by John Browne, Senior Market Strategist, Euro Pacific Capital

Despite the fact that the governments of the G-7 nations have injected some $3.5 trillion into their financial systems to prevent a meltdown of the world's financial system, stock markets are still reeling. With some stocks down by over 60 percent, many investors already have been through a disastrous erosion of wealth. The declines have not occurred in just a few days as they did in 1929. Rather, Government interventions, regulatory changes and bailouts have drawn out the fall in prices over a long enough time period to make it feel like a slow water torture.

Nonetheless, the reality is that there has been a dramatic fall in the price of stocks, precipitated by a massive sub-prime induced deleveraging and the opening salvos of a credit crunch that will likely be with us for some time. After years of misplaced optimism, market participants are now coming to grips with some rather unpleasant recessionary prospects. So, despite government rescue measures around the world, markets continue to sputter.

Worse still, as America is perceived as the engine of the fading economic order, the looming recession appears increasingly to be both worldwide and potentially severe. Indeed, it looks likely that, if badly handled, the recession could easily slip into a depression, based on a far more highly leveraged base than in the 1930's.

Therefore, the sad conclusion of the current stock market crash is that it appears to be anticipating an economic crash, just as bad as that of the 1930's.

For a moment at least, attention is focused increasingly on economic recession and diverted from the risk of financial panic. Temporarily, this is reducing the upward pressure on the price of gold. At the same time, recessionary influences are pressing the gold price down, like other more conventional commodities. Therefore, gold continues to trend downwards, possibly even towards $600 a fine once.

In addition, as the risk of recession appears to gaining international perspective, the strength of certain non-U.S. dollar currencies, including the Euro are eroding and driving the U.S. dollar upwards. This, in turn, is bringing yet further downward pressure on the U.S. dollar price of gold.

Regardless of which candidate the United States selects, the next President will face the prospect of severe recession and be forced to "spend, spend, spend" in an effort to avoid an international depression. In the meantime, a second tsunami of credit card, auto, personal and business loan defaults is heading for the banking industry.

Investors are sensing the approaching storm. On January 12, 2009, General Motors Automobile Credit Corporation (GMAC) is due to redeem $1 billion worth of bond issues. Just three months from redemption, these GMAC bonds are trading at a massive discount from par. In today's climate, three months can feel like an eternity. It is a finite measure of only a small part of the financial storm ahead.

In the third weekend of November, leaders of the G-20 nations will assemble in Washington for urgent economic talks. There may even be calls for a new Breton Woods to discuss a revised world monetary order. Key will be China's role. It is likely that a major debasement of all currencies will be undertaken to rescue the global economy and with it, the world's politicians. As this proposal gathers momentum, gold is likely to explode in price.

However, with the possible exception of countries like Switzerland, politicians the world over are likely to create international rules designed to preclude the holders of gold from making "windfall profits."

Therefore, holders of gold should renew their efforts to ensure their holdings of gold are as isolated as possible from the long, greedy arm of the law.

By : David Morgan

This headline should grab anyone’s attention, especially those interested in the silver market. Before going forward, let me explain that fully 70% of silver is produced as a result of mining other metals, mostly base metals. Copper mining, for example, is responsible for 28% of the silver mined in 2007. Lead/Zinc mining yielded 32% of the silver mined in 2007. Finally, gold mining brought about 10% of the silver mined, again in 2007. All data is from GFMS World Silver Survey 2008, page 31.



The point is, with the current low prices for all of the base metals, many companies that produce them are slowing, closing, or stopping projects. The result is obvious: the overall production of silver from base metal and even gold mining is going to be reduced because of current economic conditions. Will this bring down silver production by the 70% mentioned in my “yellow journalism” headline? Of course not, but my headline builds awareness that a slowdown in global mining activity is not necessarily going to flood the market with silver; quite the contrary, slowing mining activity slows the amount of silver produced.



As far as primary silver producers are concerned, some will be unprofitable at these levels, and all will be looking to find as much high-grade ore as possible, to stay as close to profitable as can be expected. Some marginal projects will be shelved and some projects may be forced to close if prices remain in the doldrums.



The overall mining equities have been completely devastated, as all of us in this sector know, and the prices of these stocks have dropped to levels that few can believe. The earnings of these companies will of course be falling as well, due to the fall in their respective products.



As of the week ending October 24, 2008, the year-to-date results are as follows:



Copper -44%

Zinc -54%

Lead -55%

Silver -37%

Gold -12%

XAU -59%

HUI -59%

Across the board, both the metals and mining shares have been blasted. The base metals fare worse than both silver and gold, and the basket of precious metals stocks (as per the XAU and HUI) are doing worse than any metal cited. Again, we find silver at this point in time being not as precious as gold, but more precious than its base metal cousins.

There is some encouragement, as the past few days in the metals markets have shown some strength as interest rates were cut on the U.S. dollar. The gold/silver ratio has backed off from being over 85 recently to 77. Perhaps the worst is over, perhaps not.

I could not help looking further into the GFMS Survey since pulling it off the shelf for this week’s article, and found the following.

For those who are historically inclined, the GFMS World Silver Survey 2008, page 58, discusses the main uses of silver. Under the classification of coins we find:

Historically, silver was more widely used in coinage than gold, being in greater supply and of less value, thus being practical for everyday payments. Most nations were on a silver standard until the late 19th century with silver coin forming the main circulating currency. But after the gold rushes, the silver standard increasingly gave way to gold. Silver was gradually phased out of regular coinage...

Yes, silver coinage stopped in 1965, the U.S. closed the gold window in 1971, and here we are today looking at a financial system that has certainly lost its way.

By : Theodore Butler


In a moment, I’d like to describe a new development in silver that should prove quite bullish to the price, but first I’d like to review some continuing facts that are significant in their own right. It would appear that the confluence of many factors point to sharply higher silver prices dead ahead. Yes, I know the price has recently collapsed. Ironically, it is that very price smash that is the basis for the coming price launch higher.

Since the recent top in July, the price of silver has undergone a dramatic collapse. As proven by data released in government reports, a large U.S. bank or two sold a massive number of COMEX silver futures contracts into the top and subsequently has covered a good number of those short contracts on the resultant price decline. Quite simply, this is the single most important factor behind the price collapse. The latest data appear to indicate that the price decline is now largely behind us.

The latest data in the Commitment or Traders Report (COT) indicate a near-record shift in market structure over the past three months. The total net commercial silver short position has been reduced by approximately 50,000 contracts (250 million ounces). This is an absolutely massive amount of commercial buying, and has pushed many COT measurements to their most extreme bullish readings in years. Similar commercial buying has occurred in COMEX gold futures.

Make no mistake, this massive commercial buying was no accident. This was precisely why silver and gold dropped sharply, namely, to enable the commercials to buy at the expense of speculative long liquidation. The commercials don’t do anything on this scale by accident. To think otherwise is naïve. Ask yourself this - if silver’s price smash did indicate we faced a long term future of lower silver prices, then why would the commercials, the dominators of the market, buy every contract they could get their hands on?

By no small coincidence, other unusual factors suggest silver prices should soon embark on a significant price rally. A notable increase in demand for 1000 oz bars can be seen in tightening price differentials between nearby futures contract months and by reports in the physical market, a marked increase in deliveries in the nearby October silver delivery contract, as well as recent withdrawals in COMEX silver inventories from those taking delivery on October futures. All are supportive of a pending shortage in 1000 oz silver bars, the industry unit of trade. When the shortage of 1000 oz bars becomes apparent, all talk that silver has only experienced a "retail" shortage, will be dashed. Coupled with the bullish COT structure, it adds up to strong upside price potential ahead.

But the sharply lower price of silver and other commodities has introduced a new bullish development that, quite frankly, I had not anticipated. It has resulted in unintended consequences that all should recognize shortly. So potentially bullish is this new factor that it appears to be on the order of a coming shock to the silver pricing structure.

It is said, in the world of commodities, that the cure for low prices, is low prices. In other words, according to the law of supply and demand, low prices discourage production and encourage consumption to the point at which the low prices are replaced with higher prices. The unprecedented deep declines in the price of silver and base metals, such as copper, lead, zinc, and nickel promise to disrupt the production of these metals. After all, no one can produce at a loss indefinitely. Almost without exception, the price of all these industrial metals has fallen deeply below the cost of production for most producers. This is not just anticipatory, as daily reports confirm continuing mining production cutbacks. In addition, smelter cutbacks, especially in China, the world’s largest refiner, have been ongoing for months.

What makes the sudden price declines so unusual is that have apparently occurred not so much due to specific supply/demand fundamentals in the metals in question, but more to general dark sentiment about general overall concerns about prospective industrial demand and credit issues. All commodities have been smashed, almost indiscriminately. But there is a highly unusual feature to the price declines. For the first time in half a century or longer, the price declines have come at a time of generally low inventory levels, in marked contrast to prior price declines.

Normally, the industrial metal cycle tops out with high prices amid high inventories. Then, the high prices diminish demand, which in turn pressures price, often to levels below the cost of production. Mines react to the low prices by curtailing production or shutting down, which stimulates demand and eats up the high inventories. When inventories reach levels too low to support further draw downs, prices rise until the next peak in prices and inventories. These normal free market cycles take years to unfold.

This time, prices have collapsed even though inventories are on the low side. Therefore, in spite of the fears of reduced industrial consumption, because of the sharply lower prices, production promises to fall faster, and the already low inventories can’t support draw downs for long. Although it is not currently widely expected, even in recessionary times, shortages can and will occur if supply (production and inventory draw downs) can’t satisfy demand, even though that demand may be reduced.

Separately, the resource boom over the past five years was characterized by a noteworthy lack of increase in additional production capacity of most non-ferrous metals. Now, with dramatic postponements and cancellations of new mining projects, due to economic and credit concerns, there will be significantly less production available if and when shortages occur.

The net result for silver could be profound. Not only is the current price below the cost of production for mines in which silver is the primary source of revenue, but the price of base metals like zinc, lead and copper, is also below the cost of production. Since the by-product silver from the mining of these three metals account for a full 60% of total silver mine production (400 million oz out of a total 670 million oz annually), the expected reduction in base metal production will have an exaggerated impact on silver production. Throw in the 200 million oz primary annual silver mine production and the vast majority of total silver mine production is in jeopardy. Finally, recycled silver of some 200 million ounces is perhaps the most price sensitive of all. Talk about the unintended consequences of sharply lower prices.

This is the first time since I have been studying silver that total production has been in such sudden danger of a sharp decline. In fact, it would appear to me that this could be the perfect bullish storm for silver. Please consider the facts. World silver inventories are the lowest they have been in hundreds of years, thanks to a century of industrial consumption. This is precisely at the same time of the most serious threat to production in memory. More than any commodity, silver has been demonstrating real signs of tightness, even before impending widespread production cuts.

What really sets silver apart from the other industrial metals that may quickly go into related shortage situations if prices remain depressed, is the special dual role of silver, as both a vital industrial material and as a primary investment asset that can be owned directly by investors of all means. Silver, like gold, is an asset desired by investors, particularly when financial conditions are unsettled. Copper, lead and zinc are not such assets. So whereas we can have easily see industrial shortages and sharply higher prices for base metals, even in a recession, if production declines enough, those sharply higher prices will not be accompanied by ordinary investors rushing to buy zinc coins or bars of lead. That, most definitely, will be case in silver.

In fact, as I wrote last week, it is not just that investors are likely to buy silver, there is already an historic silver investment rush in force. And this investment rush is even more significant since it has developed only in the past three years, after decades of net investment selling of silver. Again, I couldn’t make these things up if I tried. And please remember, even in a recession with lower industrial demand, if users can’t get the silver supplies they need, they will panic at some point and rush to build inventories.

I did not anticipate the brutal decline to below $9 an ounce. Fortunately, those who hold real silver on a non-margined basis, my consistent public advice, still hold their silver. The rise in premiums of many items, particularly U.S. Silver Eagles, has minimized the pain of the decline. New buyers, however, have just been given a gift beyond description. The collapse in price has had nothing to do with the merits of silver, but will have everything to do with the coming explosive rally. The uneconomic low price will shock the price higher.

Key facts that are likely to see the precious metals move in a big way soon:

Goldman Sachs is now NET LONG gold on TOCOM after being heavily net short for the better part of 2 ½ years.

All the traditional gold shorts on the TOCOM have reduced their net shorts to very low levels.

The FOMC meeting is Oct 28-29 when they will very likely drop FED funds rate by 0.5%.
There is a massive build up of COMEX gold CALL options in the DEC contract that outnumber PUTS by 1.7 to 1. The option expiry is Nov 20.

There are rumors of such a high delivery demand in the DEC COMEX contract that there is a high risk of default.

There is a G8 summit in New York Nov 15 to discuss plans to reform the international financial/monetary system; references are even being made to having the discipline of Bretton Woods. What ever the outcome it is sure that the dollar will not retain its supremacy. That will mean a lot of countries are holding too many dollars!

by H.A. Scott Trask

As in so much else, the French revolutionary regime (1789-94) was the precursor of the centralized, totalitarian, managerial, pseudo-democratic despotisms that now reign over the West. It is also reminder that mass democracy and inflation go together, as surely as thunder and lightning. Let us revisit the Revolution, from a free-market, hard-money perspective.

After two centuries, there remains no better analysis of the first two years of the French Revolution than Edmund Burke's Reflections on the Revolution in France (1790). Astute, penetrating, prescient—Burke, an Anglo-Irish MP and a liberal Whig, was of a rare type: both practical statesman and political philosopher. Had the English ministry and his fellow Parliamentarians followed his advice in the 1770s, they would never have driven the Americans to revolt and hence lost their most valuable colonies in the world. Had the French, they would have been spared the Terror, total war, and Napoleon. Burke continues to be accused by clueless academics and ignorant pundits either of inconsistency or deviationism for his very different reactions to the American and French Revolutions.

Burke was both a liberal and a man of the Right. He believed in religious toleration but supported an established church, the Anglican Communion. A friend and admirer of Adam Smith, he defended commercial liberty, but he also believed that civilization depended on the perpetuation of a landed aristocracy with its own separate political representation. While he denied that a king could tax his subjects without their consent, he was a fierce opponent of democracy and universal suffrage. Burke denied that liberty could be achieved by revolution or intellectual endeavor. For him, it was the product of tradition and history, and its victories had to be embodied in institutions.

Did the assignat "save" the Revolution? On the contrary, it helped bring on the Terror and set French progress back a generation.

Burke thought the French Revolution, rather than being a necessary if needlessly bloody hill on the path of progress and freedom, was a catastrophe for France, for western civilization, and for ordered, hierarchical liberty. Before the Revolution, French royal absolutism, and the stifling mercantilism that was its handmaiden, was on the wane. Already its rigors and severities were considerably softened from the reign of the Sun King, Louis XIV; and his great-great grandson possessed a reformist ethos that was liberalizing the economy and resurrecting the representative institutions of medieval liberty—provincial assemblies and the Estates General. Burke called the modern French monarchy "a despotism rather in appearance than in reality" in which, if anything, "rather too much countenance was given to the spirit of innovation," rather than too little.

The power of the French king was checked by public opinion, by an independent clergy, and by the parlements of the judicial nobility. The nobility itself was filled with admiration for the mixed constitution of England, with its limited monarch, its Parliament, its bills of rights, its toleration of religious dissent, its freer economy, and they wished to find a French approximation, and they were well on the road to doing so.

As Burke noted, the noble cahiers and instructions for their delegates to the Estates General "breathe with the spirit of liberty as warmly, and they recommend reformation as strongly as any other order." Maybe more. The spirit of laissez faire, mixed constitutionalism, and civil libertarianism was stronger in the nobility than among the bourgeoisie, and certainly stronger than among the urban artisans and peasantry.

The political argument in the Estates General in May–June 1789 that led to the outbreak of the Revolution was over voting. The question at issue was whether the three estates should vote by order (the traditional practice) or by head. The monarchy rightly sided with the first two estates on the question, but the Third Estate eventually grew tired of the controversy and declared itself to be the National Assembly, the other two orders be damned. They were only following the logic of their position to its logical conclusion, but they were also fulfilling the visionary and naive expectation of the French masses that the ancient social orders be erased so they could live lives of greater abundance and freedom. Many "conservative" and "liberal" historians have applauded the Third Estate's seizure of power and argued that the Revolution went wrong later with the ascendancy of Robespierre and the Mountain. Burke knew better.

By its arrogant usurpation, the Third Estate expressed its rash "preference for a despotic democracy to a government of reciprocal control." Big mistake, thought Burke. "I cannot help concurring" with the opinion of Aristotle and other ancient critics of democracy, "that an absolute democracy, no more than an absolute monarchy, is [not] to be reckoned among the legitimate forms of government. They think it rather the corruption and degeneracy than the sound constitution of a republic."

Aristotle pointed out that "a democracy has many striking points of resemblance with a tyranny." Burke translates: "Their ethical character is the same; both exercise despotism over the better class of citizens; … the demagogue, too, and the court favorite are not unfrequently the same identical men, and always bear a close analogy; and these have the principal power, each in their respective forms of government, favorites with the absolute monarch, and demagogues with a people such as I have described."

Burke was not so naïve as to believe that France with its 26 million people, its wide extent of territory, its diverse interests, could ever be a genuine democracy. He expected effective power to be wielded by "an ignoble oligarchy," in alliance with "the monied interest" of Paris, fattening on government bonds and rioting in feverish speculations in the confiscated estates of the clergy and nobility. As far as the braying mob, "the swinish multitude," they would prove a very effective instrument in the hands of the elite, especially when shouting down free market economic reform. Burke foresaw a government that would combine the vices of democracy with those of oligarchy and that would substitute a despotism of lawyers and sycophants for a government of laws and social orders. How right he was.

An exasperated Burke wondered why the French seemed to lunge from one extreme of government to another, as if there were no third option. "Have they never heard of a monarchy directed by laws, controlled and balanced by the great hereditary wealth and hereditary dignity of a nation, and both again controlled by a judicious check from the reason and feeling of the people at large acting by a suitable and permanent organ?" Nay, instead of retaining the Estates General as "a permanent assembly in which the commons had their share of power," they thrust total power upon the politically inexperienced and rash masses. Overnight, the whole fabric of the ancient constitutional order of France had been "pulled down and the area cleared for the erection of a theoretic, experimental edifice in its place."

Was this wise? What check remained on the power of the Assembly, the power of Paris? Burke thought that none remained. The National Assembly, claiming to be the nation incarnate, had erased the ancient provinces of France (substituting the unnatural departments), abolished the Parlement of Paris and its provincial counterparts, destroyed the first estate by confiscating its property and stripping it of its functions, rendered the nobility politically powerless, and concentrated all political power in a revolutionary assembly. He compared Paris under the new regime with ancient Rome. "As long as Paris stands in the relation of ancient Rome, so long will she be supported by the subject provinces. It is an evil inevitably attendant on the dominion of sovereign democratic republics. As it happened in Rome, it may survive that republican domination which gave rise to it. In that case despotism itself must submit to the vices of popularity. Rome, under her emperors, united the evils of both systems." So would Paris, so would Washington. Once all independent social authorities, legal institutions, and constitutional checks on the sovereign and divine people were destroyed, the way was prepared for le levee in masse, for les assignats and les papiers-monnaies, for the Maximum, for le Comite de Salut Public, for la Terreur, for la guerre totale, … for Napoleon.

The Assignat Inflation

The National Assembly that took de facto control of political power in France in the summer of 1789 found itself facing an even worse fiscal crisis than that faced by the now defunct monarchy just months earlier. The Assembly was spending enormous sums on public works projects in Paris and for bread subsidies. Having just thrown off the shackles of royal authority, the people were in no mood to resume paying taxes, much less pay more. Many of them, no doubt, interpreted the Revolution to mean the cessation of taxes, and the obliteration of the oppressive and coercive collecting apparatus. Desperate for revenue, the Assembly actually refrained from abolishing the hated gabelle (the salt tax), but no one paid it anymore anyway.

Meanwhile, the interest and principal was falling due on the national debt. What to do? The logical and just thing was to repudiate the enormous debt incurred by the monarchy. After all, the people of France, voiceless and unrepresented for centuries, had never approved nor sanctioned it; and if the monarchy had been as oppressive and iniquitous as the revolutionaries claimed, then surely the liberated masses should not be burdened with the responsibility of paying its extravagant debts?

Jean Baptiste Say recalled with disgust that "the moment there was any question in the National Assembly of commerce or finances, violent invectives could be heard against the economists."


Well, justice is one thing when one is out of power, and another when one possesses it. The Assembly rejected repudiation because they feared antagonizing the moneylenders of Paris, Amsterdam, Hamburg, and Geneva. They had already incurred the enmity of the royal houses of Europe, why add that of the bankers? Besides, the new government would need to borrow funds too. A formidable republican army would be needed to defend the revolution from its enemies, at home and abroad. Thus, they decided to honor the debts of the monarchy, but how?

The Assembly knew that it was politically inconceivable to lay new taxes and expect them to be paid without sending an army into the countryside to shake down the peasants, but who would pay the army? And further borrowing was out of the question until new taxes could be laid. That left one resource—plundering the privileged orders. In November 1789, the Assembly expropriated the vast lands and estates of the French church and declared them to be "national properties." From thenceforth, they would be "at the disposal of the Nation" (meaning the state). Burke observed sardonically that the government, still in its infancy, had grasped at "one of the poorest resources of doting despotism."

Burke angrily rejected the notion that the rights of property applied only to individuals. They also applied to corporate bodies, such as the Gallican Church, whose property titles were over 1,000 years standing. Not so, according to the leaders of the Revolution. For them, the church "had no right to the possessions which they held under law, usage, the decisions of courts, and the accumulated prescription of a thousand years."

Burke denied that the church was a parasitic body attached to the French nation. It was not exempt from all taxes, and it provided essential social services, such as free primary schools, classical academies, hospitals, and orphanages. Although we might prefer a purely private provision, can we doubt that France was better off with its eleemosynary and educational institutions under the control of a Christian establishment that was independent of government and under the necessity of practicing economy? Burke considered the expropriation of its lands to be a tyrannical act which he compared with the seizure of church properties by the "tyrant" Henry VIII of England250 years before.

Burke ranked the confiscation of the church lands, along with a "compulsory paper currency" with which it was linked, as the first layer of the "cement" by which the revolutionary government would rule over a unified and servile France, which they were treating as a conquered country. The second cement would be "the supreme power of the city of Paris" and the third "the general army of the State," thus joining economic power with political and military power in an impious trinity of oppression and expropriation.

He believed the confiscation served the new government in three ways. First, it all but destroyed a rival social authority that could check its moral and political power. Second, it placated the powerful "monied interest" of Paris and abroad by providing a means for funding the immense debt of the monarchy. How unjust to do so by pillaging the church, an institution that was neither responsible for contracting the debt nor had benefited from the deficit expenditures. "It is to the property of the citizen, and not to the demands of the creditor of the state, that the first and original faith of civil society is pledged," wrote Burke. Third, it created a new class of landowners whose loyalty would be to the revolutionary state, upon whose authority and survival their property titles depended.

It was not long before the Assembly realized that the sale of church lands alone would not be the fiscal bonanza they had envisioned. For one thing, throwing all those properties on the market would diminish their selling price. Second, there was just not enough floating capital (i.e. specie) in France to make large scale purchases. What to do? It was time for "the last remedy" for fiscal insolvency—government fiat paper currency. Here, the American Revolution furnished a pernicious precedent. In March 1790, the Assembly authorized the printing of 400 million livres of paper assignats of denomination of 200, 300, and 1,000 livres, bearing three percent interest, and receivable for taxes and the purchase of the national properties. In character, they were like English exchequer bills or American bills of credit. Supporters argued that the assignats would furnish payments to the state creditors, provide a means for the people to purchase lands and properties, draw specie out of hiding, and stimulate commerce and industry.

The consequences: depreciation, rising prices, feverish speculation, complaints about a shortage of money, calls for more assignats, the prostration of commerce and industry, inordinate consumption, and declining savings.


Many delegates, including Cazales, Bergasse, Maury, Necker, and Nemours, opposed the measure on economical principles. They argued that the new currency would depreciate, that it would be followed by additional emissions, further depreciation, and that the calamities of John Law's Mississippi Bubble (1717–20) would be re-enacted across republican France. Their objections and warnings were brushed aside. The enthusiasts essentially argued that economic laws did not apply to France, that she had learned from John Law's failed experiment never to overdo paper money, that a republican government could more safely inflate than a monarchical one (the precise opposite of the truth), and that the immense landed wealth of France provided solid security. Even though the issue was relatively moderate, the assignats promptly depreciated five, and later seven, percent, as measured against gold.

It should be noted that the Assembly was not a total bust when it came to economic freedom. They did abolish the tithe, the corvee, the guilds, and all internal custom barriers. However, they would go no farther, and would soon regress into a kind of hyper mercantilism. Burke writes of their open and contemptuous "defiance of economic principles." Jean Baptiste Say recalled with disgust that "the moment there was any question in the National Assembly of commerce or finances, violent invectives could be heard against the economists." Such is ever the reception accorded men who bear unwelcome or inconvenient truths.

By late summer, the government was again short of funds, so they naturally turned to a second issue of assignats. However, this time they doubled the dose to 800 million, dropped the interest payment, and made them legal tender for all purchases and debts across France. When the economists again remonstrated, paper advocates replied that the backing of the state would guard against depreciation, that assignats paid into the treasury would be destroyed, and that this would be the last emission.

(Whenever a government promises not to use a power they wish to exercise, or have just acquired, by way of assuaging the fears of those who anticipate abuse, they are sure to break that promise whenever it becomes convenient or they believe they can get away with it. Only fools or ignoramuses ever trust the word of government officials or politicians.)

Burke finished his Reflections soon after this second emission. As many of the French paper advocates had cited the notes of the Bank of England as a source of English prosperity and proof that paper money was safe, Burke drew an invidious contrast between his country's redeemable bank currency and the French assignats. In contrast to the latter, English bank notes have their "origin in cash actually deposited," are "convertible at pleasure, in an instant and without the slightest loss, into cash again," and not one shilling "is received but of choice." The French inflationists mistakenly assume that "our flourishing state in England is owing to that bank paper, and not the bank paper to the flourishing of our commerce, the solidity of our credit, and to the total exclusion of all idea of power from any part of the transaction." How different was the government currency of France—coercive, inconvertible, and without limit, its quantity subject to the needs or whims of the revolutionary assembly. Burke denounced its legal tender quality and the harsh measures adopted to enforce it as an "outrage upon credit, property, and liberty." Referring to their theft of the property of the French Church and using it to back their fictitious but coercive currency, he wrote: "They rob only to enable them to cheat." Having erected a deadly "apparatus of force and deception," they order the once free people of France, at the point of a bayonet, "to swallow down paper pills by thirty-four millions sterling at a dose." Liberte, egalite, fraternite, indeed!

The consequences of the second issue were just as the unpopular economists had foretold: depreciation in their value, rising prices, feverish speculation, complaints about a shortage of money, calls for more assignats, the prostration of commerce and industry, inordinate consumption, and declining savings. Economic calculation became impossible, but speculation quite profitable (or ruinous). Burke should get credit for a remarkably accurate and precise prediction. He believed that the rise of prices, consequent to assignat inflation, would render it unprofitable for farmers to take their crops to market. They would stay home and produce only for themselves or for barter with their neighbors. The government would then send troops into the countryside to confiscate grain and other foodstuffs. It happened exactly as he foretold.

The revolutionary government first decided to cure the evils generated by inflation with more inflation. Instead of destroying assignats received for the national properties, they reissued them in the form of smaller notes. In June 1791, they issued another 600 million assignats (the previous promise not to issue more was conveniently and predictably forgotten), and in December an additional 300 million. By the end of the year, its market value had fallen to 66 percent of its face value. In 1792, they issued 600 million more. In April of the same year, they confiscated the estates of the émigrés (those who fled France to avoid being arrested or murdered) and added them to the national properties. Then came 1793—Year One; the year of la Terreur. Having tried inflation and legal coercion, they would try terrorizing the population into accepting the plunging assignat at par, and producing and selling at a patriotic loss.

In March, the National Convention created the Orwellian-named Committee of Public Safety (another unfortunate American precedent), which was a kind of committee of terror, dedicated to expropriating and murdering those deemed to be "traitors" to France or enemies of la Revolution. In May, they passed le Maximum, imposing price ceilings on grain. It worsened the grain shortage. In June, they passed the Forced Loan, a progressive income tax, whose progressivity was progressively lowered to reach more and more citizens. They also passed increasingly draconian and deadly laws designed to force people to accept the assignats at par and forbidding them from exchanging them for anything less than their face value. In July, the Convention repudiated the first issue of interest-bearing assignats.

In August, trading (i.e. buying or selling) specie was prohibited. In September, the Convention passed the General Maximum, extending price ceilings to all foodstuffs, as well as firewood, coal, and other essentials. In that month, despite the deadly coercion, the assignat fell to 30 percent against gold. During 1793, the Convention issued 1,200 million assignats; in 1794, 3,000 million. Next came the deluge. In 1795, 33,000 million were printed, and in October, when a new government—the Directory—assumed power, the assignats' purchasing power had fallen to almost nothing. On the black market, 600 francs of assignats traded for one gold franc.

The Directory was done with the assignat, but it was not done with inflation. In February 1796, it issued a new paper currency, the mandat, and made it exchangeable for assignats at the rate of 30 to 1. By August, after 2,500 million had been issued, the mandat had fallen to three percent of its face value. In 1796, the Directory had had enough, finally, and it withdrew the legal tender character of both the assignat and the mandat. Thereupon, their remaining meager exchangeable value disappeared altogether.

It took Napoleon to restore hard money to France. As First Consul (1801), he introduced the 20 franc gold piece and insisted that from thenceforth soldiers, contractors, and merchants would be paid only in gold, or its equivalent. The paper blizzard was over. As the Bank of England had suspended specie payments in 1797, the English government was thrown into consternation. Napoleon would go on to conquer most of the Continent while on the gold standard. His success gives the lie to generations of scholarly and academic excuse making that for all its pitfalls the assignat "saved" the Revolution. On the contrary, it helped bring on the Terror and set French progress back a generation. Will the fiat dollar one day do the same to America?

John Maynard Keynes was a member of the British delegation to the peace negotiations at Versailles after World War I. He was disgusted by the Allies’ vindictive, grasping, and short-sighted actions at the conference, and he dashed off a book to denounce those actions and to explain why he thought the treaty would give rise to a plethora of troubles, as indeed it did. His book, The Economic Consequences of the Peace (1919), is still well worth reading today for its vivid character sketches, its recitation of key facts, and its penetrating political and economic insights.

Along the way, Keynes digressed to discuss why the European governments’ inflation of their money stocks during and after the war portended grave consequences. Although Keynes is not ordinarily cited as a strong anti-inflationist—indeed in important ways, his later views helped to create a well-nigh inevitably inflationary system of government macroeconomic interventionism—I know of no stronger statement against inflation than the one he expressed on pp. 235-36 of his book. It reads as follows:

Lenin is said to have declared that the best way to destroy the Capitalist System was to debauch the currency. By a continuing process of inflation, governments can confiscate, secretly and unobserved, an important part of the wealth of their citizens. By this method they not only confiscate, but they confiscate arbitrarily; and, while the process impoverishes many, it actually enriches some. The sight of this arbitrary rearrangement of riches strikes not only at security, but at confidence in the equity of the existing distribution of wealth. Those to whom the system brings windfalls, beyond their deserts and even beyond their expectations or desires, become ‘profiteers,’ who are the object of the hatred of the bourgeoisie, whom the inflationism has impoverished, not less than of the proletariat. As the inflation proceeds and the real value of the currency fluctuates wildly from month to month, all permanent relations between debtors and creditors, which form the ultimate foundation of capitalism, become so utterly disordered as to be almost meaningless; and the process of wealth-getting degenerates into a gamble and a lottery.

Lenin was certainly right. There is no subtler, no surer means of overturning the existing basis of society than to debauch the currency. The process engages all the hidden forces of economic law on the side of destruction, and does it in a manner which not one man in a million is able to diagnose.”

By Richard Heinberg

The only way to way avert a food crisis resulting from oil and natural gas price hikes and supply disruptions while also reversing agriculture's contribution to climate change is to proactively and methodically remove fossil fuels from the food system.

The removal of fossil fuels from the food system is inevitable: maintenance of the current system is simply not an option over the long term. Only the amount of time available for the transition process, and the strategies for pursuing it, can be matters for controversy.

Given the degree to which the modern food system has become dependent on fossil fuels, many proposals for de-linking food and fuels are likely to appear radical. However, efforts toward this end must be judged not by the degree to which they preserve the status quo, but by their likely ability to solve the fundamental challenge that will face us: the need to feed a global population of 7 billion with a diminishing supply of fuels available to fertilize, plow, and irrigate fields and to harvest and transport crops.

If this transition is undertaken proactively and intelligently, there could be many side benefits - more careers in farming, more protection for the environment, less soil erosion, a revitalization of rural culture, and more healthful food for everyone.

Some of this transformation will inevitably be driven by market forces, led simply by the rising price of fossil fuels. However, without planning the transition may be wrenching and destructive, since market forces acting alone could bankrupt farmers while leaving consumers with few or no options.

The Transition

To remove fossil fuels from the food system too quickly, before alternative systems are in place, would be catastrophic. Thus the transition process must be a matter for careful consideration and planning.

In recent years there has been some debate on the problem of how many people a non-fossil fueled food system can support. The answer is still unclear. But we will certainly find out, because there is likely to be no alternative, given that substitute liquid fuels - including coal-to-liquids, biofuels, tar sands, and shale oil - are all problematic and cannot be relied upon to replace cheap crude oil and natural gas as these deplete.

There are reasons for hope: a recent report on African agriculture from the United Nations Environmental Programme (UNEP) suggests that "organic, small-scale farming can deliver the increased yields which were thought to be the preserve of industrial farming, without the environmental and social damage which that form of agriculture brings with it."

Nevertheless, given that we do not know whether non-fossil fuel agriculture can in fact feed a population now approaching seven billion - and given that current fuels-based agriculture cannot be relied upon to do so for much longer, given the reality of fuel depletion - the prudent path forward would surely be to tie agricultural policy to population policy.

Indeed, coordination will be essential also between agriculture policies and education, economic, transport, energy policies. The food system transition will be comprehensive, and will require integration with all segments and aspects of society.

This document is intended to serve as the basis for the beginning of that planning process. Our aim is to develop a template that can be used to strategically plan the transition of food and farming across the world, region by region, and at all scales (from the farm to the community to the nation), beginning here in the UK.

Elements of Transition

The following are some key strategic elements of the food systems transition process that will need to be addressed at all levels of scale, from the household to the nation and beyond.

Re-Localization

In recent decades the food systems of Britain and most other nations have become globalized. Food is traded in enormous quantities - and not just luxury foods (such as coffee and chocolate), but staples including wheat, maize, meat, potatoes, and rice.

The globalization of the food system has had advantages: people in wealthy countries now have access to a wide variety of foods at all times, including fruits and vegetables that are out of season (apples in May or asparagus in January), and foods that cannot be grown locally at any time of year (e.g., avocadoes in Scotland). Long-distance transport enables food to be delivered from places of abundance to areas of scarcity. Whereas in previous centuries a regional crop failure might have led to famine, its effects now can be neutralized by food imports.

However, food globalization also creates systemic vulnerability. As fuel prices rise, costs of imported food go up. If fuel supplies were substantially cut off as the result of some transient event, the entire system could fail. A globalized system is also more susceptible to accidental contamination, as we have seen recently with the appearance of toxic melamine in foods from China. The best way to make our food system more resilient against such threats is clear: decentralize and re-localize it.

Re-localization will inevitably occur sooner or later as a result of declining oil production, since there are no alternative energy sources on the horizon that can be scaled up quickly to take the place of petroleum. But if the transition process is to unfold in a beneficial rather than a catastrophic way, it must be planned and coordinated. This will require deliberate effort aimed at building the infrastructure for regional food economies - ones that can support diversified farming and reduce the amount of fossil fuel in the British diet.

Re-localization means producing more basic food necessities locally. No one advocates doing away with food trade altogether: this would hurt both farmers and consumers. Rather, what is needed is a prioritization of production so that lower-value food items (which are typically staple calorie crops) are mostly sourced from close by, with most long-distance trade left to higher-value foods, and especially those that store well.

This decentralization of the food system will result in greater societal resilience in the face of fuel price volatility. Problems of food contamination, when they appear, will be minimized. Meanwhile, revitalization of local food production will help renew local economies. Consumers will enjoy better quality food that is fresher and more seasonal. And transport-related climate impacts will be reduced.

Each nation or region will need to devise its own strategy for re-localizing its food system, based on a thorough initial assessment of vulnerabilities and opportunities. The following are some general suggestions that are likely to be applicable in most instances:

The process will benefit enormously from policy support at both national and regional levels. This could include, for example, the provision of grants to towns and cities to build year-round indoor farmers' markets.
Food-safety regulations should be made appropriate to the scale of production and distribution, so that a small grower selling direct off the farm or at a farmers' market is not regulated as onerously as a multinational food manufacturer. While local food may have safety problems, these will inevitably occur on a smaller scale and will be easier to manage because local food is inherently more traceable and accountable. Governments can require that some minimum percentage of food purchases for schools, hospitals, military bases, and prisons are sourced within 100 miles of the institutions buying the food. Channelling even a small portion of institutional food purchasing to local growers would greatly expand opportunities for regional producers while improving the diet of people whom these institutions feed.
Cities and towns can rework their waste management systems so as to collect food scraps that can then be converted to compost, biogas, and livestock feed - which can in turn be made available to local growers.
But government can do only so much. Consumers must develop the habit of preferentially buying locally sourced foods whenever possible, and they can be encouraged in this by "Buy Local" educational literature distributed by retailers - who can also assist by clearly labeling and prominently displaying local products.

Growers themselves must rethink their business strategies. Instead of growing specialty crops for export, they must plan a transition to production of staple foods for local consumption. They must also actively seek local markets for their food. The Community Supported Agriculture (CSA) movement provides a business model that has proven successful in many communities. Small producers can also create informal co-ops to acquire machinery (such as small threshing machines for cereal and oilseed processing or micro hydro turbines for electricity).

The strategy of re-localizing food systems will be more challenging for some nations and regions than others. Given that the food footprint of London encompasses essentially all of England, the challenge for Britain is greater than is the case for many other nations. More urban gardens and even small animal operations (with chickens, ducks, geese, and rabbits) within London and other cities should be encouraged, but even then it will be necessary to source most food from the countryside, delivering it to the city by rail. Thus re-localization should be seen as a process and a general direction of effort, not as an absolute goal.

Energy

As society turns away from fossil fuels, the energy balance of farming must once again become net positive. However, the transition process will be complex and problematic. Farms will still need sources of energy for their operations, and will need to provide much or all of that energy for themselves. Meanwhile, farmers could also take advantage of opportunities to export surplus energy to nearby communities as a way of increasing farm income.

Farms must be powered with renewable energy. However, many energy needs on farms - such as fuel for tractors and other machinery - are currently difficult to fill with anything other than liquid fuels, which currently come in the form of diesel or petrol made from crude oil. Farmers should first look for ways to reduce fuel needs through efficiency or replacement of machines with animal power or human labor. This is most likely to be economically feasible in dairy, meat, vegetable, fruit, and nut operations. Where fuel-fed machinery is still required, which is likely to continue being the case for grain production, ethanol or biodiesel made on-site could supplement or replace petroleum. Farmers could aim to apportion one-fifth of their cropland to production of biofuels for their own use.

Many other farm operations require electricity, and this can be generated on-site with wind turbines, solar panels, and micro-hydro turbines. Effort first must be devoted to making operations more energy-efficient. Because these technologies require initial investment and pay for themselves slowly over time, assistance from government and from financial institutions in the form of grants and low-interest loans could be instrumental in helping farmers overcome initial economic hurdles toward energy self-sufficiency.

Eventually farmers are capable of being not just self-sufficient in energy, but of producing surplus energy for surrounding communities. Much of this exported energy is likely to come in the form of biomass - agricultural and forestry waste that can be burned to produce electricity. While farmers can also grow crops for the production of biofuels, the ecological and thermodynamic limits of this energy technology require that the scale of production be deliberately restricted. Otherwise, society's demand for fuel could overwhelm farmers' ability to produce food - and food must remain their first priority. In exporting biomass from the farm, growers must always keep in mind the productive capacity of sustainable agricultural systems, and they must strictly monitor soil health and fertility.

The transition of farms to renewable energy will require planning. Farmers, ideally with the assistance of regional and national agencies, should plan to increase energy efficiency, to reduce fossil fuel inputs, and to grow renewable energy production according to a staged, integrated program designed for the unique needs and capabilities of each farm. As a general guideline, the plan should aim to reduce oil and natural gas inputs by at least half during the first decade

Soil Fertility

In industrial agriculture, soil fertility is maintained with inputs provided from off-site. Of these inputs, the most important are nitrogen and phosphorus. Nitrogen comes from ammonia-based fertilizers made from fossil fuels - principally, natural gas. Phosphorus comes from phosphate mines in several countries. While sufficient low-quality phosphate deposits exist to supply world needs for many decades, high-quality deposits that are currently being mined are quickly depleting, which means that phosphate prices will likely rise within the next few years. [Phosphate Primer]

Both nitrogen and phosphorus are essential to agriculture. And our current ways of supplying both are clearly unsustainable. Unless alternative ways of maintaining soil fertility are quickly found, a crisis looms.

The long-term solution will surely depend on a two-fold strategy: designing farm systems that build fertility through crop rotations, and recycling nutrients.

Crop rotation can help with maintaining nitrogen levels. Simply planting a cover crop after the fall harvest significantly reduces nitrogen leaching while cutting down on soil erosion. Meanwhile, introducing leguminous crops into the rotation cycle replaces nitrogen.

Cleverly designed polycultures can sustainably produce large amounts of food, as has been shown not only by small-scale "alternative" farmers in Britain and America, but also by large rice-and-fish farmers in China and giant-scale operations (up to 15,000 acres) in Argentina. There, farmers employ an eight-year rotation of perennial pasture and annual crops: after five years grazing cattle on pasture, farmers then grow three years of grain without applying fertilizer. The need for herbicides is also dramatically reduced: weeds that afflict pasture cannot survive the years of tillage, and weeds of row crops don't survive years of grazing.

Most industrial farmers have left behind the practice of cover cropping because commercial fertilizers have become the cheaper option. That cost equation is about to shift. It is therefore important that farmers begin planning for higher fertilizer prices now by gearing up their rotation cycles and building natural soil fertility ahead of the immediate need.

In industrial agriculture, the soil is treated as an inert substance that holds plants in place while chemical nutrients are applied externally. Without efforts to maintain natural fertility, over time organic matter disappears from the soil, along with beneficial soil micro-organisms. In the future, as chemical fertilizers become more expensive, farmers will need to devote much more attention to the practice of building healthy soil. But rebuilding nutrient-depleted soil takes, at minimum, several years of effort.

Traditional farmers increase organic matter in topsoil through the application of compost - which not only builds soil fertility, but also improves the soil's ability to hold water and thus withstand drought. There is also mounting evidence that food grown in properly composted soil is of higher nutritional quality. Currently, in typical modern cities, consumers, retailers, wholesalers and institutions discard enormous quantities of food. Some communities have already instituted municipal programs for composting of food and yard waste; such programs could be expanded and made mandatory, with compost being given free to local farmers. This would reduce the amount of garbage going to land fills, as well as farmers' needs for fertilizers and irrigation, while improving the nutritional quality of the British diet.

In addition, recent research with "terra preta" (also known as "bio char"), a charcoal-like material that can be produced from agricultural waste, suggests that its introduction to soils could reduce plants' need for nitrogen by 20 to 30 percent while sequestering carbon that would otherwise end up in the atmosphere.

The potential of composting and the use of terra preta to mitigate the climate crisis is hardly trivial: a one-percent increase of soil organic matter in the top 33.5cm of the soil is equivalent to the capture and storage of 100 tonnes of atmospheric CO2. per square kilometre of farmland.

Ultimately, there is no solution to the phosphorus supply problem other than full-system nutrient recycling. This will entail a complete redesign of sewage systems to recapture nutrients so they can be returned to the soil - as Chinese farmers learned to do centuries ago. But if sewage systems (or simpler variants) are to become primary sources of phosphorus and other soil nutrients, they cannot continue to be channels for the disposal of toxic wastes. It is essential that separate waste streams be developed for the disposal of all pharmaceuticals, household chemicals, and industrial wastes. Thus the problem of soil fertility is one that farmers cannot solve on their own: it is a crisis of the food system as a whole, and must be addressed contextually and holistically.

Diet

The consumer is as important to the food system as the producer. During recent decades, consumer preferences have been shaped to fit the industrial food system through advertising and the development of mass-marketed, uniform, packaged food products that, while often nutritionally inferior, are cheap, attractive, in some cases even physically addictive. The advent and rapid proliferation of "fast food" restaurants has likewise fostered a diet that is profitable to giant industrial agribusiness, but disastrous to the health of consumers. However lamentable these trends may be from a public health standpoint, they are clearly unsustainable in view of the energy and climate crises facing modern agriculture.

Because processed and packaged foods and fresh foods imported out of season add to the energy intensity of the food system, rich and poor alike must be encouraged to eat food that is locally grown, that is in season, and that is less processed. Public education campaigns could help shift consumer preferences in this regard.

A shift toward a less meat-centered diet should also be encouraged, because a meat-based diet is substantially more energy intensive than one that is plant-based.

Government can help with a shift in diet preferences through its own food purchasing polices (see "Re-Localization," above). The process can be helped even further by a more careful official government definition of "food." It makes no sense for government efforts intended to improve the nutritional health of the people to support the consumption of products known to be unhealthful - such as soda and other junk food.

Farming Systems

During the past few decades farming has become more specialized. Today, a typical farm may produce only meat of a single kind (turkey, chicken, pork, or beef), or only dairy, or a single type of grain, vegetable, fruit, or nut.

This narrow specialization seemed to make economic sense in the era of cheap transport and cheap farm inputs. But because nature is diverse and integrated, the deliberate elimination of diversity on the farm has led to problems at every step. For example, animal feedlot operations (also known as concentrated animal feed operations, or CAFOs) produce enormous amounts of waste that end up in massive manure lagoons that pollute ground water and foul the air. Meanwhile, grain diets fed to the animals result in digestive problems requiring the large-scale administration of antibiotics that find their way into both the human food system and ground water, and that lead to antibiotic resistance among disease organisms that afflict humans.

Farm specialization also impacts the grain or vegetable grower: soils that annually produce these crops need a regular replenishment of nitrogen; but if the farmer keeps few animals, there may be no option other than to import fertilizers from off-site.

By switching to multi-enterprise diverse systems, farmers can often solve a range of problems at once. Feeding much less grain to livestock while giving them access to pasture that is in rotation with other crops maintains soil fertility while leading to better animal health and higher food quality. The farmer, the environment, and the consumer all benefit.

The post-hydrocarbon food transition may also compel a rethinking of the size of farm operations. The mechanization of farm operations and the centralization of food systems favored larger farms. However, as fuel for farm machinery becomes more costly, and as farming once again involves more labor, smaller-scale operations will once again be profitable. In addition, a smaller scale of operations will be needed as farms become more diverse, since farmers will have more system elements to monitor. Agriculture will thus become more knowledge-intensive, requiring a curious, holistic attitude on the part of farmers.

In urban areas, micro-farms and gardens - including vertical gardens and rooftop gardens that in some cases include small animals such as chickens and rabbits - could provide a substantial amount of food for growers and their families, along with occasional income from selling seasonal surpluses at garden markets.

Farm Work

With less fuel available to power agricultural machinery, the world will need many more farmers. But for farmers to succeed, some current agricultural policies that favor larger-scale production and production for export will need to change, while policies that support small-scale subsistence farms, gardens, and agricultural co-ops must be formulated and put in place - both by international institutions such as the World Bank, and also by national and regional governments.

Currently the UK has 541,0001 farmers, depending on how the term is defined. In the UK in 1900, nearly 40 percent of the population farmed; the current proportion is less than one percent. Today, the average farmer is nearing retirement age.

In nations and regions where food is grown without machinery, a larger percentage of the population must be involved in food production. For example, farmers make up more than half the populations of China, and India, Nepal, Ethiopia, and Indonesia.

While the proportion of farmers that would be needed in Britain if the country were to become self-sufficient in food grown without fossil fuels is unknown (that would depend upon technologies used and diets adopted), it would undoubtedly be much larger than the current percentage. It is reasonable to expect that several million new farmers would be required - a number that is both unimaginable and unmanageable over the short term. These new farmers would have to include a broad mix of people, reflecting the UK's increasing diversity. Already growing numbers of young adults are becoming organic or biodynamic farmers, and farmers' markets and CSAs are also springing up across the country. These tentative trends must be supported and encouraged. In addition to Government policies that support sustainable farming systems based on smaller farming units, this will require:

Education: Universities and community colleges must quickly develop programs in small-scale ecological farming methods - programs that also include training in other skills that farmers will need, such as in marketing and formulating business plans. Apprenticeships and other forms of direct knowledge transfer will also assist the transition.
Financial Support: Since few if any farms are financially successful the first year or even the second or third, loans and grants will be needed to help farmers get started.
A revitalization of farming communities and farming culture: Over the past decades UK rural towns have seen their best and brightest young people flee first to distant colleges and then to cities. Farming communities must be interesting, attractive places if we expect people to inhabit them and for children to want to stay there.
Seeds

Today's seed industry is centralized and reliant upon the very fuel-based transport system whose future viability is in question. Most commercial seeds are of hybrid varieties, so that farmers cannot save seed but must purchase new supplies each year.

Worldwide, a growing proportion of the commercial seeds that are available are genetically modified. GM seeds have primarily been developed by chemical companies to support the sale of their proprietary herbicides. The promise of more nutritious foods, or crops that can produce biofuels more efficiently, is years from realization. Given that the need for transition is immediate, efforts to build a post-fossil fuel food system cannot wait for new technologies that may or may not appear or succeed. In any case, the GM seed industry is based upon current systems of transport, and fuel-based inputs such as chemical fertilizers and herbicides, that are all inextricably tied to the wider fossil-fuel based provisioning systems of society. Thus GM crops would be unlikely to be of much help in the transition in any case.

What is needed instead is a coordinated effort to identify open-pollinated varieties of food crops that are adapted to local soils and microclimates, and a program to make such seeds available to farmers and gardeners in sufficient quantities. In addition, local colleges must begin offering courses on the techniques of seed saving.

Processing and Distribution Systems

The transition process will undoubtedly be fraught with challenges to food processing and distribution systems, which currently rely on large energy inputs and long-distance transport.

For example, the meat industry now depends upon centralized facilities for slaughtering livestock - which must be transported long distances to these facilities. Re-localizing food systems will entail creating incentives for the emergence of smaller, more localized slaughterhouses and butcher shops. One interim solution would be for a fleet of mobile abattoirs to go from farm to farm, processing animals humanely and inexpensively.

Many health regulations were originally designed to check abuses by the largest food producers, but such regulations may now inhibit the development of smaller-scale and more localized processing and distribution systems. For example, farmers should be able to smoke a ham and sell it to their neighbours without making a huge investment in nationally approved facilities. A small producer selling direct from the farm or at a farmers' market should not be subject to the same food safety regulations as a multinational food manufacturer: while local food may occasionally have safety problems, those problems will be less catastrophic and easier to manage than similar problems at industrial-scale facilities.

Food processors must look for ways to make their present operations more energy efficient, while government, consumers, and retailers find ways to reduce the need for food processing and also for food packaging. This gradual shift will require institutional support for families in storing, processing, cooking, and preserving food within the home.

Meanwhile, in view of inevitable problems with existing transport systems, national and regional food storage systems must be reconsidered. Reserves of grain, sufficient to provide for essential needs during an extended food crisis, should be kept and managed to avoid spoilage.

Packaging of food should be regulated to minimize the use of plastics, which will become more scarce and expensive as oil and gas deplete - and which are implicated as sources of toxins in any case.

Government should institute policies that prioritize the distribution of food within the nation by rail and water, rather than by road, as trucks are comparatively energy inefficient.

Supermarkets are currently the ultimate distribution sites for food in most instances. However, this model presupposes near-universal access to automobiles and petrol. A resilient food system will require smaller and more widely distributed access points in the forms of small shops and garden or farm markets. Government regulations and tax incentives can help accomplish that shift.

Wholesalers and distributors will have a changed role in a transitioning food system. They will still be needed to manage the supplies of various seasonally produced foods moving from producers to consumers. However, rather than favoring large producers and giant supermarket chains, they must alter their operations to serve smaller, more distributed farms and gardens, as well as smaller and more distributed retail shops.

Resilience Action Planning

The transition process will succeed by creating more resilience in food systems. Resilient systems are able to withstand higher magnitudes of disturbance before undergoing a dramatic shift to a new condition in which they are controlled by a different set of processes. One quality of resilience is redundancy - which is often at odds with economic efficiency. Efficiency implies both long supply chains and the reduction of inventories to a minimum. This "just-in-time" delivery of products reduces costs - but it increases the vulnerability of systems to disturbances such as fuel shortages. As more attention is paid to resilience and less to economic efficiency, redundancy and larger inventories are seen as benefits rather than liabilities. Other resilience values include diversity (as opposed to uniformity), and dispersion (rather than centralization) of control over systems.

Building resilience into our food systems as we move toward a post-fossil fuel economy will entail all of the Elements of Transition detailed above. It will also require planning at four levels: Government, Community, Business, and Individual or Family. At each level the planning process will necessarily be somewhat different. The purpose of this section is to delineate the main planning steps that will make sense at each of these levels. In some instances, steps within an action plan can or should be undertaken concurrently. In any case, what is offered here is merely a skeletal outline for a process that must be developed to fit unique needs of those it will serve.

Government

The following steps are applicable at any level of government - national, regional, or local. At the highest level of scale (the nation), each step will itself be the subject of planning and delegation. At the lowest level of scale (small villages), government may lack the capacity to undertake any of these steps and can do more than offer symbolic official support to volunteer citizen initiatives.

1. Assess the existing food system. Begin with a study of current systemic vulnerabilities and opportunities. How are farm inputs currently sourced? How much food is currently imported? What proportion of those food imports are staples, and what proportion are luxury foods? What are the environmental costs of current agricultural practices? How would the current food system be impacted by fuel shortages and high prices?

2. Review policies. How are current policies supporting these vulnerabilities and environmental impacts? How can they be changed or eliminated? Are there policies already in place that are likely to help with the transition? How can these latter policies be strengthened?

3. Bring together key stakeholders. Organizations of farmers, food processing and distributing companies, and retailers must all be included in the transition process. Many will wish simply to maintain the existing system; however, it must be made clear that this is not an option. Many companies involved in the food system will need to change their business model substantially.

4. Make a plan. The transition plan that is formulated must be comprehensive and detailed, and must contain robust but attainable targets with timelines and mechanisms for periodic review and revision. A scoping exercise must be undertaken to assess the impact of the plan on agricultural output and to quantify the changes in kinds of commodities produced and in their volumes and prices. Simon Fairlie's paper, "Can Britain Feed Itself?", is an initial attempt at such an exercise, and can be used as a model to be built upon and supplemented.

5. Educate and involve the public. The public must not only be informed about the government-led aspects of the transition process, but must be included in it to the extent that is practical. Citizens must be educated about food choices, gardening opportunities, and ways to access food from local producers. Their successes and challenges in adaptation will inform new iterations of the plan.

6. Shift policies and incentives. This is the key responsibility of government, as it either limits or enhances the ability of community groups, businesses, and families to engage in the transition process. Policy changes must reflect stakeholder input, but must nevertheless be designed primarily to further the Elements of Transition, rather than the short-term interests of any particular stakeholder group.

7. Monitor and adjust. An undertaking of this magnitude will inevitably have unforeseen and unintended impacts. Thus it is essential that progress be continually be reviewed with an eye to making adjustments to pace and strategy, while maintaining absolute adherence to the central task of methodically removing fossil fuels from the food system.

Community

The following are action steps for adoption by voluntary community groups, as opposed to governments (see above). The Transition Network provides an excellent model for this kind of community action. Such efforts seem to work best when the scale of community is such that meetings are manageable in size and meeting participants need not travel long distances. Thus in large cities, neighborhoods could apply Resilience Action Planning while sending delegates to occasional city-wide coordinating meetings. The overlap and mutual support between community organizations and local government efforts must be a matter for discussion and negotiation.

1. Assess the local food system. This assessment process should be undertaken in cooperation with government, so as not to duplicate tasks. Volunteer citizen groups are in position to provide perspectives that otherwise might elude government assessment efforts - such as opportunities for community gardens, or problems with access to food from local producers.

2. Identify and involve stakeholders. Local growers, shop owners, public kitchens, restaurants, schools, and other institutions that produce or serve food should all be contacted and invited to join a voluntary re-localization initiative and to offer input into the process.

3. Educate and involve the public. Community groups can stage public events to raise awareness about food transition issues. "Buy local" brochures and pamphlets, paid for and distributed by a consortium of local businesses (but organized by volunteer groups), can list local producers, farm markets, restaurants, and shops.

4. Develop a unique local strategic program. This can include farmers' markets, CSAs, school lunch programs, and public kitchens, networked with local producers, including community gardens. The program, based on input from stakeholders, should feature targets and timelines developed through a "backcasting" process, beginning with a collaborative exercise aimed at envisioning the local food system as it might look in 2025 after fossil fuels have ceased to play a role.

5. Coordinate with national programs. Local volunteer efforts can play a significant role in informing national government policies, and in implementing the national transition strategy. However, this will require the maintenance of open channels of communication, which in turn will be the responsibility of both government and the local groups.

6. Support individuals and families. Individuals are likely to change food habits and priorities only if they see others doing so as well, and if they feel that their efforts are supported and valued. Community groups can help by establishing new behavioral norms through public events and articles in local newspapers. Practical help can be offered via canning parties, garden planting and harvest parties, and gleaning programs. Local food and gardening experts can be made available to answer questions and concerns. Neighborhood food storage facilities can also be created to supplement household cupboards.

7. Monitor and adjust. All of these efforts must be continually adjusted to assure that all segments of the community are included in the transition process, and that the process is working as smoothly as possible for all.

Business

Relevant businesses include farms, shops, processors, wholesalers, and restaurants. However, the following steps could also be useful to organizations such as schools, colleges, and hospitals that dispense food as an ancillary part of their operations.

1. Assess vulnerabilities. Every business or organization that is part of the food system must take an honest look at the inevitable impacts of higher fuel prices, and fuel scarcity, on its operations. Examine scenarios based on a doubling or tripling of fuel costs to highlight specific vulnerabilities.

2. Make a plan. Develop a business model that works without - or with continually shrinking - fossil fuel inputs. Then "backcast" from that imagined future condition, specifying time-related targets.

3. Work with government and community groups. Given the fact that government will be developing regulations to reduce fuel use in the food system, and that community organizations will be offering support to local farmers and food shops that spearhead the transition, it makes good business sense to lead the parade rather than lagging at the rear.

4. Educate and involve suppliers and customers. No business is an island. The transition will flourish through strengthened relationships on all sides.

5. Monitor and adjust. For businesses, one obvious and essential criterion of success is profitability. The bottom line will help indicate which adaptive strategies are working, and which ones need work. However, negative financial feedback is no reason to abandon the essential goal of transition.

Individual and Family

1. Assess food vulnerabilities and opportunities. Whether at a family meeting or by oneself over a cup of tea, take a long honest look at your typical monthly food purchases and give careful thought to the implications. How much of your food comes from within 100 miles? How much is packaged and processed? How many meals are meat-centered? Where do you shop? How would you be impacted if food and fuel prices doubled or tripled?

2. Make a plan. Create an ideal food scenario for yourself, including diet, shopping habits, and gardening goals. Then "backcast" a series of time-related goals. Write these prominently on a calendar and attach it to the front of your refrigerator.

3. Garden. Even if you don't have access to a plot of land, you can still grow sprouts in a jar or a few food plants in a window box. Look for opportunities to contribute work to a community garden. Develop your skills by seeking out gardening mentors.

4. Develop relations with local producers. Even if you have a large garden you probably can't grow all the food you eat. Rather than shopping at a supermarket, begin to frequent your local farmers' market, or join a CSA.

5. Become involved in community efforts. Get to know your neighbors and compare gardening experiences with them. Together, form a "tool library" from which members can check out garden tools and gardening books. Organize or participate in planting, harvesting, food-swapping, gleaning, and canning parties.

6. Monitor and adjust. At the end of each month, revisit your plan and revise it if necessary.

I DO NOT LIKE GREENBACKS OF SHAM,
I DO NOT LIKE THEM, UNCLE SAM!!!
I WILL NOT BUY THEM HERE OR THERE,
I WILL NOT BUY THEM ANYHERE!!

I WILL NOT BUY THEM WITH A MOUSE.
I WILL NOT SAVE THEM IN MY HOUSE.
I WILL NOT BUY THEM WITH A FOX.
I WILL NOT SAVE THEM IN MY BOX.

NOT in a car, not in the dark.
NOT in a train, not in the rain.
I DO NOT LIKE GREENBACKS OF SHAM.
I WILL NOT BUY THEM, UNCLE SAM.

Gold Coins? Try them Try them, you will see?
If I try them, uncle sam, will you let me be?
I like them, I really like them, uncle sam.
So I tried them, uncle sam,

And, I liked them, uncle sam.
So, where are those coins, my uncle sam?
He will not sell them here or there.
He will not sell them anywhere,

Not at a bank, not from the safes,
Not from a house, nor through a mouse.
So I tried them, and I like them,
But I can not find them here or there,

I can not find them anywhere.
I can only find, greenbacks of sham,
I can only find them, uncle sam,
And, I can find them here and there,

And, I can find them everywhere.

Neville Bennett Oct 17/08

Last week was the most cataclysmic in global history. Share markets collapsed as much as in October 1987, and the banking collapse was more dangerous. It was riveting to watch the huge Royal Bank of Scotland share price melt. Iceland crashed, leaving its external depositors in the lurch.

Australian banks were in the frame. I spent some time each day monitoring their share prices, and advising friends that only the Public Trust guaranteed deposits in New Zealand. It seemed possible that Australia and New Zealand could follow Iceland.

Iceland had some external support. The Scandinavians helped, and Russia offered a loan (perhaps in return for Iceland’s magnificent military bases). Who would help NZ, or their Australian cousins?

Why My Interest in Iceland?

New Zealand and Iceland have the similarities of small populations, an independent currency, huge current account deficits, inflation and high interest rates set to attract foreign capital. While both have friends, they are not part of a big currency bloc. They are vulnerable to being the playthings of speculators.

The New Zealand dollar has fallen from nearly 80 c to the US dollar in June to about 60c now (a 33% loss). The Krona is in free-fall, and dependent upon an IMF rescue. In short, Iceland raises question for New Zealand: namely, can small countries with similar problems avoid a banking crisis, currency crisis and debt default?

What happened to Iceland?

When Iceland nationalized or rescued its three biggest banks, the British Government condemned its failure to guarantee British savers deposits in Icelandic banks in Great Britain. Gordon Brown said the move was “effectively illegal and completely unacceptable; he froze the assets using anti-terrorist legislation. More than 80 British local government councils, police, fire services and charities have frozen deposits.

Inflation targeting

Iceland is the first casualty of the credit crunch. Its failure was predicted in my earlier column. Partly it failed because its Reserve Bank has policies (similar to RBNZ) which target inflation. This policy has widespread support in economic theory but was disastrous in Iceland’s case.

In inflation targeting, the Bank raises interest rates if inflation is above its target level and lowers them if inflation is low. Iceland did not have low rates: inflation ran high, sometimes reaching 15%. Its high Interest rates, like NZ’s, encouraged borrowing foreign currency.

This created a path well known in NZ: a large inflow of foreign currency resulted, which increased the exchange rate and created a bubble arising from the interaction of domestic interest rates and forex inflows. A huge current account deficit ensued because exports are over-priced and imports very cheap.

Another factor was the magnitude of the banking system: its assets were about ten times the size of GDP. They were well capitalized but in the last resort could not depend upon the support of a powerful state, An Icelandic government might guarantee a bank: but who would trust that guarantee when it comes from a 300,000 person state? One lesson of the crisis is the crucial ratio between the state and the size of its banks.

Iceland might have survived if it had been part of the Euro bloc. Ireland also had a ferocious run but survived by offering a deposit guarantee. There was no currency issue because Ireland is in Euro.

Spare a thought for the innocent Icelandic people. They assumed housing loans in foreign currency. There was a nice rise in house prices. What now? Payments on loans have increased by up to 50%! Inflation? About 30%! Employment? Mass layoffs. My point is that Iceland is a front runner: who knows whether New Zealand might also be very adversely affected by the crisis?

New Zealand

Iceland and most New Zealand banks have transgressed some rules of good sense. Sometimes you can borrow short, and lend long. This works when the interest rate curve is normal, with short-term interest lower than long-term. But in crises the curve can invert, and short –term rates are higher than long-term. Then short-term borrowers have a tiger by the tail, and the tiger can turn and bite. It bit Iceland.

A key point is that although Icelandic banks borrowed extensively abroad, they lent most of it abroad, and were perhaps careless about hedging. Kiwi banks are not subject to that risk, but they have liabilities of about $130 billion and 60% of that is due in six months or less.

The situation is not entirely dire, as some funding is due from parent banks (mostly Australian). Moreover, NZ banks also hedge their exchange rate risk which is important when the exchange rate changes. NZ banks swap most of their foreign exposure. Nevertheless, a lot of funding is problematic in the short-term, and the RBNZ has warned the banks of their vulnerability in times of a credit crisis.


I would add that Iceland’s gross assets plus liabilities is colossal, especially in comparison to Australasia. It might be noted in another exclusive release of data that New Zealand is more exposed than Australia. Australia’s net foreign liabilities are 61% of GDP, while NZ’s liabilities are 89% of GDP which is 45% higher’ New Zealand also needs to fund a mammoth current account deficit of 8.4% of GDP.

Afterthoughts

Iceland is road kill; the first victim in the credit crisis. Iceland failed largely because it was alone. If it had been part of the Euro area, as Ireland is, it may not have collapsed. The lesson of the present crisis is that New Zealand is also isolated. Australia is also exposed. Last week its banks looked liked dead men walking. Iceland’s failure will put pressure on Australia, Denmark, Sweden, Singapore and Switzerland to lessen exposure to their banks and currencies.

Bullionmark's comment:

Iceland a nation that was ranked the fifth-richest in the world per capita in the United Nations 2007/2008 Human Development Index is now facing chronic shortages of imports including food and clothing. Individual wealth has been decimated. Icelanders who held gold and silver now realise how important precious metals are for wealth protection and as a medium of exchange during a crisis. The Iceland example should be a warning signal to most citizens of the Western world, especially US, UK, Australia & NZ.

"Argentum et aurum comparenda sunt"

Not for nothing did US billionaire Warren Buffett call them the real 'weapons of mass destruction'

By Margareta Pagano and Simon Evans

The market is worth more than $516 trillion, roughly 10 times the value of the entire world's output: it's been called the "ticking time-bomb".
It's a market in which the lead protagonists – typically aggressive, highly educated, and now wealthy young men – have flourished in the derivatives boom. But it's a market that is set to come to a crashing halt – the Great Unwind has begun.
Last week the beginning of the end started for many hedge funds with the combination of diving market values and worried investors pulling out their cash for safer climes.
Some of the world's biggest hedge funds – SAC Capital, Lone Pine and Tiger Global – all revealed they were sitting on double-digit losses this year. September's falls wiped out any profits made in the rest of the year. Polygon, once a darling of the London hedge fund circuit, last week said it was capping the basic salaries of its managers to £100,000 each. Not bad for the average punter but some way off the tens of millions plundered by these hotshots during the good times. But few will be shedding any tears.
The complex and opaque derivatives markets in which these hedge funds played has been dubbed the world's biggest black hole because they operate outside of the grasp of governments, tax inspectors and regulators. They operate in a parallel, shadow world to the rest of the banking system. They are private contracts between two companies or institutions which can't be controlled or properly assessed. In themselves derivative contracts are not dangerous, but if one of them should go wrong – the bad 2 per cent as it's been called – then it is the domino effect which could be so enormous and scary.
Most markets have something behind them. Central banks require reserves – something that backs up the transaction. But derivatives don't have anything – because they are not real money, but paper money. It is also impossible to establish their worth – the $516 trillion number is actually only a notional one. In the mid-Nineties, Nick Leeson lost Barings £1.3bn trading in derivatives, and the bank went bust. In 1998 hedge fund LTCM's $5bn loss nearly brought down the entire system. In fragile times like this, another LTCM could have catastrophic results.
That is why everyone is now so frightened, even the traders, who are desperately trying to unwind their positions but finding it impossible because trading is so volatile and it's difficult to find counterparties. Nor have the hedge funds been in the slightest bit interested in succumbing to normal rules: of the world's thousands of hedge funds only 24 have volunteered to sign up to a code of conduct.
Few understand how this world operates. The US Federal Reserve chairman, Ben Bernanke, tapped up some of Wall Street's best for a primer on their workings when he took the job a few years ago. Britain's financial regulator, the Financial Services Authority, has long talked about the problems the markets could face on the back of derivative complexity. Unfortunately it did little to curb the products' growth.
In America the naysayers have been rather more vocal for longer. Famously, Warren Buffett, the billionaire who made his money the old-fashioned way, called them "weapons of mass destruction". In the late 1990s when confidence was roaring in the midst of the dotcom boom, a small band of politicians, uncomfortable with the ease with which banks would be allowed to play in these burgeoning markets, were painted as Luddites failing to move with the times.
Little-known Democratic senator Byron Dorgan from North Dakota was one of the most vociferous refuseniks, telling his supposedly more savvy New York peers of the dangers. "If you want to gamble, go to Las Vegas. If you want to trade in derivatives, God bless you," he said. He was ignored.
What is a Derivative?
Warren Buffett, the American investment guru, dubbed them "financial weapons of mass destruction", but for the once-great-and-good of Wall Street they were the currency that enabled banks, hedge funds and other speculators to make billions.
Anything that carries a price can spawn a derivatives market. They are financial contracts sold to pass on risk to others. The credit or bond derivatives market is one such example. It is thought that speculation in this area alone is worth more than $56 trillion (£33 trillion), although that probably underestimates the true figure since lax regulation has seen the market explode over the past two years.
At the core of this market is the credit derivative swap, effectively an insurance policy against the default in the interest payment on a corporate bond. One doesn't even need to own the bond itself. It is like Joe Public buying an insurance policy on someone else's house and pocketing the full value if it burns down.
As markets slid into crisis, and banks and corporations began to default on bond payments, many of these policies have proved worthless.
Emilio Botin, the chairman of Santander, the Spanish bank that has enjoyed phenomenal success during the credit crunch, once said: "I never invest in something I don't understand." A wise man, you may think.

Bullionmark's comments

Matt Simmons has been an investment banker for 40 years. He is the founder and chairman of the world's largest energy investment banking company, Simmons & Co. International. In 2005, he published “Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy,” a book that has galvanized the peak oil debate.
I believe him to be the worlds foremost expert on peak oil. When he proclaimed peak oil production would occur in 2005 he was ridiculed. The following chart highlights how accurate he was.



Watching his presentation at the recent APRO conference is almost alarming. The financial crisis and the decline in oil prices has governments, investors and consumers in a false sense if security. If Matts position is accurate the next crisis will be of a magnitude far greater than any we have seen in history, it will impact everyone, will happen almost overnight and no amount of money printing will solve it. This is the 1000 pound gorilla in the room that no one has noticed. It is another compelling reason why we are headed for hyperinflation and gold & silver will be the go to assets.