A Fundamental Paradox
As we race into the third decade of the 21st century, the need to move America off of fossil fuels and into a clean energy future has never been more obvious. At the same time, achieving this goal has never been more challenging or in question. While the American people are generally in favor of moving off of fossil fuels and into a higher-tech, clean-fuel economy, the American government has been slow to respond to popular sentiment. Indeed, the Trump administration, in particular, has been downright hostile to the idea. Why this paradox, from a nation that literally led the world in both environmental consciousness and technical innovation throughout the 20th and into the early 21st centuries?
The answer is complex. However, there may be one very deep and intractable piece of the puzzle that I believe has not been fully explored by anyone. (At least I haven’t been able to find much written in this vein.) That piece, in my opinion, is what I believe is a link between how the world purchases fossil fuels (primarily crude oil), and our exploding national debt. In this column, I’ll introduce you to my argument that the world is forced to keep the debt-riddled American economy from collapsing, and from dragging the rest of the world economy down with it, via the way that America forces the world to purchase crude oil. I will argue further that promoting an ever increasing use of fossil fuels (mainly crude oil) by nations around the world is a primary strategy by which American leadership has attempted to bolster and stave off the collapse of our increasingly ill and fragile economy. Please understand that this is a speculative piece, and feel free to let me know if you are aware of other research already conducted on this topic, or thoughts you may have after reading this. I welcome constructive feedback on this issue which I hope to bring to wider attention.
What’s Old Is New Again: A Brief History Of Alternative Energy
The history of alternative energy is surprisingly long, stretching back to the 1820’s and is nearly contemporaneous with the dawn of the fossil fuel age. The fossil fuel age more or less began in 1823, with the invention of the internal combustion engine by Samuel Brown. This set the stage for the building of large and fast machines that would use coal or crude oil in massive volumes, should massive volumes of coal and oil and a way to mass produce the machines ever become easily available. Shortly after the debut of internal combustion, scientists discovered photovoltaic compounds which release energy when exposed to light. The methods used to harness these compounds became the precursors of our modern solar power cells. Just a few years later, in 1839, William Robert Grove invented the first hydrogen fuel cell. These latter inventions, along with clever use of passive solar collected by parabolic mirrors and harnessed to run steam engines, would have created a global clean energy economy except for one thing: the almost simultaneous discovery of deposits of easily available, high quality crude oil in the northeastern U.S.
In a twist of fate that must have seemed literally Heaven sent, a huge, shallow pool of easily exploited, high-quality crude oil was discovered in Titusville, Pennsylvania in 1859. How convenient so soon after the internal combustion engine had been developed! The well in Titusville was the first American well that had been deliberately drilled for oil, and the first oil pumping operation ever conducted on a commercial scale. At that time, while combustion engines were not yet widely known, crude was eagerly being sought as a lighting oil replacement for whale oil as the whaling industry declined. Thanks to the Titusville oil discovery and numerous additional discoveries across the northeast, the Midwest and Texas in subsequent decades, America not only had enough to satisfy its tiny but growing domestic demand, but enough extra to become an oil exporter.
Not surprisingly, the availability of cheap and easily pumped crude in America encouraged Americans and our trading partners – mainly the more developed economies of western Europe – to turn their attention to the potential of the automobile and produce increasing numbers of horseless carriages with gasoline-driven engines. At the same time, electric cars, which had been invented around the same time and had the advantage over gasoline-driven vehicles of being clean, quiet, and starting without a manual crank, were available and preferred by the wealthy and urban women of the day. The invention of the electric starters for gasoline cars, however, removed one advantage of electric vehicles, and the superior range of gasoline-driven engines removed another advantage as roads outside of the cities were improved and better roads beckoned everyone to get out and travel. The final blow to electric vehicles arrived when Henry Ford turned the assembly line model of killing and dismembering animals in slaughterhouses on its head, and adapted it to constructing automobiles. The assembly-built, gasoline-powered Model T was born as the alternative to the handcrafted cars of the day, and with its cheap price compared to the electric car, the Model T made the oil-powered lifestyle available to the masses. The rest, as they say, became history.
Interestingly, as the fossil fuel-driven industrial economy was developing in earnest in both America and Europe, French solar steam engine developer Augustin Mouchot had a fit of prescience in 1880 and is credited with asking the following question: “What”, he queried, “would happen to European industry when its coal reserves (coal, in his day, being the new and dominant fossil fuel primarily fueling the European industrial revolution) are used up?” In hindsight, the answers were to exploit every European coal deposit down to the lowest quality lignite; offshore industry to poorer parts of the world where labor is cheaper and environmental standards are lower, and import fuel. In many respects, it’s the latter strategy, increasingly exercised over the decades by both Europe and many other countries around the world as development expanded, that has helped to both fund America’s raging debt-fueled economy and create what I see as the “save the climate”/”fund the national debt” conflict. Were there to be a mass international movement from conventional to alternative sources of energy, what would happen to the American and the global economies? I believe the effects on both would likely be catastrauphic due to triggering the deep and massive fiscal crisis towards which the world has been lurching for some time, now and which the world’s central banks have collectively been engaged in fighting with increasingly extreme and bizarre methods.
It’s The Climate, Stupid
The first solar power company in America was developed in 1908 by American solar energy system developer Frank Shuman. It didn’t persist, however, because, as discussed above, high quality, easily exploited fossil fuel (particularly oil) deposits made dirty energy abundant and cheap. This wasn’t just the case in America, however. During the decade before WWI, Western powers (especially the British) began taking an interest in the Middle East because of its potential oil reserves. In 1901, British entrepreneur William D’Arcy effectively kicked off the middle eastern oil rush by negotiating a concession with the Persian (now Iranian) government to search for oil in its territory. Eight years later, after large oil deposits were found near the border with modern day Iraq, the Anglo-Persian Oil Company was incorporated in London. Investors were lured in by the prospect that the British government planned to convert their warships from coal to oil, making British consumption of oil “almost limitless” (https://www.bl.uk/maps/articles/oil-maps-of-the-middle-east) In subsequent decades, more oil fields were discovered in areas across the Middle East, and with each new discovery, new oil companies were founded with the backing of investors from Britain, continental Europe, and, of course, America. Determining the boundaries of each oil concession was a prickly task that became the primary force determining the boundaries of the modern day Middle Eastern countries with which most of us are familiar.
Several decades later, however, beginning in the 1950’s, concerns about Peak Oil and unchecked human population growth outstripping energy sources began to raise concerns about fossil energy. Interest in finding alternative sources of energy began to develop. A growing environmental consciousness through the 1960’s and 70’s sparked landmark legislation including the Clean Air and Clean Water Acts (both of which are now in serious danger because of the Trump administration). The dangers of fossil fuel usage were beginning to be appreciated, and the shallow, easily mined pools of oil in the United States started running dry. Continued untouchable dominance of “cheap” fossil fuels seemed in question. Yet, forty to fifty years later, and after a massive boom in advanced technology, at the end of 2018 alternative energies still made up only about 17% of domestic energy production. (Globally, the figure is closer to 20%, which is still pretty low, but better than in America.)
Still, Donald Trump has unleashed several strong attempts to dismantle America’s alternative energy and energy conservation research capabilities. In 2017, for example, Trump attempt to de-fund the Advanced Research Projects Agency – Energy, a rare bipartisan program that started under the Bush administration to fund early-stage alternative energy technologies. Then, in 2018, Trump came out with tariffs aimed squarely at the solar industry and followed up with a plan to slash the Department of Energy’s Renewable Energy and Energy Efficiency programs by 72% for fiscal 2019. While this was happening, in 2018, the level of carbon dioxide in the global atmosphere climbed above 407.4 parts per million (ppm), a level higher than the peak carbon dioxide level seen on earth during the last 800,000 years. If this isn’t significant enough in itself, the way in which it’s occurring should be ringing alarm bells. Over the last 60 years, human activity (mostly energy usage) has caused not only the total carbon dioxide level to jump up, but also the rate at which carbon dioxide is accumulating in our atmosphere, to increase. https://twitter.com/RonPaul/status/1225508124867596289?cn=ZmxleGlibGVfcmVjc18y&refsrc=email Carbon dioxide is now accumulating at a rate that’s about 100 times above normal (www.climate.gov/news-features/understanding-climate/climate-change-atmospheric-carbon-dioxide). In other words, human activity is distorting the natural fluctuations in atmospheric carbon dioxide by dramatically increasing both the total amount of carbon in our atmosphere and how fast it’s getting there. The effects of this change (in combination with other unsavory distortions we’re causing) are downright life-threatening for humanity as a whole: significantly rising sea levels; an increasing number of storms of unprecedented strength and destructiveness; changing weather patterns around the globe; longer droughts and deeper floods; increasing spread of dangerous insects and diseases; widespread death of coral reefs and shelled marine animals due to ocean acidification (and attendant collapse of fisheries and marine ecosystems); and declines in many climate-sensitive species of animals and plants. (Otherwise OK?) While there is no one complete solution to the massive problem of too much carbon in our atmosphere, one of the largest and most effective steps that humanity, as a whole, could take to reverse the trend would be to change from using fossil fuels to using energy sources that don’t emit carbon (and preferably don’t simply substitute other, equally dangerous substances, such as radioactivity, for the carbon).
It seems logical that the United States, as one of the most powerful, educated and technologically advanced nations, should be taking the lead on moving beyond the old fossil fuels paradigm and into a safer future, but we’re not. Why is that? There are actually a variety of reasons. One is our distributed style of government in which the various stakeholders must come to a consensus before anything can be done. For example, if an energy project requires the modification of energy infrastructure across state lines, voters in one state can block the changes required to implement the initiative arising in another state. Or, just one powerful constituency in Congress can prevent passage of legislation backed by even a large citizen majority. Another major reason why America is falling behind on the need to make the leap to clean energy is because many parties have invested heavily in our current, though old, energy infrastructure. It’s understandable that they would rather not lose their ongoing sources of income, and no strong constituency in the government has looked at developing ways to ease their economic transition to alternatives. A third reason is because fossil fuels are heavily subsidized by tax breaks and tax dollars, making them look less expensive than alternative energy sources when customers receive their power bills. And who wants to save the earth when they’re going to apparently be charged extra for doing so? In this paper I’d like to propose a fourth reason which I will argue is the most important reason of all, but least understood: because turning off the fossil fuel (mainly crude oil) taps would effectively crush the U.S., and by extension, global, economies.
No, Not the Climate: It’s The Economy, Stupid
While there’s nothing technological stopping America from developing a clean energy economy and growing a thriving alternative energy equipment export business (i.e., we don’t lack for the brain power, equipment or material resources), I will argue that the structure of our economy, being uniquely dependent upon the sale of oil (from any country, not just from our own supplies) to fund our national debt, is preventing us from making the leap to a clean energy future and sustainable economy. As I see it, we are stuck in an impossible dilemma: if we do continue to base our economy on dirty fuel, and press other countries to do the same, we will trash our environment. But if we don’t continue to consume massive quantities of crude oil and force other countries to do the same indefinitely, then we’ll lose our primary tool for servicing our national debt: the payments made to our Treasury from the dollar reserves held by foreign governments and institutional investors. Here’s roughly how the oil economy works: Foreign governments are forced to use U.S. dollars to purchase crude oil from any nation that sells it (why is explained below). When their businesses sell their goods and services to us, they receive dollars in return and exchange those dollars for their national currency. Their central banks then tuck a portion of those dollars away in a reserve pile, from which they make payments for crude oil and settle their international debts. While not being used, most of the reserve dollars are squirrelled away in a sort of savings account, composed of U.S. Treasury bonds and notes that governments purchase as a means of protecting and earning a little bit of interest on the dollars they’re forced to accumulate. Other large foreign and domestic institutions, such as pension funds and investment funds, likewise purchase Treasurys as a means of making a bit of interest (or yield) on their investable capital. And the American worker pays the taxes and fees that refill the Treasury after the Treasury repays investors their original investment when the bond matures, plus the interest owed. (Ahem, taxpayers! Think about the implications of this as the amount of our debt – and the interest owed on that debt – increases!)
At the present time, our debt is so great that without the Fed artificially suppressing the interest rate on it, it would be too expensive for us to service even the minimum required payments. (Makes one wonder what’s going to happen after about 2024, when the bulk of the Boomers will be retired and the Social Security Trust Funds will run out? That’s going to add approximately $5 trillion to our national debt in one fell swoop. Add on free healthcare, free tuition and free housing, and we might start to have a problem….?) Anyway, the point is that if foreign and institutional investors don’t keep increasing the amount of oil they consume, and thereby don’t keep needing more and more dollars to buy it with, and therefore don’t need more and more Treasury bonds in which to park their excess dollars, then how are we going to get enough money to fund our continually growing debt? There’s always the time-honored method of raising taxes, fees and inflation to strongarm it out of the working people, of course, but as the population has aged, the welfare state has expanded and good manufacturing and science jobs failed to re-materialize broadly across the landscape after decades of decline, there are simply fewer people and fewer high-paying jobs from which to squeeze the dollars necessary to cover the gap, at least in an honest way.
This state of affairs has led the Fed to resort to ever-more exotic tricks to keep the dollars flowing – for example, like creating trillions out of the nothingness and pouring them into the repurchase market to keep the banks from running low on capital and thereby ceasing to function. If foreign countries don’t buy our dollars and debt fast enough, the Fed will lower interest rates (perhaps into negative territory) which will artificially boost the stock markets and create huge profits for bond holders – until the Fed is forced to raise interest rates again because nobody will buy our bad deal. The stock market will then tank. Holders of trillions of low- or negative-interest government bonds will be wiped out as new Treasury bonds offering higher interest rates flood the bond market. Foreign countries that hold our dollars will lose confidence in them as they plunge in value, and all of the “too big to fail’ banks WILL fail as the holders of their $76 trillion or so of global debt derivatives begin to default on them. Finally, both the countries and the commercial institutions that buy our Treasuries (and thereby fund our debt), will stop investing in us and maybe even engage in a “run on the Treasury” as they turn their existing Treasury holdings in and demand payment before our dollars become completely worthless. (An equivalent problem already happened once in our history, forcing Richard Nixon to take our dollars off the Gold Standard as I’ll discuss below.) The entire global economy, led by America, will plunge into The Greater Depression, and there will be very little hope of recovery within most readers’ lifetimes.
That almost makes the extinction-level environmental problems facing us if we stick with using fossil fuels look manageable, doesn’t it?
Alternative Energy – What’s the Big Economic Deal?
Despite the continual pooh-poohing by most of our country’s entrenched economic and political leadership, there is a very strong economic case to be made in favor of transitioning from fossil fuels to alternative energy as the field develops. Wind and solar are reaching price parity with conventional fuels in many markets, and are getting ever closer to reaching the performance potential of conventional energy sources (with current gains being increasingly driven by improvements in battery storage). Investment levels in alternative energy are growing, while the costs associated with project development and management are decreasing. These combined trends will provide financial support for a greater array of technologies and suppliers to enter the market. Increasing integration of non-related technologies such as blockchain, AI and automation, will synergistically boost the deployment of renewable energy sources by decreasing their costs and easing their integration into the energy infrastructure.
According to accounting firm Deloitte,
“ The prospects for short-term solar and wind energy growth appear favorable, with about 96.6% of net new generation capacity additions (about 74GW) expected to come from these two sources in 2020. With several states increasing their renewable portfolio standards (RPS) in 2019, the industry will likely see mandatory RPS-driven procurement growth through the mid-2020’s, while voluntary demand will continue to hit new levels. As of late 2019, at least 10 utilities have announced 100% decarbonization goals, and we’ll be watching for that list to grow in 2020.” (Motyka, Marlene 2020 Renewable Energy Industry Outlook, Deloitte U.S.)
Independent assessments of demand for renewable energy show the market projected to reach $2.15 trillion globally in 2025. This statistic is impressive enough, but what’s even more impressive is the amount and quality of associated economic activity the alt energy field generates. According to statistics compiled by The World Bank, the U.S. wind and solar industries create about 13.5 jobs (direct, indirect and induced) per million dollars spent within each industry. Likewise, the companion industry of energy efficiency creation (i.e., retrofitting), creates approximately 16.7 jobs per million dollars spent. A million dollars spent in the oil or natural gas industries, by contrast, generate about 5.2 total jobs. When looked at by the investment firm AltEnergy Stocks, almost identical ratios were found, and a 2015 study by the Illinois Department of Commerce and Economic Opportunity concluded that for every $1 million invested in energy efficiency retrofit programs, 66 job years of combined direct and indirect employment were created. What’s more, the jobs offered by the clean energy industry tend to be of better quality and more broadly geographically distributed than traditional fossil fuel jobs. (www.greenbiz.com/article/how-many-jobs-does-clean-energy-create)
Another important, and generally overlooked, positive economic aspect of alternative energy is the potential for savings it offers on health care costs associated with reduced air pollution levels. Given the skyrocketing nature of health care costs and insurance premiums, this public benefit isn’t insignificant. According to research published this year by the MIT Center for Energy and Environmental Policy Research, if a swathe of just 10 states across the Midwest and rust belt (Pennsylvania, Ohio, Wisconsin, Michigan, Illinois, Indiana, West Virginia, New Jersey, Maryland and Delaware) increased their current commitments of generating 13% of their energy from renewables up to 19.5%, they would spend about $5.8 billion but save about $13.5 billion in reduced health care costs by 2030. If they each increased the percentage of energy generated by renewables to about 26%, the cost to implement would be about $9 billion, but the savings in health care costs alone would amount to about $20 billion. Most of the savings would come from the reduction in the rates of lung cancer, heart attacks, and strokes precipitated by fine particulates (soot) in the air. The states chosen for study all have higher levels of soot in their air due to the fact that they generate more power than most states from coal. One would think that the savings in terms of both money and lives would provide a compelling argument in favor of moving forward with more clean energy in “dirty sky country”, but, sadly, neither argument is guaranteed to hold sway to those in leadership positions. While 22 states and seven local governments have bended together to sue the Trump administration over his rollback of Federal protections for clean air, Ohio Governor Mike DeWine signed a bill that significantly reduced his state’s portfolio commitment to clean energy in order to subsidize nuclear and coal. One wonders if perhaps the nuclear and coal industries, in conjunction with the Trump administration, may have offered Mr. DeWine a “health care bonus he couldn’t refuse” for making sure that the people of Ohio will have to pay dearly for the privilege of breathing dirty air and being exposed to the joys of nuclear waste?
What’s a ‘Petrodollar’ and how Does It Differ From…. Well, A Dollar?
A ‘petrodollar’ is simply an ordinary U.S. dollar used to purchase oil from any oil-exporting country (ex. – Saudi Arabia, Iran, Venezuela, or, currently, even the United States itself, which recently became and oil exporter for the first time since the 1960’s). So, when an entity such as a large multinational corporation or a soverign government purchases oil from an oil exporting nation and pays for that oil in U.S. dollars, those dollars become labelled as ‘petrodollars’ when used in that transaction. When used for other purposes later on, they may simply be called dollars again, or may continue to be called ‘petrodollars’ if the purpose is to remind us that they were once used as an instrument by which to purchase oil.
Why Do Purchasers of Oil Pay For It In (Petro)Dollars?
This question might better be phrased as, “Why MUST purchasers of oil pay for it in dollars?”, because dollars are required, globally, for oil purchase transactions to take place. The answer to this question takes us all the way back to 1944, just after the end of WWII. At the time, the United States was so economically productive that our goods and services combined represented about half of the world’s industrial output. America was the industrial powerhouse of the world, and our central bank was also serving as the central “safe house” where many nations of Europe were storing their gold for safekeeping during the war. (Remember that the Nazis plundered everything of value they could lay their hands on as they raged across Europe.) When the war finally ended, delegates from 44 nations came together at a conference held in Bretton Woods, New Hampshire, and pledged to allow the value of their nation’s currencies to be tied, or “pegged”, to the value of the USD. The USD was itself at that point tied, or “pegged”, to the value of gold. One dollar was valued at 1/35 of an ounce of gold. Another way of saying this is that an ounce of gold was worth 35 dollars. The dollar was therefore both a store of known value, and a source of relative economic stability over time because gold was a safe and stable store of value over time. “Pegging” the value of one’s national currency to the value of the dollar therefore indirectly provided the security of pegging it to gold, without the need for each nation to acquire, or repatriate and care for, its own gold stockpile. Pegging to the dollar instantly gave each national currency a relatively high degree of stability and credibility for very low cost and effort – an arrangement that was sorely needed in chaotic and deeply indebted post-WWII Europe.
It was via this “pegging” that the USD not only helped to stablilize the currencies of most of the industrialized world, but also became the communally-accepted medium of exchange by which the nations participating in Bretton Woods could settle international debts and facilitate international trade. Debts could easily be paid and trade deals easily negotiated when the central banks of participating nations all had stockpiles of a mutually acceptable third-party currency (in this case, the USD) with which to pay one another. These stockpiles are known as reserves, and the currency being stockpiled is known as the reserve currency. At the Bretton Woods Conference in 1944, the USD became the world’s reserve currency, and it remains so to this day. And this role of the USD in the world economy was what set the stage for locking the planet into the embrace of the oil monster.
From Reserve Currency to Petrodollar In Three Acts
Act 1 – WWII and Bretton Woods
In the beginning, the Bretton Woods arrangement worked reasonably well to facilitate international trade and keep economies stable. However, it contained a fatal loophole that the signatories apparently either hadn’t considered, or thought they wouldn’t need to deal with: the agreement failed to specify that the United States could not print additional dollars for each ounce of gold it held, and then devalue each dollar be worth less than 1/35 of an ounce of gold. But that is exactly what the United States did. For you see, we, too, had debts to repay after WWII and the two easiest ways to pay off those debts were either to openly cheat the people out of their money and confiscate it directly (by raising taxes), or surreptitiously cheat the people out of their money by decreasing the value, or purchasing power, of each dollar via inflation. Inflation, properly understood, isn’t the increase in cost of any good or service, but the increase in the total amount of currency in circulation. The effect is that more dollars circulating in the economy means each dollar soon loses an amount of ability to buy goods or services proportional to the number of new dollars coming into the system. Debtors love inflation because it helps them pay off their debts in two ways: first, it creates additional dollars that the debtor can amass and count towards the total number of dollars he owes. And second, it makes each dollar worth less than the dollars the debtor borrowed, so the debtor is paying off his obligations with notes that have less value, or purchasing power, than the notes he originally borrowed. In the process of paying off a loan with less valuable currency, the debtor effectively makes a profit! Such a deal! Not so good for the lender, of course, but when you’re lending to Uncle Sam, you’ve got to expect that he may be willing to sweep aside ethical niceties like fairness when he can generate a profit by screwing you.
Thus it came to be that in the United States, the debts incurred for the costs of fighting WWII were gradually paid off primarily through a combination of tax increases and inflation. (Inflation essentially wipes out the value of a debt by creating more and more currency units while decreasing the value of each unit. This is a classic method used by governments to pay off huge debts by making them worthless. Essentially, they reclaim prosperity by cheating their lenders.) Anyway, the period of financial repression caused a great deal of upset and resentment among the people, of course, but overall, the economy continued to expand and improve. At that point (unlike today), America was bursting with a vigorous young work force; retirees workers rarely lived more than three years beyond retirement; medical technology was simple and relatively inexpensive; natural resources were abundant (and the environment was considered expendable) so manufacturing was profitable and easy, and there were few publically-funded social welfare services. Perhaps most importantly, though, government was still relatively small and unable to micromamange (and thereby drive up the cost on) everything from your doctor’s visits to student loans. So the overall economy still grew despite the drag of financial repression. Of course, with each dollar gradually becoming worth less than 1/35 of an ounce of gold as the United States inflated away its debts, financial repression also hit every country that had pegged its currency to the dollar. In other words, America not only inflated away some of the value of its own people’s money, we also inflated away the some of the purchasing power of each of unit of foreign currency, as well. That did not make our allies very happy campers.
Act 2 – Viet Nam, The Great Society and Nixon Ends Covertibility of Cash for Gold
Had America stayed the economic course after recovering financially from WWII and ending financial repression, both the domestic and the global economy probably would have grown beautifully and the world would be in a very different place than we are today. But alas, not long after America pulled out from under her debts from WWII, war hawks within the upper levels of government began to lay upon us a new source of debt: Viet Nam. Social doves responded by demanding an essentially blank check for an open-ended domestic social welfare spending regime that came to be called “The Great Society”. (It may have been more aptly named “The Ever Growing Entitlement With no Exit Strategy” Society.) Maybe in their zeal to “do good”, nobody on either side stopped to ask “how’re we gonna pay for all this?” Or maybe there was simply too much money and power to be had by the right parties on both sides if their plans went forward, and damn the consequences to the rest of us. Or perhaps both. Whatever the cause, however, the net effect of the new war combined with the new social entitlement economy was to put America firmly back on the path of debt. Back came the need to impose various forms of financial repression (most notably deliberately-induced inflation) on a more or less permanent and ongoing basis.
By 1971, debts from both Viet Nam and early Great Society program expenditures became a problem. While the hyperinflation feared during the late 1960’s never materialized, the United States Government did flood the markets with paper dollars again to inflate the debts away. America was simultaneously producing so much paper and burning through so much gold just to keep the debts from exploding that many of the other nations who were holding dollars in their reserves became nervous. How much would the value of their reserves drop because of all the additional money printing? How long would it be before America had spent all her gold reserves, and could no longer exchange gold for paper? European countries became understandably nervous and began converting their reserve dollars for gold while they thought they still could. The net effect was a “run on America’s gold” akin to the old-fashioned runs on banks. The final straw arrived when, late in the process, the U.K. effectively gave America a vote of “no confidence” by redeeming most of its dollar holdings for gold. In response, in August of 1971, President Nixon suddenly ended the convertibility of paper currency to gold. He took this unprecedented step – in lieu of reforming our spending habits (sound familiar?)- to protect America’s remaining gold reserves. The value of the now-unbacked dollar plummeted. While that was bad news for domestic consumers and holders of dollar reserves, it did have the positive effect of boosting our manufacturing base because it drove down the cost of our exports, making them more competitive with goods manufactured in countries with cheaper labor and raw materials. For a while.
Act 3 – The Arab Oil Embargo and Befriending the House of Saud
In October of 1973, when Egypt and Syria attacked Israel in the Yom Kippur War, President Nixon agreed to assist Israel by sending them a shipment of arms. Even though he refrained from taking further action to imply that he understood and sympathized with Egypt’s position, in the eyes of the Arab countries, lending any help whatsoever to Israel was considered a serious offense against the Arab world. To express their displeasure at the United States for assisting their enemy, the oil exporting countries, which had recently formed a coalition they called the Organization of the Petroleum Exporting Countries (OPEC), cut off oil sales to the United States and other allies of Israel. The resulting shock caused the price of oil to quadruple in six months. This caused damage to the U.S. economy, angered and frightened the American people, and encouraged the U.S. to seek some means of insuring that the flow of oil would never be interrupted or compromised again.
President Nixon, assisted by his globalist Secretary of State Henry Kissinger, hit upon a simple but brilliant plan. In 1974, Nixon and Kissinger together ended the oil embargo by negotiating a deal with Saudi Arabia, the largest producer and swing voter of the OPEC bloc. In exchange for providing military protection for Saudi Arabia’s oil fields, becoming Saudi Arabia’s exclusive supplier of military arms, and protecting Saudi Arabia from Israel, all the U.S. asked for was that Saudi Arabia sell its oil exclusively in U.S. dollars and invest its oil profits in U.S. Treasury obligations. To the Saudis, the deal was practically a no-brainer. Over time, and until recently, it paid off handsomely for them. Among other things, it meant that the U.S. lent its influence to try to solve the Israeli-Palestinian conflict, and helped protect Saudi Arabia militarily during an unstable era which saw the Soviet invasion of Afghanistan, the fall of the Shah of Iran, and the Iran-Iraq war. It was only two years after the Saudi deal was inked, in 1975, that the rest of the OPEC nations fell in line and agreed to the same terms with the U.S. as Saudi Arabia was getting. The genius of the deal for America was that it effectively replaced the backing of the USD by gold, with the backing of the USD by oil – the most valuable and heavily traded commodity in the world. Our dollar was now back from the beating it took under Bretton Woods, and better than ever. It was now undergirded by something even more precious than gold: a fungible and seemingly inexhaustible supply of energy. And the best part is that since Saudi Arabia is obligated to purchase U.S. Treasuries with their oil profits, this allows the rest of the world to effectively subsidize our debt through their purchases of Saudi oil (and remember that Saudi Arabia was, and still is, the world’s largest oil producer). How great is that?? We get to spend basically without limits, while every other country picks up our tab for as long as the oil keeps flowing. No wonder our government wants to keep the oil taps open, and priced in U.S. dollars. And they will do anything necessary, including lying to us, starting wars, killing innocent civilians and destroying the environment to keep this sweet deal in place. For if it were to go away – say, be replaced by energy not controlled by the U.S. or priced in our dollars – not only would America’s economy be destroyed, but the entire global financial system will collapse in a hurry.
The very best part of the deal was that, after the OPEC agreement was signed, nobody on earth could buy or sell oil without the United States being involved somewhere on the deal. Remember the term reserve currency? Countries can’t obtain reserves of USD’s needed to buy oil, without selling their goods or services to us. Thus, nations are motivated to sell reasonably-priced gadgets to the U.S. and Americans are given permission to consume instead of producing. It works because foreign countries must manufacture and sell goods and services to us in order to build up their dollar reserves. (For example, if Japan needs more oil, they assemble some Toyotas, ship them to our shores, and get paid in dollars. Voila! They can now use those dollars to purchase crude from any producer in the world.) This is an example of how Americans get to “help” the world by consuming instead of producing. Hey! It’s practically a free lunch – for us! Never mind that, as a side effect, turning us from producers to consumers also turned our industrial states into the rust belt, and eventually shifted our entire economy into a low-skill, low-education, low-opportunity, dead-end service economy wasteland. Who cares! We now had a way to fund an ever-growing welfare-warfare state, impose democracy upon any portion of the world needing our help to become politically enlightened, and make sure that citizens who once would have been expected to take care of themselves and their families, could now shift ever more of their burdens onto “the village”, courtesy of their “helpers” in the State. It was a state of affairs that brought so much warmth to the cockles of every social engineer’s heart that they soon made opposition futile. Indeed, currently, a number of “social welfare” organizations are currently fighting efforts to reduce social expenditures, under the argument that America has all the wealth needed to keep every current benefit flowing and even increasing if only the corporate and political Scrooges would stop crying wolf with our budget deficit. It would be a lovely idea if there were actually any truth to it.
Petrodollar Recycling
An interesting thing about petrodollars is that they never really leave the U.S. economy permanently. Petrodollars are acquired as dollars by foreign companies selling goods or services to the U.S. The U.S. pays them in dollars, which they exchange with their government for local currency. The dollars then sit in the foreign government’s reserves until needed for purchasing oil (or some other purpose, but the focus of this paper is on following the oil economy specifically). The dollars are then sent to an oil-producing nation in exchange for oil. Some of those dollars may be sent elsewhere by the oil producing nation to purchase other goods and services, and some will be saved for a time in reserves, but some will be recycled back to the U.S. when the oil producer purchases U.S. Treasury notes or bonds, or when the oil producer agrees to hire U.S. companies to come into their country and provide goods or services. The original agreement with the Saudis, for example, specified that the Kingdom was to re-cycle some of the petrodollars back to the U.S. in the form of contracts to U.S. firms for construction and other services.
The recycling of petrodollars through spending them on U.S. Treasury securities or goods and services provided by U.S. firms, provides a convenient and rather ingenious way of creating liquidity and “foreign” capital inflows to bolster our financial markets. And the really great part of this arrangement is that it boosts our markets without creating significant inflation, and it comes back to the U.S. interest free. The petrodollars coming into the markets aren’t significantly inflationary because they aren’t newly created currency, they’re dollars that were created and introduced into the U.S. money supply some time in the past, and have simply been circulating in and out of the markets ever since. As for the interest free part, well, that’s extremely significant because it’s not our national debt per se, as heinous as it is, that poses the main problem for our government (and, ultimately, for us as the taxpayers who fund our government). The worse problem is actually the interest, because it compounds. For every dollar spent that increases the debt, our government must promise to pay whoever purchases that debt their money back, plus interest. That interest compounds over time, making the total burden of repayment grow exponentially rather than linearly. As economist Daniel Amerman points out, with a total current overt national debt burden of $23 trillion and counting, plus upcoming debt bombshells such as the expected depletion of the Social Security Trust Funds in approximately 2024, and the Fed signaling that they will be deploying another round of QE as a preemptive, rather than reactive, response to the threat of recession, forcing interest rates down as far as possible is a matter of economic life and death for the United States. According to Congressional Budget Office (CBO) projections, our government plans to spend approximately $12.2 trillion more than it takes in via taxes over the next 10 years. That equals about $102 billion it plans to pull from the financial system each and every month, and this is assuming that there will be no wars, massive natural disasters, or significant increases in any of our social spending programs. From where will it get that $102 billion per month?
Although it hasn’t come out and said so, the practical reality is that the Fed will be effectively forced to create a large chunk of that money. About $7.2 trillion, to be exact, if the Fed continues on its present course of creating $60 billion per month. (That may need to rise, as the overnight repurchase, or repo, market that provides liquidity to the banks, has just shown in the last few days a need for cash greater than the daily amount the Fed has currently decided to supply.) That leaves $5 trillion (at least) that will need to come from somewhere else. Who will purchase American debt at what Amerman describes as the “irrationally low” (in other words, seriously below free market determined) interest rates the U.S. must impose to keep our current debt plus interest obligations from spiraling completely out of control and creating a global crisis of confidence in our currency? Currently, our government is using laws created under the Basel III international economic agreement, which require “systemically important” banks to have massive “extra” reserves of cash on hand for “safety” in case something goes wrong within the financial system (a distinct risk) and triggers a run on any of the banks. The Fed is currently using those “extra” reserves as the place from which to pull the additional cash the American government requires, and is replacing that cash – which the banks may need in a hurry some day – with Treasury obligations (essentially, IOU’s). (See Dan Amerman’s recent work for an extensive treatment of this issue.) While this will work as long as the banks have enough “excess” deposits to fund government needs and never have to touch those reserves for their own purposes, why not have other funding sources, as well?
Another way to get the huge amount of cash our government will need to find its growing debt at low interest rates might be to keep other nations tethered to fossil fuels and the petrodollar treadmill. As long as other countries must acquire dollars to purchase oil and would benefit from earning even small amounts of interest on their dollar reserves, they will continue to purchase our Treasury obligations (while complaining, of course). And, the more oil they consume, the more of our growing debt they can be counted on to fund.
So how much of our debt, measured in terms of Treasury purchases, do the oil producing nations of the world currently fund? While a very important question, it’s one that can’t really be answered because of the way the U.S. Treasury keeps records of Treasury purchases by the OPEC countries. Under the original agreement with Saudi Arabia, the value of the Kingdom’s purchases of Treasury obligations was to be kept secret. Until 2016, the Treasury helped keep this secrecy by omitting individual Treasury holdings for the OPEC nations from its annual reports, and lumped the purchases from all the primary exporters into one total figure. In May of 2016, however, a Freedom of Information Act (FOIA) was filed and the U.S. government was forced to disclose the individual Treasury holdings of the separate OPEC members. Saudi Arabia’s holdings came in at a modest $116 billion, but there is some evidence that the Saudis hide a fair amount of their actual banking activity by funneling it through places like Panama and the British Virgin Islands. (www.marketslant.com/article/petrodollar-regime-crumbling-how-will-us-economy-react, 25 April, 2017). With Saudi Aramco’s IPO finally accomplished and coming in at $25.6 billion (amid accusations that the company achieved its total $1.7 trillion valuation primarily by pressuring friendly local investors and limiting the amount of stock it’s selling), there is reason to believe that the Saudi’s claim that they hold $750 billion in Treasurys. This would be consistent with the idea that Saudi Arabia and its petrodollars do constitute a fundamentally important source of economic support for American debt.
Don’t Fight the U.S.
Perhaps the most important rule that foreign governments caught in the shell game that is our petrodollar economy must understand, is “Don’t Fight the U.S.”. When it comes to protecting the right of all soverign nations to sell, purchase and pay for their energy needs in our currency, America is vigilant to the extreme. This is what the leadership of every foreign government that has foolishly tried to exercise the right to trade for oil in the currency of their choice, has found out the hard way. In PetroSpeak, “Keeping the world safe for Democracy” means “Keeping the world safe for propping up the U.S. economy and standard of living, regardless of what that does to anybody else around the globe”.
Three Prominent Examples Of Those Who Fought The Law- And How The Law Won
1. Mommar Qadhafi, Lybia and the Pan-African Experiment
Since the 1980’s, the heads of several countries have attempted to buy or sell their soverign energy resources in the currencies of their choice, and both they and their people have punished back into their places by the U.S. military. The first, and perhaps most extensive and best known example of a foreign leader who tried to defy the United States, was Momar Qadhafi. Under Qadhafi’s influence, in 2004, 53 African nations agreed to a plan decades in the making, to require that anyone purchasing African oil must do so using a pan-African gold currency bsed on the Lybian Golden Dinar. Qadhafi also created a massive pipeline that brought water to arid regions of Lybia and created allowed the development of large areas where grain could now be grown. This project was entirely paid for via the gold held by the Lybian central bank; no foreign loans (and thus no debt with strings attached) were necessary. Emails recovered from Hillary Clinton’s private email server revealed that NATO’s strikes on the Lybian aqueduct, the factories necessary to manufacture new pipe and repair materials, and the general attacks on Qadhafi and his country had nothing to do with “humanitarian concerns”, but everything to do with suppressing the opportunity for financial and political independence across Africa. In this case, Lybia’s main target was actually France and overthrow of the French franc as the dominant currency of North Africa; however, as Lybian oil, like all other oil, was priced in petrodollars, the U.S. had no problem joining France and the other NATO nations in demonizing and overthrowing Qadhafi, and even embedding Al Queida troops among the revolutionaries. https://theecologist.org/2016/mar/14/why-qaddafi-had-go-african-gold-oil-and-challenge-monetary-imperialism The poetic justice of the situation is that, while the overthrow of Qadhafi did indeed solve the problem of losing most of the African oil producers to political independence and a gold standard, protecting our debt-based economy inadvertently helped give rise to terrorist organizations that now target us and encouraging waves of immigration from countries that either saw their developing agricultural infrastructure destroyed (Lybia), or that never really had the opportunity to develop modern agricultural infrastructure (most of the other countries that bought into the Lybia’s idea of a Pan-African economic bloc). In addition, the suppression of Lybia helped open up Africa as an economic vacuum into which China has been pouring resources as part of its “Belt and Road” initiative. This raises the ironic spectre that the battle won yesterday over keeping African oil priced in dollars, may have paved the way for oil to be purchased in Yuan, tomorrow.
On Feb. 3, the United States Commerce Department just finalized a rule to impose anti-subsidy duties on products from countries that it determines undervalue their currencies against the US dollar. In other words, the U.S. will slap tariffs on goods from countries whose currencies our government considers to be “too cheap” relative to the dollar. Countries with “cheap” currencies can sell a lot of goods and services to the U.S. because, well, their goods and services are priced quite reasonably in terms of the dollar. But at the same time, we have difficulty selling to them because our goods and services are expensive in their currencies. This leads to trade deficits, which are considered bad, but running a continual trade deficit is an obligation for a country with a reserve currency because other countries must build up reserves (dollars, in our case) in order to purchase oil. As we’ve seen, when other countries use these reserves to purchase U.S. Treasurys, they directly fund the growth of the debt upon which our economic expansion depends. And when they turn their reserves into petrodollars, those dollars return to our economy in ways that boost our GDP without triggering inflation. So what happens if the United States effectively punishes countries by artificially raising the prices for their goods if they try to sell more to us by cheapening their currencies against our dollar? Aside from creating a great deal of global ill will, we will effectively reduce the capacity of foreign governments to build up dollar reserves and purchase our debt. https://theecologist.org/2016/mar/14/why-qaddafi-had-go-african-gold-oil-and-challenge-monetary-imperialismhttps://theecologist.org/2016/mar/14/why-qaddafi-had-go-african-gold-oil-and-challenge-monetary-imperialism
2. Saddam Hussein: Iraq Gets Testy
After the threat of Gaddhafi was neutralized, Iraq rose to challenge American economic and political dominance by beginning to export its oil for euros. Saddam Hussein was becoming dissatisfied with the declining value OPEC was receiving from American dollars that kept decreasing in value because of inflation. On November 6, 2000, the government of Iraq announced that it would no longer accept U.S. dollars that it sold for oil under the UN’s Oil for Food program. It chose, instead, to accept Euros rather than dollars. This wasn’t a bad choice, as the Euro was the only currency that could potentially rival the dollar for global dominance. Naturally, the policy makers in our government became alarmed and began to look for reasons to sell the American people on war against Iraq. The Bush administration trotted out alarming stories of WMD’s and extreme cruelty of Saddam Hussein to his own people, providing cover for the real impetus behind removing Hussein: to replace him with a puppet agreeable to keeping the old economic order and maintaining the basis for American economic growth and dominance. Secondary reasons for instituting regime change in Iraq included gaining more direct control of Iraq’s oil fields, and sending a clear message to Iran, OPEC’s second largest oil producer, to back off of its own considerations of switching to the Euro for pricing its oil exports. Selling significant quantities of oil in Euros would effectively have boosted the value of the Euro against the dollar, and pushed many oil importing countries to stockpile reserves of Euros instead of reserves of dollars. (www.thefreelibrary,com/Beyond+American+Petrodollar+Hegemony+at+the+eve+of=Global+Peak…a)199069569) 1/26/20
If that were to happen, how would we continue to fund our ever-increasing debt, and thereby keep our economy growing and maintain our global military dominance?
Prior to invading Iraq, the United States announced that only the allies who joined us in war would be privy to receiving the lucrative contracts that would be doled out to rebuild the Iraqi oil fields. Germany and France, who had rights to huge new Iraqi oil fields, objected on the basis that a successful American military invasion would dash rising reserve currency prospects for the Euro. Russia objected because it had recently secured rights to exploit a large new oil field and China protested because American control of Iraq’s oil would close off prospects for Beijing to negotiate for vast quantities of cheap oil the Chinese leadership felt they required for rapid economic development. And these nationalistic fears of what would happen if the U.S. took over Iraq were not unfounded. A mere two months after the invasion, during the “reconstruction” of Iraq, the U.S. terminated the U.N.’s Oil For food program in Iraq, converted Iraq’s euro accounts into dollar accounts, and declared that Iraqi oil would once again be sold only in U.S. dollars. Hurrah! Another country of the world was now made safe for democracy.
Or maybe not quite. Despite the “warning” inherent in the United States’ invasion of Iraq, Iran has been causing trouble for the petrodollar since 2007, when it decided that Japan should pay its energy bills in Yen instead of dollars. More recently, Iran has been planning to create an oil exchange, or bourse, in which all interested parties could buy and sell oil in Euros. This makes sense from both an Iranian and European perspective, as Iran is the fourth largest oil producer in the world and lies within reasonable proximity of its main customers: The EU, China and India. Indeed, Iran has such a lucrative trade with its current customers that it feels no burning need to sell oil in the faraway markets of New York or London. An Iranian oil exchange, or bourse, would not only benefit Iran at the expense of America, but it would also be open to Russia, which would probably take advantage in order to sell its oil directly to Europe in Euros. Therefore, an Iran that refuses to sell oil in petrodollars would be not only a severe and direct economic threat to the United States, but also the nucleus of an entirely new bloc of potential enemies (Iran plus Russia plus China plus India, even if the EU remained relatively neutral. If Iran gets away with creating and controlling the lion’s share of the global oil trade and wields its power in Euros instead of dollars, where will that leave America financially, politically and militarily?
3. Nicholas Meduro Thinks Selling Oil In Other Currencies Can Rescue The Venezuelan Economy
Despite the foregoing string of attempts by the United States to economically and militarily crush any soverign nation that dares to step away from trading oil exclusively in dollars, Venezuela is the latest challenger to make the attempt. In April, 2017, Venezuela began to slide into economic and social turmoil, prompted partly by socialist efforts to overhaul the Venezuelan economy and partly by the efforts of President Nicholas Maduro and his cabinet to install a new legislative body to re-write that country’s constitution. In September 2017, President Maduro and senior Venezuelan officials came under sanction by the Trump White House for their activities. In response, Venezuela began publishing prices for oil in Chinese Yuan and the Venezuelan state oil company, PDVSA, reportedly asked joint venture partners to open accounts in Euros and to convert existing accounts into Euros to avoid the sanctions. Trump’s attempts to embargo Venezuela included forbidding U.S. citizens and businesses from purchasing Venezuelan debt (this crippling their economy further, as ours would be crippled if foreign countries stopped purchasing our debt), or making deals with PDVSA. As the sanctions drove Venezuela even deeper into economic crisis, Maduro attempted to repatriate fourteen tons of Venezuelan gold from the Bank of England where it was being held as collateral against several international loans worth several billion dollars from several global banks. The U.S. government leaned on the B of E to withhold Venezuela’s gold, which it did. Deprived of this resource, in December 2018, Venezuela hit upon a new scheme in which they would begin selling their oil in a cryptocurrency backed by oil and minerals. Many analysts and experts, however, seriously doubt that the petro-backed crypto is a legitimate currency, and is actually backed by anything. Currently, Venezuela’s oil sales are beginning to recover from U.S. sanctions, but most oil transactions are now either made as swaps (crude oil is swapped for finished oil products like gasoline and diesel fuel) or sold in repayment for old, existing debts. Since Venezuela’s crypto Petro was sanctioned in March of 2018, almost nobody uses it. On January 20, at least 1 million barrels’ worth of oil exports were put on hold as the Venezuelan government began to demand that certain shipping port fees be paid in crypto Petros instead of Euros. How this will affect the Venezuelan economy remains to be seen, but the important outcome for our purposes is that, even if the United States has yet to fully succeed in forcing Venezuela back into the petrodollar fold, we have at least succeeded in preventing them from undermining the global trade in petrodollars. At the same time, we’ve driven Venezuela into the arms of Iran and strengthened their “sympathy” ties with Russia and China, so perhaps we’re dimming our long-term prospects to fight more immediate threats to the power of the petrodollar and its role in preventing our economy from collapsing under the weight of our debt (over $23 trillion currently, and with trillion+ annual deficits projected out to at least the end of the 2020’s).
Effectively Becoming Our Own OPEC
For better or worse, like most intimate relationships, the love fest between the United States and Saudi Arabia – still our largest petro partner – has recently begun to sour. Stress between the two partners began to show In September of 2016 when Congress passed Public Law 114-122, the Justice Against Sponsors of Terrorism Act. This law allows U.S. courts to prosecute foreign governments, or officials employed by foreign governments or acting on their behalf, if they cause injury or death to American citizens on American soil pursuant to acts of terrorism or crime. This law was specifically targeted against Saudi Arabia, to appease the American public who perceived that the Saudis literally walked away from aiding and abetting the 2001 terrorist attacks. In response, the Saudis claimed offense, and threatened to retaliate for passage of the law by cashing in all their Treasurys to badly damage our economy. When all was said and done, however, neither side really did much of anything. Later in 2016, upset over the role of the Saudis in supporting the Yemeni government in Yemen’s ongoing civil war, the U.S suspended its arms deals to the Kingdom in December. This has not sat well with the current Saudi leaders, who have since entered an arms deal with Russia, in violation of the original 1970’s petro agreement.
As the relationship between America and Saudi Arabia deteriorates, and America cuts off oil exports from places like Iran, aren’t we threatening the petrodollar and, by extension, risking the blowing up of our own economy (and taking the world down with us)? Well, we would, if we hadn’t recently become a major oil exporter, ourselves. What’s happened is that we’ve pretty effectively replaced the oil produced by Saudi Arabia with our own oil, and effectively begun to substitute the support for our debt coming from Treasury purchases via foreign petrodollars, with a stream of income coming from oil being purchased directly from the U.S. The idea is that if other countries don’t want to continue to let us boss them in exchange for the privilege of playing on a playground that we control, well, then, we’ll flood the entire playground with our marbles so nobody else has room to play with their own marbles. (Insert the sound of raspberries being blown, here.)
In a related move, on Feb. 3, the United States Commerce Department just finalized a rule to impose anti-subsidy duties on products from countries that it determines undervalue their currencies against the US dollar. In other words, the U.S. will slap tariffs on goods determined to be “injurious to U.S. industries” from countries that are determined to have devalued their currencies in an effort to make their exports more economically attractive than comparable American goods. Countries with “cheap” currencies can sell a lot of goods and services to the U.S. because, well, their goods and services are priced quite reasonably in terms of the dollar. But at the same time, we have difficulty selling to them because our goods and services are expensive in their currencies. This leads to trade deficits, which are considered bad. However, running a continual trade deficit is an obligation for a country with a reserve currency because other countries must build up reserves (dollars, in our case) in order to settle international debts and purchase oil. This conundrum is known as Triffin’s Dilemma, named after Yale economist Robert Triffin who correctly predicted that the Bretton Woods system was doomed to fail. As we’ve seen, when other countries use these reserves to purchase U.S. Treasurys, they directly fund the growth of the debt upon which our economic expansion depends. And when they turn their reserves into petrodollars, those dollars return to our economy in ways that boost our GDP without triggering inflation. So what happens if the United States effectively punishes countries by artificially raising the prices for their goods if they try to sell more to us by cheapening their currencies against our dollar? Aside from creating a great deal of global ill will, we will effectively reduce the capacity of foreign governments to build up dollar reserves and purchase our debt. While artificially propping up U.S. exports, we’ll be simultaneously reducing the will and the capacity of the world to purchase oil and thereby underwrite our economy.
Bad Timing
This decision to slap fees on “injurious” goods being sold by countries that are undervaluing their currencies, comes when America is running a $23 trillion national debt, and projecting to run trillion-plus annual deficits (or more, if we roll out programs like ‘Medicare for All’ and student loan forgiveness) for at least the next decade. And this doesn’t count the $5-$6 trillion that will be added to the budget deficit around 2025, when the Social Security trust funds run out, or the nearly $1 trillion dollars that the Fed has so far sucked out of the “excess reserves” from our banking system, loaned to the government to spend, and replaced with Treasury bills (effectively IOU’s). Given that the real (inflaton-adjusted) rates of return on U.S. Treasury bills and bonds is now negative because the interest being paid is less than the rate of inflation (even the official rate of inflation, which probably severely underestimates how much inflation you pay for the stuff you purchase every day), who wants to invest in Treasurys? As Dan Amerman points out, to purchase an instrument that pays back less in interest than the interest one would receive in a competitive free market, is irrational. But the catch is that, until other countries can replace all of their oil usage with alternatives, it’s also required.
In addition to being coerced by the need to purchase oil, another main reason why anybody still buys our Treasury obligations is because the return on most corporate and European soverign bonds is even worse. If investors try to flee to corporate bonds, they’re taking a huge risk with their money because an increasing number of both domestic and foreign corporations are now rated as ‘junk’, or nearly so. Speculators love ‘junk’ bonds because if the companies issuing them manage to survive to payout time, the payouts can be quite handsome. But for average, safety-conscious investors or major institutional investors like pension funds, junk bonds are more risky than they’re worth. U.S. Treasury obligations may now be returning less money than they cost to purchase, but when the best competing alternatives are either extremely risky or paying even worse inflation-adjusted returns, where’s an investor to turn?
The other main reason anybody buys Treasurys is, as we’ve been discussing, they need a safe and liquid source of dollars with which to purchase oil. As bad as the United States is to deal with, because we can print dollars, we at least have the virtue of being extremely unlikely to default on out obligations. We may inflate the value of each dollar to almost nothing, but we won’t default. Relatively speaking, inflation sucks, but compared to the risks of default when investing in other economies that must themselves borrow to cover their debts, it’s not quite so bad. So, there!
As America’s global partnerships (with Saudi Arabia, Europe and other friendly countries) become strained, enemy countries (mainly China and Russia) work on developing alternatives to paying for oil in dollars, and major oil suppliers and consumers alike look to creating new alliances to challenge the Petrodollar, America’s answer to these changing conditions has been to attempt to increase our own economic security by reducing the need of foreign countries to hoard dollars and pay for our debt through Treasury purchases. Now they can simply buy oil directly from us, in dollars, and we keep the profits. That’s an easier and more straightforward method of bringing in cash to fund our debt, and it incurs not low, but no interest payments from us. Thus, it doesn’t grow the interest payments on the national debt. Brilliant! Except that since we’re still planning to increase the sum total of our debt and our annual deficits, we still need the rest of the world to continue to consume ever greater quantities of oil to finance our deficit spending. They hydrocarbons will still go into the air, more people will die of cardiovascular and respiratory issues, and climate change will accelerate. The fundamental problem with alternative energies is that they’re not solid and exportable objects, like fossil fuels (or uranium). With little to no export capability, alternative energy sources cannot be traded, and so cannot be priced in U.S. dollars. We lose a vast source of funding for our debt, and to add insult to injury, foreign nations become more independent and self-sufficient. The United States loses not only a source of income, but also a massive economic leveraging tool with which we can direct the world towards greater freedom, greater democracy, and greater self-determination. How would nations that could become self-sufficient in their energy production, spend less money on American-led development, and create a cleaner environment for their citizens, possibly get along without us? That would be a horrible conundrum for our leadership, for sure, but also for the rest of us, as we grappled with the harsh reality that our economy could no longer be sustained. Our stock market would tumble, bond prices would tank, and the nest eggs that we’ve created from our high home process would evaporate. If the transition happened quickly enough, our inability to raise the cash to pay off our debts might set off a wave of defaults that would sink the global economy. If the global transition to alternative energy happened more gradually, however, the rest of the world might be able to absorb the effects of the U.S. gradually crumbling, but the effects here at home will be increasingly horrific for most of us. And when looked at that way, I wonder how eagerly most average taxpayers would still embrace alternative energy and saving the planet over the fairly long-term economic consequences of leaving dirty fuels behind?
CONCLUSION
I must emphasize that the theory that I’m putting forth here – that the U.S. government’s general hostility towards alternative energy is driven in significant part because of the potentially catastrauphic effects a global switch to alternative energy would have upon our economy, the national debt and even the global economy (but with the primary concern being for our own hides, of course) – is purely speculative. It is based upon my own semi-educated attempt to “connect the dots” of domestic and international economics, the national debt, energy policy, and political history concerning energy and monetary issues. There is, to my knowledge, no “smoking gun” showing a direct and irrefutable connection between American energy policy and our national debt. That is, at least to me, a theoretical linkage for which I have attempted to make the case in this paper. To the extent that I understand the facts and interrelationships involved (which is an open question), I think a reasonable case can be made. To the extent that Donald Trump and any future presidents continue to simultaneously push both increases in domestic spending with no regard for the national debt, and increases in the domestic and global use of fossil fuels (particularly crude oil and especially American crude), I think my case is strengthened. If we see a dramatic changeover from fossil fuel use to alt energy usage by larger economic powers, no simultaneous uptake in oil consumption by smaller economies and corresponding significant drops in foreign government Treasury purchases followed by the Fed raising interest rates, then my case will be strengthened. But even if something in my analysis is dramatically wrong, please consider it for what it is – a speculative inquiry and thought exercise – and use it as a springboard for looking at the issue in a different way and coming to your own conclusions.
Economics Watchdog 