As discussed in parts 1 though 3of this series, the global demand for energy, and fossil fuels are expected to increase. At the same time, the supplies to meet that demand are declining. We examined how the gap between supply and demand is at risk of becoming too large and making the current economic crisis far worse. Finally we examined how a comprehensive policy that includes increasing U.S. supply and decreasing U.S. demand for fossil fuels can help ensure that we have access to a cost-effective and reliable source of energy for the foreseeable future.
The unfortunate fact is that the U.S. government seems unwilling, or unable to develop a comprehensive Energy Policy that could help prevent this economic collapse. Indeed, many members of the Senate and Congress, as well as the Obama Administration, seem bound and determined to attack our industry and make it all the more likely to create a significant gap between supply and demand.
If they are successful, the increased price of energy, coupled with an economy already at risk of collapsing, and the U.S. could see a major economic crisis that includes double digit unemployment, double digit inflation, a collapse of the stock market, and a significant devaluation of the dollar, so much so, that it may no longer be the global currency. What follows is a brief summary of the many conditions that are coming together in such a way as to potentially create an economic tsunami.
The U.S. Debt
Following many years of deficit spending and massive social entitlement programs, the U.S. is now saddled with a tremendous debt. Like a family addicted to credit cards, we, as a country, continue to live above our means. According to the
debt clock the current U.S. National Debt is $11.5 Trillion dollars and increasing at a rate of $3.9 Billion A DAY. To give you a feel for the size of that number, there are just over 3 Billion seconds in 100 years. It takes 45,000 years to have a Trillion seconds.
The simple fact is that we, as a Nation, can not sustain this rate of debt increase. To pay the current debt off, every man, woman, and child in the U.S. will need to contribute, by way of taxes, just under $40,000. Unfortunately, most Americans could not “contribute” anywhere near that amount.
The nature of that debt
Of our $11.5 Trillion Dollar debt, $4.4 Trillion is in Intergovernmental Holdings. These include various Federal obligations such as the Federal Old Age and Survivors Insurance Trust Fund, aka Social Security (2.2 Trillion), the Federal Employees Retirement funds ($740 Billion) and a number of other government funds. The remaining $7.1 Trillion dollars of U.S. debt is held by the public, which includes notes, bills, bonds, and other debt instruments.
Of our public debt, almost half is held by foreign countries and foreign-based companies. Of the foreign held debt, the Peoples Republic of China holds 24% and Japan holds almost 21%. As a result,
"Foreign interests have more control over the US economy than Americans, leaving the country in a state that is financially imprudent. More and more of our debt is held by foreign countries – some of which are our allies and some are not. The huge holdings of American government debt by countries such as China and Saudi Arabia could leave a powerful financial weapon in the hands of countries that may be hostile to US corporate and diplomatic interests.”
David Walker, the US comptroller general. 23 July 2007.
When the Debtors say No More
Any family that has abused credit cards can tell you that the first thing credit card companies do is raise your interest rates. The second thing that they do is cut off your credit. Given the size of the National debt, we are very close to having the holders of that credit say “No More!” It recently happened in California where voters rejected a number of tax initiatives. It is very likely to happen to the U.S. as a whole.
When it does, the government will be forced to undertake a number of measures, all of which will be painful and detrimental to economic stability. The first response will be to increase taxes. This may temporarily help offset the debt but history shows us that the long-term result will be a net loss of revenues. So the next step will be to cut services. This is what California is doing now.
Increased taxes and decreased services will not be sufficient to manage the budget without increasing the debt. So the government will have to either print money or restructure the debt. The first of these moves will cause the rate of inflation to increase and the value of the currency to decreases. The second of these moves will almost certainly result in the U.S. Dollar being replaced as the standard world currency as it would strongly impact China who is already seeking to replace the dollar with the Yuan. Of course, the first debt likely to see restructuring is the $2.2 Trillion of Social Security. That restructuring means that individuals counting on Social Security can expect to receive pennies on the dollar, and many will see nothing.
Where Energy Comes In
The ongoing efforts by Congress and the Obama Administration to increase energy costs will have two affects on the U.S. economy. The most immediate affect will be on consumers. We have already seen the impact that $4.00 /gallon gas has on consumer spending. With increased electricity costs as well as increased gas prices, a significant drop in consumer spending can be expected. This in turn will have a ripple affect on a number of businesses and industries.
This hit on the economy will come at a time when our government is trying to increase consumer spending to stimulate the economy. Since the government is likely to be the only remaining consumer, it is likely that they will seek additional stimulus spending – adding to the debt, and bringing us that much closer to a major collapse of the economy.
The second impact of the current attack on the energy industry is that global fossil fuel supplies will diminish. As discussed in parts one and two of this series, that will result in an increase in fossil fuel costs. This will add inflationary pressure to our economy.
Sound and growing economies will be able to absorb these increased costs. The U.S., as a result of its deliberate dependence on foreign oil will have difficulty competing in the global market for those fuels, particularly if China and or Japan, our largest debt holders, limit or cut off our credit. In that both countries are also dependent on foreign energy sources, they are not likely to lend us the money to buy resources they themselves need.
Preparing for the Coming Crisis
For many of you, your first reaction will be to dismiss this column outright. After all, the U.S. has seen debt levels over 90% of GDP once before, right after WWII. We reduced our debt then and we can do so again. Unfortunately, there is a significant difference between then and now.
Following WWII, there was a tremendous increase in manufacturing as the U.S. helped rebuild a war-torn Europe and Asia. There is no massive building program that can be expected in the near future. Even if there was, over the last 40 years, the U.S. has lost most of its manufacturing base. The second major difference is that this time around, there is no baby boom driven consumerism to fuel economic growth. I am afraid that these two differences mean that the economic situation in the U.S. is likely to become very severe.
Therefore, it would be wise to re-look at your investment portfolio and make sure that you include some investments to protect you from inflation and from a fall in the stock market. After all, if George Soros can have “… a very good crisis”, why can’t we.
To help prepare yourself, I recommend two excellent books, both by Stephen Leeb. The first is The Oil Factor. The second, The Coming Economic Collapse: How You Can Thrive When Oil Costs $200 a Barrel.
Good luck – and good investing.
