Like a fine wine slowly degenerating into vinegar, the world’s reserve currency is disintegrating into worthless paper—and it’s going to take our power grid down with it. The U.S. dollar is not only the victim of a severe global financial crisis and marauding currency warriors in emerging and established economies. It is being hit hard by internal tinkering from our own central bank, the Federal Reserve. A new round of quantitative easing, or “QE2,” might more appropriately be called “quantitative exploitation,” as it is, by intent, walking our currency down the garden path to inflation and national insolvency.
The real energy source that fuels our power plants (and, indeed, our entire economy) is the U.S. dollar. It is by far our most prevalent and most valuable export. All of the indicators point to its collapse in less than three years time, at which point energy will be unaffordable. Even our own endless supplies of coal will be out of the reach of our battered dollars, leading to squalor or, worse, to the governmental nationalization of our natural resources.
In order to see how the economy and the power grid are being set up for failure, we will need to look at the real sources of our financial crisis, why government tinkering won’t work, and why it is inevitable that the power grid must fall.
The Road to Insolvency
While the Fed goes through the charade of stimulating the economy, anyone who sat through Macro Economics 101 knows that the central bank’s inflationary medicine is doing more harm than good. While the steroidal effect of doubling and tripling the money supply may treat some of the symptoms of a short-term liquidity and credit crunch, the financial “steroids” being employed also incapacitate the immune system of our economy, which then allows our economy to die from the real disease of insolvency.
For 40 years we have been fixing and growing our economy through consumption – consumption underwritten by debt, both public and private. From 1944 until we went off the gold standard in 1971, the U.S. national debt doubled, but it plummeted as a percentage of GDP from 100% to 35% over the same period. The debt increased by two-and-a-half times over the next 10 years, at which point the hockey stick upward trend began to steadily and increasingly emerge. We fought off economic declines in the 70s, 80s, and 90s on the back of big government spending.
In the latter part of the 90s, the restrained Clinton budgets with a Republican Congress showed a surplus, but exposed our weakness without the open checkbook of Uncle Sam. Consumer credit and personal debt took the place of runaway government spending and subsidized our economy with more borrowed money. It seemed that household incomes were rising, but that was not the result of productivity, but rather the need for women to bring a second income into most every household. Then real incomes dropped for the first time from $51K in 1998 to $50K ten years later. Households had less money, more debt service, and a real part of their income dedicated to interest payments.
The Debt Trap
But consumption is only half of the equation necessary for a healthy, viable economy. The production piece was missing. We had been exporting jobs for decades. American consumption was driving Chinese and other foreign production. We were becoming the largest debtor in the history of the world. Domestic consumption without domestic production just serves to export wealth and generate debt. When we add together our public and private debt, it adds up to a staggering amount equal to 400 percent of our GDP. Only Iceland and the UK have higher debt to GDP ratios. Iceland’s economy and currency have already failed. The only thing holding up the U.S. is the status of our dollar as the world’s reserve currency.
But the dollar, especially in the wake of another unaudited round of money-printing, said to be around $600 billion, is declining and not considered stable enough for the liking of many nations. China, Russia, Brazil, and dozens of other countries have joined the International Monetary Fund in demanding a new “basket of currencies” to replace the dollar in the international marketplace. Four hundred twenty of the world’s leading banks agree, and our central bank is giving them all the reason they need to dump the dollar as they keep printing money to drive down its value and stability. When the dollar is replaced, our credit rating will tank and our interest rates will skyrocket. Without hard currency, our standard of living will fall to third world levels—Mexico already has a better credit rating and pays less interest than the state of Illinois, so don’t say it’s not possible.
The stimulus of consumption has its limits. You can run five miles on your own strength; you can run another five miles with the help of an energy drink and some vitamins; you can keep running with amphetamines; maybe you can go for a while longer with a shot of some drugs to cover up the pain and keep you awake. But eventually every Ponzi scheme reaches its Bernie Madoff moment. When the jig is up, the house of cards must fall. We cannot consume our way out of this one, and the government cannot buy our salvation. Consumption without production is debt, and more borrowed money will only make things worse. The day of reckoning is here; it is time to pay the piper.
We will see if our new Congress will have the will and wisdom of John Stuart Mill, the great 19th Century philosopher and economist:
What a country wants to make it richer is never consumption, but production… the legislator has to look solely at two points: that no obstacle shall exist to prevent those that have the means of production from employing those means as they find most for their interest; and those who have not at present the means of producing to the extent of their desire to consume shall have every facility afforded their acquiring the means, that becoming producers, they may be able to consume.
In the final analysis, mortgaging your future and sending your wealth to another country is just another form of servitude and de facto redistribution and socialism. The underlying lie of socialism is that you can “have” or consume without an equal amount of production. The political wisdom behind the cure to our dire straights buys into the benevolent ignorance that fuels this absurd doomsday device.
If you’ve ever spent much time in a third world country, you know that food prices are not much different from our own. Two hundred American dollars will fill the same shopping cart, more or less. Some local products might be a little cheaper, and the many imported goods are considerably more. Gasoline is more expensive. Electricity is much more expensive. But the household income is just a fraction of ours. Everything is spent on food and necessities for a majority of the people. When the dollar is dethroned as the king of currencies, it will no longer be the measure of the value of a barrel of oil or a ton of coal.
The same dollar that could buy 360 Japanese Yen in 1971 before we went off the gold standard can now buy about 80 or so. As the Federal Reserve foolishly, if not criminally, injects two to three trillion more dollars into the marketplace, the dollar’s value will go into free fall. Remarkably, that is the intention. Supposed fears of deflation have Chairman Bernanke running the printing presses around the clock. While this is one way to reel in some of our debt—paying back loans collateralized by valuable dollars with cheap paper and a few gallons of green ink—it will kill our economy, our lifestyle, and our political standing in the world.
The first thing to fall victim to a neutered international dollar and domestic inflation are commodities. Coal, oil, and food are at the top of that list. A tank of gasoline costs two to three days’ pay for the average new college graduate in the Philippines, and ten to fifteen days’ pay for a manual laborer. Groceries for a month cost about two weeks’ pay. That’s real life for most of the world—and it may be coming to a neighborhood near you. The first round of quantitative easing (printing money) in 2009 and early 2010 saw a 300% spike in the price of coal. The new round just underway is likely to cause at least another 50% increase.
But don’t worry; the government regulators won’t let the power companies triple your electric bill to keep up with their rising costs. So, what will happen? Let’s take a look at American Electric Power and Southern Company, the two main coal-fired power producers in the U.S. Some investment advisors are predicting that AEP will be bankrupt in two to three years from following the same kind of Madoff financing that undid General Motors. This isn’t hyperbole or a phony metaphor; they have actually been borrowing money year after year to pay their dividend! On paper it reported making $1.3 billion in 2009, but after spending $2.8 billion to keep their plants running with only $2.4 billion in earnings, they really lost $400 million. They just chose to call their plant maintenance an investment instead of an expense. Yet, in the face of these losses every year since 2006, their dividends have risen annually, now surpassing three-quarters of a billion dollars. But wait—there’s more!
Instead of adding to the $10 billion they borrowed since 2005, AEP just sold more stock. It sounds like their CEO is ready to run the Federal Reserve. They just printed $1.7 billion in new stock certificates, diluting (inflating) the value of the shares held by all of the other shareholders—just like we’re now doing to all of our bondholders. This is the definition of “Ponzi.”
Now, this company is already borrowing and getting creative just to keep treading water, so…what will happen when the price of coal doubles? Ask the little piggy that built his house with straw.
Southern Company has $4 billion in capital expenses to keep its plants running every year, plus a billion dollars in interest on its growing debt, but it has never shown a profit of $5 billion in its history. Again, add in higher coal prices, and the end of the road appears to be very near.
It’s not just the actions of the Fed that will act to increase coal prices. China’s growing demand for energy will soon catch up with the U.S. demand, and India is growing as fast as China. China already uses three times more coal than the U.S., and their coal imports doubled in the last year. These growing behemoths will be demanding more and more coal, driving the price higher and higher.
The price of coal is not a small part of the operating budgets for a power company. The big companies may need to come up with another $3 billion annually, and they just don’t have the money. Coal is priced in dollars, and that keeps us in the game. But if that advantage goes away, it won’t be long before the grid is unplugged. There is no more margin left for playing the system.
Will our Tea Party Congressmen vote to bail out the power companies? And what wealth will they use to accomplish that multi-trillion-dollar task? More paper currency? We have already gobbled up the next century of wealth. The game is over. We cannot consume our way out of this one, and we cannot borrow our way out. We have to slowly but surely bring the jobs back home that will allow us to produce our way out of this quagmire. Otherwise, we leave the emerging world with all of the manufacturing infrastructure and means of production that will make them our masters and put our future at the mercy of legions of people who mostly hate us.