Welcome to the age of diminishing returns

Thursday, February 13, 2014

The die off of the top predator




(Image from legacysecurity.com). The post below, by Dmitry Orlov, is the result of an exchange of e-mails about the similarities between the collapse of the Soviet Union (30 years ago) and the ongoing collapse of several Mediterranean countries, including Italy. Read Orlov's post to understand his interpretation of a phenomenon that I tend to see as the result of the behavior of the so called "Apex Predators" (or "Top Predators"). If you work with socioeconomic systems, you can't miss the similarity these systems show with ecosystems. In particular, in a socioeconomic system you can identify the top predator as the government; that is, the entity that controls the police and the army and which has the power of levying taxes on citizens without any specified limit. Now, in these systems, there exists a tendency of going in "overshoot", when a predator takes more preys than the capability of the prey population to reproduce itself, or when the preys destroy the resource on which they depend. In this case, the predator eventually destroys the prey population and, at that point, is left without resources and no other choice than disappearing in turn. Models show that, in this case, the top predator population is the last to disappear. That is, the government of a country tends to persist as long as citizens own something that can be taxed. But if the wealth of citizens depends on non renewable resources, such as fossil fuels, then in the long run most citizens are spoiled of everything they have and there remains nothing to tax for the government. At this point, we can see the government as a predator without prey: it has no other choice than to go extinct. It folds over and leaves; the state structure collapses and disappears. That could be a good interpretation of what's happening today in many countries. (UB) 



How To Time Collapses 

by Dmitry Orlov

Douglas Smith
Zeus
Over the past half a decade I've made a number of detailed predictions about collapse: how it is likely to unfold, what its various manifestations are likely to be, and how it will affect various groups and categories of people. But I have remained purposefully vague about the timing of collapse and its various stages, being careful to always append “give or take half a decade” to my dire prognostications. I wasn't withholding information or being coy; I really had no way of calculating when collapse will happen—until five days ago, when, out of the blue, I received the following email from Ugo Bardi:



Hi Dmitry,
You may be interested in this post of mine.

Starting from this post, I'm trying to draw a parallel between the collapse of the Soviet Union and the impending collapse of Italy. There are, as always, similarities and differences. In particular, the Soviet Union collapsed almost immediately after that oil production flattened out and started declining. On the contrary, the Italian government survives despite a loss of 36% in oil consumption.

My impression is that it is all related to different taxation methods. I understand that the Soviet tax system was based mainly on commodity taxes and on taxes on production. When production stalled, people had nothing to buy and the government had nothing to tax because most people owned nothing and had little or no savings in banks. So, the government had no choice but to fold over and disappear.

Instead, the Italian system is based largely on income tax and property tax. The government is losing revenues on commodity taxes (e.g. on gasoline) but it can compensate with property taxes. Italians, on the average, are “rich,” in the sense that they have savings in banks and most of them own their homes. So, the government can tax their properties and their savings. As long as Italians still have something taxable, then the government will survive. It will disappear only when it has managed to strip citizens completely of everything they have.

Do you agree with this interpretation? (BTW, Italy as a state may be even more culturally diverse than the old Soviet Union was.)

Ugo

I wrote back:
Hi Ugo,

Very interesting article. Yes, the entire southern tier of the EU is in some early stage of collapse, but so far it hadn't occurred to me to draw parallels between it and USSR. Now that you mention it, the parallel is obvious: it is financial collapse triggered by something having to do with oil, but with polarities reversed, and delayed by a period of wealth destruction.

In the case of USSR, taxation wasn't really a source of government revenue. The national economy was based on government ownership of everything, central planning and budgets, and a system of assigning ministerial contracts to enterprises owned by the ministries. The external economy was a matter of exporting hydrocarbons in exchange for foreign currency, which was used to buy grain—mostly feed grain for cattle, without which the population would become protein-deprived and malnourished. Over the so-called “stagnation” period of the 1980s the Soviet economy became hollowed out because of several trends. Too much spending on defense was one of them. Another was that investment in capital goods (machinery, plant and equipment) reached the point of diminishing returns, which is very difficult to characterize but not so difficult to observe. Lastly, Solzhenitsyn and the dissident movement had done irreparable damage to Soviet prestige, destroying morale. The coup de grace, when it came, consisted of two pieces. One was the inability to expand oil production given the state of Soviet oil extraction technology of the era. The other was the fall in oil prices, down to $10/bbl at one point, because North Sea and Alaska both went on stream, and the Saudis pumped as much oil as they could based on a tacit agreement with the US to depress oil prices and thus crush the Soviets. In this they largely succeeded. The USSR became heavily indebted to the West, and, at the very end, needed Western credit to keep the lights on in the Kremlin. One of the final scenes featured Gorbachev on the phone with [West Germany's Chancellor] Helmut Kohl asking him to ask the Americans to release some funds.




Now, I can see parallels to this in what is happening now in the US and in the EU, but with all the polarities reversed: here oil flows in and money flows out, and the coup de grace [will be] high oil prices rather than low. Instead of failures of central planning, which failed to allocate production effectively, we have failures of the globalized market, where production is effectively globalized but consumption is ineffectively localized among the wealthy and the formerly wealthy, and has to be fueled by credit. Instead of diminishing returns from deployment of capital goods, we have diminishing returns from deployment of capital itself, where a unit of new debt now produces much less than a unit of economic growth. The damage to reputation and morale is mostly on the US side of the Atlantic, where in place of Solzhenitsyn and the dissident movement we have Abu Ghraib [scandal], [Wikileaks' Julian] Assange and [Edward] Snowden. With the EU, most of the damage has to do with [the] experience of economic disparities between the rich core and the increasingly impoverished periphery, and the recent move in Ukraine to walk away from the EU, and the ensuing Western-financed mayhem in Kiev, show that the bloom is off the EU rose as well. The runaway military spending is likewise mostly a US issue, although epic failures in Afghanistan, Libya and Syria, in which the EU is complicit, are likely to have some effect as well.



Comparing USSR to Italy is difficult because of the disparity of scale: 1/5 of the planet's dry surface versus a smallish peninsula; an economy that slowly decayed in isolation versus an integral part of the EU; a country where the choice is between burning hydrocarbons or dying of exposure versus one where the choice is between riding a scooter or taking the bus; a country with a ravaged agricultural sector unable to grow enough protein calories versus a nation of foodies where corner groceries make worthy subjects for oil paintings. But I think that when it comes to the actual collapse, when it finally comes, there will still be identifiable similarities. Financial collapse always comes first: all sorts of financial arrangements unravel as the center becomes unable to float the periphery, and in response the periphery starts to withhold economic cooperation. The result is a breakdown in supply chains, shutdown of production, and, shortly thereafter, shutdown of commerce. In the case of the USSR, this unfolded in 1989-91 as the various republics and regions refused to cooperate with Moscow. I suspect that this will also happen in the EU, at some point. But I think that you are exactly right that whereas the average Soviet citizen could not be fleeced, Italy, and much of the EU, still have plenty of fat sheep that the government can shear to keep things running. Thus we are looking at a few more years of steady decline before the lights start going out. This, then, is the key distinction: the USSR collapsed promptly because it was already skin and bones, whereas the US and the EU still have plenty of subcutaneous fat to burn through. But they are, in fact, burning through it. And so, the conclusion is, collapse will come, but here it will take a little longer.



-Dmitry
Ugo responded:


I agree with you, of course. It makes perfect sense to me and it is the main point I was making: the Soviet government couldn't tax Soviet citizens too much because they owned very little.

...

The Italian government instead has some luck in the sense that Italians have some savings and most of them own their homes. So, the government is progressively strangling their citizens to squeeze out of them all that they have—while they still have something.

The last round of tax increases in Italy is targeting homes and it is really, really hurting, especially the poor. You can be poor here, and still own a house that you inherited from your parents. Now the government asks you to pay as if that house were revenue! That is truly evil. People who don't have the money to pay this property tax can only indebt themselves with banks (or worse). Eventually, they'll have to sell their homes or give them to the bank (or to the Mafia)—the result is disaster for everybody, including for the banks, and even the government. But the whole thing has a perverse logic. It has the advantage that it generates some immediate cash which is badly needed, then the hell with the future.

The [next] phase will be to target bank accounts. Then, when there will be nothing left, the government will decamp and say bye to everybody. Hell, what a planet I landed in.....

All the best,

Ugo

And so here is the outline of the method for calculating the timing of collapses:

1. Find out when the collapse clock starts running by looking for a significant drop in energy consumption

2. Calculate how long the clock is going to run by dividing the total wealth of the citizenry by the economic shortfall of the shrinking economy

For any industrial economy the collapse clock starts running as soon as the consumption of fossil hydrocarbons starts dropping appreciably. It is sometimes difficult to tell whether this has already happened if the country in question is still a major hydrocarbon producer. Gross production numbers can still be holding steady or even seem to go up a bit, but once you subtract all the energy that is being expended on energy production itself, and on the unprofitable mitigation of its many undesirable consequences, you might be able see a decline sooner rather than later. Notably, the net energy yield, or EROEI, is very low for all the newer unconventional sources that have been trumpeted as panaceas in recent years, such as ones that require hydrofracturing and drilling in deep water, tar sands and so on. (The so-called “renewables,” such as wind, solar and biofuels, are an even bigger joke, because all of them with the exception of hydroelectric plants have net energy that is too low to sustain an industrial economy, plus they all depend on technologies that are “nonrenewable” unless the country maintains a vast industrial base which happens to run on fossil fuels.) And so the drop in net energy consumption is clear for Italy, which produces 7% of the oil it consumes and imports the rest, whereas the picture is somewhat less clear for the US, which still manages to supply around a third of its oil.

Since all industrial economies literally run on fossil fuels, lower energy consumption immediately translates into a lower level of economic activity and a shrinking economy. The gap between the expectations of economic growth that are dialed into all of the financial arrangements, and the reality of economic decline driven by lower energy availability, has to be plugged with the population's savings. There are a number of ways of expropriating wealth, generally proceeding from various kinds of stealth taxation measures, to more overt measures, to outright expropriation. Taking the US as the example (since I am most familiar with it) the expropriation cascade is proceeding as follows:

1. Central bank policy of zeroing out of interest rates on savings combined with massive money-printing. This forces money into speculative markets (stocks, real estate, etc.) creating huge financial bubbles; when these bubbles pop, savings are said to be destroyed, but in reality that money has already been spent by the government or used to fill the private coffers of those closely associated with the government.

2. Government policy of canceling retirements or short-changing retirees. The federal government has worked hard to make its official measure of inflation all but meaningless so that it can justify its policy of making cost of living adjustments to social security payments that are far less than the the real increases in the cost of living. Another federal expropriation scheme is via guaranteed student loans, which cannot be discharged through bankruptcy, and which have created an entire class of indentured servants. At the more local level, state and municipal governments are curtailing or canceling retirement programs by virtue of going bankrupt.

3. Ever more onerous reporting requirements for financial transactions, especially for those who try to leave the country and expatriate their savings. All foreign bank accounts must now be reported, and people who work abroad are now forced to file voluminous annual reports that cost thousands of dollars to prepare. Those who decide to repudiate their US citizenship are made to pay a hefty exit tax. Nevertheless, record numbers of US citizens have been doing just that. Just having a US passport often makes it impossible to set up accounts in foreign financial institutions, which have little desire to comply with US demands for financial disclosure.

These are the measures that are already in place. Looking at what's been tried before, here and elsewhere, we can see what other measures are in the works. Among them:

1. So-called “bail-ins” where insolvent financial institutions are rescued by confiscating depositor funds. We can expect the script to be similar to what happened in Cyprus: politically connected depositors get word ahead of time and yank out their money forthwith; everybody else gets shorn.

2. Limits on bank withdrawals. You might still “have” money in the bank, but that's the only place you can “have” it. The semantics of the verb “to have” can be quite tricky, you see...

3. Ever-increasing taxes on property resulting in property confiscation. It works like this: government prints money and hands it out to its friends; its friends use it to temporarily bid up property values; property taxes go up to a point where the property owners can't pay them; owners lose their properties. A staggering 63% of real estate purchases in Florida last December were cash purchases.

4. Various kinds of sudden, new, super-complex regulations, noncompliance with which results in very large fines. In turn, nonpayment of these fines results in forfeiture of assets. The US has some very curious laws according to which inanimate objects such as cars, boats and houses can be charged with a crime, seized and auctioned off. We can expect lots more of such property grabs in the future.

5. Gold confiscation, which happened once in the US already, so there is a precedent for it. Yes, I know that this will make a number of people upset, but I am yet to hear a convincing argument for why the US government would not resort to gold confiscation when that turns out to be one of the few remaining cards it can play.

This list is by no means comprehensive. If you feel that I have missed something major, please submit a comment, and I will consider it for inclusion.

Now, it would be nice if all of these measures worked like clockwork, always producing the right amount of wealth confiscation to levitate the government, and the financial scheme on which it is based, for a little while longer. Alas, as with most things, something is bound to go wrong at some point, most likely when you least expect it. And it seems like a dead certainty that something will in fact go wrong well before every last American citizen is relieved of every bit of their accumulated wealth and is living peacefully in a roadside ditch, wearing an attractive loincloth and a stylish mudpack for a hat, quietly perfecting a nouvelle cuisine that features snails au jus and dandelion salad au chaume. Maybe you can imagine it, but I can't. Beyond a certain point, I can only imagine reports of widespread “public disturbances” followed by “breakdown of law and order.”

Still, I hope that this framework will allow us to set an upper bound for how long collapse can be deferred for any given country. Once hydrocarbon consumption drops appreciably, the clock starts running. Then it is possible to estimate how long the clock can theoretically run by dividing the remaining net worth of the population by the size of the hole in the economy created by falling energy consumption.

But after that things get messy. Some countries will hollow themselves out quite peaceably, and go softly into the night, while others will explode and fast-forward though the financial-commercial-political collapse sequence. And so perhaps the most useful thing to know is whether the collapse clock is already running for any given country, because if it is already running, then it becomes a fool's game to wait around for the inevitable outcome.

One reasonable approach is to get another passport and quietly relocate to another country. It is important that this country be one for which the collapse clock is not running and won't be for a long time yet. Ideally this would be a financially secure, politically stable, energy independent, militarily invincible, underpopulated, non-extradition country which will be among the last to be severely disrupted by climate change and where you could have lunch with Edward Snowden. But this approach doesn't appeal to everyone, and I understand that.

And so another approach is to adapt to what's coming while remaining in the US, or in any other country for which the collapse clock is running, by making yourself, and your wealth, should you have any, illegible. Here is a very nice article by one smart cookie by the name of Venkatesh Rao on the concept of illegibility. And here is his very nice primer on being an illegible person. This kind of illegibility has nothing to do with bad handwriting; it is about hiding in plain sight. Please read these as homework, because I will have more to say on this topic in the near future. And I would love to see a list of countries for which the collapse clock is running, along with first-order estimates for how long it could possibly run for each one, based on their population's net worth and the country's economic shortfall. But since this post has just gone over 3000 words, I am leaving this as an exercise for the reader.

13 comments:

  1. Hello Ugo - thanks for this post, it is a bit of a eureka. Obviously the first thing I did after reading it was to delve into the UK's statistics. It's quite shocking to see how much oil the country now imports compared to its position even a decade ago. What is clear from the oil production stats is that North Sea oil decline is precipitous. At this rate, just by estimation, it will be all gone in 10 years or less at current rates of production. Oil imports have risen markedly to make up the shortfall, but we all knew that.

    Saying that, the UK's oil consumption hasn't changed much. It is still stuck on a peak of about 2 million bpd - so no collapse there, (yet). But all that imported oil must be paid for at around $100/barrel - and considering we sold and squandered most of our historic oil at $10/barrel this represents crazy resource management.

    Interestingly, domestic electricity usage has been declining by 4 or 5 % per year since the credit crunch - with most of the decline taking place in the less wealthy areas of the country. And this with a generally rising population and more infrastructure still being built.

    So how are we paying for these oil imports? My guess is through property taxes on the rising real estate bubble, and old fashioned debt. When either of these bubbles pop my guess is that there will be a huge shock to the system. I can't calculate when that will be based solely on the energy use stats - plus, there are a number of complicating factors, such as Scotland's desire for independence (most oil production takes place off Scotland). I'd be very interested to see what dates/figures anyone else comes up with. In the meantime, I'm working on becoming illegible.

    The one silver lining in all this (for me) is that my property is not valued highly compared to most. If the government has to eat through all the subcutaneous fat of the relatively rich first then at least there will be some wriggle room.



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  2. I have one quibble. In the US, and arguably many other places, the apex predator isn't exactly the government per se. It's corporations and government policies as directed to favor those corporations. As noted regarding Italian homeowners having to mortgage properties to pay taxes, the banks profit from this. In the US, policies have evolved in a direction that seems to be pushing the masses into indentured servitude to corporations, while taxes as a percentage of GDP are flat or slightly falling.

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    1. Yes, my interpretationj is simplified, of course. We could see corporation/banks and the like as the real top predator - a predator of the government. Nothing would change much in the sense that the government acts as an instrument of corporations.

      It is interesting that taxes in the US are slightly falling; I think it is because the US is still enjoying a short lived fossil renaissance and the GdP is going up as a consequence. So it is a very different condition in comparison to that of the collapsing Mediterranean countries.

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  3. "One reasonable approach is to get another passport and quietly relocate to another country. It is important that this country be one for which the collapse clock is not running and won't be for a long time yet. Ideally this would be a financially secure, politically stable, energy independent, militarily invincible, underpopulated, non-extradition country which will be among the last to be severely disrupted by climate change and where you could have lunch with Edward Snowden."-UB

    I am hard pressed to come up with a country that fits this description. Alaska is pretty close, but it is not a country (yet).

    BTW Ugo, Diner 2nd Anniversary Party is this weekend. I will be running Google Hangouts from Sat late afternoon until Sunday morning AK time. I'll send you a link when I get it going.

    RE

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    1. From Alaska, you can reach that country by walking on ice westward.

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    2. Walk West from Alaska across the Bering Straight, you reach Russia.

      Russia is NOT financially secure, I refer you to the crashing Rouble, which like all the EM currencies is getting hammered. It is also NOT Politically stable, and when the Rouble collapses I can guarantee you Vlad the Impaler will have a first class mess on his hands.

      I got friends here who travel to Russia every year (big Russian community here of course), and they say it gets worse there with each trip back.

      I'd pick NZ before Russia to hole up.

      Besides that, unless you have NSA files to trade, I find it unlikely you will get under Vlad's wing for Protection. Plus, howz your Russian?

      RE

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    3. RE, moving to Russia is Dmitry Orlov's idea. I don't completely agree with it, considering the impending new peak in Russian production. Anyway, my Russian is not fluent but improving! You know, just in case..... :-)

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    4. @ReverseEngineer
      I am or a Russian origin, defended a Ph.D. in Engeneering in France and returned back 5 years ago due to the same line of thought that Dmitry outlined. And believe me I know well of cituation both in Europe (living there for 4 years) and Russia.

      Back to the facts. Russia IS financially secure, it has one of the lowest Debt/GDP ratio, lots of reserves, as to a bit diminishing rubble course it is connected with the changed politics of Central Bank under a new head. I'd say that I approve of her policy as she makes a sanation of banking and financial system.

      Russia IS politically stable, there is a question, of course, who will come after Putin. If he chooses well, I don't expect any political problems in the next 25 years. We didn't have any mess when the Ruble collapsed before and won't have it, even, extremely unlikely, if it collapses again.

      I came back 4 years ago, and I assure you that it is getting better here, govermant doesn't know where to spend money. Amasingly even health care become better. The main problem nowadays are qualified specialists.

      As for coming here, as I said we lack good specialists. Education got worse, and almost two decades of brain drain also had a big impact.

      @Ugo Bardi
      I also worry a bit about a peak in Rusian production, though Arctic exploration can move it further. And there is, of course, gas. Recently public transport started a conversion to pressurized methan, so it will take 20+ years before a peak energy in Russia.

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  4. BTW, another important thing to remember was that when the old Soviet Union collapsed, there was still a functioning global economy with a functioning Credit System and functiong reserve currency (the Dollar).

    A collapse of the Dollar and concurrent collapse of the global banking system is orders of magnitude greater than the Soviet collapse, which while large was still a basically local phenomena with the possibility of "rescue" from without (aka loans/investment capital from the West).

    When the Dollar goes south, nobody but the Ferengi arriving with Starship Freighters loaded with Gold Pressed Latinum and Dilithium Crystals can bail us out.

    RE
    http://doomsteaddiner.org

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  5. I am not convinced. I do concur with collapse being on our doorsteps, I just see to many other factors, other than econical, that could make your calculations difficult.

    The discussion how and when capitalism would meet its doom was set in motion by Karl Marx. He was very convinced and convincing about the inevitability of the self destruction of capitalism by its exploitation of the working class.

    It did obviously not work out this way. The italian post marxist sociologist Antonio Gramsci later brought up the ideas of hegemony and ideology. Luis Althusser extended these and formulated the theories of the ideological state apparatus (ISA) and the repressive state apparatus (RSA). The soviet union was a textbook example of an RSA. RSAs collapse very differently from ISAs, any comparisons are therefore unlikely to give good results.

    As it seems, the ISA is much more resilient against collapse. As long as the dominant ideology is incorporated and defended by the same people it works against, the basic system will remain stable.

    As I see it, and as probably Marvin Harris or the late Stuart Hall, who sadly died a few days ago, might have put it, for the capitalist system to collapse there must be first a change in broad common sense. This change in perception will triggered by an ecological overshoot, but it the IST will only really collapse when its ideology "dies". For this to happen, it needs a form of revolution.

    I am not talking about pitch forks and guillotines. The revolution happens when an ideology is called into question by the predominant part of a population. Economic factors will definitly play a role in changing the perception of the neoliberal ideology by the people it rules and exploits, but societies are ruled by more factors than the economy.

    In the global hegemonial power, the USA, the neoliberal ideology seems to be stronger than ever before. Astonishingly it has strong support in the religious south and especially with the poor. Fundamentalism and jingoism are mixed with the neoliberal ideology to form a the mystical and unshakable believe into something called the american dream, that becomes stronger the more people are prevented from fulfilling it. In short, the USA has near limitless ideological ressources to pull from, so to say.

    We have reached the ecological boundaries of our ecosystems for some time now. Obviously the destruction of our atmosphere or the exploitation of earth and all its inhabitants in the name of profit is not enough to shatter this ideology.

    The question I put foreward for timing the demise of the system would therefore be: What event will or can be responsible for irrefutably denying any further believe in the neoliberal growth ideology?

    If you time that event you will have timed your collapse. As long as a majority is willingly and happily suffering for upholding the rule of the rich, the system can drag out its inevitable collapse for some time still.

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  6. Thanks Ugo and Dmitry for another thought provoking post.

    Do you think that the story of declining kilometres/miles driven is enough to depict a declining oil consumption on its own? It really looks like the UK miles driven has peaked (see my post http://rationthefuture.blogspot.co.uk/2014/02/peak-short-sightedness.html ) I also remember reading about Peak Car for the US too. That would be a fairly easy indicator to use as a starting point in most countries.

    I'm going to follow your suggestion and dig deeper to see how far down the collapse route the UK is. I'll let you know what I find.

    It occurred to me that the current flooding 'emergency' in the UK could be used as an excuse to raise taxes or introduce a bail-in, and it would raise less opposition as it would look like a genuine necessity.

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  7. As a continuation to emigrating in Russia.
    First, the standard of living here is still behind that of EU and USA, so I doubt that many people would seriously decide to move here. The difference is that life is getting better here, while the reverse is true for EU and USA. May be in 20 years we will get to even, not earlier.
    Second, the mentality is very different here from europe. I mean more difference than between France and Germany. It would be hard to adapt as many core values are different.
    Finally, in the long term 50+ years I'd bet that Russia has the best chance among most countries to conserve benefits of industrial society. So moving to Russia would be "profitable" only in long term, i.e. 25 - 75 years.

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  8. I've been arguing (at neven's forum) that civilization won't crash as long as the grid is up - and TPTB are going to keep the grid up for a long time even if the costs for doing so are huge.
    Your thoughts re. timing the crash are interesting & I look forward to further elucidation.
    Canada, which I recently returned to, seems reasonably poised to survive, unless our neighbor poses problems & Cuba has already proven her resiliancy in many ways.
    Terry

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