Downsize or doze off

Banks are being chastised from all and sundry for their misdeeds and blunders. Now even Sandy Weill, the person credited for creating the Citigroup behemoth, has been calling for banks to split their commercial arm from their investment trading arm. The common justification put forward for the split is the different cultural attributes of a bank's investment and commercial arms.

Actually, the split or the sizing down of banks should not be precipitated by the huge trading losses or the Libor rigging scandal. Warren Buffett has observed that, "Only when the tide goes do you discover who's been swimming naked." Indeed an op-ed piece in the Financial Times confirms that the banks have been rigging the Libor for more than 20 years. Bob Diamond and his ilk, the regulators and the central bankers have known this all along. The parliamentary committee hearing was a sham to provide cover for everybody's ass. The reason this scandal wasn't exposed earlier is because the tide was still up. As the tide recedes, all the skeletons will start walking out of the closet

As for the differing cultures, they can be easily managed by having separate organisational setups that don't mix the two. The only reason that compels a bank to downsize is much deeper than these specious arguments. To understand why, we must delve into the bank's ecophysiology, not philosophy since there's nothing philosophical about overly paid bankers making money from borrowing cheap and lending dear, or betting on market movements.

Like any living things, a bank grows big if its food is aplenty. Similarly, if food is scarce, it must start scaling itself down. Sizing down entails shrinking a bank's loan asset base by recalling loan assets that pose great risks. Income will fall but in these depressing times, growth and income are the least of a bank's priorities; survival is the most pressing.

It's been observed in evolution that mammals above the size of rabbits living on islands would diminish in size (see The Island Rule). To remain big and active in times of scarcity is an invitation for disaster. A bank's food is the money supply, the best measure of which is total credit. If you look at the total credit picture for the US, the picture appears bleak, more so with the recent second quarter 2012 GDP growth turning south.

Obama's deficit spending only manages to slow down the slide and the resulting bank failures (see right table). But as its impact will soon start to wear off with the declining deficits, the descent will resume its previously steep decline. The eurozone total credit has crumbled in Italy, Spain and Greece with more states joining in. Whenever total credit crashes, banks will be the first to be hit because of their gearing.

We also should be aware by now that Bernanke's QE won't work. If only someone would sock it to Bernanke that his QE actually means quantitative exchange, that is, a swapping of debts on the scale of trillions of dollars, maybe he'll wise up to the fact that QE doesn't print money. QE works only to stem a panic, that is, when a bank is in imminent danger of collapse. The bank can swap its less liquid assets for liquid money from the central bank. But if the bank has assets that have hugely lost their value, there's nothing to prevent its collapse except by a takeover by the state. And if the state itself is in a wreck, the mess multiplies severalfold. Now, this latter scenario is going to haunt the banks as round two of the economic depression starts to unfold.

The other alternative to sizing down for a bank is powering down its thermal engine through hibernation. A bank can power down by switching its loan assets to low-return Treasury bonds and bills and aggressively paring its operating costs through salary and bonus cuts. After all you don't require smart people in banking; banking is best served by staid and conservative characters. No matter how pristine the quality of a bank's loan assets is now, it will be tarnished once total credit resumes its downward slide. By then it'll be too late to unload the assets at good prices as all banks will be rushing for the exit. The sight of panic, naked bankers is not something you'd want to behold.

Baltic austerity "success"?

Two Baltic countries, Estonia and Latvia, have been recently touted as the poster children of austerity. Even Paul Krugman who tried to play down the success of Estonia has been chided in several twitter comments by none other than the Estonian President himself. For a president of a sovereign state to stoop so low is demeaning to the office of a president. Unless you take into account a few facts regarding that sovereign state.

To start with, the problem lies with presenting only half-truths which are quite common with statistics. Half-truths are in fact worse than outright lies. At least with lying, you know that the facts are false but with half-truths, the facts are, well, facts but only selectively disclosed. You don't know what's hidden and if you're like Krugman, you'll be stumped.

The Council of Foreign Relations has produced the following chart as evidence that the Baltics have performed better economically than Iceland and Ireland, two troubled states that are still recovering.



For Latvia, the Financial Times has an excellent op-ed piece, 'Latvia is no model for an austerity drive' written by Michael Hudson and Jeffrey Sommers. Sommers also has written a similar piece, 'Latvia's fake economic model' in the CounterPunch newsletter. We don't need to elaborate further on what they have written but there are other relevant facts that should've been highlighted to enable us to view the issue in the right perspective.

For this, I've summarised on the left the 2011 GDP, population size and GDP per capita of the two Baltic states that supposedly have successfully undergone the austerity regime plus those of the PIIIGS, that is, including Iceland.

Though both Estonia and Latvia are sovereign states, their population sizes are no more than that of a city. Worse, the three Baltics states, i.e., including Lithuania, have been suffering a population loss of more than 1.5 million or 15% since 1990. That loss is the fastest in Europe.

Now look at the GDP size. For both Baltic states, a 10% increase in GDP amounts to less than 1% of Greece's GDP. Even their GDP per capita is much less than that of the other economically problematic European states. With such low starting bases, it's easy to go up. Living next door to rich neighbours to their north and west, there's bound to be some economic spillovers from them, especially with the Baltics' relatively low labour cost. Simply plonking a few export generating factories can easily boost their GDP. Even any bailout fund is small change for their big neighbours.

If Iceland, another small state but with high GDP per capita, were to adopt the austerity regime instead of close to a 50% devaluation, the economy would have collapsed because the alternative would have been a 50% across-the-board cut in wages. Still, the foreign debts of its venturous and now collapsed banks remain unpaid. But at least with the devaluation the local debts can be easily managed or even paid off. That should've been the first step in any economic recovery process: whittle the debts through either debt write-offs or high inflation which is synonymous with currency devaluation.

In another related matter, Angela Merkel early this month commended Bulgaria for its fiscal virtue. Let's see how do Bulgaria's statistics rank with the others. Its 2011 GDP is $53.51 billion while its population is 7.476 million, giving it a GDP per capita of just $7,160. Comparing apple with orange may not be right but probably still acceptable. But this not even orange, it's peanut. Are the eurozone leaders taking us for monkeys?

The quest for bounty

The world population now has passed the 7 billion mark. Although food production in modern times has generally surpassed demand, the margin of safety is very small. The latest numbers for 2011 show that cereal production (2,344 million tonnes) exceeded demand (2,325 million tonnes) by less than one percent. Despite this surplus, one billion people are suffering from malnutrition while at the opposite extreme, one billion are afflicted with obesity. Although the chief fault lies with distribution which is not equitable, food production yield in its current form is itself approaching the tail-end of the proverbial S-curve.

The world's longest-running research on wheat yield has been conducted since 1843 at Broadbalk field, which lies within Rothamsted Research, an agricultural research station in the UK. Its record of wheat yields (see chart at left from The Economist) is instructive. After the discovery of guano in the 1830s followed by Chilean nitrate in the 1870s, progress in wheat yield as well as those of other cereal crops since then had been static for more than 100 years. During this period, increasing the food production depended on the opening up of new lands, which were in abundance, for cultivation. Since the advent of the Industrial Revolution, new farmlands have been created in the American Midwest, followed by the Canadian prairies, Ukraine, Australia and New Zealand. Consequently, the growth in food production before the Green Revolution of the 1960s was derived not from higher yield but from increased acreage. This explains why Hitler wanted to expand east lest Germany ran out of space for food production.

There was technological progress then but its main impact lay not in increasing yield but productivity through the replacement of farm labour and animals with machinery. Mechanisation started with the use of animal power, specifically, the horse. The early animal-powered machine began with the reaper (1830s), then the reaper-binder (1870s) and when it finally included threshing technology, it became known as the combine harvester (1880s). When the steam engine came along, it didn't totally replace the horse because the heavy weight of the machinery made it unwieldy on the farm.

As a result the steam engine was generally operated from a fixed position. In Britain because of the soft ground, the steam-powered machinery was stationary and a cable was used to pull ploughing or cultivating implements across the field. In this case, two steam engines located on the opposite ends of the field and attached with a winch each would pull the implements first in one direction, and then the other. However in the US, the fields being of hard ground, the steam tractor itself would haul the plough. The steam tractor also pulled steam powered combine harvester but its productivity improvement over the horse powered was only one third. However the benefits of replacing horses were realised not only in the form of greater workload capacity but also in the increased availability of land, about 25% more; this being the result of land formerly used to grow animal feed now switched to human food. The introduction of the lightweight gasoline-powered tractors in the 1910s offering vastly greater productivity eventually totally replaced both steam engines and draught animals.

Such mechanical innovations which have largely run its course are the root cause of the decline in US agricultural employment since the 1840s (see chart below from the MinnPost). The Green Revolution which started in the 1960s contributed only a minor portion to the decline. Similar employment busting trends which have afflicted manufacturing since the 1950s are now plaguing the services sector, read the government sector since it is turning out to be the biggest employer in this depression if you also include the private sector employment that depends on the expanding largesse of government deficits. In time this will leave the government prostrate which should see to the decline of the services sector jobs.

The increased production from the new fields would have amounted to nothing had not advances in communication, food storage, and food processing technology progressed alongside to ensure that the surplus production was transported and distributed to those able and willing to consume it. However, it was the communication aspect that played the most prominent role in ensuring the uptake of US grain by other countries. As usual, major changes in communication can be segmented into periods that correspond with the Kondratieff Waves timeline.

The First Kondratieff Wave was set in motion in Britain, the cradle of the Industrial Revolution. But it didn't take long for the US to latch onto the Kondratieff Wave bandwagon. By the Second Kondratieff Wave, the US would overtake Britain in all aspects of the 4Cs.

Grain grown in the Midwest had to be transported through the Erie Canal—which had been completed in 1825—to New York before being shipped to Europe. Even though rail technology already existed, it was used only for short distant travel because the wrought iron used could not bear the high pressure of the steam boilers nor the weight of the railcars. Only when steel was introduced, could the railways effectively end the commercial use of the Erie Canal sometime in the 1880s. Long before the canal construction, the grain producing centres had moved from New York and Pennsylvania to the two Dakotas and Minnesota in the Midwest. Without the canal, transporting the grain would require going through the Mississippi and loading it onto ships at New Orleans. From here, the grain would be sent to the east and Europe.

The freight transport aboard the Europe-bound ships also benefited from the steel high pressure compound engines which saved 50% of the coal fuel compared to the iron single cylinder engines. It made a lot of difference as coal used to occupy two thirds of cargo space. By the Third Kondratieff Wave, ships were using fuel oil allowing them to travel farther without refueling while releasing more space for cargo.

Steel has also gone into ship construction. Steel ships are 15% lighter than iron ships, and both do not have the structural limitations of wood which restricts the length of a ship to 300 feet. It thus beggars belief the claims in historical texts that Zheng He's 15th century wooden ships reached 400 feet as the keels of such ships wouldn't have survived the longitudinal stress exerted by the high seas.

Lack of proper transhipment, storage and packing facilities has often resulted in the spoilage of perishable goods. To address this, the steam-powered grain elevator was conceived in the 1840s to mechanise the loading and unloading of grain. For the transport and packaging of meat produce, canning enabled Australia to ship vast quantities of meat to Britain from the 1860s while mechanised refrigerated shipping, introduced in the mid 1870s, did the same for beef and mutton shipped from Australia, Argentina and the US to Britain.

Containerisation which was introduced just before the Fourth Kondratieff Wave helped the US army sort out its logistics mess in the Vietnam war. By packing cargo in standardised boxes, containerisation facilitates the loading and unloading of non-bulk cargo, and its seamless transfers between ships, trucks and trains, very much like the internet formatting and routing data in packets. It has fueled the rise of global trade, the benefits accruing mostly one way from the inefficient and prodigal to the efficient and frugal.

The dramatic increase in cereal yields started to register only from the 1960s although inorganic fertilisers had been available decades earlier proving that it wasn't solely the fertilisers that led to the higher yields. And the increased yields were also recorded for fields fertilised by organic manure (see first chart above). The key to increasing the yields in fact had been found in the Scientific Agricultural Revolution that preceded the Industrial Revolution but it was carried out on livestock, not crops. Only in the 1960s, was cross breeding of plants being carried out to take advantage of the nutrients furnished by the fertilisers. The person most responsible for championing this cause was Norman Borlaug.

With the artificial synthesis of nitrogen which was invented in 1911 by Fritz Haber, there has been no shortage of inorganic nitrogen-based fertilisers. However before the 1960s, farmers had to restrict fertiliser usage as larger and heavier seed heads would result in the plants toppling over. What Borlaug did with his cross breeding was to produce dwarf wheat breed with shorter stalks that could support the heavy weight of the seed heads. Mass starvation in India was averted with the help of this new breed. The heavy consumption of nitrogen fertiliser on the farms can be seen from the following graphic from The Economist comparing the situations before and after plant cross breeding took hold.

The great transformation of agriculture in the 1960s onwards has conferred us an unprecedented steep increase in population (The Economist chart at left) but this population dividend is now turning into a drag as fertility rates are falling off the cliff. For this, we can thank urbanisation and improved healthcare and yet we'll see more worsening rates with the coming economic depression. Now you know why the great deficits of most nations after World War II could be easily whittled down. The reason can be traced to the global economic expansion on an unparalleled scale brought on by the tremendous increase in population. Simply put, the consumption rose to absorb what the capacity produced. It had never happened before and it will not happen again.

The great availability of nitrogen-based fertilisers doesn't mean that yields would keep improving. Overuse of such fertilisers, as in India, has degraded the soil and lower the yields. India also has its share of other agricultural follies. Although it has recently reported record harvests, there are approximately 250 million Indians who are malnourished. The fault lies with distribution with the poor failing to get their ration coupons. Accentuating the problem is the lack of proper storage facilities, resulting in the high wastage of crops that have been left in the open. The right solution of course is to empower its populace with income generating jobs but that appears very remote as increasing automation and mechanisation have made the poor superfluous. Deaths from hunger have struck not only the urban but also the rural populace, bespeaking the futility of running way from the tightening grips of an economic depression.

As for the world, did the spike in food commodity prices in 2008 (The Economist chart at left) signal the looming shortage of food? Or was it the diversion of corn crop towards biofuel that created the artificial shortage? Although producing bioethanol from corn is indeed a dumb idea to begin with, ascribing the blame of higher food prices to such practice is equally daft. Food commodity-prices slumped in 2009 in line with all commodities despite the fact that there had been no drastic reduction in corn used for biofuel. So the main cause for the spike and decline is money, or rather, credit creation and destruction, as explained in several of my earlier posts.

However based on current agricultural technologies, we certainly have reasons to worry about food shortages. Looking at the first chart above, we know that yields have been static. And the recent issue of The Economist (see chart below) has demonstrated that the recent increase in food production was totally dependent on farming of formerly virgin land in the Amazon and adoption of western agricultural practices in former Eastern Europe Communist land. But these should be the least of our worries if we factor in the emergent technologies that will revolutionise agriculture and food production and distribution in the Fifth Kondratieff Wave.



 Among the radical innovations include genetically modified crops which since their first planting in 1996 have proven to have no ill effects. Since then the area planted with GM crops rose from 1.7 million hectares to 148 million in 2010. Even Craig Venter, who is in the forefront of developing designer bugs and new GM crops, believes that agriculture will undergo a radical change with commodity crops producing 10 to 100 times their current yields. Then we'll see the end of large scale farming as every person starts to grow his own food just enough for his own consumption, no more no less. The need to trade will disappear and with it the government's raison d'etre as food surpluses which were in ancient times the basis for financing the governing bureaucracy start melting away.

Food for revolt

Food has sown many revolutions. While engendering countless revolutions in its own production beginning with the switch from hunter-gathering to farming sometime in the 10th millennium BC which marked the start of the Neolithic era, it also has been triggering revolutions in economics and politics. In economics, the most famous of all was the Industrial Revolution which had its roots in Britain.

The Industrial Revolution didn't appear out of the blue. Although its mechanical inventions, particularly the watermills, had their roots in Ancient Greece and Rome, they were not widespread as the two societies relied a lot on slaves. Their application on a greater scale only began in the medieval ages. The most plausible reason for that may have been the surplus agriculture produce arising from the medieval warming period (900-1300). Certain correlations can be established. For example, the increase in watermill number in England intensified between 1050 and 1200, then slowed until 1275 before levelling off. Technological change wasn't the only impact of the surpluses, politics and society also had their fair share as feudalism would eventually crater in the face of the increased trade and wealth redistribution arising from those surpluses.

The mechanical movement of the watermills began with the rotary motion, and then with the use of cranks, a horizontal forward and backward motion was added. With cams, a beating motion came into being. The new range of motions allowed the mills to move out from their initial use of crushing wheat to crushing malt for beer-making (invented in 861), hammering flax stalks for linen fibres (990), fulling the wool cloth (1086), pounding the leather (1138), and pounding linen rags into pulp (1276). Only by the 14th century, did the watermills go into iron-making, a task unrelated to agriculture. So when the Industrial Revolution came along 400 years later, it was a matter of switching the power source from limited sources of water to limitless supply of coal.

However it was the Agricultural Revolution that preceded as well as enabled the Industrial Revolution. Little known is the fact that the British picked up the skills necessary for the Agricultural Revolution from the Dutch. Certainly, there are reasons for the Dutch’s agricultural innovativeness but they were also equally adept in other fields that made up the 4Cs of capacity, consumption, communication and currency. But more curious is why such innovativeness didn’t lead to the birth of the Industrial Revolution in Holland.

The rise of the Dutch was partly attributable to the migration to Amsterdam of Antwerp’s Protestant and Jewish inhabitants fleeing Spanish persecution in the 16th century. They brought with them their skills and financial capital, key prerequisites for the ascendant of the Dutch in the 17th century. However, the original inhabitants of the Dutch Republic, of which Holland being the most prominent province, had been introducing technological innovations, such as the watermills to drain and reclaim wetlands, as far back as the 8th century. By the 14th century, the mills were modified to use wind as the motive force. The latter invention not surprisingly coincided with the Little Ice Age (1315-1720) which saw a drop in sea level.

The Dutch, challenged by their very limited land, had to excel in agriculture. They applied the four-field rotation system, first discovered by farmers in Flanders, to fully utilise the land all year round instead of leaving a third fallow under the three-field system. The field which would have been fallow was instead planted with turnips and clover pasture. The clover, a fodder crop increased livestock production which in turn increased manure production, a much needed fertiliser. Another innovation was the enclosure system which encouraged experimentation with new farming techniques and fertilisers.

Their labour-saving wind-powered mills not only pumped water but also crushed grain and sawed shipbuilding timber, boosting their shipbuilding capacity in the process. That killed two 4C birds—capacity and communication—with one stone. For inland transport, they capitalised on the canals and waterways originally built to drain away the pumped-out water. Water transport in the pre-railways age was 90% cheaper than land transport. With their fluyt ships which used half the usual manpower while offering more cargo space, they could offer the lowest shipping rates, thus monopolising the European carry trade. Like Ancient Athens and Ancient Rome, who both had the most powerful navies of their time, the Dutch also enjoyed the same advantage, helping them to dislodge the Portuguese from the Eastern spice trade.

Reclaiming the low-lying land and building the windmills and ships all entailed heavy capital spending. These ventures couldn't simply be financed from future profits. Ancient Athens had its silver mine while Ancient Rome had both silver mines and war spoils. The Dutch however needed a financial innovation: a well developed bond market with capital coming from Jewish immigrants. However it was the Spaniards who, flushed with gold and silver from their Latin American colonies, provided the bulk of the money that spread around the whole of Europe. It was this money that initiated the Price Revolution in 16th century Europe (see above chart taken from Bacci's The Population of Europe). This is damning evidence that it's not precious metals that provide price stability but the quantity of money supply.

Lulled by the easy wealth, the Spaniards ludicrously embarked on wars with most of the European major powers in the 16th century, leaving them always short of funds. Their deficit spending, which eventually bankrupted the state after their gold and silver supply had ran out, created the money. That was the currency leg of the 4Cs. Note that without deficit spending, the gold and silver alone wouldn't have been spread across Europe. Nowadays, dazed by the cheap euro, the Spaniards went on a real property frenzy. Again they end up short of funds as their banking sector faces a collapse on a massive scale.

The last leg, consumption which depended on population, was a given in those days provided the other 3Cs were favourable. Indeed, Europe was undergoing a rapid population growth rate beginning in mid 15th century (see chart above). So all the 4Cs were favourable for the Dutch economic take-off. But towards the end of the 17th century, it was soon to be eclipsed by the next great power.

In 1688, a century after the rise of the Dutch, William III of Orange was invited by the English to depose their unpopular king, James II who happened to be William’s uncle and father-in-law. William brought with him Holland’s financiers, scientists and skilled workers. By then the Dutch monopoly of spice trade no longer mattered as the widely grown turnips could be stored in winter for livestock food. Consequently, livestock need not be slaughtered in winter, reducing the need for odour masking spices.

As is typical of any end-of-cycle economic wave, extreme wealth polarity afflicted the Dutch. Without any new economic wave, its society was bound to collapse. It so happened that its neighbour, France, was ruled by Napoleon who was intent on dominating Europe. With a so highly divided society, the Dutch easily fell to the French in 1794.

The Dutch loss was the English gain. The English copied the agricultural innovations of the Dutch. The English also had land enclosures which came in two waves. The first in the 16th century was a result of the Price Revolution, in which prices quintupled. The second wave of enclosure arose from 1765 to 1815, also a result of massive deficit spending, this time by the major European powers, especially England and France, which were engaged in the Seven Years’ War (1756-1763) and the Napoleonic Wars (1799-1815). As always, wars can do wonders to the economy and society. You can't miss fortunes in misfortunes.

The English and Dutch agricultural productivity surpassed that of the other European countries. Between 1500 and 1800, their agricultural yield improved from 7:1 (seven units of output for every one of input) to 10:1 whereas that of France, Italy and Spain remained static. Other European countries were only getting 4:1.

The English also benefited from having a unified nation since the reign of Henry II (1154-1189) whereas other big European nations were fragmented. France, for example, was still having feudal principalities despite the semblance of a nation-state up until the French Revolution in 1789. As a result, France had internal tolls, tariffs and other trade barriers on goods moved from one locale to another while the English could move their surplus produce with ease. Although knights no longer existed, pre-revolutionary French still had their lords who had feudal rights over peasants in their provinces. Other current big states, such as Germany and Italy, were worse; they were non-existent then, merely existing as a slew of principalities, bishoprics, counties, kingdoms and states.

The French Revolution was partly triggered by poor grain harvests leading to food shortages which worsened the price inflation. France’s low agricultural productivity was also a consequence of its partage inheritance laws which split agricultural lands among all offspring whereas the English had primogeniture inheritance which passed on all the lands to the eldest son. But food shortages in France recurred even after the revolution. So it couldn't have been the main driving factor.

The bigger contributory cause was the burdensome tax from which the nobles and clergy were exempt. These taxes were necessitated by the preceding wars with England, including the support for the American revolutionaries. The tax burden is akin to the modern day austerity drive as governments tried to accumulate reserves in order to tame the runaway deficits. But for the government to be in surplus, the rest must see their wealth worn down. It's a zero-sum game; only an economic expansion will alleviate the sense of loss. If in 1789, it led to the French Revolution, then horrors awaits the Eurozone denizens if the Eurozone countries still insist on waiting for the austerity drive to bear fruit.

In contrast to the French, the English with their primogeniture inheritance laws favoured wealth accumulation or capitalism. The land owners now had more incentives to rapidly introduce new techniques, which not only increased agriculture surpluses—enclosed fields had 20%-25% more yields than those of open fields—but also released labour from agriculture. Aside from practices copied from the Dutch, the British also introduced several innovations of their own. Among these include farm mechanisation, such as Jethro Tull's horse-drawn seed drill which economised on the use of seeds as well as ensured better plant growth since planting was done at the correct density. Threshing was also mechanised using horse power. Selective breeding of livestock improved their desirable characteristics, such as fast maturing and easy tameability.

As a result of these advances, between 1700 and 1800, the proportion of England's population involved in agriculture decreased from 80% to 40% at a time when its population increased from 5.45 million to 9.25 million. England's population in the Roman period, and a few times in the past when it had reached the former number, would stop growing because of agriculture constraint. But by 1750 at the onset of the Industrial Revolution, this Malthusian trap was smashed. By 1870, England produced 300% more agricultural produce than in 1700 with only 14% of the population. These monumental advances in agriculture production came to be known as the Agricultural Revolution.

The resulting farming surpluses released farmers from agriculture. These surplus workers were one of the factors that enabled England to embark on its Industrial Revolution. The benefits were however mutual as without the Industrial Revolution, England would have undergone a social revolution as the unemployed workers would have revolted without stable employment. However, home production of food wasn't enough. England had to import sugar—which provided most of its calorific values—from the West Indies and wheat and meat from Ireland. In turn the Irish survived on potato. All these foods had in effect fuelled the indutrialisation of Britain.

Of course, food was only one factor that allowed Britain to forge ahead with its Industrial Revolution. Like the Dutch, it had the greatest navy of its day. With a series of Navigations Acts, aimed at the Dutch, it restricted the conveyance of goods to and from the Commonwealth on English vessels. By 1700, the shipping tonnage on English vessels doubled.

England's first central bank was established in 1694 for the purpose of financing the war with France. Bonds were issued to finance the issuing of bank notes. Amsterdam lost its luster when it transferred its financial business to London after it suffered financial crises in 1763 and 1773.

As for consumption demand, this depends on population growth. Looking at the chart above, the population of the whole of Europe was on a rapid ascent especially post-1700, thus ensuring a ready market that could absorb whatever stuff the increased capacity could throw at it.

The most critical component was of course, energy, or more specifically, coal. As land that used to provide firewood had become scarce with its clearance for agriculture, firewood had become expensive and had to be replaced with coal. Fortunately in England, coal was cheap because of plentiful supply of surface deposits and easy access to canals. This is the main reason why the Industrial Revolution had its roots in Britain. Holland, France and Germany also had deposits of coal but they had to await the invention of railways to unlock them.

Foodprints of feudalism

Over the ages, food and agriculture have always left indelible impacts on politics, cultures and even the ecosystems. As we are about to enter a new age of fractured living, a look back at the age of feudalism can help us prepare for the bleak days ahead. In the days prior to the Agricultural Revolution, which was a precursor to the Industrial Revolution, upwards of 80% of the population had been engaged in food production, specifically in agriculture. So a knowledge of past food production would provide us with the ability to understand why political systems or cultures evolved the way they did.

A major impact of food production on the environment, as detected by the anomalous increase in CO2, began way back 8,000 years ago when humans began clearing European forests on a large scale for agriculture. This was followed by an increase in methane 3,000 years later when the Chinese grew wetland rice. Fast forward another 2,500 years, Ancient Athens ushered in democracy, not in a small way a consequence of its smallholding farmlands. Their owners, with important stakes in the wealth generation and accumulation of the economy, esteemed freedom and property rights. In the same vein, Ancient Rome had started off as a democratic republic, only gradually turning into an emperorship after its small farmlands were acquired by the big land owners who consolidated them into latifundia.

On the opposite extreme of the Eurasia land mass, the need to cultivate rice in a cooperative manner but under the direction of a strongman has resulted till today in the prevalence of social constraints in the East Asian societies though each with its own unique character. The Chinese valued a strong central authority while the Japanese, decentralised authority residing in a few chiefs, a carryover from the daimyō of its feudal days. South Korea has the added twist of regional factionalism reflective of its rule under the Three Kingdoms that lasted around 600 years while its sibling North has always been under strong authoritarian rule bolstered by pervasive neighbour-on-neighbour snooping. In all cases, the people rally around personalities rather than issues. Till today you can observe these in their respective politics despite the veneer of democracy slapped on some of them. For the West to preach its version of democracy reflects a poor understanding of regional history.

The Athens and Greek models involving individual farming led to the increasing concentration of wealth by a minority few. It is not a recent phenomenon; it's a pattern that always unfolds towards the end cycle of an economic wave. Ancient Rome could sustain itself for so long despite the skewing wealth accumulation was due to its continual conquests. And of course, events in the ancient era moved at a snail's pace.

However to link Ancient Athens and Rome with the democracy prevailing in the western world is a bit far-fetched. Democracy was resurrected in the western world because it had early exposure to the Industrial Revolution. The link between the democracies of the ancients and the moderns only exists in the figment of those have always wanted to imagine it so since more than 1,900 years had passed before democracy made a comeback.

The collapse of the Western Roman empire greatly devastated Western Europe that it took more than three centuries before Charlemagne ascended the throne in AD 768 and began the task of reconsolidating the region. The interregnum was aptly known as the Dark Ages. No much literature exists to document the agriculture of this period.

Much of what is known about this period is that agriculture gave in to reforestation. The fall in agricultural yields was attributed to the cold period lasting from AD 300 to AD 700 (we should be careful with what we wish for with regards to global warming.) What was left of agriculture was just subsistence level farming. Rural life replaced urban life. Trade disappeared and Roman roads fell into disuse. Invasions from the Germanic tribes destroyed trade routes and town centres. With the absence of a hegemonic power and the existence of many barbarian kingdoms, violence was endemic (now you know why we still need a superpower regardless of which side it is on.) Simple artifacts of civilisation, such as bricks, glass and pottery stopped being produced.

It is hard to tell which is the root cause but the most plausible would have been the cold period with agriculture in a strong supporting role. As agriculture yields fell, it became difficult for the formation of a strong government, which always needed surpluses from agriculture to support itself. Also there was no necessity for trade without surpluses. So overland trade routes, which needed funds for upkeep, were left to decay. Even sea trade was minimal as evidenced by the small number of shipwrecks dated around this period. Cities, which had always depended on the countryside to supply them food and migrants up until the 18th century, fell into ruin when their lifeline stopped.

Almost as the final nail in the coffin, a bubonic plague struck Europe, North Africa, Persia and Arabia in 542, raging intermittently for 200 years. About half of the population in the affected regions perished. In that vacuum, Islam rose at the most opportune time. In time, it has become one of the most powerful religions but the literature on the military strategies and political and economic administration of the Prophet and his successors has been woefully lacking in the details in contrast to those of the western leaders. Whatever has been written does not do justice since it does not square with the spread of Islam in so short a time and so large an area.

The rise of Charlemagne coincided with the end of the Dark Ages Cold Period. That made possible Charlemagne's reconsolidation of Western Europe after a lapse of more than 300 years dating from the collapse of the Roman empire. Charlemagne was a brilliant statesman who understood the keys to running successful military campaigns as well as administering an empire. He was one of the rare few who grasped the essentials of the 4Cs of capacity, consumption, communication and currency. His legacies should have been required reading for the current crop of flustered euro leaders.

As regards the agricultural innovations during Charlemagne's reign, two worthy of note are the heavy mould-board plough and the use of the three-field rotating system, that is, in a year one field left fallow for every two planted. The plough was suitable for the northern Europe heavy wet clay and loam soils. By improving drainage, the plough enabled the farmers to reclaim previously unusable water-logged areas for farming. However the plough was expensive and pulling it required at least six oxen. It also required sufficient space for turning. So the farmers had to pool their resources together and cultivated in common.

The three-field rotation which replaced the Roman two-field rotation reduced the fallow period from a half to a third. Combined with increased fertility as a result of legume planting, productivity increased by 50%. The risk of crop failure was reduced as the two planted fields had different planting and harvesting seasons: wheat sown in fall and harvested in summer, and oat or barley interspersed with legumes sown in spring and harvested in fall.

After Charlemagne's death, his empire was split into three among his progeny. During his reign, Charlemagne had sown the seed of feudalism. He had rewarded his nobles with land grants. The nobles in turn redistributed them to knights under their keep so that they could generate the needed economic output to equip them with spare horses, attendants, trainee knights and iron armour. All in all, 500 people were required to support a knight. The knights on horsebacks were the key to Charlemagne's battlefield successes, they were the equivalent of modern day battletanks.

Charlemagne's successors couldn't hold the empire intact as Charlemagne hadn't relied heavily on taxes to finance his empire-building, instead depending on his substantial crown properties to generate his income. The lack of tax income combined with the splitting empire to produce weak rulers.

Knights took advantage of the weak power at the centre to create their own fiefdoms, living in well secured castles, in an arrangement known as feudalism. Power now was diffuse. It shouldn't have been a peaceful time as the absence of a central power meant that everybody was fair game for depredation. But it didn't happen. Instead the papacy launched the crusades against the Muslims in the Holy Land. One of the benefits of the the crusades was to divert the fighting inclinations of the knights to foreign lands. Western Europe also benefited from the medieval warming period from AD 900 to AD 1300 in which Europe produced larger harvests. The building of Europe's great cathedrals bore witness to the prosperity of this period.

Innovations in agriculture continued with the introduction of the nailed horseshoe, the necklace harness and the harnessing arrangement. The horseshoe minimised foot rot and wear and tear of the hooves. The necklace harness no longer restricted the horse's breathing when pulling a load. These two innovations enabled horses to replace oxen as draught animals. The new harnessing arrangement which changed from the side-by-side for ox-teams to one behind the other for horse-teams, amplified the pulling power of the horse-teams. A pair of horses could replace two pairs of ox-teams despite the fact that the horse's strength was less than that of the ox. In addition, the horse could perform the task with greater speed and endurance.

The horse however was one of the catalysts that would see to the end of feudalism. As horses became more prevalent, people became more mobile. So markets and towns expanded as peasants surplus to the manors' needs could find employment in towns. The agricultural surpluses enabled them to become specialised artisans, such as spinners, weavers, butchers, smiths, builders and so on. Improvements in transportation in the 12th century comprising moveable front axles for carts, four-wheel wagons, better brakes and the new harnessing as that used in agriculture sextupled the load that can be pulled by the horses.

The population of the medieval ages was also on the increase; from 1000 to 1340, Western Europe's population almost tripled, from 12 million to 35.5 million. Initially, the increase was absorbed by the expanding agricultural land. The crusades also absorbed part of the population increase. However it was the growth of town and cities that eventually accommodated the burgeoning population. From the 11th to the 13th century, the amount of agricultural land in northwest Europe more than doubled.

The trading of the surplus agriculture and craft production presupposed the availability of money. Prior to the rise of trade, life in a lord's manor did not require money, and not even barter. There simply was no trading within the manor. The serfs paid their dues to their lord in kind, wheat in the case of Western Europe, rice in the case of Japan. The lord used the surplus to trade for salt and iron. Otherwise the manor produced all the things that it needed. However, as trade grew, large silver strikes in Germany, Bohemia, Hungary and Sardinia in the 12th and 13th century provided the raw material for coin minting. But note that the silver content in the coins was never consistent. It wasn't the silver that provided the credence to money but the sovereign strength backing the coin.

Sovereign states were in ascendant with the growth of towns. Townsmen contributed tax monies to the king in return for guarantees of protection against the feudal lords. It was taxation that gave value to money. Some towns became prosperous on the back of trade fairs. To obviate the need to carry large sums of money, traders at the fairs exchanged letters of credit or bills of exchange. This then led to the imposition of usury in the 13th century. It was a logical progression. Interest, that is, the price of money, is needed to ensure that money is used profitably. Zero interest rate is self defeating as it encourages wasteful utilisation of fund.

Despite the prosperity experienced, dark clouds began to gather over the horizon. The crusades ended in the 13th century after the last Christian invaders had been evicted from the Holy Land. Western Europe had also reached the limits of population growth as no more new lands could be cleared for agriculture, and technological achievements in agriculture had reached saturation point. Overpopulation began to outstrip food production. The Little Ice Age, lasting from 1315 to 1720, reduced large areas of formerly fertile land. Again, like the affliction that struck Europe in the 6th century, the bubonic plague came back, this time leaving a third of Europe's population dead. Lacking manpower, the lords, faced with increasing labour costs rented out their lands to the serfs. The serfs, now able to sell their agricultural produce, had the financial incentive to produce more.

The knights were increasingly marginalised as more of the newly created wealth went to the merchants. Those that held out were eventually forced to give up their old ways with the coming of two new military technologies - the long bow and gunpowder - in the 15th century. The French sovereign, for example, towards the end of the 100-year war with the English king forced the submission of the occupants of 60 castles in northern France in four days with the help of cannons.

Meanwhile, in Japan, secure with the Sea of Japan as a natural barrier, feudalism continued until the second half of the 19th century. The growth of towns enticed the peasants from the lord's estate (han) and the growth of money economy shifted wealth to the merchants. Taxes paid to the imperial government enabled the restoration of the Meiji emperor and the downfall of the shogun. The coup de grâce was delivered in 1877 when the conscript army defeated a rebellion by the samurai, the Japanese equivalent of the medieval knights. Although Japan has modernised greatly since then, Japanese mindsets and social relations still bear traces of feudalism.

There are many useful lessons that we can glean from the feudalistic way of life. Authoritarian rulers who wish to maintain continuous rule must keep restricting the mobility of their subjects which also means that money supply must be limited. North Korea has managed this well while China which has transgressed this rule is likely to suffer from an extreme internal implosion. Once, the economy is liberalised, politics is at the beck and call of the economy. As it is, every successive wave of China's new leaders appears to be weaker and weaker compared to their predecessors. Of course, North Korea has been suffering from economic deprivation but their leaders are in a stronger position relative to those of China.

Second, innovations that affect the 4Cs, however innocuous they may appear initially, are destined to shake at the core of politics and economics. In the medieval ages, it took ages but in our current Kondratieff Wave, 60 years is the lifespan of one wave.

Third, in an era before the Age of Exploration, climate played a crucial role in determining the economic fortune of a nation-state, the more so because climate took hundreds of years before it reversed course. In fact climate qualifies to be a sub-component of the 4Cs capacity leg. Only in our post-Industrial Revolution age, was climate a non-issue because all the while we've been benefiting from the warming climate except from the 1980s onwards when Lady Thatcher began foisting the global warming scare on us.

The coming of age of nanotechnology and biotechnology in the Fifth Kondratieff Wave will see to the breakup of the US and most nation-states. As a major superpower collapses, tribes will start forming. Each tribe can attain self-sufficiency with the help of the two emergent technologies. Do we still need money when nation-states have ceased to exist? Probably not except for small sums for trifling exchange. Money without sovereign backing will not have the cachet that will stand it in good stead regardless of how much silver or gold backing it.