Both were back in the fray last week. In one of his New York Times columns, Professor Krugman reminded us that last year America's imports were 57% larger than her exports, that her borrowing binge was unsustainable and that, since a "soft landing" was unlikely, there could be a 30% fall in the value of the dollar in order to eliminate the trade deficit. Professor Godley (writing with a colleague in the Financial Times) warned that excessively high trade deficits in the US (6.5% of GDP) and in the UK (4.5%), buoyed up by budget deficits and personal borrowing, were unsustainable. If personal borrowing and spending slow down, they argue, neither government has a policy to avert a "prolonged deficiency in total demand", which implies a serious economic recession. The professors are not alone. Among others, the venerable JK Galbraith, who has been right about so many things, has been predicting a stock market crash and high unemployment for well over 10 years.

This week's UK economic statistics do not offer many crumbs for comfort either, despite the fact that total output (GDP) is being revised upwards following discovery of a serious under-recording of the contribution of the software industry. While inflation is still low at only 1.9% (and working days lost through industrial disputes are the lowest since records began in 1891), unemployment is steadily rising and the trade deficit is huge - with no obvious signs of coming down. Whether our modern Cassandras will eventually be vindicated, or whether both the US and UK economies will somehow stumble into stability, as they have these past few years, is genuinely unknowable. But if the crash does happen there will be no shortage of people claiming it was inevitable all along. And there will also be plenty of evidence to back them up. Cassandras only have to be proved right once in order to justify their prognostications, however long it takes for them to be properly tested. It would be comforting to know that governments of both the US and UK have a Plan B to be unfolded if a real economic disaster were to happen. But we would not want to forecast it.

Since printing paper money is nothing short of counterfeiting, the issuer of the international currency must always be the country with the military might to guarantee control over the system. This magnificent scheme seems the perfect system for obtaining perpetual wealth for the country that issues the de facto world currency. The one problem, however, is that such a system destroys the character of the counterfeiting nation’s people-- just as was the case when gold was the currency and it was obtained by conquering other nations. And this destroys the incentive to save and produce, while encouraging debt and runaway welfare.

The pressure at home to inflate the currency comes from the corporate welfare recipients, as well as those who demand handouts as compensation for their needs and perceived injuries by others. In both cases personal responsibility for one’s actions is rejected.

When paper money is rejected, or when gold runs out, wealth and political stability are lost. The country then must go from living beyond its means to living beneath its means, until the economic and political systems adjust to the new rules-- rules no longer written by those who ran the now defunct printing press.

“Dollar Diplomacy,” a policy instituted by William Howard Taft and his Secretary of State Philander C. Knox, was designed to enhance U.S. commercial investments in Latin America and the Far East. McKinley concocted a war against Spain in 1898, and (Teddy) Roosevelt’s corollary to the Monroe Doctrine preceded Taft’s aggressive approach to using the U.S. dollar and diplomatic influence to secure U.S. investments abroad. This earned the popular title of “Dollar Diplomacy.” The significance of Roosevelt’s change was that our intervention now could be justified by the mere “appearance” that a country of interest to us was politically or fiscally vulnerable to European control. Not only did we claim a right, but even an official U.S. government “obligation” to protect our commercial interests from Europeans.

This new policy came on the heels of the “gunboat” diplomacy of the late 19th century, and it meant we could buy influence before resorting to the threat of force. By the time the “dollar diplomacy” of William Howard Taft was clearly articulated, the seeds of American empire were planted. And they were destined to grow in the fertile political soil of a country that lost its love and respect for the republic bequeathed to us by the authors of the Constitution. And indeed they did. It wasn’t too long before dollar “diplomacy” became dollar “hegemony” in the second half of the 20th century.

This transition only could have occurred with a dramatic change in monetary policy and the nature of the dollar itself.

Congress created the Federal Reserve System in 1913. Between then and 1971 the principle of sound money was systematically undermined. Between 1913 and 1971, the Federal Reserve found it much easier to expand the money supply at will for financing war or manipulating the economy with little resistance from Congress-- while benefiting the special interests that influence government.

Dollar dominance got a huge boost after World War II. We were spared the destruction that so many other nations suffered, and our coffers were filled with the world’s gold. But the world chose not to return to the discipline of the gold standard, and the politicians applauded. Printing money to pay the bills was a lot more popular than taxing or restraining unnecessary spending. In spite of the short-term benefits, imbalances were institutionalized for decades to come.

The 1944 Bretton Woods agreement solidified the dollar as the preeminent world reserve currency, replacing the British pound. Due to our political and military muscle, and because we had a huge amount of physical gold, the world readily accepted our dollar (defined as 1/35th of an ounce of gold) as the world’s reserve currency. The dollar was said to be “as good as gold,” and convertible to all foreign central banks at that rate. For American citizens, however, it remained illegal to own. This was a gold-exchange standard that from inception was doomed to fail.

The U.S. did exactly what many predicted she would do. She printed more dollars for which there was no gold backing. But the world was content to accept those dollars for more than 25 years with little question-- until the French and others in the late 1960s demanded we fulfill our promise to pay one ounce of gold for each $35 they delivered to the U.S. Treasury. This resulted in a huge gold drain that brought an end to a very poorly devised pseudo-gold standard.

It all ended on August 15, 1971, when Nixon closed the gold window and refused to pay out any of our remaining 280 million ounces of gold. In essence, we declared our insolvency and everyone recognized some other monetary system had to be devised in order to bring stability to the markets.

Amazingly, a new system was devised which allowed the U.S. to operate the printing presses for the world reserve currency with no restraints placed on it-- not even a pretense of gold convertibility, none whatsoever! Though the new policy was even more deeply flawed, it nevertheless opened the door for dollar hegemony to spread.

Realizing the world was embarking on something new and mind boggling, elite money managers, with especially strong support from U.S. authorities, struck an agreement with OPEC to price oil in U.S. dollars exclusively for all worldwide transactions. This gave the dollar a special place among world currencies and in essence “backed” the dollar with oil. In return, the U.S. promised to protect the various oil-rich kingdoms in the Persian Gulf against threat of invasion or domestic coup. This arrangement helped ignite the radical Islamic movement among those who resented our influence in the region. The arrangement gave the dollar artificial strength, with tremendous financial benefits for the United States. It allowed us to export our monetary inflation by buying oil and other goods at a great discount as dollar influence flourished.

This post-Bretton Woods system was much more fragile than the system that existed between 1945 and 1971. Though the dollar/oil arrangement was helpful, it was not nearly as stable as the pseudo gold standard under Bretton Woods. It certainly was less stable than the gold standard of the late 19th century.

During the 1970s the dollar nearly collapsed, as oil prices surged and gold skyrocketed to $800 an ounce. By 1979 interest rates of 21% were required to rescue the system. The pressure on the dollar in the 1970s, in spite of the benefits accrued to it, reflected reckless budget deficits and monetary inflation during the 1960s. The markets were not fooled by LBJ’s claim that we could afford both “guns and butter.”

Once again the dollar was rescued, and this ushered in the age of true dollar hegemony lasting from the early 1980s to the present. With tremendous cooperation coming from the central banks and international commercial banks, the dollar was accepted as if it were gold.

Fed Chair Alan Greenspan, on several occasions before the House Banking Committee, answered my challenges to him about his previously held favorable views on gold by claiming that he and other central bankers had gotten paper money-- i.e. the dollar system-- to respond as if it were gold. Each time I strongly disagreed, and pointed out that if they had achieved such a feat they would have defied centuries of economic history regarding the need for money to be something of real value. He smugly and confidently concurred with this.

In recent years central banks and various financial institutions, all with vested interests in maintaining a workable fiat dollar standard, were not secretive about selling and loaning large amounts of gold to the market even while decreasing gold prices raised serious questions about the wisdom of such a policy. They never admitted to gold price fixing, but the evidence is abundant that they believed if the gold price fell it would convey a sense of confidence to the market, confidence that they indeed had achieved amazing success in turning paper into gold.

Increasing gold prices historically are viewed as an indicator of distrust in paper currency. This recent effort was not a whole lot different than the U.S. Treasury selling gold at $35 an ounce in the 1960s, in an attempt to convince the world the dollar was sound and as good as gold. Even during the Depression, one of Roosevelt’s first acts was to remove free market gold pricing as an indication of a flawed monetary system by making it illegal for American citizens to own gold. Economic law eventually limited that effort, as it did in the early 1970s when our Treasury and the IMF tried to fix the price of gold by dumping tons into the market to dampen the enthusiasm of those seeking a safe haven for a falling dollar after gold ownership was re-legalized.

Once again the effort between 1980 and 2000 to fool the market as to the true value of the dollar proved unsuccessful. In the past 5 years the dollar has been devalued in terms of gold by more than 50%. You just can’t fool all the people all the time, even with the power of the mighty printing press and money creating system of the Federal Reserve.

Even with all the shortcomings of the fiat monetary system, dollar influence thrived. The results seemed beneficial, but gross distortions built into the system remained. And true to form, Washington politicians are only too anxious to solve the problems cropping up with window dressing, while failing to understand and deal with the underlying flawed policy. Protectionism, fixing exchange rates, punitive tariffs, politically motivated sanctions, corporate subsidies, international trade management, price controls, interest rate and wage controls, super-nationalist sentiments, threats of force, and even war are resorted to—all to solve the problems artificially created by deeply flawed monetary and economic systems.

In the short run, the issuer of a fiat reserve currency can accrue great economic benefits. In the long run, it poses a threat to the country issuing the world currency. In this case that’s the United States. As long as foreign countries take our dollars in return for real goods, we come out ahead. This is a benefit many in Congress fail to recognize, as they bash China for maintaining a positive trade balance with us. But this leads to a loss of manufacturing jobs to overseas markets, as we become more dependent on others and less self-sufficient. Foreign countries accumulate our dollars due to their high savings rates, and graciously loan them back to us at low interest rates to finance our excessive consumption.

It sounds like a great deal for everyone, except the time will come when our dollars-- due to their depreciation-- will be received less enthusiastically or even be rejected by foreign countries. That could create a whole new ballgame and force us to pay a price for living beyond our means and our production. The shift in sentiment regarding the dollar has already started, but the worst is yet to come.

The agreement with OPEC in the 1970s to price oil in dollars has provided tremendous artificial strength to the dollar as the preeminent reserve currency. This has created a universal demand for the dollar, and soaks up the huge number of new dollars generated each year. Last year alone M3 increased over $700 billion.

The artificial demand for our dollar, along with our military might, places us in the unique position to “rule” the world without productive work or savings, and without limits on consumer spending or deficits. The problem is, it can’t last.

Price inflation is raising its ugly head, and the NASDAQ bubble-- generated by easy money-- has burst. The housing bubble likewise created is deflating. Gold prices have doubled, and federal spending is out of sight with zero political will to rein it in. The trade deficit last year was over $728 billion. A $2 trillion war is raging, and plans are being laid to expand the war into Iran and possibly Syria. The only restraining force will be the world’s rejection of the dollar. It’s bound to come and create conditions worse than 1979-1980, which required 21% interest rates to correct. But everything possible will be done to protect the dollar in the meantime. We have a shared interest with those who hold our dollars to keep the whole charade going.

Greenspan, in his first speech after leaving the Fed, said that gold prices were up because of concern about terrorism, and not because of monetary concerns or because he created too many dollars during his tenure. Gold has to be discredited and the dollar propped up. Even when the dollar comes under serious attack by market forces, the central banks and the IMF surely will do everything conceivable to soak up the dollars in hope of restoring stability. Eventually they will fail.

Most importantly, the dollar/oil relationship has to be maintained to keep the dollar as a preeminent currency. Any attack on this relationship will be forcefully challenged—as it already has been.

In November 2000 Saddam Hussein demanded Euros for his oil. His arrogance was a threat to the dollar; his lack of any military might was never a threat. At the first cabinet meeting with the new administration in 2001, as reported by Treasury Secretary Paul O’Neill, the major topic was how we would get rid of Saddam Hussein-- though there was no evidence whatsoever he posed a threat to us. This deep concern for Saddam Hussein surprised and shocked O’Neill.

It now is common knowledge that the immediate reaction of the administration after 9/11 revolved around how they could connect Saddam Hussein to the attacks, to justify an invasion and overthrow of his government. Even with no evidence of any connection to 9/11, or evidence of weapons of mass destruction, public and congressional support was generated through distortions and flat out misrepresentation of the facts to justify overthrowing Saddam Hussein.

There was no public talk of removing Saddam Hussein because of his attack on the integrity of the dollar as a reserve currency by selling oil in Euros. Many believe this was the real reason for our obsession with Iraq. I doubt it was the only reason, but it may well have played a significant role in our motivation to wage war. Within a very short period after the military victory, all Iraqi oil sales were carried out in dollars. The Euro was abandoned.

In 2001, Venezuela’s ambassador to Russia spoke of Venezuela switching to the Euro for all their oil sales. Within a year there was a coup attempt against Chavez, reportedly with assistance from our CIA.

After these attempts to nudge the Euro toward replacing the dollar as the world’s reserve currency were met with resistance, the sharp fall of the dollar against the Euro was reversed. These events may well have played a significant role in maintaining dollar dominance.

It’s become clear the U.S. administration was sympathetic to those who plotted the overthrow of Chavez, and was embarrassed by its failure. The fact that Chavez was democratically elected had little influence on which side we supported.

Now, a new attempt is being made against the petrodollar system. Iran, another member of the “axis of evil,” has announced her plans to initiate an oil bourse in March of this year. Guess what, the oil sales will be priced Euros, not dollars.

Most Americans forget how our policies have systematically and needlessly antagonized the Iranians over the years. In 1953 the CIA helped overthrow a democratically elected president, Mohammed Mossadeqh, and install the authoritarian Shah, who was friendly to the U.S. The Iranians were still fuming over this when the hostages were seized in 1979. Our alliance with Saddam Hussein in his invasion of Iran in the early 1980s did not help matters, and obviously did not do much for our relationship with Saddam Hussein. The administration announcement in 2001 that Iran was part of the axis of evil didn’t do much to improve the diplomatic relationship between our two countries. Recent threats over nuclear power, while ignoring the fact that they are surrounded by countries with nuclear weapons, doesn’t seem to register with those who continue to provoke Iran. With what most Muslims perceive as our war against Islam, and this recent history, there’s little wonder why Iran might choose to harm America by undermining the dollar. Iran, like Iraq, has zero capability to attack us. But that didn’t stop us from turning Saddam Hussein into a modern day Hitler ready to take over the world. Now Iran, especially since she’s made plans for pricing oil in Euros, has been on the receiving end of a propaganda war not unlike that waged against Iraq before our invasion.

It’s not likely that maintaining dollar supremacy was the only motivating factor for the war against Iraq, nor for agitating against Iran. Though the real reasons for going to war are complex, we now know the reasons given before the war started, like the presence of weapons of mass destruction and Saddam Hussein’s connection to 9/11, were false. The dollar’s importance is obvious, but this does not diminish the influence of the distinct plans laid out years ago by the neo-conservatives to remake the Middle East. Israel’s influence, as well as that of the Christian Zionists, likewise played a role in prosecuting this war. Protecting “our” oil supplies has influenced our Middle East policy for decades.

But the truth is that paying the bills for this aggressive intervention is impossible the old fashioned way, with more taxes, more savings, and more production by the American people. Much of the expense of the Persian Gulf War in 1991 was shouldered by many of our willing allies. That’s not so today. Now, more than ever, the dollar hegemony-- it’s dominance as the world reserve currency-- is required to finance our huge war expenditures. This $2 trillion never-ending war must be paid for, one way or another. Dollar hegemony provides the vehicle to do just that.

For the most part the true victims aren’t aware of how they pay the bills. The license to create money out of thin air allows the bills to be paid through price inflation. American citizens, as well as average citizens of Japan, China, and other countries suffer from price inflation, which represents the “tax” that pays the bills for our military adventures. That is until the fraud is discovered, and the foreign producers decide not to take dollars nor hold them very long in payment for their goods. Everything possible is done to prevent the fraud of the monetary system from being exposed to the masses who suffer from it. If oil markets replace dollars with Euros, it would in time curtail our ability to continue to print, without restraint, the world’s reserve currency.

It is an unbelievable benefit to us to import valuable goods and export depreciating dollars. The exporting countries have become addicted to our purchases for their economic growth. This dependency makes them allies in continuing the fraud, and their participation keeps the dollar’s value artificially high. If this system were workable long term, American citizens would never have to work again. We too could enjoy “bread and circuses” just as the Romans did, but their gold finally ran out and the inability of Rome to continue to plunder conquered nations brought an end to her empire.

The same thing will happen to us if we don’t change our ways. Though we don’t occupy foreign countries to directly plunder, we nevertheless have spread our troops across 130 nations of the world. Our intense effort to spread our power in the oil-rich Middle East is not a coincidence. But unlike the old days, we don’t declare direct ownership of the natural resources-- we just insist that we can buy what we want and pay for it with our paper money. Any country that challenges our authority does so at great risk.

Once again Congress has bought into the war propaganda against Iran, just as it did against Iraq. Arguments are now made for attacking Iran economically, and militarily if necessary. These arguments are all based on the same false reasons given for the ill-fated and costly occupation of Iraq.

Our whole economic system depends on continuing the current monetary arrangement, which means recycling the dollar is crucial. Currently, we borrow over $700 billion every year from our gracious benefactors, who work hard and take our paper for their goods. Then we borrow all the money we need to secure the empire (DOD budget $450 billion) plus more. The military might we enjoy becomes the “backing” of our currency. There are no other countries that can challenge our military superiority, and therefore they have little choice but to accept the dollars we declare are today’s “gold.” This is why countries that challenge the system-- like Iraq, Iran and Venezuela-- become targets of our plans for regime change.

Ironically, dollar superiority depends on our strong military, and our strong military depends on the dollar. As long as foreign recipients take our dollars for real goods and are willing to finance our extravagant consumption and militarism, the status quo will continue regardless of how huge our foreign debt and current account deficit become.

But real threats come from our political adversaries who are incapable of confronting us militarily, yet are not bashful about confronting us economically. That’s why we see the new challenge from Iran being taken so seriously. The urgent arguments about Iran posing a military threat to the security of the United States are no more plausible than the false charges levied against Iraq. Yet there is no effort to resist this march to confrontation by those who grandstand for political reasons against the Iraq war.

It seems that the people and Congress are easily persuaded by the jingoism of the preemptive war promoters. It’s only after the cost in human life and dollars are tallied up that the people object to unwise militarism.

The strange thing is that the failure in Iraq is now apparent to a large majority of American people, yet they and Congress are acquiescing to the call for a needless and dangerous confrontation with Iran.

But then again, our failure to find Osama bin Laden and destroy his network did not dissuade us from taking on the Iraqis in a war totally unrelated to 9/11.

Concern for pricing oil only in dollars helps explain our willingness to drop everything and teach Saddam Hussein a lesson for his defiance in demanding Euros for oil.

And once again there’s this urgent call for sanctions and threats of force against Iran at the precise time Iran is opening a new oil exchange with all transactions in Euros.

Using force to compel people to accept money without real value can only work in the short run. It ultimately leads to economic dislocation, both domestic and international, and always ends with a price to be paid.

The economic law that honest exchange demands only things of real value as currency cannot be repealed. The chaos that one day will ensue from our 35-year experiment with worldwide fiat money will require a return to money of real value. We will know that day is approaching when oil-producing countries demand gold, or its equivalent, for their oil rather than dollars or Euros. The sooner the better.

The 1200 block of South Olive Street was also shut down when its pavement suddenly began to bulge and the oily liquid bubbled from cracks and manhole covers.

Families grabbed what they could and fled to a parking lot across the street from the brick apartment building and watched as Department of Water and Power, Gas Co. and city sanitation workers huddled with police and firefighters trying to figure out where the steaming-hot liquid was coming from.

By midafternoon South Olive Street seemed ready to deliver a gusher.

"The street looked like it was about to pop. Everybody sort of stepped back and said, 'Whoa!' " said fire Capt. Al Gonzales. "Then we put two and two together."

Authorities remembered that there's a petroleum drilling site two blocks from the apartment building. When they checked there, they discovered that workers were injecting high-pressure hot water into old wells to extract leftover crude oil.

When the St. James Oil Co. halted the hot water pumping, the bulge in the street began to subside and the flow of oily liquid quickly slowed.

But residents remained locked out of the 35-unit apartment building, which was constructed in 1907.

They said they first noticed a pungent odor shortly after midnight.

"It smelled like a sewer," said resident Alejandra Canchola, a 14-year-old ninth-grader.

Neighbor Rufina Urbano, 36, who lives in the building with her husband, Julio Baltazar, and daughter, Crystal Baltazar, 3, was awakened by the smell. "I was afraid there might be an explosion," she said.

"The smell gave me a headache. So I said let's go," said Baltazar, 31, a garment worker who has lived on the building's third floor for 10 years.

The trio planned to spend Monday night with Urbano's sister in El Sereno. Others were taken to a Red Cross shelter set up at Santee High School, said Jerome Thierry, a Red Cross representative.

Resident Daniel Bolanes, 13, took only his school backpack and a vibrant green pet iguana named Tiha. He was hoping to get back inside his unit to retrieve a Monopoly board game. "We're getting bored," said the seventh-grader.

Daniel said he peeked into the basement before evacuating and saw its floor covered with several inches of the oily substance. "It smelled like the La Brea Tar Pits," he said.

Fire officials said the building would remain off limits to residents until it could be inspected by city building and safety experts. They said the 160-degree water, injected into the oil wells at a pressure of 1,200 pounds per square inch, might have undermined its foundation.

Fire Department spokesman Ernie Bobadilla said that while the St. James Oil Co. is the only petroleum firm nearby that has a permit to operate, "there are a multitude of old pipelines in the ground here."

A worker at the company's leased site at 1325 S. Broadway said he was not authorized to comment on the incident. The firm's main office in Laguna Hills was closed Monday.

Officials indicated that portions of South Olive Street near the apartment building may have to be excavated to determine the extent of subterranean damage. The oily water could also be seen bubbling through the pavement at the intersection of Olive and Pico Boulevard.

A City businessman who will today learn if he is to be extradited across the Atlantic to face Enron-related fraud charges, is warning British executives to avoid dealing with the US.

David Bermingham, one of the "NatWest Three" executives, says that "the potential for disaster is enormous", and "may not be of your making".

Mr Bermingham blames the current extradition laws amid deepening concern that US prosecutors are using 2003 Extradition Act to extradite an increasing number of business people for alleged white collar crime, rather than making it easier to send suspected terrorists across the Atlantic for trial.

Chain gang

Speaking to The Daily Telegraph yesterday, Mr Bermingham said: "Right here, right now, as things stand under this law, I would advise not even to engage in a business relationship with the US.

"Any businessman with any connection with the United States, however tenuous, should think very carefully about the potential peril they face. There is no doubt that people are waking up to the potential hazard of this legislation."

Mr Bermingham, 43, who now works as a film financier, said the three men were "hopeful" that the US attempt to extradite would be thrown out, after racking up an "obscene" legal bill battling the action.

His career in the City was over, he said: "Win or lose, I will never be able to resume a career again in the City. Even if we were to get a prosecution here in the UK, it would mean that I would be out of the City for five to six years. You can't just do that and step back in.

"I have been living under this uncertainty for the best part of four years. My perspective is that what does not kill you makes you stronger. This is really horrible but so many people suffer so much worse on a daily basis.

"We are suffering because of a really bad and dangerous law. I can guarantee you that 90pc of the Commons did not know what they were passing." Other High Court extradition hearings, including that of former Morgan Crucible chief executive Ian Norris, are on hold pending today's decision by two Appeal Court judges - Lord Justice Laws and Mr Justice Ouseley.

Mr Bermingham, along with Gary Mulgrew, 43 and Giles Darby, 43, is accused of conspiracy with others to defraud NatWest of $20m (£12m). Of this sum, more than $12m is alleged to have been shared by two senior executives at Enron.

The three men deny the charges.

The trio are appealing against a magistrates' court decision to extradite them, and seeking judicial review of the decision by the Home Secretary to uphold that ruling.

The bankers are also challenging a decision by the Serious Fraud Office not to prosecute them.

Lawyers for the three have argued that Robert Wardle, the SFO director, had acted unlawfully in not investigating allegations against them of fraud.

A Home Office spokesman said: "All those who are the subject of an extradition request to the UK are protected by full and effective safeguards in the Extradition Act 2003, regardless of their nationality.

"The act provides a much more modern framework for the making and receiving of requests, but both the old and new treaties ensure that the legitimate rights of requested persons are respected.

The United States is a trusted extradition partner with a mature legal system and it guarantees appropriate safeguards within its domestic courts".

Separately, lawyers from 66 of the FTSE 100 including Barclays, Prudential, BP, Unilever and Emap are planning to meet Home Office officials in the near future to discuss the Act, after Mike Harding, general counsel at Barclays, said that the extradition arrangements were "lop-sided".

Less than half the crude oil used by refineries is produced in the United States, while 60 percent comes from foreign nations, Bush said during the first stop on a two-day trip to talk about energy.

Some of these foreign suppliers have "unstable" governments that have fundamental differences with America, he said.

"It creates a national security issue and we're held hostage for energy by foreign nations that may not like us," Bush said.

Bush is focusing on energy at a time when Americans are paying high power bills to heat their homes this winter and have only recently seen a decrease in gasoline prices.

One of Bush's proposals would expand research into smaller, longer-lasting batteries for electric-gas hybrid cars, including plug-ins. He highlighted that initiative with a visit Monday to the battery center at Milwaukee-based auto-parts supplier Johnson Controls Inc.

During his trip, Bush is also focusing on a proposal to increase investment in development of clean electric power sources, and proposals to speed the development of biofuels such as "cellulosic" ethanol made from wood chips or sawgrass.

Energy conservation groups and environmentalists say they're pleased that the president, a former oil man in Texas, is stressing alternative sources of energy, but they contend his proposals don't go far enough. They say the administration must consider greater fuel-efficiency standards for cars, and some economists believe it's best to increase the gas tax to force consumers to change their driving habits.

During his visit to Johnson Controls' new hybrid battery laboratory, Bush checked out two Ford Escapes — one with a nickel-metal-hybrid battery, the kind that powers most hybrid-electric vehicles, and one with a lithium-ion battery, which Johnson Controls believes are the wave of the future. The lithium-ion battery was about half the size of the older-model battery. In 2004, Johnson Controls received a government contract to develop the lithium-ion batteries.

On Tuesday, Bush plans to visit the Energy Department's National Renewable Energy Laboratory in Golden, Colo., to talk about speeding the development of biofuels.

The lab, with a looming $28 million budget shortfall, had announced it was cutting its staff by 32 people, including eight researchers. But in advance of Bush's visit, Energy Secretary Samuel Bodman over the weekend directed the transfer of $5 million to the private contractor that runs the lab, so the jobs can be saved.

The department "has been informed that the NREL lab director will use these funds to immediately restore all of the jobs that were cut earlier this month due to budget shortfalls," the department said in a statement Monday.

"Our nation is on the threshold of new energy technology that I think will startle the American people," Bush said. "We're on the edge of some amazing breakthroughs — breakthroughs all aimed at enhancing our national security and our economic security and the quality of life of the folks who live here in the United States."

Later Monday, Bush visited the United Solar Ovonics Plant, which makes solar panels, in Auburn Hills, Mich., outside Detroit. "This technology right here is going to help us change the way we live in our homes," Bush told reporters.

Bush said he was impressed with the growing commercial uses of solar energy.

"Roof makers will one day be able to make a solar roof that protects you from the elements and at the same time, powers your house," Bush said. "The vision is this — that technology will become so efficient that you'll become a little power generator in your home, and if you don't use the energy you generate you'll be able to feed it back into the electricity grid."

Rep. Ed Markey, D-Mass., questioned Bush's energy policies Monday, saying the administration also supports subsidies for luxury SUVs.

"This single tax subsidy dwarfs anything being done for hybrid batteries," Markey said in a news release.

As a complement to Bush's travels, six Cabinet officials are crisscrossing the nation this week, appearing at more than two dozen energy events in more than a dozen states.

Malaysia announced the deaths of 40 chickens from the lethal H5N1 strain, the first reported cases of the virus in the country in more than a year.

In Hong Kong Tuesday, a dead magpie found near a street flower market was confirmed to have been infected by the H5N1 virus, the government said. It was the latest in a spate of bird deaths from the strain in recent weeks.

With India conducting a mass slaughter of birds for a second day Monday, plumes of black smoke filled the air as farmers burned dead chickens in the now-deserted poultry farms around Navapur, more than 250 miles northeast of Bombay.

Local officials near the affected area reported that a 27-year-old poultry farm owner died of bird flu-like symptoms, though tests had yet to determine the cause of death. Samples from at least eight other people hospitalized for flu-like symptoms near Navapur also were being tested, and results were expected later this week.

Inspectors visited homes and farms surrounding Navapur, a town of 30,000 people, searching for signs of illness and making sure even chickens being raised at private homes were killed and properly disposed of.

"It's like a war _ they come in completely covered with masks and goggles and check if the carcasses are disposed properly," said Ghulam Vhora, a Navapur poultry farmers' association.

Since early Sunday, more than 200,000 chickens have been slaughtered around Navapur, a major poultry farming region where the H5N1 strain of bird flu was found in some of 30,000 dead chickens. Checkpoints also have been set up to stop people carrying poultry out of the area.

Heavy earth movers also dug deep pits at some poultry farms. Workers already dumped more than 200,000 bird carcasses along with the gloves, goggles and blue gowns used by health teams. The pits were coated with chemicals, including disinfectant, before being filled in.

The government now plans to slaughter some 700,000 birds within a 1.5- mile radius of the outbreak, and 48 poultry farms will be emptied and shut for three months.

There are concerns the Indian poultry industry could suffer badly. India exports some $84 million worth of poultry and eggs annually to Europe, Japan and the Middle East.

"There must be no movement of poultry out of Navapur," said O.P. Tiwari, a health officer in neighboring Surat district.

Since 2003, the H5N1 virus has devastated poultry and killed at least 92 people, mostly in Asia, according to the World Health Organization. Most human cases have been linked to contact with infected birds. But scientists fear the virus could mutate into a form that is easily transmitted between humans, triggering a pandemic.

Nigerian health authorities said Monday the H5N1 strain has been identified in two more states, and the government ordered an immediate slaughter of birds in the area. The northern states Katsina and Zamfara are among five of Nigeria's 36 states now confirmed to have been affected. Nigeria documented Africa's first H5N1 case earlier this month, but no human infections have been reported.

In Europe, nearly 250 German troops cleared dead birds from the Baltic island of Ruegen, where the country's first outbreak of the disease were confirmed in wild birds last week.

EU officials cautioned against panic, saying bird flu had not reached commercial stocks, only wild birds. They encouraged people to continue eating poultry.

"This is an animal disease, not a human disease," EU Public Health Commissioner Markos Kyprianou said. "There is no reason for Europeans not to eat poultry meat."

France, the EU's largest poultry producer, became the latest European country to confirm H5N1 in wild fowl. Birds in Austria, Germany, Greece, Italy and Slovenia also have tested positive for the strain. Hungary also has reported five cases of suspected H5N1 in birds.

Elsewhere in Europe, the virus has turned up in Azerbaijan, Bulgaria, Croatia, Romania, Russia, Turkey, Ukraine, and Bulgaria.

European chicken farmers said consumption has fallen, causing hundreds of millions of dollars in losses. The EU head office said recent outbreaks of avian bird flu in wild birds had created "a very serious market situation."

However, EU Agriculture Commissioner Mariann Fischer Boel told the EU farm ministers that conditions were not serious enough to warrant compensation for poultry farmers. She said she would reconsider "if the situation so requires."

France, the Netherlands, Italy and other nations want to vaccinate poultry "but opinion in Europe is divided," said Josef Proell, the Austrian agriculture minister who chaired the EU meeting.

In Asia, Malaysia's government said 40 chickens died last week from the H5N1 virus in an area near Kuala Lumpur, the main city. Agriculture Minister Muhyiddin Yassin said there were no human deaths, and all 110 chickens in the area, covering four hamlets, were slaughtered.

Malaysia had declared itself free of bird flu in January 2005, more than six weeks after its last infection was detected.