Sunday, March 29, 2009

Petrodollar Slavery

This is 2009. It has been 320 years since Issac Newton published his Principiae Mathematicae. It has been 233 years since James Watt made his principal modifications to the steam engine. And it has been 104 years that Albert Einstein proposed his theory of relativity

But we still live in a world rife with poverty, disease and warfare. In Haiti, hardly a stone's throw from USA, human beings are forced to eating mud-biscuits to avoid the pangs of hunger. Around the world, every single day, 29000 children under the age of 5 die from completely preventable diseases.

Poverty may have been the natural state of mankind. But this was made obsolete by the advent of automation technology. Nevertheless, right in the 21st century, we still suffer from 16th century problems.

I request you to take a moment and contemplate. Why is this so ?

What is the most optimal way of utilizing technology to improve human well-being ? Are our current political and economic systems facilitating or hindering this process ?

Let it be known

At the current state of technology, it is possible to provide a supremely comfortable lifestyle for every single human being, something unmatched today by that of even the richest person on the planet. All forms of boring, mechanical or back-breaking work can be automated. We have enough resources of land, minerals and energy on this planet to do so for all the 8 billions of our population. If we see poverty, malnutrition or warfare on this planet, that is purely due to social and political reasons.

And the problem is not just limited to human beings. Vast numbers of plant and animal species are going extinct at unprecedented rates. The world's rivers, lakes and seas are suffering extraordinary amounts of pollution. The very air surrounding the planet has changed in nature. Our planet is on the brink of an environmental disaster due to climate change. Again, let it be known that we already have all the technological know-how needed to address these environmental problems.

What choices have we made to be against technology, against the planet, and against happiness ?

In this blog, I would like to convince you that we have not yet made that choice. In other words, a part of us is still enslaved and we have not exercised our freedom.

My discovery of the petrodollar

I am interested in sustainable energy sources for the future of humanity. Thus I discovered nuclear power and breeder reactors. In 1994, a very promising research program called the Integral Fast Reactor (IFR) was terminated by the US senate. The official explanation was that this program increased the risk of nuclear proliferation. But nothing can be farther from truth. (I advise you to read the excellent book of Tom Blees to get the whole story). Several US senators across the political stripes have voted to terminate the program. In reality, the IFR project could produce vast quantities of energy from depleted Uranium (U238) that is currently treated as nuclear waste. It is far safer and proliferation resistant than the current light water reactors (LWR). More interestingly, it would have no fuel supply crunches that exist with LWRs. I was forced to think what could be the political opposition to the IFR.

Clearly, there were the environmentalist groups who were opposed to nuclear power. These people did not care to differentiate the IFR from the older LWRs. But Greens never had a vast political support in the US senate. So who were the real opponents and what were they against ?

There were the coal power plants and the giant oil corporations who could be worried about an alternative energy source. But the IFR was a research project which could not have made a difference in the market for at least another couple of decades. As any corporation, these energy giants would never plan for that far in the future. In all likelihood, when it gets ripe for the market, they would have purchased the rights to use IFR technology.

Whoever terminated the IFR project was worried about the scientific and technological dissemination of this knowledge. Nothing less. In fact, the IFR scientists were gagged, and asked not to speak about the project.

When you compare the IFR project with existing nuclear reactors, the key difference is that it doesn't have fuel supply crunches. Is there someone who desperately wanted to maintain a monopoly on nuclear fuel supply ? But the current nuclear industry is very tiny and doesn't have plans of growing much. The existing LWRs need a rare isotope of Uranium (U235), and there is not enough such fuel to run the entire world for more than a few decades. The IFRs would not eat into this market, but create a new market for themselves. And in any case, it would not be ripe for the market for another decade at least.

Now I enlarged the question and asked myself, is there someone who desperately wanted to maintain a monopoly on energy fuel supply ?

And I discovered the answer is yes.

Oil accounts for most of the energy consumption in today's world. And the interesting bit is there is a monopoly of US dollar in the crude oil market.

Fiat currencies & the extraordinary privilege of the US dollar

Until the major economic depression in 1929, most world-currencies were convertible to gold. The national reserve banks of countries maintained gold reserves in their vaults. But the gold standard was abandoned after the depression and the currencies were floated on the foreign exchange market. However, the national reserve banks still maintained gold in their vaults as a security against their currencies.

By the end of the second world war, 80% of the world's gold ended up in US vaults. This created an extraordinary prestige for the US dollar, with several countries treating "dollar safer than gold". Many countries started to buy dollar assets and storing US dollars in their vaults, as a security for their currencies. US dollar remained convertible to gold.

For some reason, in 1971, there was a serious lack of confidence around the world in the US dollar (my guess is that this is probably due to the US oil-peak in 1970). France was the first country to demand the USA to exchange the dollars it held for gold. USA has flatly refused, and announced that the dollar is no longer convertible to gold. Instead, it approached Saudi Arabia and reached to an agreement that OPEC prices crude oil entirely in US dollars.

When I spot a monopoly, my first reaction is that something would be wrong. This monopolistic privilege would surely be abused. So what are the ramifications of the monopoly of US dollar on the pricing of international petrol crude ?

The OPEC US dollar agreement (to be called petrodollar from now on) effectively means that the entire world's oil reserves serve as security for the US dollar. These are not gold reserves sitting in a vault, but mineral reserves deep underneath Arabia. These reserves are estimated to be far more in value than the entire quantity of gold ever mined since the dawn of humanity.

With such extraordinary privilege, the US Federal reserve can keep on printing paper dollars. And keep buying petrol. Effectively, the USA owns the world's petrol for free. Since every country needs petrol to run their industrialized economies ,there will always be a demand for dollars in the world market. Other countries have to worry about inflationary pressures when they over-print their currencies. But not USA. These inflationary pressures are propagated throughout the world.

USA buys the entire world's goods and services in exchange for these paper dollars. Thus, the entire world's economy is based on exports to the USA. Manufactured goods and services are sold to US consumers in return to paper dollars which are stored in the vaults across the world's nations.

The USA has the largest trade deficit in the world. For any other country, such huge budget deficit will spell death to its economy. But not to the USA. Any devaluation of the US dollar will hurt countries across the globe. China and Japan hold trillions of US dollars as assets in their national reserve banks : they will sink along with the dollar in case of a crash. In fact, it is not just countries, most global corporations have their assets in dollars.

With such special privileges, USA can afford to do several adventures across the globe. A large portion of US government expenditure is spent abroad, mostly in warfare. The Iraqi war costs several billions every week. This money is all borrowed from the US Federal Reserve, which just prints the dollar bills. But who exactly is working to pay for the Iraqi war ?

Shock propagation by oil & commodity prices

Everyone still remembers the recent increase of oil prices, when a barrel of crude shot up to 125 dollars and more. But we have seen that the dollar is immune to inflationary pressures. Well, almost ! The oil producing countries would not want to sell their crude to empty dollars. Moreover, when futures-trading was allowed in the oil market (there exist only two oil-bourses in the world, in London and New York, both owned by Americans), the oil price was artificially shot up.

In order to buy oil, every country had to spend 2 to 3 times more money than they would otherwise. This has given leverage for the US Fed to print the extra dollars that it needed to sponsor the Iraqi war.

Now, the oil prices are immediately linked to the retail prices of products in the supermarket (because most of the transportation is done by oil) and these have shot up correspondingly. Such inflationary pressures are experienced throughout the world, and consumer spending was reduced. The worst of these pressures were felt in the poorest countries, of course.

When the market goes to a downturn, all traders rush to buy commodity shares which are supposed to be more resistant to market fluctuations. Consequently, these prices have shot up (food, minerals, metals and raw materials) in the aftermath of the oil price hike.

Thus, the economic shocks of US budget deficit were propagated around the world by oil and commodity prices. The global market came to a slowdown.

The wiggle room for financial thieves

Anybody who has done a course of accounting knows the concept of the wiggle-room. The account books are checked periodically, and if the company is making profits, the guy who is keeping the accounts can hide a tiny share of the profits for himself.

At the end of the year, the company still registers a profit, but that would be slightly lower than what it would have naturally registered. If the stolen amount is small enough in comparison to the profits, nobody would ever notice.

The knowledge of this critical threshold on how much to steal is what makes a successful thief. The stolen amount can be used by the thief for several purposes (a) blow it away in luxury goods and holidays (b) invest in casino shares which are super risky (c) invest in properties with no production utility for the economic engine, such as real estate.

All will be fine in a normal scenario. But what happens in a stock-market slowdown is that several financial thieves will discover that their knowledge of wiggle-rooms is not good enough. What should have been a small profit for the company ends up in a major loss. What should have been a small loss for the company ends up in a major bankruptcy.

If small companies file for bankruptcy, it is okay. Not many people shed tears, life goes on. But if major economic giants file bankruptcy, that will spell serious trouble in today's interconnected financial world.

Thus we enter economic recession. All prices fall down in this scenario to reflect to the new scenario of lowered consumer spending. Even the oil and commodity prices fall down, and behind everybody's backs, the US dollar rises in value against every other currency.

The incentives provided by petrodollar

The hegemony of the US dollar provides certain weird incentives for the market.
  1. Every country will be working day and night to export to the US consumer. In fact, even highly industrialized economies such as Germany and Japan are totally dependent on exports to the USA.
  2. US consumer is encouraged to waste energy (that he can get for free), food (that is subsidized by undervalued animal feed exports from across the globe) and consumer goods (that he gets for lower value, and that he trashes every other Christmas to buy new ones)
  3. The US government strives to maintain the petrodollar monopoly. That is, it has to work to (a) prevent alternative energy sources from spreading across the world, which eat into the oil-market (b) prevent any oil producing country from pricing their oil in euros, or any other world currency. If needed, the internal politics of that country may be altered by regime change or military invasion.
It might be interesting to reflect that Saddam Hussein started selling Iraqi oil in Euros in 2000. This was revoked back to the US dollar after the Iraqi invasion, when western oil giants gained their lost foothold in Iraq. Currently, Venezuela and Iran are openly rebelling against the US dollar.

Solution : Energy Dollar Equivalence

All the three incentives that I described earlier will disappear if there is an equivalence between the mechanical notion of work (measured in physical units such as Mega Joules) and economic notion of remuneration (measured in dollars). In an industrialized society, most mechanical work will be done by automated machines that run on energy resources.

In today's world which is run mostly on oil, the notion of energy dollar equivalence translates into a fixed price for oil, or an oil standard for all the countries' economies. Who will be up for it ?

Every oil producing country in the world wants to have a fixed demarcated price for oil. This will help them plan for future oil explorations carefully. Countries which have unconventional oil resources such as Venezuela or Canada (with its tar sands) would welcome such an initiative.

Every oil consuming country would also welcome a fixed oil price : because the consumers will be protected against inflationary pressures and oil spikes.

Alternative energy industries (solar / nuclear) would support a fixed oil price too, because that would provide stable economic incentives for their development (incentives which work for the long term, so that their usually high capital costs can be safely repaid).

If there is a democratic vote, there will be a unanimous yes for a fixed oil price, ranging from the leftmost end to the rightmost end of the political spectrum.

That will however shatter the petrodollar relationship, and institutions dependent on that will be affected, such as the US Federal Reserve (despite its name, the Fed is a private institution run by certain corporations).

Occam's Razor vs Conspiration Theory

Since I am a computer scientist, I subject every theory to the occam's razor. In layman's terms, this means when there are multiple theories explaining a situation, we ought to prefer the simplest one (the one which makes the least number of assumptions). Most conspiracy theories fail in this test because they usually create extra variables which do not have sufficient data to support them.

For example : (1) 9-11 was an inside job (2) Iraq was invaded to preserve the petrodollar (3) Afghanistan was invaded to preserve poppy crop cultivation (4) Omar Torrijos, Olof Palme or Yitzhak Rabin were assassinated by the CIA. The problem with these theories is that they equate correlation with causation, and they do not have sufficient data to support their hypotheses.

But what I have mentioned in this post is not a conspiracy theory. The relation between US budget deficit and oil prices is well known. The relation between oil prices and commodity prices is well known. And several influential economists have estimated the high costs of the Iraqi war.

The petrodollar hypothesis for our economic woes might still be wrong, but it has a nice property. It is falsifiable. That is, we can experimentally test it - revoke the special petrodollar privilege of USA and measure the state of the world's economy.

The twin aspects of slavery

Slavery has existed since ancient times. Iron chains were used to bound the slaves, and any rebellion amongst slaves was punished by horrific means.

Let's keep the ethical and moral arguments aside, and check if there is any social need for slavery today. And the answer is no. Due to our technological advances in automation, every single mechanical and tiresome work can be automated. There are three areas with applications for computers, automation and robotics : (a) work in hazardous or dehumanized conditions - radioactive zones, sanitation, waste disposal.. (b) repetitive and boring work - fruit picking, agricultural labor, repetitive industrial labor.. (c) work requiring excessive mechanical energy - transport, construction..

If we see such chores still being performed by human beings, that is purely due to a conscious choice of our society. We do not need slaves, but we choose to have them.

Slavery as we know, has two aspects (1) the theft of human labor (2) the lack of choice of labor.

Though iron chains no longer exist to bound our necks, these twin aspects of slavery exist in subtle forms even in modern times.

(1) According to leftwings, human labor is stolen by existing social structures. According to righwings, human labor is stolen in the form of handouts by the welfare state. But beyond these two simplistic views, the biggest theft of human labor happens unnoticed : by financial crime and stock market crashes, the causes of which we have observed earlier.

(2) Most people take the lack of choice of work for granted. We human beings had a long and painful cultural history, and the lack of choice of work is etched onto our subconscious. So, we can measure the gravity of this problem only by the opportunity cost. We have no need to have dreadful and mechanical chores, but we still have them. Even supposedly creative professions such as research or art have strong pressures from the market. Musicians are bound to the dictates of the recording industry and sacrifice their creative freedom to keep their contracts. Researchers prefer short-term targets and applications because they need to publish and keep the research grants coming. Both these pressures are especially high when the artist/researcher is young. However, the biggest lack of choice comes on the eve of financial earthquakes : when all the research money disappears and aspiring scientists have to look for ordinary worker posts.

In fact, what is being enslaved is the human creative spirit. And the culprit is not capitalism, not the petrodollar, and not large corporations. It is our own fear.

Politics : the art of obfuscation

I hope that by now you acknowledge the existence of modern slavery. And may be, you have a few hints on how to eradicate it. Since this is a global problem affecting the economy and the environment of the entire world, it can only be solved at the global level. Participating in elections etc. in individual countries will not lead us to a solution. And the bad news is that we have absolutely no functional political institutions at the global level.

Let us look for inspiration on how our ancestors have earlier eradicated different forms of slavery.

Jesus has taught to love the fellow man as one's own brother. Buddha has taught the same thing in India. Some people were moved by these ethical exhortations, but slavery or caste system still remained.

In fact, physical slavery was never completely eradicated until the success of automation. Slaves were toiling in American fields till the 1860s.

Mahatma Gandhi has rebelled against racial discrimination in South Africa. He has agitated by non-cooperation and non-violence. He might have stirred the Indian independence movement, but colonialism perished only after the second world war. And racial apartheid continued in South Africa until the 1990s.

The interesting thing is that in both scenarios, normal people have accepted slavery as something without escape. If somebody rebelled against bad working conditions, he was told that other slave owners treat their slaves much worse.

Today, if Indian laborers ask for better wages in Dubai, they will be asked to leave the country. If Mexican visa applicants are ill-treated at US consulates, they accept it as a part of their Karma. But when he was asked to leave the first class whites-only compartment in a train in Durban, . Mahatma Gandhi did not accept it as his Karma. He started to think why.

This is what I would like all you people to think (especially immigrant workers in developed countries). Thoughts lead to ideas, and ideas lead to action. This is when we should be prepared for politics - the art of obfuscation.

In a democratic society, an existing social institution can prevent a threat not by actually destroying the opponent, but (1) by sustaining the illusion of normalcy amongst the populace (2) by creating sufficient confusion amongst the populace about the opponent (3) by keeping the opponent sufficiently divided.

A politician is a person who perfects this art of sowing confusion. For example, we are led to believe that there is an inherent dichotomy between liberty (as exemplified by libertarians) and equality (as exemplified by socialists). We are led to believe that there is an inherent dichotomy between our environment (as exemplified by Greens) and human well-being (as exemplified by free-market idealogues). Our first task should be to destroy such dichotomies.

There will be G20 discussions starting 2nd April, and there will be thousands marching in the streets of London demanding to end world's poverty, to save the environment, to cancel off the debt to poor nations etc.. There will be also be thousands who disdain these marchers, but at the same time complain about the financial crisis and handouts. What we need is an open dialogue between both people, and find common evils. We start from an issue that we agree on, and proceed from there.

If only every single marcher in London shouts "fixed price for oil", that would bring in faster change than anything else.

Wednesday, March 11, 2009

Bon Appetit, Indian Democracy

Hello my friend and compatriot,

Come April and May, our country will be witnessing elections. 714 million voters will have to cast their votes out of a total population of 1 billion and 150 millions. This will make this the greatest democratic exercise in the history of mankind, ever.

We human beings have absolutely no mental conception for numbers of the order of one billion. I will help you visualize. How many are 1.15 billion people ? Well, let's say that I would like to shake hands with every Indian. Assuming that I line up all the Indians in a queue and shake their hands one by one, and assuming that a handshake takes 3 seconds, I will need 109.398 years to complete my job.

The thing is I don't have that much time.

So let's do something drastic. Let's stack Indians one on top of the other in a pipe. And then I send a radio signal from one end. Assuming that the average height of an Indian is 160 cm, and that we stack the Indians up in vacuum (because that is where light travels the fastest), I would need 6 seconds for my radio signal to reach the other end of the pipe.

That's more reasonable.

So what is my message ? Okay, I want you to remember this.

"Take it easy !"

Elections are overrated. Casting a vote is not the same as tying the knot in a wedding, so don't get too tensed up, alright ? Life goes on.

Well, now that we are past that important message, let me elaborate.

Imagine that you go to a restaurant to get your meal served, you expect basic courtesy and service from the waiter, right ? You expect him to lay down the table, give you the menu and look at you deferentially with a polite smile. And when you make up your mind, you expect him to take the order carefully in his notebook, answering any of your questions carefully if you didn't understand the items on the menu. Then, you expect the food to be prepared well in time, and be served to you in the most appetizing manner. Well, then you pay for the meal. And if you are happy with your meal, you appreciate the waiter and leave him a tip. Simple ? Precisely.

So, where were we ? Yes, elections. In a democracy, we have the honor of selecting the waiters for picking up our orders. We do it once every five years. So my advice is simple : just pick the most polite person, one that actually listens to you, and not one that treats you like you are a worm. Don't get too worried this step, or you will never get to eat anything.

It is the job of the waiter to note your orders. Do check if the waiter you picked is doing his job correctly. So here comes my first demand : (1) Every Member of the Indian Parliament (MP) has to hold a public internet forum where the demands of their constituents can be edited and displayed. To cater to constituents without internet access, every MP hires a team of journalists who interview the constituents and list their demands in the above website.

After the orders are noted down, the waiter should go to the kitchen and convey the information to the chef. In a democracy, this step is done by parliamentary debates. You want to be sure if the waiter is doing his job properly. Thus comes my second demand : (2) Every MP displays his attendance of the parliamentary sessions on his website, summarizes the proceedings of the sessions from his viewpoint, via text and video. At the end of every parliamentary season, each MP produces a thesis document, for evaluation on the progress of his tasks.

Then the chef actually starts to cook your meal, and you would be happy to know if he understood the waiter properly. In a democracy, the chef is called the executive. Here comes my third demand : (3) Every executive committee of India displays the plan and proceedings of its undertakings in an open and user-friendly format, with all geographical data superimposed on Google earth for better navigation. Such websites should be welcoming comments from the users. And whenever needed, each such website has a resident team of journalists who interview the users and note their comments on the plan.

Finally, the meal is cooked and arrives on your table. You expect the waiter to lay down the table, and serve you the meal with the utmost decorum. (4) Every MP should interact with the constituents and help them utilize the projects after completion. The opinion of the constituents should be noted down and published in a concise summary over the MP's website.

Then you happily finish your meal and proceed to pay. In politics, this process is called paying taxes, and is the least comfortable part of the whole experience. (5) The tax receipts of every single citizen should be put up for display, and the accounting of how every single paisa of that money is spent should be furnished with detail. It is the obligation of the MP to do this for the constituents.

Finally, if you are happy with the meal, you cast a benevolent gaze at the waiter and leave him a tip. (6) There will be a public voting held at the end of every year on the efficiency of MPs. This is done similar to the Indian Idol program with votes cast by cellphones. The best MPs are selected in various departments and they are given job perks.

See, digesting a democracy is not that difficult. I hope you are as convinced as I am. Here in India, we are living in a free country. So let's celebrate this. The way of doing that is by shouting. Just make sure that you are heard by as many people as possible. Stack the people up in a tube of vacuum if that's necessary (-:

I don't care what you have to say. You want your wife to get a free manicure every week ? Go for it. Shout it out ! You want the coconut tree be recognized as the official tree of India ? Good. Shout it out. You want mosquitoes to be exterminated from the face of earth ? Very good. You want to exterminate human beings ? Sure, oh wait, there is a problem. You don't exterminate human beings, that's outside the rule-book. (But please go ahead and shout so, if that makes you feel any better).