Monday, December 01, 2008

Mumbai part two - financial warfare.

Here is a nice, short answer to a few questions people have asked Matt Savinar about his previous post (which I excerpted here for you)on the financial angle of the Mumbai Terrorist attacks.

...Scanning the posts to the LATOC Forum and the emails I've gotten regarding the alert I put out last week regarding the Mumbai attacks (See LATOC Red Alert posted Friday, November 28th) it seems a good number of people don't understand the context of the attacks. Whoever pulled off the attack is thinking in terms of financial warfare those of you thinking "oh this is much a do about nothing" are still thinking in terms of conventional warfare. But body counts are pretty much meaningless in the context of global financial warfare as the Fortune 500 are far more concerned about their interest rates than they are a loss of 200 or so human lives. This is why, as Mike Ruppert wrote last week, every world leader with an IQ over 70 is shaking in their boots right now. Reason being the effects of the attacks on the Fortune 500 and Dow 30 will be, at the very least, as follows:

A) the cost of insuring their outsourced operations goes through the ceiling

B) the cost of providing security goes through the ceiling

C) the cost of capital (interest rate) for any projects outsourced to India
and elsewhere just went through the ceiling

With so many companies as highly leveraged as they are, it doesn't take much to push them over the edge. Jack up their interest rates, jack up their insurance premiums while drastically escalating the amount of money they need to spend on security and a whole bunch of them will be plunged right into insolvency.

Point #2: "But won't they just move their operations back U.S. soil, thereby creating more jobs for us Americans?"

Again, this would only serves to raise their operating costs and therefore raise their interest rates. In a different era, where things weren't so mind-bogginly leveraged, a company might be able to absorb these increased costs. But modern Fortune 500 companies rely on "Just in Time" (JIT) financing the same way Safeway and Shell rely on JIT delivery food and fuel. As you already know, it only takes a brief (2-5 day) or small (1-3%) disruption in the JIT delivery of food and fuel to totally shoot the whole system to hell. It's the same with the JIT delivery of money. The companies most affected by these attacks have structured their operations for maximum financial "efficiency".* Maximum efficiency is great for a company's bottom line when times are good and the flow of capital is reliable. But when things get dicey, maximum efficiency means just a small increase in costs, be it in labor, in capital, in insurance rates, in the cost of security, etc. can blow your entire balance sheet to hell.

Key point: the big banks have loaned money to the Fortune 500 under the assumption that the project of globalization will continue, more or less, unfettered. An attack like this therefore detonates one of the basic assumptions undergirding the finances of pretty much every multinational corporation on the planet.

So the answer to the question of "will they be moving their operations back to U.S. soil" is "no, they won't be as the loans they've been getting from the Big Banks are based on the assumption of ultra-cheap outsourced labor. Without these artificially cheap loans, many of them will simply go out of business as their entire business model was predicated on low-cost loans, the issuance of which was predicated on unfettered access ultra-cheap outsourced labor."

Point #3: The Fortune 500 Do Not Have Their Finances Arranged the Way You Have Your Finances Arranged

I don't blame people for failing to understand the context of the attacks as it is only natural for a "normal" person to contemplate the financial situations of the Fortune 500 the way they think about their own personal financial economy. If, for instance, Joe the LATOCer is making $100,000 a year and paying 7% interest rate on his credit cards, then a pay cut to $97,500 coupled with an increased interest rate to 8.5% is not likely to make very much of an impact on his personal balance sheet. Heck, he might even fail to notice if he isn't totally on top of things. But that's not the way it works with Fortune 500 companies as they've already sheered everything to the bone for, as explained previously, "maximum financial efficiency." So people hear what sounds like small numbers and, thinking the finances of the Fortune 500 are structured the same way their own personal finances are structured, they fail to understand how such small numbers can wreak such huge havoc on such powerful companies.

Bottom Line:

The point of all this is that if you want to understand current events, you need to start thinking more in terms of financial warfare. When something like these attacks happen, the Fortune 500 only bother themselves with questions like "how many people were killed?" to whatever degree is deemed necessary by their public relations departments. Behind closed doors, what they are really concerned about are questions like "what is this going to do to our interest rates?" As the answer is "raise them drastically", an attack like this has them completely freaked out.

Best of luck,

Matt


*For more on this point see the article: How Efficiency Maximizes Catastrophe, which takes you to a page with an article about midway down called:

Diesel-Driven Bee Slums and Impotent Turkeys
The Case for Resilience
By Chip Ward

...Resilience. You may not have heard much about it, but brace yourself. You're going to hear that word a lot in the future. It is what we have too little of as our world slips into unpredictable climate chaos. "Resilience thinking," the cutting edge of environmental science, may someday replace "efficiency" as the organizing principle of our economy.

Our current economic system is designed to maximize outputs and minimize costs. (That's what we call efficiency.) Efficiency eliminates redundancy, which is abundant in nature, in favor of finding the one "best" way of doing something -- usually "best" means most profitable over the short run -- and then doing it that way and that way only. And we aim for control, too, because it is more efficient to command than just let things happen the way they will. Most of our knowledge about how natural systems work is focused on how to get what we want out of them as quickly and cheaply as possible -- things like timber, minerals, water, grain, fish, and so on. We're skilled at breaking systems apart and manipulating the pieces for short-term gain.

Think of resiliency, on the other hand, as the ability of a system to recover from a disturbance. Recovery requires options to that one "best" way of doing things in case that way is blocked or disturbed. A resilient system is adaptable and diverse. It has some redundancy built in. A resilient perspective acknowledges that change is constant and prediction difficult in a world that is complex and dynamic. It understands that when you manipulate the individual pieces of a system, you change that system in unintended ways. Resilience thinking is a new lens for looking at the natural world we are embedded in and the manmade world we have imposed upon it.

In the world today, efficiency rules. The history of our industrial civilization has essentially been the story of gaining control over nature. Water-spilling rivers were dammed and levied; timber-wasting forest fires were suppressed; cattle-eating predators were eliminated; and pesticides, herbicides, and antibiotics were liberally applied to deal with those pesky insects, weeds, and microbes that seemed so intent on wasting what we wanted to use efficiently. Today we are even engineering the genetic codes of plants and animals to make them more efficient.

Surprise Happens

...Our efficient energy and food systems are perfect examples of how monolithic and brittle our infrastructure can become. Political turmoil in the Middle East, storms ravaging offshore oil wells, refinery fires, terrorism, and any number of other easily imaginable, even inevitable disruptions send gas prices soaring and suddenly our oil-dependent economy is pitched into a crisis. Because there is no readily available alternative to how we fuel our way of life -- no resilience -- our dependence on fossil fuels leaves us especially vulnerable to crisis. Our food system is likewise vulnerable, since it is so dependent on oil-based fertilizers and pesticides and relies on cheap and consistent supplies of gas for farm machinery and shipping.

Redundancy -- alternative energy sources, for example -– would have left us options to fall back on in a time of such crisis. We did not develop those options, however, because they weren't considered "competitive." That is, if one energy source is cheaper to produce than others -- ignoring, of course, all the associated and unacknowledged environmental and health costs -- then that is the predominant energy source we will use to the exclusion of all others. Decades ago, oil and coal were cheap and so we constructed an entire energy infrastructure around those resources alone. (Nuclear squeaked through the door only because it was so heavily subsidized by government.) Solar and wind couldn't compete according to the rigid market criteria we applied, so those sources hardly exist today. We are still told that we will get them only when they become more competitive.

Our focus on efficiency in building manmade systems has been short-sighted because it fails to anticipate change over the long run. Resiliency is eliminated at each turn by owners, managers, and planners steeped in the cult of efficiency and trained to cut out profit-reducing redundancy whenever it appears. In organizations, this usually works well -- at least for a while. But our attempt to maximize the use of natural systems has, in this regard, been an unmitigated disaster...

...Ultimately, the loss of resilience can result in profound and unanticipated changes that happen when thresholds are crossed and ecosystems shift suddenly into new patterns of behavior with no way back...

...Restoring resilience to manmade systems will require an eye for options, an appreciation for redundancy, and a tolerance for chaos. Messy organizations may also be creative. But, hard as it may be, we will always find it easier to anticipate disturbance and build choices into our manmade systems than to understand how to conserve resilience in the natural systems that support us.


We have put all of our eggs in a big basket with large holes in it, class. We're going to have to ditch the big basket and use several smaller ones. And that goes not just for agriculture but for the economy in general - giant conglomerates need to be traded in for numerous redundant local and regional businesses doing the same things the giant multi-national conglomerate used to do. No more giant factory in China making your household goods, each little town and county will need their own little cottage industries making all that stuff we have been importing. This is the model that built this country - self sufficiency, redundancy, local economies and local farms and businesses. Sure, some small businesses may get "famous" for the quality of their work, but gone are the days of dreams of crushing all the competition and being the ONLY supplier of this or that - that paradigm is unsustainable.

Redundancy, relocalization, resilence - this is what we now need, class. So vote with your dollars - vote with your feet. This is the only way that the economy can be transformed, one shopping trip at a time. "Demand destruction" for cheap junk made by defacto slave labourers in oversea sweatshops where the Robber Baron CEOs can operate with impunity because there are no wage laws, safety rules, environmental rules, rules prohibiting child labour or rules requiring sabbaths, holidays, 8 hour work days, and so on. We, as a Judeo-Christian nation, have decided that such working conditions are immoral and unethical, and we should NOT support businesses that engage in these practices, period. Every dime you spend buying junk at Wally-Wort is a dime that could have been spent supporting your own local businesses in your own community - which benefit you far more than does sending away your money to the coffers of the Robber Barons, to support their communities and their children instead of yours.

We are way, way past the point of diminishing returns for globalization and debt-driven economics. It's madness now, and we must extricate ourselves from it.

1 comment:

BeyondGreen said...

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Check out what a company called Better Place and the State of CA are doing, setting up the infrastructure to accommodate electric plug in cars. Very exciting !
http://www.scienceray.com/Technology/Transport/Will-Shai-Agassis-Better-Place-Become-a-Reality.373407