight, no protections for taxpayers, no returns on taxpayer investment, and no help for homeowners.

Congress said no way, no how, no blank check. Instead, Democrats and Republicans in Congress worked together to make improvements to the Administration’s plan. We included the oversight, accountability and stake in our investment that American taxpayers need and deserve.

That is why I voted for the Emergency Economic Stabilization Act of 2008 (HR 3997). Although I voted in favor of the bill, it failed by a vote of 228-205. This improved financial rescue package would have cut the $700 billion payment in half and conditioned any future payments on Congressional review. It would have banned golden parachutes and exorbitant bonuses for Wall Street executives who participate. It would have provided help for families who have been hit hard by the foreclosure crisis. It would have ensured that taxpayers get a fair return on our investment, benefit from any future profit, and it would have provided strong oversight and prohibited any conflicts of interest.

The economic rescue package I voted for today is not about helping banks or Wall Street. It is about protecting all of us — American families in Washington State and across the country who need our economy to recover and grow.

Due to the credit crunch we already face, banks in Washington State and around the country have already tightened lending, and families and business are finding it more difficult to get the loans they need in their everyday lives. If you own a small business and need a loan, are planning to buy a home, or if your son or daughter wants to go to college, you could pay the price.

Without an emergency intervention, Americans who play by the rules, Americans who pay their bills on time every month, and Americans with good credit will suffer due to Wall Street’s mistakes and the Bush administration’s refusal to provide the appropriate regulation our economy needs.

Under the financial rescue package, the federal government would buy bad debt from troubled banks to unclog our financial system, allowing banks to once again provide the capital our economy needs to recover and grow.

In the coming days, it is critical that Members of Congress come to an agreement and pass a financial rescue package as soon as possible. Our economy depends on it.

In the coming weeks, Congress must also act to deliver the appropriate regulation and oversight our economy needs for the long-term - regulation and oversight the Bush administration has failed to provide.

Sincerely,

Rick Larsen
United States Representative
Washington State, 2nd District

My response follows:

Dear Congressman Larsen,

I appreciate your response outlining your reasons for supporting the Bailout bill. While I understand some action is necessary, I firmly believe this plan would have done more harm than good. At the very least, it sends the message that poor management and decision making don’t have dire consequences and lays the burden for such behavior on the backs of the taxpayers - which coincidentally is ONLY ~60% of those who file income tax returns.

Furthermore, I’m a bit dismayed by your attempt to lay the blame for this credit crisis entirely on Wall Street and the Bush administration. I’m not going to defend Bush or his economic policies, though I will point out two facts that must have escaped your consideration.

1. This crisis was brought about largely by the subprime lending fiasco of recent years, which was fueled by the Community Reinvestment Act and mismanagement at Freddie Mac and Fannie Mae - both government sponsored enterprises (GSE). These are not “Wall Street” firms.
2. Congressional hearings were held in 2004 & 2005 regarding this mismanagement and, at that time, Republicans were calling for more oversight and regulation of these two entities. The Democrats in Congress, however, prevented such reform.

Personally, I believe there is plenty of blame to go around - Wall Street greed, crony capitalism, and both parties have created this mess. Furthermore, I believe the American electorate should own up to most of it for putting partisans like you in office. I, for one, will not fall for your blame game politics. I would desperately like to see changes in Washington, but it is obvious to me you won’t be part of it.

Regards,

Randy Arabie
Independent Voter

CSPAN footage of congressional oversight hearings held in 2004 and 2005. The regulators were predicting the mortgage industry meltdown and DEMOCRATS blocked the REPUBLICAN efforts to enact regulations to prevent it.

People say many things about Ron Paul, but one thing he should be given credit for is this: Ron Paul talks about important issues that almost no one else does. Given his status as one of the biggest critics of the burgeoning national debt, I’ve been waiting anxiously for his reaction to the $700 billion debt-funded bailout of the financial industry.

Well, I just received this email from a friend who get alerts from the Ron Paul re-election campaign.

I agree with him on this issue; this bailout will only make our problems worse and will only accelerate the erosion of our freedom and liberty.

Wednesday, September 24, 2008

Dear Friends,

Whenever a Great Bipartisan Consensus is announced, and a compliant media assures everyone that the wondrous actions of our wise leaders are being taken for our own good, you can know with absolute certainty that disaster is about to strike.
The events of the past week are no exception.

The bailout package that is about to be rammed down Congress‘ throat is not just economically foolish. It is downright sinister. It makes a mockery of our Constitution, which our leaders should never again bother pretending is still in effect. It promises the American people a never-ending nightmare of ever-greater debt liabilities they will have to shoulder. Two weeks ago, financial analyst Jim Rogers said the bailout of Fannie Mae and Freddie Mac made America more communist than China! “This is welfare for the rich,” he said. “This is socialism for the rich. It’s bailing out the financiers, the banks, the Wall Streeters.”

That describes the current bailout package to a T. And we’re being told it’s unavoidable.

The claim that the market caused all this is so staggeringly foolish that only politicians and the media could pretend to believe it. But that has become the conventional wisdom, with the desired result that those responsible for the credit bubble and its predictable consequences - predictable, that is, to those who understand sound, Austrian economics - are being let off the hook. The Federal Reserve System is actually positioning itself as the savior, rather than the culprit, in this mess!

• The Treasury Secretary is authorized to purchase up to $700 billion in mortgage-related assets at any one time. That means $700 billion is only the very beginning of what will hit us.
• Financial institutions are “designated as financial agents of the Government.” This is the New Deal to end all New Deals.
• Then there’s this: “Decisions by the Secretary pursuant to the authority of this Act are non-reviewable and committed to agency discretion, and may not be reviewed by any court of law or any administrative agency.” Translation: the Secretary can buy up whatever junk debt he wants to, burden the American people with it, and be subject to no one in the process.

There goes your country.

Even some so-called free-market economists are calling all this “sadly necessary.” Sad, yes. Necessary? Don’t make me laugh.

Our one-party system is complicit in yet another crime against the American people. The two major party candidates for president themselves initially indicated their strong support for bailouts of this kind - another example of the big choice we’re supposedly presented with this November: yes or yes. Now, with a backlash brewing, they’re not quite sure what their views are. A sad display, really.

Although the present bailout package is almost certainly not the end of the political atrocities we’ll witness in connection with the crisis, time is short. Congress may vote as soon as tomorrow. With a Rasmussen poll finding support for the bailout at an anemic seven percent, some members of Congress are afraid to vote for it. Call them! Let them hear from you! Tell them you will never vote for anyone who supports this atrocity.

The issue boils down to this: do we care about freedom? Do we care about responsibility and accountability? Do we care that our government and media have been bought and paid for? Do we care that average Americans are about to be looted in order to subsidize the fattest of cats on Wall Street and in government? Do we care?

When the chips are down, will we stand up and fight, even if it means standing up against every stripe of fashionable opinion in politics and the media?
Times like these have a way of telling us what kind of a people we are, and what kind of country we shall be.

In liberty,

Ron Paul

via Insapundit.

The Bush administration today recommended the most significant regulatory overhaul in the housing finance industry since the savings and loan crisis a decade ago.

Under the plan, disclosed at a Congressional hearing today, a new agency would be created within the Treasury Department to assume supervision of Fannie Mae and Freddie Mac, the government-sponsored companies that are the two largest players in the mortgage lending industry.

The new agency would have the authority, which now rests with Congress, to set one of the two capital-reserve requirements for the companies. It would exercise authority over any new lines of business. And it would determine whether the two are adequately managing the risks of their ballooning portfolios.

The plan is an acknowledgment by the administration that oversight of Fannie Mae and Freddie Mac — which together have issued more than $1.5 trillion in outstanding debt — is broken. A report by outside investigators in July concluded that Freddie Mac manipulated its accounting to mislead investors, and critics have said Fannie Mae does not adequately hedge against rising interest rates.
–New York Times, 11 September 2003

The Freddie Mae/Fannie Mac problem was reported by the Wall Street Journal back in October 2004. (emphasis mine)

Fannie Mae Enron?

We’ve looked closely at the 211-page report issued by the Office of Federal Housing Enterprise Oversight (Ofheo), and the details are more troubling than even the recent headlines. The magnitude of Fannie’s machinations is stunning, and in two key areas in particular they deserve to be better understood. By improperly delaying the recognition of income, it created a cookie jar of reserves. And by improperly classifying certain derivatives, it was able to spread out losses over many years instead of recognizing them immediately.

In the cookie-jar ploy, Fannie set aside an artificially large cash reserve. And — presto — in any quarter its managers could reach into that jar to compensate for poor results or add to it to dampen good ones. This ploy, according to Ofheo, gave Fannie “inordinate flexibility” in reporting the amount of income or expenses over reporting periods.

[…]

Well, in its wisdom, Fannie decided to recognize only $200 million, deferring the other half. That allowed Fannie’s executives — whose bonus plan is linked to earnings-per-share — to meet the target for maximum bonus payouts. The target EPS for maximum payout was $3.23 and Fannie reported exactly . . . $3.2309. This bull’s-eye was worth $1.932 million to then-CEO James Johnson, $1.19 million to then-CEO-designate Franklin Raines, and $779,625 to then-Vice Chairman Jamie Gorelick.

[…]

Fannie Mae isn’t an ordinary company and this isn’t a run-of-the-mill accounting scandal. The U.S. government had no financial stake in the failure of Enron or WorldCom. But because of Fannie’s implicit subsidy from the federal government, taxpayers are on the hook if its capital cushion is insufficient to absorb big losses. Private profit, public risk. That’s quite a confidence game — and it’s time to call it.

Who are James Johnson, Franklin Raines, and Jamie Gorelick?

Obama’s Choice of Insider Draws Fire, Republicans Assail Head of VP Vetting

Last month, Sen. Barack Obama turned to James A. Johnson, a former Fannie Mae chief executive and Washington insider since the Carter administration, to lead the vetting of potential running mates for the Democratic Party’s presumptive presidential nominee.

But four years earlier, as Johnson was angling for a job if Sen. John F. Kerry (D-Mass.) was elected president, Fannie Mae did some vetting of its own. Company executives had grown so worried about the lucrative consulting deal they had cut with their former CEO that they considered enlisting an outside investigator to comb through the deal “in light of issues that could come up during Senate confirmation . . . or White House review of the consulting contract,” according to company documents unearthed by federal regulators.

Isn’t it curious that Obama is the second largest recipients of Fannie Mae and Freddi Mac campaign contributions?

All Recipients of Fannie Mae and Freddie Mac Campaign Contributions, 1989-2008

#1 Senator Christopher Dodd (D) $165,400
#2 Senator Barack Obama (D) $126,349
#3 Senator John Kerry (D) $111,000

There must be some history there.

Fanny, Freddie, and Obama (They go way back)

Both Raines and Johnson have served as CEO of Fannie Mae, with Raines taking over from Johnson. Both are key political and economic advisers to Obama.

[…]

It isn’t just Fannie Mae where Obama has a problem. Another close political adviser, in fact the one man responsible for rallying support for Obama early on among Congressional Democrats, is Rep. Rahm Emanuel, who served on the Board of Directors for Freddie Mac after leaving the Clinton White House. According to Freddie Mac insiders, Emanuel during his time on the board opposed every reform proposed by the Bush Administration that would have impacted Freddie and Fannie Mae.

Emanuel claimed to be neutral in the primary race between the wife of his old boss and his longtime Chicago acquaintance, Obama. But the chairman of the House Democratic Caucus, who would be first in line for the vacated Senate seat of Obama should he win the presidency, quickly dumped Clinton when it was clear Obama had a head of steam for the nomination.

As it turns out, the real culprit in this meltdown is Big Government.

The Real Culprits In This Meltdown

Obama in a statement yesterday blamed the shocking new round of subprime-related bankruptcies on the free-market system, and specifically the “trickle-down” economics of the Bush administration, which he tried to gig opponent John McCain for wanting to extend.

But it was the Clinton administration, obsessed with multiculturalism, that dictated where mortgage lenders could lend, and originally helped create the market for the high-risk subprime loans now infecting like a retrovirus the balance sheets of many of Wall Street’s most revered institutions.

Tough new regulations forced lenders into high-risk areas where they had no choice but to lower lending standards to make the loans that sound business practices had previously guarded against making. It was either that or face stiff government penalties.

The untold story in this whole national crisis is that President Clinton put on steroids the Community Redevelopment Act, a well-intended Carter-era law designed to encourage minority homeownership. And in so doing, he helped create the market for the risky subprime loans that he and Democrats now decry as not only greedy but “predatory.”

[…]

As soon as Clinton crony Franklin Delano Raines took the helm in 1999 at Fannie Mae, for example, he used it as his personal piggy bank, looting it for a total of almost $100 million in compensation by the time he left in early 2005 under an ethical cloud.

Other Clinton cronies, including Janet Reno aide Jamie Gorelick, padded their pockets to the tune of another $75 million.

[…]

The Clinton-era corruption, combined with unprecedented catering to affordable-housing lobbyists, resulted in today’s nationalization of both Fannie and Freddie, a move that is expected to cost taxpayers tens of billions of dollars.

And the worst is far from over. By the time it is, we’ll all be paying for Clinton’s social experiment, one that Obama hopes to trump with a whole new round of meddling in the housing and jobs markets. In fact, the social experiment Obama has planned could dwarf both the Great Society and New Deal in size and scope.

[…]

While government arguably has a role in helping low-income folks buy a home, Clinton went overboard by strong-arming lenders with tougher and tougher regulations, which only led to lenders taking on hundreds of billions in subprime bilge.

This is just another example of Big Government Gone Bad. I still can’t comprehend why so many people keep looking to the government for solutions to their problems. We see example after example of well meaning government intervention that only exacerbates the problem, yet we have roughly 50% of the electorate who believe the government should have a greater role in providing health care, education, and jobs.

Make no mistake, I’m not a free market extremist. The government certainly has a role as an infrastructure-builder. This however, is a prime example of the problems associated with government involvement in the economy. Too often the goals are wrong. Even when they are right, progress is often hampered by politicians, their friends, and businesses hoping to game the government system to benefit themselves at the taxpayers’ expense.

Thomas Friedman writes about Imbalances of Power today and raises some important issues - specifically the need for a source of energy to replace fossil fuels and global shifts in power. These are things I’ve taken particular interest in and would like to share my thoughts on some specific points made by Tom.

It baffles me that President Bush would rather go to Saudi Arabia twice in four months and beg the Saudi king for an oil price break than ask the American people to drive 55 miles an hour, buy more fuel-efficient cars or accept a carbon tax or gasoline tax that might actually help free us from what he called our “addiction to oil.”

I don’t dispute the underlying facts that (1) we need a source of energy to replace fossil fuels and (2) the current administration hasn’t put forth a plan. However, improving fuel efficiency does not, necessarily, led to less fuel consumption. In fact, more frequently it contributes to an overall increase in fuel consumption. Likewise, taxes on fuel and/or emissions won’t, by themselves, reduce fuel consumption or our dependence on imported oil.

None of that, however, is news to anyone who has paid attention to energy policy over the last three decades. The appropriate place to lay blame is at the feet of the American electorate - not any single politician or even either of the two major political parties. When it comes to energy policy, we - as a nation - have been fooling ourselves for decades.

Mr. Zakaria’s central thesis is that while the U.S. still has many unique assets, “the rise of the rest” - the Chinas, the Indias, the Brazils and even smaller nonstate actors - is creating a world where many other countries are slowly moving up to America’s level of economic clout and self-assertion, in every realm. “Today, India has 18 all-news channels of its own,” notes Zakaria. “And the perspectives they provide are very different from those you will get in the Western media. The rest now has the confidence to present its own narrative, where it is at the center.”

For too long, argues Zakaria, America has taken its many natural assets - its research universities, free markets and diversity of human talent - and assumed that they will always compensate for our low savings rate or absence of a health care system or any strategic plan to improve our competitiveness.

“That was fine in a world when a lot of other countries were not performing,” argues Zakaria, but now the best of the rest are running fast, working hard, saving well and thinking long term. “They have adopted our lessons and are playing our game,” he said. If we don’t fix our political system and start thinking strategically about how to improve our competitiveness, he added, “the U.S. risks having its unique and advantageous position in the world erode as other countries rise.”

I don’t accept Zakaria’s implicit premise that the rising rest - China, India, and Brazil - are more competitive than America because our savings rate is lower and our health care system is comparatively absent. I’ll grant that these countries are ascending competitors in the global economy. However, it would be simplistic to believe their rise is the result of America’s low savings rate and poor health care system. Furthermore, while there are many methodologies for ranking the quality of health care systems, I’ve never seen one where the quality of those in China, Brazil, or India are ranked higher than the US.

I’ll grant that we don’t have a strategic plan to improve our competitiveness, but once again I wonder why that is perceives as a new problem. What previous administration had a “strategic plan to improve our competitiveness?”

Rather than falling competitiveness, I think a greater problem facing America and much of the developed world is the ongoing shift in global power. Tom quotes the author of “The Post-American World.”

“Today, India has 18 all-news channels of its own,” notes Zakaria. “And the perspectives they provide are very different from those you will get in the Western media. The rest now has the confidence to present its own narrative, where it is at the center.”

While he doesn’t state it explicitly, I believe Zakaria is talking about a the ability to project power. Not simply power in the kinetic sense, but in terms of culture. Historically, the greatest factors that enable the projection of cultural power are wealth and manpower. The “rising rest” are getting richer and more populous while the more developed nations are getting older, less populous, and drift toward economic stagnation. The “rising rest” will see their ability to project power around the globe grow as the ability of more developed countries to project power wanes.

Current world wide demographic trends are:

• Overall slowing rate of population world wide;
• Stable populations in more developed nations (< 1% growth); and
• Growing populations (> 2%) in less developed nations.

Currently, the US birth rate is right at the replacement rate. That means we are having about as many babies as there are people dying each year. However according to the RAND Corporation, birth rates in Europe are falling and family sizes are shrinking.

The total fertility rate is now less than two children per woman in every member nation in the European Union. As a result, European populations are either growing very slowly or beginning to decrease.

At the same time, low fertility is accelerating the ageing of European populations. As a region, Europe in 2000 had the highest percentage of people age 65 or older — 15 percent. According to data from the U.S. Bureau of the Census, this percentage is expected to nearly double by 2050.

These demographic trends portend difficult times ahead for European economies. For example, a shrinking workforce can reduce productivity. At the same time, the growing proportion of elderly individuals threatens the solvency of pension and social insurance systems. As household sizes decrease, the ability to care for the elderly diminishes. Meanwhile, elderly people face growing health care needs and costs. Taken together, these developments could pose significant barriers to achieving the European Union (EU) goals of full employment, economic growth, and social cohesion.

Thus, if we want to address the “rising rest” in a strategic manner, we should consider the loss in power facing many developed nations. They face a world where their wealth & populations will diminish. Cultures are not static and don’t exist in a vacuum. They evolve, battle against competitors, and sometimes go extinct - just as species do. Historically, three of the most influential factors behind cultural survival are the will to procreate, the will to defend itself, and the ability to create wealth. Given that, what do the demographic trends of today’s world say about the future of Europe and its culture?

Regarding energy, the problem isn’t simply America’s dependence on fossil fuels. The entire global economy depends on fossil fuels. As the populations of developing nations (i.e. the ‘rising rest’) like India, China, Brazil, and Pakistan increase, so to will world wide consumption of fossil fuels. The reality we face is that the rate of growth in those countries and, consequently world wide demand for fossil fuels, will exceed our ability to switch to an alternative source of energy. America could certainly lead the way in alternative energy R&D, but we are not anywhere close to finding a replacement for fossil fuel based energy.

As Tom notes further along, that another significant global trend is the waning influence of nation-states and international governing bodies. Consequently, the system for addressing global issues among nation-states is more ineffective than ever. We face a future where “Never Again” means only one or two…well, perhaps three genocides every decade. A world we will be forced to share with genocidal tyrants ‘contained’ by international sanctions that will starve a million children each year or, alternatively, where we must form alliances to fight wars of ‘liberation’.

If international governing bodies don’t have the influence to stop blatant episodes of genocide like Rwanda & Darfur, I have little confidence in their ability to address exponentially more complex issues like global climate change and the looming global energy crisis.