an almost certain future?

English: James Earl "Jimmy" Carter

Image via Wikipedia

32 years ago yesterday, on July 15, 1979, U.S. President Jimmy Carter gave a half-hour long talk on TV about a “top-down political solution” to address the issue of oil imports, global energy prices and the economic sustainability of one particular nation. He pointed to a few bold ideas: limit U.S. importing of oil and, rather than spend so much on oil, invest in technology that promotes efficiency, and finally, conserve fuel… as in simply use less energy.

The people of the U.S., generally speaking, ignored his proposals and elected someone else rather than re-elect him. If they had done as President Carter suggested and stabilized energy consumption and oil imports, the U.S. would not have had the boom it did into the 1990s. The U.S. economy would have followed a path closer to that of Japan, which peaked in 1989 and fell into a credit deflation for the 21 years since then.

Instead of taking a moderate or conservative path, the American people went on something of binge in the 80s and 90s. From 1980 to at least 2000, the American people spent much of their wealth, including on buying stocks and buying real estate, leading to huge gains in stocks and real estate. Most of the wealth spent by the American people in recent decades was accumulated earlier in the 20th century when the US was the top producer of oil in the world. Though the U.S. did not ever export much oil, we did export things like that we had made very cheaply because of our abundant supplies of oil, things such as steel and ships and missiles. That produced a huge transfer of wealth away from places like Europe toward places like Texas and California, two of the leading oil-producing states in the 20th century.

united states currency seal - IMG_7366_web

united states currency seal - IMG_7366_web (Photo credit: kevindean)

Further, in addition to spending much of their accumulated gains from abundant oil, the American people, by the 1980s, went deeper and deeper in to debt- and not just governments and households, but businesses like the huge insurance company AIG. Of all industries, insurance companies specialize in accumulating huge debts (also called “accounts payable” or liabilities). Insurance companies like AIG made immense promises to pay for things like car repairs through auto insurance, roof repairs through home insurance, expensive but often unreliable medical interventions through health insurance, and of course defaulted mortgages through mortgage insurance.

If not for an $85 billion rescue intervention in 2008 from a private company called the Federal Reserve to the private company AIG, a ripple of defaults might have ended the insurance industry in the US and the US financial infrastructure as a whole. Nevertheless, the masses still believe unquestioningly in the unfunded promises of insurance companies like AIG as they issue bold guarantees in their annuity contracts to cover immense future debts regardless of the performance of the actual underlying investments.

So, I mention this simply to bring attention to what I would call an addiction to gambling. I have done plenty of gambling myself and so I do say this with empathy for the desperate denial of an addict.

To me, there is not a huge difference between gambling on annuity contracts or lottery tickets. At least with state lotteries, the states have the money to actually pay all the promises they make.

In the case of annuity contracts, mortgage insurance, health insurance, home insurance, and car insurance, the insurance companies rely on a steady flow of new premiums and a limited out-flow of incoming new claims. In other words, it is a classic “Ponzi scheme.”

They do not actually have the money to pay many of the huge promises they make contractually. If even just 10% of all policy-holders all filed large claims in a single month, that would be a problem (a default or bankruptcy, as in the case of AIG in 2008- which is why it took $85 billion to bail them out).

The “racket” of the insurance industry would be criminal as fraud, except that insurance is not something as safe as a state lottery when the state actually has the money to pay for all their promises. Insurance policy and contracts are unfunded and the ones investing in the promises of an insurance company are presumed to know that those promises are not actually funded. It’s just an insurance policy, after all.

So, if people choose to risk their finances on the unfunded promises of insurance companies or of the bonds of governments like Minnesota or Greece, that is their voluntary choice. Investors get the results that correspond to their choices. Further, if governments impose taxes and other coercive revenue-generating programs on their funding base of potential “donors,” that is the business of those governments.

From the USSR to the Social Security Administration, governments specialize in unfunded liabilities, similar to the business of

China Insurance Building (中国保险大厦), Shanghai

China Insurance Building (中国保险大厦), Shanghai (Photo credit: thewamphyri)

insurance companies. However, governments openly used organized coercion to fulfill their promises. That is why government bonds tend to be rated much higher for credit-worthiness than corporate bonds. Governments can always just bill the taxpayers (their involuntary underwriters). That is why legislative initiatives are called “bills.” It is because they actually are literally bills, as in invoices, as in claims, as in collection activity.

Insurance companies cannot legally criminalize new activities to produce new fines or just choose to raise their revenues (like tax rates). Insurance companies are generally stuck with the original terms of their private, voluntary contracts. They can file for protection under bankruptcy law. They can lobby for government intervention to plea for the government to impose new terms on the policy-holders who are naively expecting insurance companies to keep all their promises all of the time.

In other words, the functional market value of all insurance contracts rest on the organized coercion of the government officials who enforce contracts in whatever particular jurisdiction. The functional values of all “accounts receivable” (as in all credit and all debt) is legally based on the organized coercion of those authorized to enforce the contract, such as to perform evictions, garnishments, levies, seizures, and all other legal forms of involuntary transfer of ownership (including taxation, confiscation, and conquest).

People worldwide are newly coming to recognize the vast difference between actual cash and unfunded promises for future payment of cash (such as the legal obligations of an insurance policy or a mortgage contract). Most of the credit is grossly overvalued based on the presumption of eternal economic expansion based on eternal cheap fuel. Most of the cash is vastly discounted based on the same presumption.

The business of governments is to resolve the accounts of all legal obligations in their jurisdiction. Governments can take action to enact new laws to bail out the insurance companies (such as the immense transfer of wealth from taxpayers to financial institutions called “TARP”). Governments can also refuse to enforce certain contracts, such as when the police chief of Oakland recently listed the crimes that his police department no longer had the resources to respond to.

People worldwide are newly coming to recognize the immense functional importance of the organized coercion of governments. People may presume that there is such a thing, for instance, as “property rights.” Without a county sheriff department to “hold the boundary” of a real estate title, the ink on the paper has no more influence over the activity of humans than a law written to prevent rain drops or wind from crossing a “property line.” Property lines and property rights are concepts, as in agreements in language. Those agreements rest on the authority or “full faith and credit” of the governments of organized coercion.

What is emerging is that many prominent civilized nations are entering a sudden transition away from globalization, expansion, and cheap fuel toward localization, contraction and less fuel. In other words, President Carter’s proposal may have been rejected, but it is happening anyway.

Rather than a smooth, voluntary transition, the U.S. simply cannot afford to increase oil imports, mostly because there is less refined oil immediately available than in prior years. In the 1970s, the U.S. could just go to OPEC nations and buy their fuel from them (or invade). Now, with the U.S. consuming 25% of the world’s oil with less than 5% of the world’s population, the U.S. must realize that enough if consuming 100% of the world’s oil, there would still eventually be a decrease in the consumption of oil in the U.S., because the amount of oil available worldwide to extract and refine began declining in 2006.

For now, huge bureaucracies like Greece or AIG can borrow a little more to cover the interest on the debts that they cannot afford to pay. That is temporary.

Much smaller networks will attempt a variety of adaptions. Some will arise as the most adaptive.

Otherwise, wealth and power are shifting from the previously dominant regions toward the middle east. In the absence of a major technological shift very soon, the EU may follow the fate of the USSR and dissolve soon. While the US is still the third largest producer of oil in the world, regionalizing and localizing of politics is almost certain, according to my deductions. Oil-producing states like Alaska are in a solid position to continue expanding in affluence and influence, just as Texas did a century ago. Oil-dependent states like Arizona, Nevada, Minnesota, and New York may soon be facing a crisis much worse than that of Greece or Italy so far.

English: Debeka insurance company in Koblenz D...

Image via Wikipedia

Advertisements

Leave a Reply

Fill in your details below or click an icon to log in:

WordPress.com Logo

You are commenting using your WordPress.com account. Log Out / Change )

Twitter picture

You are commenting using your Twitter account. Log Out / Change )

Facebook photo

You are commenting using your Facebook account. Log Out / Change )

Google+ photo

You are commenting using your Google+ account. Log Out / Change )

Connecting to %s


%d bloggers like this: