Seeing The Elephant Part 2

The Bush administration's "global war on terror" required ma.s.sive defense spending, financed with U.S. government bonds, often purchased by foreign central banks. Oil, which had been $19 a barrel in 1992, had risen to $28 before the Iraqi invasion. By 2003, the U.S. and world economies started to hum again, the U.S. housing market continued to grow, and Wall Street peddled record volumes of mortgages to global investors from banks everywhere from Boston to Beijing. But this growth was based on rocky foundations: By 2005, the U.S. trade deficit spiked to an unprecedented $726 billion and oil had climbed to $50 a barrel.

Speaking of Beijing, in the early millenium China's export economy began to reap the benefits of the long global expansion. China ravenously imported industrial metals and fossil fuels needed for its red-hot economy. Newly wealthy Chinese began consuming more as well as speculating on their own real estate and local stocks. Beyond China, stock market and real estate bubbles were developing in the United Kingdom and Spain as well as in emerging markets like Russia, Kazakhstan, and Vietnam, to name a few. According to Bloomberg, from 2002 to 2006, emerging stock markets on average rose more than 400 percent.

The real estate and other a.s.set bubbles were exacerbated by the 1988 Basel Accord (Basel I), a banking framework established by the G7 plus a few other small European countries .30 Basel I aimed to standardize capital requirements across banks. In June 2004, the refined Basel II Accords were released. Under both frameworks, the more risky loans a bank a.s.sumes, the more capital it needs to hold. The new Basel II emphasized public security ratings (such as Moody's, Fitch, and S&P) to determine risk. As a result, balance sheets were built on the decisions of these credit rating agencies that bore little liability for their actions. This was a break from the past when banks cultivated in-house credit departments to review exposures, and developed deep relationships with borrowers. As a result, the large commercial banks lost their historic connections to borrowers, and risk management became a game of statistical odds. Basel I aimed to standardize capital requirements across banks. In June 2004, the refined Basel II Accords were released. Under both frameworks, the more risky loans a bank a.s.sumes, the more capital it needs to hold. The new Basel II emphasized public security ratings (such as Moody's, Fitch, and S&P) to determine risk. As a result, balance sheets were built on the decisions of these credit rating agencies that bore little liability for their actions. This was a break from the past when banks cultivated in-house credit departments to review exposures, and developed deep relationships with borrowers. As a result, the large commercial banks lost their historic connections to borrowers, and risk management became a game of statistical odds.31 To minimize Basel capital requirements, structured finance gurus utilized a loophole called a Special Investment Vehicle (SIV). By putting a small amount of money into SIVs, banks could actually bet on a lot more a.s.sets off balance sheet with no Basel capital needed. SIVs would fund themselves with short-term debt and reinvest that borrowing in longer term slightly higher yielding investments, such as AAA-rated pools of mortgages, credit cards, student loans, car loans, and commercial paper. Everyone believed the underlying a.s.sets were among the most liquid bonds available, with years of purported data and high credit ratings in tow. The trouble was that some SIVs invested in a.s.sets that were nominally rated as AAA but may not have been even close to AAA in risk. There was a dearth of NINJA defaults data amid a slowdown and rising interest rates.

Because the SIVs were buying some longer term bonds but funding their investments through short-term debt, SIVs continuously needed to reissue short-term debt. It is estimated that some $400 billion in SIV debt had been issued before the crisis. By August 2007, due to worries over subprime defaults, SIV borrowing rates rose more than 1 percent-making many SIV structures suddenly unprofitable. The gig was up. SIV managers scrambled to sell their mortgage-backed and other securities to deleverage and unwind the trades, but the markets dried up. Many banks sponsoring SIVs were forced to a.s.sume SIV debt on their balance sheets to avoid reputation damage. Stuffed with a.s.sets they thought they'd never have to take on their balance sheets, banks suddenly stopped normal commercial lending because they now had to allot capital for the SIV bailouts under Basel rules.32 The credit markets froze and housing and the economy slowed, creating worldwide panic for months. Some financial inst.i.tutions like Bear Stearns and AIG needed to be rescued, while others like Lehman Brothers failed, creating panics in the interbank credit market. In recent months, U.S.Treasury had to orchestrate major bailouts of Freddie Mac and Fannie Mae, as well as provide a $700 billion bailout for U.S. banks which included taking stakes in the nations biggest banking players to sh.o.r.e up the financial system. The credit markets froze and housing and the economy slowed, creating worldwide panic for months. Some financial inst.i.tutions like Bear Stearns and AIG needed to be rescued, while others like Lehman Brothers failed, creating panics in the interbank credit market. In recent months, U.S.Treasury had to orchestrate major bailouts of Freddie Mac and Fannie Mae, as well as provide a $700 billion bailout for U.S. banks which included taking stakes in the nations biggest banking players to sh.o.r.e up the financial system.

But systemic banking problems were not ring-fenced in the United States. Banking systems all over the world were hit but the resulting credit crisis in which banks ceased lending or trading with each other due to bankruptcy fears.While Basel II was designed by the G7 and a few of its fellow rich-world cronies, it was adopted by more than 100 countries.This explains why U.S. subprime problems reverberated globally, appearing in the most unlikely of places. Walter Molano of Columbia University notes that Basel inadvertently "was a conduit to expand the U.S. credit crunch to pandemic proportions by allowing the few investment banks that controlled the credit rating agencies to determine the use of the world's savings pool."33 Moreover, both European and EM central banks were also put in the unimaginable position of making liquidity available to their local markets and to support their banks in the wake of this credit freeze. Never before has the world witnessed such an internationalized banking crisis. Moreover, both European and EM central banks were also put in the unimaginable position of making liquidity available to their local markets and to support their banks in the wake of this credit freeze. Never before has the world witnessed such an internationalized banking crisis.

Beyond the financial contagion, the financial crisis had important economic reverberations. With bank lending curtailed and no SIVs to soak up mortgages, the U.S. housing market predictably slowed, and the fallout quickly spread to Europe, Latin America and other regions. Molano found that of 15 Latin American economies, for example, 12 showed better than a 90 percent correlation between U.S. housing starts and remittances. The results included pressure on their current account balances, dampened domestic consumption, slower GDP growth, and weaker exchange rates as transfers decline. The troubled U.S. housing sector would also cool home construction activity in Europe and the Middle East, affecting emerging market countries in North Africa, as well as India, Pakistan, and the Philippines, which relied heavy on remittances. As mentioned earlier, the global growth fueled a dramatic increase in cross-border labor remittances: From 1995 to 2007, the UN's International Fund for Agricultural Development notes they grew from $101 billion per annum to approximately $318 billion.34 It also had pumped up stock markets globally. With the havoc created in the United States and elsewhere, many emerging stock markets (pumped up by growth from record U.S. imports and global growth) peaked in October 2007 and then dropped 50 percent by October 2008. House prices in places like Mexico City and Shanghai (not to mention London and Madrid) also crashed. It also had pumped up stock markets globally. With the havoc created in the United States and elsewhere, many emerging stock markets (pumped up by growth from record U.S. imports and global growth) peaked in October 2007 and then dropped 50 percent by October 2008. House prices in places like Mexico City and Shanghai (not to mention London and Madrid) also crashed.

The U.S. dollar jerked around like a rag doll through all of this. At one point in this millennium, it only took 80 cents to buy one euro; by early 2008 it took nearly $1.60, only to fall back to $1.35 by October 2008. With a devaluing dollar, all commodity prices, which are quoted in dollars, also reached record levels and rollercoastered violently. Europe, for example, was willing to pay more in dollars because commodities actually cost less in euros with the devaluation. And then speculators added fuel to the fire contributing to price spikes in metal, energy, corn, wheat, and rice.

Wildly fluctuating commodity markets, along with rising global wealth and growing caloric intake, shifting grains, soy, and corn from human to livestock consumption, and U.S. grain shifting from food to ethanol production also resulted in ma.s.sive global food shortages in mid-2008. Skyrocketing grain prices incited riots in more than a dozen countries from Haiti to Cameroon to the Philippines, with deadly violence in many cities. These food shortages also underscore the problem of wealthy nations' agricultural subsidies that distort world supply and demand and have stalled completion of the WTO's Doha round.

This global credit crisis should be a wake-up call. In addition to trillions of dollars of paper wealth lost in stock, bond, and real estate values, banks everywhere still are taking sizable hits, requiring trillions of dollars from governments to solidify the global economy and financial system. In addition to the unprecedented structural and inst.i.tutional stress, millions of individuals are losing homes and livelihoods with this collapse, many are going hungry, and some even dying (including farmers who committed suicide).35 As a result, data collection, market intelligence, better regulation, personal responsibility and cross-border coordination need to be rethought to avoid the losses and suffering that we have witnessed. Policy makers everywhere can no longer avoid what is happening in far away places; they need to rethink domestic policies considering their global links. As a result, data collection, market intelligence, better regulation, personal responsibility and cross-border coordination need to be rethought to avoid the losses and suffering that we have witnessed. Policy makers everywhere can no longer avoid what is happening in far away places; they need to rethink domestic policies considering their global links.

The Future of the Greenback The subprime and global credit crises also raise concerns over the U.S. dollar, the world's dominant currency for more than six decades. Currency exchange rates form the basis of comparative advantage and free trade, and the dollar's recent downward plunge raises serious questions about the United States and the global economy's future along with new systemic financial risks.

During the nineteenth and early twentieth centuries, the gold standard helped anchor exchange rates between countries. Up until World War I, the United Kingdom was one of the world's strongest economies, holding 40 percent of all overseas investment. The British pound was equal to roughly $5. However, by acc.u.mulating a huge amount of war debt, the United Kingdom was forced to devalue several times between the wars to approximately $2.80 against the U.S. dollar. With the breakdown of Bretton Woods in 1971, the pound has free floated and has fluctuated between $1 and $2. This is what happens when a financial power incurs ma.s.sive overseas debt.

We have seen similar patterns with economic catch-ups in the late twentieth century. The j.a.panese yen lost much of its value during and after World War II, and was fixed at 360 against the U.S. dollar by Bretton Woods. By 1971, the yen had become undervalued. j.a.panese goods were incredibly cheap, and imports from abroad were costing the j.a.panese too much.36 The j.a.panese current account balance rose from the deficits of the early 1960s to a surplus in 1971. The belief that the yen was undervalued motivated the United States and Europe to push the yen to 308 per $1. In 1971, the fixed rate system was sc.r.a.pped, and the major nations of the world allowed their currencies to float. The j.a.panese current account balance rose from the deficits of the early 1960s to a surplus in 1971. The belief that the yen was undervalued motivated the United States and Europe to push the yen to 308 per $1. In 1971, the fixed rate system was sc.r.a.pped, and the major nations of the world allowed their currencies to float.

In the 1970s, j.a.pan grew concerned that a strong yen would hurt export growth. The government intervened heavily in foreign-exchange marketing (buying or selling dollars), even after the 1973 decision to allow the yen to float. Trade surpluses helped strengthen the yen to the mid 200s against the dollar by 1980. This continued in the 1980s, and in 1985, key nations signed the Plaza Accord to acknowledge that the yen was undervalued. This agreement, coupled with shifting market supply and demand, led to a rapid rise in the value of the yen. By 1995, the yen strengthened to less than 80 against the dollar, temporarily making j.a.pan's economy nearly the size of that of the United States. In the wake of the late 1980s and early 1990s j.a.panese a.s.set bubble, the Bank of j.a.pan kept interest rates extremely low (even less than 1 percent) to keep the yen weak. It has since settled in around 100 to the dollar, reflecting the ma.s.sive economic leveling j.a.pan made against the United States in the last few decades.

Floating currencies tend to more honestly reflect currency value, but some stability is sacrificed in the process. In the 1990s, many developing countries, struggling with hyperinflation and monetary instability, pegged their currencies to the U.S. dollar in an attempt to gain better monetary control. While this policy helped stabilize economies, over time the strengthening U.S. dollar meant that many countries-including Mexico, South Korea, Brazil, and Russia, among others-saw their trade competiveness erode. Large foreign debt loads forced countries to raise interest rates to attract capital, which ultimately depressed their local economies. The dam burst with Mexico in late 1994, Thailand in 1997, followed by South Korea and Russia in 1998, Brazil in 1999, with Argentina being the last major de-peg in late 2001.

In the wake of these currency de-peggings and free floats, most developing countries have reversed their trade deficits and have recorded record growth, trade surpluses, and hard currency reserves. Oil exporting nations-including several from the Gulf-have also ama.s.sed trillions since oil prices have risen. In short, much of the world is now awash in U.S. dollars which, along with the structural problems in the American banking system raising uncertainties over the dollar's value.

Even with these currency free-floats and phenomenal trade successes, the World Bank suggests that many EM currencies may still be theoretically undervalued. Over time, many should gain against the dollar, just as the dollar gained against the British pound and the j.a.panese yen against the dollar as trade and investment integration accelerated. Note that from the mid-1990s through 2007, fast integrators like Mexico and South Korea have seen their currencies move from roughly 30 percent to 80 percent of theoretical value.37 Russia, rebounding from its meltdown with higher oil prices, saw its currency climb from 25 percent to 62 percent between 2000 and 2007, but several Asian currencies still lag. India and China, which still do not allow full-currency conversions, have currencies valued at less than half what economists think they should be worth. Given the dramatic U.S. trade deficit with China, Beijing's currency policy has become a sore issue with U.S. government officials with routine public calls for a revaluation policy. Will the Chinese eventually allow the value gap to narrow by either market forces or government intervention? Only time will tell, but the situation is more complex than it appears. Russia, rebounding from its meltdown with higher oil prices, saw its currency climb from 25 percent to 62 percent between 2000 and 2007, but several Asian currencies still lag. India and China, which still do not allow full-currency conversions, have currencies valued at less than half what economists think they should be worth. Given the dramatic U.S. trade deficit with China, Beijing's currency policy has become a sore issue with U.S. government officials with routine public calls for a revaluation policy. Will the Chinese eventually allow the value gap to narrow by either market forces or government intervention? Only time will tell, but the situation is more complex than it appears.

China's weak currency has created a precarious codependency with the United States. With nearly $2 trillion in currency reserves in mid- 2008, a potent export machine, capital controls, and a lack of foreign debt, China can maintain its dollar peg whereas most emerging economies in the late 1990s could not. In fact, now the Chinese are financing the United States' debt. j.a.pan is the second biggest buyer, but j.a.pan has been a major U.S. economic and financial ally for decades, and people worry that China may be different. There are some Washington, D.C., hawks who believe that the Chinese are more than a new economic rival. They argue that China is acc.u.mulating dollars for geopolitical leverage. Between its undervalued currency and the U.S. deficits, the Chinese admittedly have some control of the dollar's value. Xia Bin, a government official, once publicly called such influence China's "bargaining chip."38 How would China use its leverage over the dollar for political ends? Imagine a scenario in which China disagrees with U.S. policy, say over Taiwan's independence, and decides it wants to shape U.S. behavior. Instead of taking military action, China could opt to sell U.S. bonds, causing a spike in interest rates.This would send a body blow to the already-bruised U.S. housing market, throwing the United States into a deep recession. The crisis in confidence ripples to the foreign exchange and commodities markets and the dollar plunges and commodities prices soar-it's what Chinese state media have called a financial "nuclear option."39 A couple of generations ago, the United States and Britain had a similar financial umbilical cord. During the Suez Crisis in 1956, experts speculate that President Eisenhower threatened to dump British pound reserves to prompt the United Kingdom to retreat. As international relation theorists like to remind us, when a foreign nation gains economic influence over another, sovereignty is at risk and ultimately exploitable.

Today, the risks are not the same for a number of reasons. China's wealth is hinged to the dollar's value and the U.S. economy-the largest market for its exports. A U.S. recession would upset the profitable trade pattern with China. Dumping even a couple hundred billion U.S. Treasury bonds would signal a loss in confidence and trigger dollar weakness in foreign exchange markets. So as China dumps its unsold reserves lose value. That's why many optimistic economists and Wall Streeters argue it's actually in China's best interest to keep the dollar moderately strong. Destabilizing the dollar would ultimately derail China's trajectory by hurting its largest export client, and the country still has more than 650 million very poor people who've not yet benefited from globalization. Some have called this situation "mutual a.s.sured economic destruction," and believe that while China and the United States go eyeball to eyeball financially, neither one is likely to blink. More likely, China will diversify its reserves into other currencies and buy key a.s.sets in the United States and other Western nations like ports and energy-related firms that can help China's growth. Western nations, as well as EMs, will see growing Chinese ownership and economic influence will be more evenly spread throughout the globe.

While the mutual a.s.sured economic destruction argument may hold true, keep in mind that circ.u.mstances could change. Remember, many countries have acc.u.mulated large U.S. dollar reserves. Some act less rationally and more politically. If just a single country began dumping dollars, the worry is that others might follow. Barry Eichengreen noted that in 1968 France converted dollars into gold under the old Bretton Woods fixed-convertibility arrangement. This, in turn, plunged Lyndon Johnson's administration into a mini-financial crisis during the Vietnam War.40 Moreover, Asian, Middle Eastern, and other private investors whose holdings of U.S. a.s.sets-including not only bonds but stocks and real estate-are predicated on dollar stability could divest in response to a sharp dollar decline unless U.S. interest rates rose significantly to compensate for the greater risk, which itself would negatively impact the U.S. economy. Moreover, Asian, Middle Eastern, and other private investors whose holdings of U.S. a.s.sets-including not only bonds but stocks and real estate-are predicated on dollar stability could divest in response to a sharp dollar decline unless U.S. interest rates rose significantly to compensate for the greater risk, which itself would negatively impact the U.S. economy.

The durability of the current tacit agreement ultimately depends on many nations continuing to finance U.S. external debt largely because the consequences of not doing so would hurt their own economies as much as that of the United States. In other words, the continuing funding of U.S. deficits is dependent on the confidence of foreign countries-many new to the global financial system-of the mutual benefits. Dumping dollars may not be so far-fetched with the global economy and balance of financial interests in major flux. To prevent a financial meltdown will require careful multilateral communication, coordination, and relationship building as soon as possible. In this respect, the October 2008 meeting of G7 heads to discuss joint efforts to combat the crisis was encouraging, although concrete action will be needed in addition to supportive rhetoric.

Amid this turmoil the United States still can exert some control over this trajectory. Currency values and exchange rates are tied to a mix of government and private sector practices and choices. The U.S. current account deficit, rooted in a stubborn trade gap (partially due to rising energy prices but also to heavy Asian and European imports, excessive defense costs tied to Iraq, and Middle Eastern oil imports, as well as interest payments on debt to foreigners) has ballooned in the last decade to roughly 5 to 6 percent of GDP.The United States is tied into a codependency with many countries that fund its borrowing in order that their export-driven economies have the benefit of compet.i.tive exchange rates to sell their goods to Americans. Although some a.n.a.lysts have characterized this relationship as an unspoken, unofficial "Bretton Woods II," it is unstable. The United States requires many countries (especially China and j.a.pan) to continue purchasing U.S. Treasury bonds, but these countries' capacity, need, and willingness may not last forever. If foreign investors-or even just China-stop buying dollars, this will not only spell trouble for the United States but also for the stability of the growing, entangled Macro Quantum economy. To diffuse this risk, the United States needs to reduce its own governmental budget deficit and promote wider international agreement for currency and other economic adjustments that can help to rebalance trade flows.

The United States helped pioneer the liberal economic order in the postwar period and has been the global markets' shepherd ever since. No other nation has yet to emerge as a leader. But this position is based on confidence, and global confidence in the United States may be eroding. The dollar's slide between 2000 and 2008, coupled with the subprime and credit meltdowns, has left the United States economically vulnerable. This situation must be addressed through responsible public policies. The United States' dependency on foreign capital requires greater fiscal prudence from the government, which has amounted ma.s.sive deficits under the Bush administration.The most obvious area of retrenchment is in defense spending. Our short but useful experience in the twenty-first century underscores the need for balanced trade and investment flows. Some suggest a new framework to limit exchange rate fluctuations from their theoretical equilibrium values through close cooperation between policy makers in both older industrial and emerging markets-something that has been the role of the G7 but now requires much broader partic.i.p.ation. We also need closer coordination of fiscal and monetary policy by large exporters (China, j.a.pan, Gulf countries, and some in Europe) that might be encouraged to stimulate domestic demand and imports. The U.S. government could also encourage domestic savings plans, discourage rampant consumption, and enact policies to slow energy imports.

Of course, this won't be easy. It will only work with radical changes in U.S. domestic att.i.tude and policies and a renewed emphasis on negotiation and collective coordination rather than unilateral control. Perhaps the current global financial stress will serve as a catalyst for such cross-border efforts. As the world's largest creditor, the United States can easily bring the right parties to the table.This should be supported by prudent domestic policies that could alleviate some market pressures. In any event, the global system-as well as the dollar's value and America's role as a financial leader-is visibly at stake.

Recoiling from the Capitalist Peace?

Only by promoting a capitalist peace can the United States and the G7 reconcile the well-being of established and up-and-coming players before imbalances and compet.i.tion create frictions that harm the overall system. But public att.i.tudes have turned more pessimistic: The proportion of Americans who think their country should be active in the world is down to 42 percent, the lowest it has been since the early 1990s.41 According to a Pew Research Center poll, the share of Americans who believe that trade is good for their country has plunged from 78 percent in 2002 to 59 percent in 2006, the lowest proportion among the 47 countries included in the survey.Yet in 2007, the global economy entered its fifth year of greater than 4 percent annual growth, maintaining the longest period of such strong expansion since the early 1970s. Despite financial market woes, world growth pushed forward, and trade grew at 9 percent according to the World Bank. The benefits of free trade tend to be dispersed widely, while the costs of it-such as bankruptcies and job losses-tend to be concentrated and highly visible. But as Hayek noted, prosperous countries make better trade partners than impoverished ones, so trading states should maintain a "selfish" interest in the freedom and prosperity of other nations. According to a Pew Research Center poll, the share of Americans who believe that trade is good for their country has plunged from 78 percent in 2002 to 59 percent in 2006, the lowest proportion among the 47 countries included in the survey.Yet in 2007, the global economy entered its fifth year of greater than 4 percent annual growth, maintaining the longest period of such strong expansion since the early 1970s. Despite financial market woes, world growth pushed forward, and trade grew at 9 percent according to the World Bank. The benefits of free trade tend to be dispersed widely, while the costs of it-such as bankruptcies and job losses-tend to be concentrated and highly visible. But as Hayek noted, prosperous countries make better trade partners than impoverished ones, so trading states should maintain a "selfish" interest in the freedom and prosperity of other nations.42 While economic liberalization can bear negative consequences such as the spectacular imbalances and volatility of the credit crisis, protectionism is far more d.a.m.ning. Protectionist sentiment has left thousands impoverished needlessly and destroyed economic opportunities for G7 and emerging states alike. In 2007, for the first time in a quarter century, the World Bank's World Development Report World Development Report put agriculture and the productivity of small farmers at the top of its global agenda to reduce poverty. Yet the continued refusal by the United States, the EU, and j.a.pan to reduce agricultural subsidies has led the Doha round of trade talks to stall and denied rural poor in developing nations access to developed nations' markets. As n.o.bel Prize Laureate Joseph Stiglitz noted, the attack on U.S.-style globalization is "driven by Luddites and protectionists." put agriculture and the productivity of small farmers at the top of its global agenda to reduce poverty. Yet the continued refusal by the United States, the EU, and j.a.pan to reduce agricultural subsidies has led the Doha round of trade talks to stall and denied rural poor in developing nations access to developed nations' markets. As n.o.bel Prize Laureate Joseph Stiglitz noted, the attack on U.S.-style globalization is "driven by Luddites and protectionists."43 Despite the immense vitriol of antiglobalization forces, increased global compet.i.tion has raised the living standards of the average American. Instead of attacking globalization, we should work to create a healthy economic environment that mitigates the risks of an interdependent economic system. Despite the immense vitriol of antiglobalization forces, increased global compet.i.tion has raised the living standards of the average American. Instead of attacking globalization, we should work to create a healthy economic environment that mitigates the risks of an interdependent economic system.

The biggest threat to U.S. prosperity is not China, India, or even terrorism. It is not the rise of sovereign wealth funds and hedge funds nor increased capital flows from abroad. The greatest threat to U.S. prosperity is not properly integrating new economic actors in an increasingly complex world is not properly integrating new economic actors in an increasingly complex world. Policy makers worldwide have struggled to understand the confluence of financial, commodity trade, and labor markets and have not adequately monitored unprecedented capital flows to prevent speculative and disruptive market volatility, which stokes nationalist fears. The United States has reacted to rising economies as threats to domestic jobs and security, inst.i.tuting protectionist measures (including blocking several U.S. acquisitions by foreigners44) that hurt everyone financially and create public opinion backlashes in the rest of the world instead of using trade and openness as a platform for cooperation.

The United States and its old cohorts are growing comparatively less powerful, less coordinated, and less influential each day. The multilateral inst.i.tutions that the world has relied upon historically to help shape economic interaction, especially the G7 and World Bank, are increasingly irrelevant in this dynamic new power landscape. Through inst.i.tutional reform, the United States can co-opt emerging economies and nonstate actors into a mutually beneficial system predicated on free trade and economic coordination. Without it, problems such as high commodity prices, food shortages, property bubbles, financial panics and other imbalances may lead to problems such as protectionism or worse, the military conflict we witnessed in the early twentieth century.

Inst.i.tutional Reform: Another Quantum Way Forward To safeguard against doomsday scenarios, rising powers should be integrated into the global order through holistic, rule-based inst.i.tutions. This has been done successfully in the past; indeed, the G7 arose in a situation similar to today. This group helped forge the rules, behavioral codes, and mechanisms for the collective progress and orderly conflict resolution of the past three decades. Before the creation of the G7, financial affairs were managed through the Bretton Woods agreement, which set fixed exchange rates. 45 45 As j.a.pan and Western Europe recovered from World War II, the global economy changed drastically. The return to convertibility of Western European currencies at the end of 1958 and of the j.a.panese yen in 1964 facilitated the vast expansion of international financial transactions and deepened monetary interdependence. A new pluralistic distribution of economic power led to increasing dissatisfaction with the privileged role of the U.S. dollar as the international currency. Additionally, the emergence of large private banking groups allowed for huge international transfers of capital for investment purposes as well as for hedging and speculating against exchange rate fluctuations. By 1970, the United States was no longer the sole economic superpower. The United States consistently ran a current account deficit and held less than 16 percent of international reserves. By 1973, the weakening dollar led to the demise of Bretton Woods. The United States could no longer afford to be banker to the world. A global recession took hold as currencies were floated.

G7 Evolution In 1975, the G7 emerged out of the rubble of Bretton Woods as an informal forum to manage the international monetary regime. The G7 members were the major economic players of the era. The rise of new economies and private actors has thrown the utility of the G7/G8 order into question.The countries of the G7 are still an essential part of the global economy: Together, they represent 14 percent of the world population and nearly two-thirds of the world's GDP, but the group no longer adequately represents the global system's expanded roster. At the fall 2007 G7 financial ministers' meeting, China's growing current account surplus and the need for the Renmindi (RMB) exchange rate to rise dominated the debate.46 But China is not a member of the G7. But China is not a member of the G7.

As we've seen, China is fast becoming a key linchpin of the global economic system along with a few other countries. Its reserves fuel U.S. spending, and this unhealthy relationship has held down interest rates the world over. A decade or two ago, speedy monetary growth in emerging economies was of little concern to the central banks of the developed world. If the Central Bank of Turkey pumped out cash, it would simply cause hyperinflation there. But today these economies play a larger role in the world economy and cross-border financial flows are much bigger. The liquidity pumped out by central banks is flowing into global financial markets.

The United States and the G7 should work on reforming the inst.i.tutional framework so that more countries can benefit from economic openness and become vested in the global system. While the United States still carries the most economic and political clout, it needs to give rising powers incentives to buy in to the system and create a strong oversight system to ensure private actors are behaving.

The existing international organizations-the World Bank, WTO, and G7-are based on the precepts of free trade and capitalist peace, but they risk becoming structurally ossified as they fail to make room for nonstate actors and accord emerging nations a role proportional to their growing economic might. Inst.i.tutional reforms must address the global trade and current account imbalances without significantly slowing growth. The new framework must also find a way to successfully conclude the Doha Round of trade negotiations. Finally, the framework must strengthen the international financial system and reduce volatility to avoid further financial crises.

Outside of the economic sphere, properly functioning inst.i.tutions can also mitigate negative side effects of openness. While increased economic interdependence has resulted in reduced cross-border warfare and poverty, and the improvement of living standards, liberalization is by no means a panacea. Economic openness and growth have complicated environmental, health, and security challenges. With increased commerce comes the increased movement of people and greater possibilities for the spread of terrorism and contagious diseases. Greater prosperity also leads to heightened demand for commodities and energy, creating new environmental stresses. A successful economic framework must address all these issues.

The holistic platform of the G7 model makes the organization uniquely equipped to handle the reverberations of economic liberalization and is worth replicating. The original scope of the G7 was macroeconomic management, international trade, and relations with developing countries. From this initial foundation the summit agenda has broadened to include everything from environmental standards to health.The central problem with the G7 is not design but membership. Currently, the G7 focuses on issues over which it has little to no direct control.47 For example, the G7 finance ministers have called on oil-producing countries to expand production to restrain the upward rise in crude oil prices and on non-G7 Asian nations to adopt more flexible currency regimes. For example, the G7 finance ministers have called on oil-producing countries to expand production to restrain the upward rise in crude oil prices and on non-G7 Asian nations to adopt more flexible currency regimes.

The apparent solution would be to expand the G7 membership or increase the role of an already existing G20 (or most likely with some roster changes). Established in 1999, the G20 comprises the G8, the European Union, Australia, and several important emerging economies, including China, India, Brazil, South Korea, Argentina, Indonesia, Mexico, Saudi Arabia, South Africa, and Turkey. While a larger organization of states with diverse interests will likely lack the flexibility and cohesiveness of the G7, it is an obvious natural evolution. For the key monetary agreements traditionally in the G7's domain, a smaller subgroup could meet regularly to coordinate policy and occasionally meet in plenary. Under this scheme, in addition to large countries and blocs with important currencies like the United States, the European Union, the United Kingdom, Russia, and China, some regional cl.u.s.ters could also be included from Mercosur, the Gulf Cooperation Council, and ASEAN. By abolishing the G7 and acknowledging the G20, we would engender a new era of multilateralism.

WTO and Trade Progress As the private sector and EMs play a greater role in the global economy, the role of the state and intergovernmental organizations must reflect this change. Laissez-faire Laissez-faire economies have always required strong inst.i.tutional and regulatory support. The market alone cannot force consumers to pay $20 for a DVD when they can easily purchase a pirated copy for a tenth of the price. Nor can it persuade a government to stop doling out subsidies to inefficient or romanticized industries or strengthen regulations of financial markets. There will still be a need for a more formal rule-setting and judicial body to make sure terms of trade are universally applied. economies have always required strong inst.i.tutional and regulatory support. The market alone cannot force consumers to pay $20 for a DVD when they can easily purchase a pirated copy for a tenth of the price. Nor can it persuade a government to stop doling out subsidies to inefficient or romanticized industries or strengthen regulations of financial markets. There will still be a need for a more formal rule-setting and judicial body to make sure terms of trade are universally applied.

As the successor to the postwar General Agreements on Tariffs and Trade (GATT) formed in 1947, the WTO has played this role since 1994. GATT rounds began at the end of World War II and were aimed at reducing tariffs and boosting trade based on the Most Favored Nation (MFN) clause, under which the lowest tariff applicable to one member must be extended to all members.

Today the WTO aims to help all countries obtain MFN status so that no single country will be at a trading advantage over others.WTO rules also become part of a country's domestic legal system and apply to companies operating internationally. If a country is a WTO member, its local laws are not supposed to contradict WTO rules and regulations, which govern nearly 97 percent of all world trade.While this organization has achieved immense success in the postwar period (tariffs have been reduced by nearly 90 percent), the latest round of WTO talks, started in Doha, Qatar, in 2001, has stalled, and with it we have witnessed increased bilateral agreements outside the WTO framework.The proliferation of some 300 bilateral free trade agreements has become a web of conflicts whereby different conditions pertain to different countries creating a variety of cross-border inconsistencies and resentments that, in total, vitiate the concept of MFN.

One logjam in Doha has been an age-old debate over agriculture subsidies by wealthy nations (virtually all of which are guilty) and the retaliatory postures taken by developing countries on opening their countries to manufactured goods and restricting foreign ownership. On the tail of the round's kickoff, the Bush administration supported a farm bill in 2002 that actually provided more more subsidies for U.S. farm products, setting the stage for a battle. The same year, French President Jacques Chirac persuaded German Prime Minister Gerhard Schroder to postpone for another decade serious attempts to reduce agricultural subsidies in the European Union. And even as late as 2007, the U.S. Congress approved the 2007 Farm Bill, which expanded subsidies to nonstaple foods as well. subsidies for U.S. farm products, setting the stage for a battle. The same year, French President Jacques Chirac persuaded German Prime Minister Gerhard Schroder to postpone for another decade serious attempts to reduce agricultural subsidies in the European Union. And even as late as 2007, the U.S. Congress approved the 2007 Farm Bill, which expanded subsidies to nonstaple foods as well.48 The G7's $300 billion plus dollars of yearly subsidies stifles perhaps $1 trillion of trade globally. For decades (up until the recent commodity shocks), artificially depressed global prices have damaged agriculture in developing nations that can't profitably compete with subsidized agribusinesses in the G7, thereby cutting many counties off from the first entry point in global trade. This harm to agricultural producers abroad hinders many G7 efforts, resulting in retributive subsidies, tariffs, and barriers in manufacturing and foreign ownership. The well-publicized food shortages and riots in 2008 underscored the urgency of promoting freer agriculture with far more nations producing than today.

In the United States the estimated damage of maintaining farm subsidies for agricultural producers over the last 20 years is more than $1.7 trillion.49 While small U.S. farmers are part of the national lore, farmers are actually quite wealthy and have a powerful lobby in D.C. The median wealth of farm households is more than five times that of the overall average U.S. household. Farmers' average annual incomes have exceeded the overall average household income by 5 to 17 percent every year since 1996. While small U.S. farmers are part of the national lore, farmers are actually quite wealthy and have a powerful lobby in D.C. The median wealth of farm households is more than five times that of the overall average U.S. household. Farmers' average annual incomes have exceeded the overall average household income by 5 to 17 percent every year since 1996.50 Removing barriers to agricultural imports will provide cheaper food for consumers by injecting compet.i.tion and dynamism into agricultural markets.The resources currently devoted to these subsidies could be better shifted into a variety of transportation and energy technologies-not farming. And given the rising demand for food tied to increasing incomes abroad, swift resolution is needed. As WTO Chief Pascal Lamy said in the wake of May 2008 food riots, "Although the WTO cannot provide anything immediate to help solve the current crisis, it can, through the Doha Round negotiations, provide medium to long-term solutions" to increase world output to stabilize commodity markets. Removing barriers to agricultural imports will provide cheaper food for consumers by injecting compet.i.tion and dynamism into agricultural markets.The resources currently devoted to these subsidies could be better shifted into a variety of transportation and energy technologies-not farming. And given the rising demand for food tied to increasing incomes abroad, swift resolution is needed. As WTO Chief Pascal Lamy said in the wake of May 2008 food riots, "Although the WTO cannot provide anything immediate to help solve the current crisis, it can, through the Doha Round negotiations, provide medium to long-term solutions" to increase world output to stabilize commodity markets.51 Another key WTO issue for wealthier countries is phasing out foreign ownership limits in private and publicly traded companies, particularly in service areas that provide a comparative advantage for older advanced economies such as banking and finance. The issue was hotly debated by U.S. and Russian negotiators during WTO accession talks in 2006. India has pledged more openness by 2009; meanwhile, China has begun to make headway. Until this year, foreign banks could partic.i.p.ate only from the sidelines in China's growing consumer banking industry, having been barred from offering loans or banking services directly to Chinese citizens. Currently, foreign securities companies can only own up to 33 percent of a joint venture. Foreign investors can only own up to a 25 percent stake in Chinese banks. Smaller and less integrated economies, such as Vietnam and Libya, are currently preparing strategies for opening their banking sectors to foreign capital and compet.i.tion.

The G7 and emerging nations must foster faster integration through mergers and acquisitions between countries. In the last few years we've witnessed protectionist tendencies justified for purported national security reasons. Given that countries with vested economic interests in one another are far less likely to attack each other, crossborder transactions should provide the basis for greater relationship building because of practical common interests. It goes to the heart of capitalist peace theory.

Both rich and developing nations must recognize that global trade is a two-way street. It must also address such key issues as protecting intellectual property rights. The first step in reinvigorating the WTO, therefore, is for both the United States and European Union to commit to a multiyear glide-down plan phasing protectionist policies out completely in exchange for a similar timed reduction and relaxation of developing country barriers in manufacturing and services.

World Bank Reform With the stated goals of reducing poverty and providing global financial stability, the World Bank and its subsidiary organizations have been reinventing themselves for decades, from technocrats in the 1950s to developmental lenders in 1960s through the 1980s to crisis managers in the 1990s. However, the organization needs a new mission for the new millennium. With the shift to market-based systems and the new access to capital, net transfers (disburs.e.m.e.nts minus repayments minus interest payments) to developing countries from the World Bank and the International Bank for Reconstruction and Development (IBRD) have been negative every year since 1991.52 Sixty-three percent of World Bank loans are received by Middle Income Countries (MICs), but during the past 12 years, MICs have outpaced the growth of rich countries and repaid an annual average of $3.8 billion more than they have taken out in new loans. Sixty-three percent of World Bank loans are received by Middle Income Countries (MICs), but during the past 12 years, MICs have outpaced the growth of rich countries and repaid an annual average of $3.8 billion more than they have taken out in new loans.53 More stable and better managed than previous decades, coupled with reliance on local and global capital markets, many of these MICs are now able to finance themselves outside the World Bank system. More stable and better managed than previous decades, coupled with reliance on local and global capital markets, many of these MICs are now able to finance themselves outside the World Bank system.

With its traditional role as a regular lender fading in the new millennium, the World Bank group needs to reposition itself. First, it needs to address its skewed voting structure to create broader ownership stakes from developing countries. Like many postwar inst.i.tutions, the World Bank is dominated by the G7 (with roughly 45 percent of the quota and votes) and many small European nations have large stakes as well. The BRIC countries, in contrast, have less than 10 percent of the voting power; Brazil and India have a little more than 1 percent, China less than 4 percent, and Russia about 2.6 percent (the same as Belgium!). There have been various plans to restructure this with the idea of vesting several nations-China, Mexico, and Korea have been mentioned (all of which used to be borrowers from the World Bank)-with greater stakes in the inst.i.tution. It should come as no surprise that China and Russia routinely make developmental loans outside the World Bank system as influence building exercises, often with few noneconomic strings attached. World Bank loans come with a variety of social and environmental conditions. While World Bank stipulations are sound advice, for a debtor nation it may simply seem like a ha.s.sle compared to China's no-strings-attached offer of funds.

The World Bank must embrace China, Russia, and the other nations tempted to circ.u.mvent its rules to prevent these sideline deals and to save the organization itself. With few members borrowing from the World Bank and the IMF income has been reduced, forcing restructuring and cutbacks within the organization. Current managing director Dominique Strauss-Kahn recently announced a 15 percent reduction in staff and an overhaul of its noncore activities. Yet, it seems that more than ever the global financial system needs more resources to monitor capital flows and coordinate complex activities not fewer. As one Wall Street a.n.a.lyst notes, "Retrenching now is tantamount to downsizing a fire department when there is a low incidence of fire."54 Indeed, the global credit crisis has created many vulnerable countries-both emerging and industrialized-that have pet.i.tioned the World Bank for support. Indeed, the global credit crisis has created many vulnerable countries-both emerging and industrialized-that have pet.i.tioned the World Bank for support.

While a May 2008 modification shifted 2.7 percent of the vote away from advanced (largely European) economies in favor of developing countries, there needs to be a more aggressive shift. One suggestion is to rebalance the voting based on percentage GDP adjusted for PPP over a 10-year period, allowing BRICs, for example, to move toward a 45 percent stake (in line with their percentage of world output), along with the N11 and other Asian and Gulf countries to have greater voting rights. In turn, greater voting rights will also require greater financial commitments from these countries. U.S. and European influence would be dramatically reduced, and the ownership and the operations of the World Bank system would be democratized dramatically with considerably more vested parties than today.

Without a doubt the IMF and World Bank will be needed for emergency lending like during the Asian and Latin American financial crises of the 1990s, and should be reincarnated as defenders of global financial stability, with expanded roles in information and risk monitoring. As we have seen, with increased financial openness and liquidity comes the need for oversight. In addition to being a lender to countries without capital access, the World Bank could become a global authority that could track aggregate flows to protect against imbalances and speculative attacks.

Finally, on the financial front, the IMF and World Bank should take this opportunity to evolve into more dynamic financial players than in the past. As of February 2008, the IMF had dwindled down its balance sheet to roughly $5 billion in outstanding credits versus $50 billion in 2004. Stephen Jen of Morgan Stanley proposed selling the IMF's 100 million ounces of gold reserves, worth more than $90 billion at current prices (see Figure 2.8 Figure 2.8).55 With the proceeds, the IMF could start a supranational endowment for longer term investing. In additional to generating new income (which gold sitting in a vault does not), the IMF could redirect this capital to areas proven beneficial and necessary in the World Bank Group's mission to eradicate poverty, including: With the proceeds, the IMF could start a supranational endowment for longer term investing. In additional to generating new income (which gold sitting in a vault does not), the IMF could redirect this capital to areas proven beneficial and necessary in the World Bank Group's mission to eradicate poverty, including: 1. Microlending, either directly or to existing successful operators.2. Bottom of the pyramid business that seeks to cultivate commercial and entrepreneurial spiriting engage very low income world citizens.3. Renewable energy sources, that will have lower impact on the environment hopefully reducing climate change and environmental degradation.4. Sustainable agriculture, an imperative with rising wealth and population growth.5. Strengthening local financial inst.i.tutions and local markets.

Figure 2.8 The IMF's Gold Holdings and Credit Outstanding The IMF's Gold Holdings and Credit Outstanding SOURCE: IMF.

The suggestion is controversial, because making the IMF a big player in financial markets would give it more influence over the world economy. There are also questions about how it would be managed on behalf of its members, something that may be resolved if the voting structure and membership evolves as mentioned above. In total, a recapitalized, repurposed World Bank system, with broader ownership and voting structure, should be an extremely useful inst.i.tution in the Macro Quantum world.

There are no simple solutions to the global economy's challenges. The underlying themes in our suggestions for reforming the G7,WTO, and World Bank system are (1) to account for the rising relevance of emerging economies and (2) to understand the difficulties posed by an increasingly complex world. These measures work together for the greater capitalist peace on several levels. First, they create a broader forum for discussion by acknowledging and respecting the contributions of a wider group of players allowing for better coordination of foreign exchange policy for more efficient trade. Second, trade would be accelerated if we abolish farm subsidies, breaking the impa.s.se between rich and developing countries at the WTO. Finally, the global financial system may be better safeguarded by overhauling the World Bank's membership and modernizing its tactics while keeping focused on its original goals, which are as important in the twenty-first century as they were in 1944. Of course, this will take immense courage on the part of the United States as well as longtime European allies, both in recalibrating domestic policies with a new worldview and making significant shifts in its multilateral postures. However, this window of opportunity to salvage such forums is closing as Macro Quantum activities and players are quickly making them less relevant and jeopardizing the capitalist peace.

Why Do Markets Spike and Collapse in the Macro Quantum World?When oil and food prices. .h.i.t record levels in 2008, many people wondered what was driving the rise in commodity prices. If, for example, oil jumps from $50 a barrel to $100, does that mean global demand has doubled? No, the relationship is more complex: If demand rises 10 percent, we may very well see prices rise of a multiple amount.Many markets are flexible, whereby supply can easily be tweaked to meet modest demand changes. Commodities and certain other a.s.sets like real estate, however, aren't very flexible. It takes time to grow crops, refine oil, or construct buildings, leaving these a.s.sets especially p.r.o.ne to speculation which can also push markets up or down.Most oil is sold before it is even produced, leaving very little wiggle room in the market if supply or demand should suddenly change. As we'll discuss in Chapter 3, structural demand has been steadily increasing in many emerging markets (as well as in SUV driving America).20 In recent years, a shortage of global oil refineries (some starting with Hurricane Katrina) has also stifled supply. Moreover, Iraq isn't pumping as much since the invasion, and labor problems in Nigeria and other countries also have intermittently cut global oil output. In recent years, a shortage of global oil refineries (some starting with Hurricane Katrina) has also stifled supply. Moreover, Iraq isn't pumping as much since the invasion, and labor problems in Nigeria and other countries also have intermittently cut global oil output.In the case of food and agriculture markets, the effects of excess demand and new investors have been compounded by the increasing amount of grain and soy used for livestock feed and Ethanol production. So while supply of some grains has been historically high, prices spiked recently because global demand for grains-not only just for human consumption but also for animals and alternative energy-grew faster. Moreover, in oil and agriculture markets, financial speculators have driven up demand for commodities (although they can quickly change their market views).Adding another layer of complexity, commodity prices are tied to foreign exchange markets. Most world commodity contracts are denominated in U.S. dollars. So the value of goods like oil, gold, and grains, fluctuate with the dollar's value. Consider, for example, what would happen if the dollar depreciates against the euro. Say $1 was originally worth 1. If a barrel of oil cost $100, it would have also cost 100. Then, the dollar weakened so that $1 is now worth only .8. After the depreciation, oil would only cost 80. Since the underlying value of the oil hasn't changed, its dollar price may get pushed closer to $125 (the new equivalent of 100). That means only dollar-based buyers see a spike in oil prices, while euro prices remain more constant, and oil sellers aren't hurt as much by the dollar's fall.The relatively inflexible supply of commodities and the effects of foreign exchange and speculative investing drove oil and food prices to new heights by mid-2008. As quickly as prices rose, however, they fell, proving that commodity markets are just as p.r.o.ne to collapsing as they are to spiking.The recent market gyrations are warning signs of the new potential stresses in our Macro Quantum world, with many complex variables now affecting markets and lifestyles.

Chapter 3.

Energy Twilight of the Hydrocarbons?

Hydrocarbon Man shows little inclination to give up his cars, his suburban home, and what he takes to be not only the conveniences but the essentials of his way of life....The people of the developing world give no inclination that they want to deny themselves the benefits of [a fossil fuel] powered economy, whatever the environmental questions. And any notion of scaling back the world consumption of [ fossil fuel] will be influenced by the extraordinary population growth ahead.

-DANIEL YERGIN1

One of the few aspects of globalization that economists, politicians, scientists, and ordinary people agree on is that it boosts energy demand. As world living standards rise, so does the need for power. Over the last century, this increase has been met almost exclusively by fossil-based sources-oil, gas, coal, and related products. But it can't continue forever. Uncertain supplies and unprecedented demand have made our hydrocarbon economy extremely pricey, even before considering its nasty side effects: Fossil fuel dependence concentrates wealth in a few geopolitical hotspots and produces greenhouse emissions, both of which jeopardize the capitalist peace.

Our contemporary lifestyle is predicated on relatively cheap and reliable power. Compare an old episode of Little House on the Prairie Little House on the Prairie with with Desperate Housewives Desperate Housewives to understand this quick historic evolution. The cost and form of energy available determines almost everything an individual or an entire country can accomplish, including where we live and work, how we travel, what we eat, how we entertain ourselves and even how we sleep. to understand this quick historic evolution. The cost and form of energy available determines almost everything an individual or an entire country can accomplish, including where we live and work, how we travel, what we eat, how we entertain ourselves and even how we sleep.

It's tough to imagine a world without hydrocarbons, but our dependence is a recent condition. During the early Industrial Revolution, lamplight was fueled by whale oil and chopped wood provided heat. But in 1856 the Polish chemist Ignacy Lukasiewicz developed an easier way of refining kerosene from petroleum. His discovery brought an end to the whaling industry, and ushered in the brighter (literally!) modern era. Following major oil discoveries in 1859 and the late nineteenth century refinements in coal-burning power plants, Daniel Yergin's "Hydrocarbon Man" was born.

Very few countries are self-sufficient in power, putting energy at the heart of Macro Quantum cross-border discussions. It is symbiotically bound with trade, influencing and being influenced by international capital flows, as well as inflation and exchange rates. Energy affects security not only because it is necessary for economic growth, but also because one form-nuclear-can be converted to horrific weaponry. And of course, it poses huge environmental impacts. Our current power paradigm has failed to deal with the challenges of these interlinkages, requiring a major rethinking of energy's uses, sources, and costs.

Ever-Increasing Demand Worldwide energy consumption has increased 20-fold during the twentieth century. Today, the aggregate energy used around the world equals the physical work of 306 billion human beings. It is as if every man, woman, and child on the planet each had a crew of 46 people working for them. In the high-tech United States every person has 238 such hypothetical workers.2 Rising levels of productivity and consumption create a s...o...b..ll of energy usage. Americans today consume 30 times what they did in 1929, and they live in houses five times larger than a century ago.3 These huge houses are filled with heating, air conditioning, microwave ovens, and dozens of electronic gadgets and appliances that These huge houses are filled with heating, air conditioning, microwave ovens, and dozens of electronic gadgets and appliances that The Little House on the Prairie The Little House on the Prairie's Laura Ingalls couldn't have dreamt of. Moreover, we have more than 800 million cars globally shuttling us from homes to work to shopping centers; and then there are the factories that produce this lifestyle. A look at the recent past shows the quickening pace of energy use. Between 1970 and 2004 total world energy consumption more than doubled from 204 quadrillion Btu to 447 quadrillion Btu-an annual growth of 2 percent, occurring predominantly in the G7.4 With the rise of emerging markets, the U.S. Energy Information Administration (EIA) estimates an increase of 57 percent of total world demand from 2004 to 2030 (see With the rise of emerging markets, the U.S. Energy Informat