Carbon monoxide poisoning is undetectable to our senses. You’re dead even before you know it. The present state of US seems similar to a nationwide CO poisoning, as the country sinks slowly into the mud of corruption, and complacency. The confidence of yesterday yields to the despair of today, and a new sense of normalcy pervades the nation in doom and disaster.

But did we get here overnight? Even high school students have an idea on what brought America to its miserable state today. But did it all happen overnight? Did the economic system collapse because of the reckless practices of the private sector, or the irresponsible policies of the government? Or was it the insane spending habits of American citizens which resulted in the debacle that we’re going through today? And yet, perhaps it was just the extreme right-wing ideology of the Bush Administration, in both politics and economics, that brought down the US to its shameful state of today? Who knows, as some people say, it was perhaps a Chinese conspiracy in which they destroyed America by lending to Americans, poisoning the American psyche with their purchases of Treasury bills, and the financing of the current account deficit.

But are these the only causes of the disaster? How about the the Glass-Steagall Act, repealed by the Clinton Administration in 1999, which created the legal framework for the destruction of the American financial system? What about the debt bubble that brought the savings ratio of American public from double digits to zero percent of income over the course of two decades? And the massive ballooning of the budget deficit under successive administrations which was only masked during the Clinton years by the tax revenues inflated by the stock market bubble and the related illusory boom? The groundwork of that was the achievement of the Reagan Era.

Wherever we look, we see rot, decay, corruption and mismanagement. It seems like there’s nothing good about America these days, and what a great change is that, after those times when everything seemed better than perfect in this nation? What lies behind the spectacular destruction of the American Dream, constructed by the sweat and toil of generations, yet erased in the course of two brief years?

Of course matters are not as simple as they seem. Things were never as bright as they seemed even in the heyday of the Bush Balloons, and today there’s still a lot to be positive about America, regardless of all the errors, crimes, and mismanagement that becomes more apparent by the day. Still, there’s little cause for optimism: the crisis is just beginning. and we’ll have many more years of this for sure, and where and how it will end is known to Providence only at this stage.

And who did this to US? Was it the Modern Nero, Mr. George W. Bush, who successfully annihilated the greatest project of humanity in the 20th Century? Was it his nemesis, Mr. bin Laden, who brought the US to sobriety, and delivered the ivory towers to dust and ruin? Or was it just the Average Joe, with his maniacal spending practices, fanatic self-righteousness, and short-sighted aggressiveness that brought this age to its close?

It was probably all of those, and more. Nations rise and fall, and they’re weakest when they appear the most powerful. With all that sense of security, and invincibility, America did all that it could to bring all sorts of calamities upon itself through its hubris and excesses. Nothing much can be done now, and if we can’t avoid being burned, why not try to enjoy the fireworks in the meantime?

History repeats itself, as the famous saying goes. It is true that throughout history the fate of nations and states has been the same: extinction. There’s no reason to expect that America’s fate will be any different in the long run, but unfortunately that doesn’t mean that we can predict how the downfall of the nation will progress. We do not expect the process to be reversed, and as the political cycle is eternal(in practical terms), all that we, as individuals, can do, is to prepare for this eventuality, and to study its significance for the future of humanity.

At its beginning America was an experiment on a political system based on diversity, freedom, reason and tolerance. At first these principles were not all-inclusive. Freedom did not apply to blacks, and tolerance did not embrace certain ethnic minorities at times of peril. But in spite of all that, the American model always aspired to good which was defined through logic and common sense. The emancipation of human mind from bigotry and prejudice is not the work of America, to be sure, but America’s contribution to the tearing down of the edifice of unreason cannot be overemphasized either. It is a testimony to the powers of a democratic system that in such an oppotunistic society as the American one, conflicting interests were successfully accommodated, tyranny avoided, and freedom reaffirmed at every critical turning point of events. Unfortunately, the success of the system eventually became its biggest weakness, as confidence turned to hubris, and freedom to recklessness, with those of our time being the unlucky witnesses of the end of an era.

We believe that America is already past the crossroads. Many tie their hopes to the eventual success of the new administration, and to a new age of diversity, and increasing freedom and tolerance for the American people, under the benevolent and enlightened eyes of the president, Mr. Obama. We would be delighted to share in those hopes, and will gladly agree that the success of the present administration would be a miracle cure for the ills of America. Unfortunately, the Obama administration is but presiding over a reshuffling of chairs, a readjustment of shares in the political scene, while its economic policies are timid, unrealistic, and indecisive, and in the diplomatic arena, it’s but a cosmetically enhanced continuation of a tradition of follies. Mr. Obama would surely be remembered as one of the greatest three or four American presidents if he were to but steer the nation to normalcy after the various debacles of the Bush administration, but it seems now that all that he will manage will be a legacy of mediocrity and indecisiveness. We cannot criticize him too much, for he was facing a gargantuan task right from the beginning, where failure is success, and defeat, victory,

Following the victorious end of the Cold War, with all foes prostrated and subdued, with an economy that was the richest, most productive and innovative in the world, with a free political system that was the envy of nations, America was tireless, incomparable, and insuperable among peoples. From Cape Town, to Hong Kong, to Tehran, to Berlin, Moscow, or Rio de Janeiro, American firms, sportsmen, singers, and brands dominated the world. It was the end of history, we were told, liberal democracy had triumphed, and there was nothing that could challenge its victory. Even the awoved enemies of the nation could not avoid being envious of its technical achievements, of the efficiency of its goverment in comparison to much of the rest of the world, and the power that the American citizen enjoyed. Thus America overextended itself on a mammoth scale, conquering, dominating, purchasing, enslaving, and in short doing whatever it wanted, without worrying about the consequences. “We do it, it’s done” was the maxim. And America kept doing whatever it wanted until today, and now everything was undone, and the house of cards comes fluttering down.

The financial system is bankrupt, but with the dismantling and rebuilding of the system delayed and prevented, a decade long period of stagnation is highly likely. American citizens are exceptionally vulnerable to demagoguery, and chavenism as they seek someone to blame for the calamities that befell them. The political system is corrupt, subservient to the interests of a small oligarchy, and completely unable to rejuvenate itself in order to present solutions to the nation’s problems. The American society is as divided as ever, each side suspicious of the other’s motives and beliefs, with little common ground between the interests of the elite, and the average.

As with financial markets, nations move by greed and fear. In the past, a tribe would harass its neighbours either because its memebers were starving, or because all of them were well-fed, well-clothed, and superior to those that surrounded them. In today’s case, the shock is massive, and its implications unpredictable. The American giant is ashamed, and fearful. The behemoth feels hurt and grieved, unwilling to admit that there’s no one other than itself to be blamed for its sufferings. But the best way to mask shame is to boast, and the best way to hide failure is to bravado and chauvenism. And when the giant rises and strides the final paces of its path, towers will crumble, mountains shake, and man and beast will tremble in fear.

The collapse of the oil bubble that raged between 2005 and 2008 has not yet convinced that many people that the price of oil can enter a medium-term downtrend. That, however, is not surprising, given how analysts react to deflating bubbles in general: each new low is regarded as a new entry point, while concecutive lower tops are regarded as an anomaly.

Needless to say, volatility in the markets is exceptionally high these days, which makes deriving meaningful signals from market action alone a great difficulty. On the other hand, the fundamentals emit clear signals: the meteoric rise of the oil price during the past decade was by no means isolated from the general speculative tendecies of the period, which caused everything from real estate to junk bonds to trade at extremely elevated levels. The speculation on ever-increasing Chinese oil demand was predicated on the Chinese consumer gaining access to middle class privileges, such as cars and overeseas vacations, which would create endless demand for oil, and many other commodities. Today’s picture seems to contradict the scenario, with Chinese employment growth slowing down significantly, as global trade contracts by the largest amount in decades.

The ongoing severe demand shock would suggest that the oil price is unlikely to gain much momentum for a number of years. On the other hand, it is difficult to decide on oil market trends without deciding on the fate of the dollar first, but on this front also, we do not expect any immediate collapse. The deleveraging process is ongoing, spreading from the financial sector, to the manufacturing branch, and finally reaching the consumer in the aftermath of the the massive layoffs that are still continuing. As long as there’s dollar-denominated debt that awaits settlement and liquidation, a dollar collapse seems improbable.

But all that shouldn’t blind us to the difficulties that the eventual rise in oil consumption in emerging markets, and in China in particular, will pose for the world at large. Oil reserves are limited, alternative energy is still unproven and expensive, and the track record of world governments in timing and resolving supply and demand issues is unimpressive, to say the least. Neither nuclear energy, nor electric cars were enough to eliminate the dominance of oil as an energy resource, and there’s no reason to think that all the investments in solar power will eventually supplant oil as the energy source of the world. The dynamics are rather simple: as oil prices rise, panicky governments sponsor all sorts of investments in alternative energy, which lose most of their appeal and financial feasibility as oil prices correct lower, and the market readjusts itself. It is easier to convince the taxpayer to fund solar power projects when oil is $140 per barrel, but the urgency is far less evident when it trades between 30-60, as is the case today.

Still, the problem with oil isn’t necessarily born of the limited amount of supply in today’s world. Supply and demand are volatile, and direct and indirect speculative activity can distort prices and the fundamental picture easily. That there are a lot of people buying very expensive cars today doesn’t mean that they can afford to do so by any means. The last phase of the  credit cycle greatly inflated the demand for oil, and I believe that is also what convinces so many people about the impending disastrous consequences of peak oil today. Oil may or may not may not peak soon, or it may have already done so, but the developments of the past decade, at the very least, demonstrate in an unmistakable fashion that the price-reserve relationship is very weak indeed.

What really causes the oil-related strategic problems that complicate the relationship between China and the US is the total dominant power of Western Nations over all sorts of secure energy resources in the world. Oil resources are often operated by Western firms, or are located in the area of dominance of Western nations, as is the case with Nigeria, the Middle East, or Central Asia. While there are oil-rich nations that are mostly immune to the political influence of the Western World, such as Russia, or Venezuela, China has no special influence or relationship with them either, at least at this stage. The isolation of such a dynamic and vigorous power from all kinds of secure access to the most important energy resource in the world is an uncommon phenomenon, and doesn’t bode well for the global balance of power.

The repeated attempts and stated intention of China to acquire an airplane carrier, its attempts at improving relations with the unpleasant regime in Sudan, its close relationships with regimes in Russia, Iran, or Venezuela, should all be seen in this context. As a nation whose foreign policy has often been determined by concerns about secure energy supplies, the US should be understanding toward the natural, and honest worries of the Chinese leadership about the total dependence of the Chinese people on resources that are completely dominated by others.  

Of course, no one is impeding the access of China to oil in today’s world. Free Trade is still the maxim, and there’s no expectation of an embargo, or any kind of serious conflict between China and any other major Western nation. But nations do not base their plans on what is available today, but rather on what may be unobtainable tomorrow. In order to successfully accommodate China as a rising nation, its right for secure access to energy resources must be acknowledged and guaranteed, as there is no justification for the opposite course.

Sadly, all these necessities must be implemented by the future presidencies of the US. As populism, protectionism, and nationalism rise across the globe, it’s unrealistic to expect that politicians can choose the course of decency over short-term gain and provocation. The head of the US Federal Reserve has reapeatedly blamed the profligacy of the US consumer on the high savings of the Chinese. The Bush administration, with its own stellar attitude toward human rights, was always willing to criticize the violations in China, and with the recent changes in policy, we can expect that attitude to be solidified further in American minds. It remains to be see whether the massive imbalances of global power can be managed through peaceful and sensible means, but the immediate signs in the political field do not bode well in this respect.

Politicians, activists, radio hosts, polemicists enjoy discussing the War on Terror, writing pages after pages on how the struggle is faring. Authorities never miss an opportunity to declare their commitment to destroy the terror network, although a lot more is unclear on how the causes that inspire the militants will be dealt with. It is indeed probable that the Al Qaeda network, and its chief, will be eliminated eventually as a result of some chance event which cannot be predicted today, and then the authorities will claim some kind of victory. But, alas, if the purpose was destroying US supremacy, and causing maximum harm, Al Qaeda is already victorious, and in this article we will examine how that victory was won.

Al Qaeda, and the numbers 9/11 are etched indelibly in the collective memory of America. And yet the September 11th attacks occurred in an environment that was already challenging and difficult for the US. A multi-year stock bubble had burst, hundreds of thousands of people were losing their jobs, inventory liquidations, and falling asset prices were stoking fears of deflation across the political and economic landscape. The stock bubble, the culmination of dynamics that were in place since the 80’s at the latest, had grown to an enormous size before bursting, and the risk that it would hurl the American, and global economies into a long period of economic slack and pessimism was significant and frightening.

Sorting out these difficulties was the duty of one person before everyone else, and that was Alan Greenspan, the head of the Federal Reserve at the time, whose counter-cyclical policies up till then had lead the nation through a period of unprecedented optimism and prosperity. But in fact the tools at the disposal of Mr. Greenspan were not that numerous. All that he could do was to reduce the central bank’s interest rates in response to the slack in economic activity, and to hope that the extra liquidity would unclog the credit channels, allowing the American machine to keep running full-steam ahead, just as it had done in the aftermath of the many other recessions that had occurred since the end of the Second World War.

But then came the Black Swan, and alighted, in an altogether ungraceful manner, atop the Twin Towers of New York. Suddenly we were speaking of a war beside the recession, and worrying that the fear and uncertainty that would arise out of a wartime mentality would multiply the economic perils of the US. The US government’s response to 9/11 was fulminating in every direction, and in hindsight, judging by the success of the US intelligence agencies in restraining violent anti-American activities around the world, we can say that the reaction of the government was extreme and unnecessary. But Americans are emotional creatures, and America wanted revenge.

And so, Alan Greenspan had to keep reducing federal funds rate, in order to make sure that the wars that the US would have to wage would not lead to an even wilder and longer contraction of the American economy. He had been reducing them for quite a while since the beginning of the recession, but he had reduced the size of the cuts to 25 basis points two months before 9/11, and in the last statement the central bank declared:

“The Federal Open Market Committee at its meeting today decided to lower its target for the federal funds rate by 25 basis points to 3-1/2 percent. In a related action, the Board of Governors approved a 25 basis point reduction in the discount rate to 3 percent. Today’s action by the FOMC brings the decline in the target federal funds rate since the beginning of the year to 300 basis points.”

At that point there was no sign that the rates would be close to 1 percent before the end of the year. But on September 17th, the statement was reading:

“…decided today to lower its target for the federal funds rate by 50 basis points to 3 percent. In a related action, the Board of Governors approved a 50 basis point reduction in the discount rate to 2-1/2 percent. The Federal Reserve will continue to supply unusually large volumes of liquidity to the financial markets, as needed, until more normal market functioning is restored. As a consequence, the FOMC recognizes that the actual federal funds rate may be below its target on occasion in these unusual circumstances.”

And then they went on to reduce the rates two more times by fifty percent before the year was out, bringing it down to 1 percent eventually, creating a large gap between where the rates should have been according to the guidelines of economics, and where they actually were. The gap was easy money, the unraveling of which destroyed the US economy in the end.

Today it is widely acknowledged that the divergence of actual policy rates from the suggestions of the Taylor Rule, for such a long time, in such a pronounced fashion was one of the major causes of the financial and property bubbles. The Federal Reserve’s own statements at the time state clearly that the events of 9/11, and the panic in its aftermath had an important role in convincing them to reduce the main rate by a greater amount, and with greater speed, than had been previously anticipated. In any case, there is no logic to a central bank zigzagging between 25 and 50 basis point moves unless there are compelling reasons for their decisions.

It is clear that what forced the hands of the US Federal Reserve were the momentous events of September 11^th, 2001. We are still going through the aftermath of that day, and it is as yet unclear how deep down the US will be taken by the unraveling consequences of this historic attack, and the consequent policy error.