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Monday, February 04, 2008

BOOK REVIEW: American Theocracy

American Theocracy: The Peril and Politics of Radical Religion, Oil and Borrowed Money in the 21st Century -- Kevin Phillips -- 2006 -- 394 pages ( 462 pages with notes and index)

American Theocracy qualifies as a must-read for both Republicans who might suspect something is not quite right with their party and for Democrats who believe their party is proposing any policies which can truly counteract the magnitude of the problems America currently faces. The subtitle reflects the outline of the book's focus on

* American energy consumption and policy
* the evolution of religion and its role in American politics
* fiscal and regulatory policies that favored financial speculation and narrower distribution of jobs and wealth over manufacturing

Readers could literally split the book into thirds at pages 96 and 262 and read each section independently and gain tremendous insights into each of the topics. In each, Phillips provides details from at least one hundred years of history and in many cases, draws repeated parallels with the Spanish, Dutch and English empires which all followed similar arcs of power derived from energy and wealth and all rode them into the ground when their economies failed to adjust to new economic and social paradigms.

Before reviewing highlights in each of the sections, one additional point is worth making about the author. Kevin Phillips is not writing from the vantage point of a typical "buyer's remorse" Republican such as Peggy Noonan of The Wall Street Journal who cheered on every advance of the Republican Party through 2004 as long as they kept winning elections and the consequences of their actions hadn't recoiled to harm even the base of the party. For a time, Phillips was arguably one of the pre-eminent strategists within the Republican Party who coined the term "Sun Belt" in the late 1960s as part of his larger analysis of a Southern religious conservative coalition that could provide a base for Republican success for over thirty years. Since 1988, he has written consistently about the religious and economic extremes pursued by the Republican Party and their contribution to the undoing of that coalition and the country in general.

American Oil Policy

Perhaps the single most salient point in the analysis of American oil policy and our blunder in Iraq comes from this point Phillips includes from James Paul of the Global Policy forum:

Iraq's oil is the cheapest to produce, at a cost of only about $1 per barrel. The gigantic "rent" on Iraq's oil, during decades of production, could yield company profits in the range of $4-5 trillion… Assuming fifty years of production and 40% royalties, Iraq could yield annual profits of $80-90 billion, more than the total annual profits of the top five companies, even in the banner year of 2003. (page 91)

Besides this overarching positive incentive on the part of American oil companies and politicians to actively interfere in Iraq, Phillips cites two other related and reinforcing fears that also came into play. In 2001 and 2002, it became known that Saddam Hussein was pursuing arrangements to open access to Iraqi oil fields to non-Anglo oil companies. American military and business policymakers viewed this as a threat because such plans would cut American firms out of the profit stream associated with the biggest remaining known oil opportunity in a work market facing dwindling supplies and put that highly valuable oil in under the control of foreign firms and governments. Phillips cites a story from Newsweek magazine that concluded assignment of key oil fields to American interests within a post-war Iraq was a key topic of discussion in the secret energy summit meetings held by Dick Cheney in the summer of 2001.

A less obvious but possibly more crucial source of American concern about Iraq's plans was the idea of vast amounts of oil being purchased with currencies other than the US dollar. Iraq had already been selling oil in limited quantities in Euros since 1999. Due to an agreement between the US and Saudi Arabia dating from 1973, all Saudi oil contracts with all buyers are denominated in US dollars, which virtually assures all OPEC oil is sold under the same terms, which reinforces use of the US dollar as a de facto world currency. An Iraqi oil market denominated in Euros or some other currency could materially weaken world demand for US dollars, which poses its own cataclysmic risks to the US economy because of our high debt and dependence on low interest rates. Phillips reinforces the concern over non-dollar denominated oil sales by confirming that one of the first acts of the Iraqi Coalition Provisional Authority was to revert all Iraqi oil sales to US dollars.

The Role of Religion in America and its Politics

Religion is obviously a very subjective subject so Part II of the book focusing on religion in American and its electoral implications is probably the most "non-concrete" portion of the book. Even with that caveat, the center section makes some interesting points, the most interesting of them involving the dominance of southern flavors of Protestantism, particularly the members of the Southern Baptist Convention, and a peculiar combination of willful re-invention of history and Biblical literalism that emphasizes faith over reason.

In Phillip's analysis, much of the current schism over religion and politics emanates from the Civil War and the bitterness of southerners towards the policies imposed on them during Reconstruction by the North after the war. He recaps the social and psychological forces others have characterized as the "Lost Cause" movement in southern culture in which the South essentially grit its teeth under Northern imposed Reconstruction policies after the war then transferred concepts of salvation, redemption and resurrection inherent in its varieties of Christianity into a political and social sense of "resurrection" after the North abandoned reconstruction efforts in 1877. In this thinking, rather than viewing the Civil War as a disastrous war fought for the wrong reasons and justly lost for being fought for the wrong reasons, Southerners viewed it as some sort of redemptive suffering under God that tested their mettle, just like the Israelites were tested by slavery under the Egyptians.

It may sound like a stretch but Phillips points out a few interesting anecdotes to support the theory. One, an emphasis on memorializing the heroic struggles of Confederate soldiers during the war. Maybe Confederate memorials make sense for Richmond, Atlanta, Andersonville or Vicksburg but what is the motivation in border states, Union states and then-territories? The more recent example of revisionist history / fantasy cited is Newt Gingrich's 2003 novel Gettysburg which imagines in very vivid detail an alternate ending in which the South wins. It's hard to imagine the wistful, "what if" motivation that would prompt one to spend time imagining an alternate ending to the decisive battle of a war that at a minimum began attempting to correct one of the founding sins of our nation -- legalized slavery.

The rest of the section on religion reviews the evolution of church membership and voting trends up to the present. It also outlines how the revisionist tendencies (defeat? what defeat?) and Biblical literalism espoused by evangelical churches have contributed to two of the Republican Party's biggest current problems -- its willingness to ignore reality (mushrooming deficits) in favor of faith (tax cuts are always good in all circumstances) and its rejection of science playing a role in social and environmental policy. In that analysis, Phillips quotes two other southern writers, Charles Kimball and Bruce Lawrence, who identified key characteristics of fundamentalism (Lawrence's list below from page 205, parenthetical comments from the book):

(1) claiming absolute truth (when "people presume to know God, abuse sacred texts and propagate their particular versions)
(2) seizing upon an "ideal time," as in claims for imminent cataclysms or fast approaching end times
(3) fostering blind obedience
(4) using ends to justify the means (as in deaths or acceptance of collateral damage) and
(5) pursuing "holy war" as in the Crusades (and to some extent the 1991 Gulf War)

This makes it very easy to see how Milton Friedman style strategies for economic reforms find so much support within a portion of the Republican base. Economic shock therapy and religious fundamentalism are kissing cousins.

The Financialization of America

Part III of the book focuses on the conversion of the American economy from a manufacturing base to one based upon FIRE --- Financials, Insurance and Real Estate and how that evolution has combined with the energy culture and the religious domination of the Republican Party to jeopardize the long term picture for the country. It is at this point in Phillip's narrative where some of the tangents taken in the sections on energy and religion really come together to cement the key points of the book. His first key point is that FIRE-related economic activity now accounts for nearly 40 percent of American business profits (per a story from the August 24, 2004 issue of The Economist). That means 40 percent of the net increase in wealth is based not upon physical, tangible materials and products and physical services, but virtual goods that are financial in nature and extremely dependent upon interest rates, monetary policy and the fiscal discipline of our government. The key problems Phillips identifies with the FIRE segment are that a) the FIRE sector accounts for a vastly smaller share of total jobs in the post-2000 American economy than manufacturing did in the economy of the 1950s and 1960s and b) income distribution within the jobs of the FIRE sector is heavily skewed towards a very narrow portion of that very narrow job base. In other words, a very negative "two-fer" in the ability to use a growing FIRE segment (as measured by dollars) to bolster the larger economy (as measured by people).

The second point Phillips makes about the dominance of the FIRE segment in the overall economy is that by statute, the interests of the Federal Reserve and its Chairman (regardless of who it is) are tied directly to the fate of the FIRE segment since the Federal Reserve's very existence is dedicated to stabilizing payment systems, the American currency, and banks within the country. When the financial system is no longer merely the oil in the engine but the engine of the entire economy, the result is a system in which the financial system and its regulatory protector wind up sucking up all the oxygen in the room at the expense of other aspects of public policy and economic growth. A very insightful point.


American Theocracy was published in early 2006 well before most Americans had considered the dangers of collateralized debt obligations, credit default swaps and the multitude of other derivatives invented by Wall Street to further leverage the already over-leveraged American economy. In the final chapters of the book, Phillips addresses these issues and his analysis drives home a key point. When compared against historical standards, the vital signs of the American economy and society are already operating well beyond levels of national debt (public and private), energy dependency and foreign investment that have toppled prior empires.

A more crucial point Phillips doesn't directly state but seems evident even if you ignore all the political and religious analysis of the book, is that our economy could be literally melt down in months by either a decision to stop using the US dollar as the trading currency for oil or a decision to stop investing in US Treasuries by foreign countries. A decision by OPEC countries to use Eurodollars for oil sales would substantially drop demand for American dollars, drastically increasing the price of the goods American imports and now no longer can manufacture domestically. One might argue cheaper dollars would make American exports cheaper abroad and help bring back jobs but the jobs took fifteen years to leave, they won't come back in five. A major reduction in holdings of US Treasuries would make it vastly more difficult to sustain American's deficit spending without major hikes in interest rates. Phillips highlights the danger of short term interest rate spikes by citing the conversion of the majority of our current national debt to short term (under 5 year) obligations in the 2003 timeframe. In a very literal sense, the Federal Government did exactly the same thing sub-prime borrowers did at the exact same time -- refinance huge amounts of debt with short term teaser rates with dangerous balloon payments in the future.

If you see any truth in that conclusion, it is very apparent that neither the Republicans nor the Democrats are succeeding in conveying the gravity of the situation to American citizens, much less proposing any change in course to alter the outcome. A very sobering thought.