“Why do empires wane? They wane because they get excessively indebted and their growth rate slows, especially when their debts are to foreigners. This was the British experience, and the Spanish experience, and the French experience. And the US is there right now. That’s what tends to kill empire.” ~Niall Ferguson, Harvard historian on CNN’s Fareed Zakaria GPS
In these tumultuous times, I prefer historians over economists. Economists, with their malfunctioning models and cozy Wall Street relationships, have been abysmal at economic predictions in recent years.
The clock is ticking on the U.S. dollar, and there is no time to waste. If we are as determined to destroy our currency as it appears, let’s at least build a productive infrastructure while we still can. We cannot afford to blow the stimulus money on political patronage and transfer payments. Those are the traditional political remedies to insure re-election. However, this time re-election may just mean taking the blame for a rapidly-declining empire.
Reserve Currency Status at Risk
Time is critical and common sense is essential. If the U.S. loses its tremendous advantage of having the world’s reserve currency, we will not be able to simply print money and force the world to accept it to service our massive foreign debt. We will be forced to build up our savings and pay down our debts, which will greatly slow our growth rate. With an aging, inefficient infrastructure, this will make the process of revamping and restructuring our economy extremely difficult.
We need to rebuild the infrastructure of this country quickly (very difficult) and intelligently (even more difficult). Mindlessly dumping hundreds of billions into roads and bridges is not thinking strategically. We need a full-court press, all-out national effort to re-build intelligently and focus on areas with the most benefit. In addition, effective regulatory oversight must ensure open competition among market players in executing the projects. Unfortunately, our slow-moving, politically-motivated bureaucracy is more likely to dither away this last critical opportunity.
A Sense of Urgency
However, if a real sense of urgency and focus on re-building America can emerge, we might have a fighting chance to someday dig out from our mountain of debt. Maybe. But if we continue wasting trillions bailing out banks, auto companies, states and political cronies, we will soon enough be buried alive under our debt mountain, our vaunted standard of living just a distant memory.
Our leadership must focus on where our country is headed and how massive stimulus could be utilized most effectively to positively affect our future. The Chinese think in terms of generations; how their actions will affect their grandchildren and beyond. Americans think in terms of this weekend, or this quarter’s earnings. This myopic strategic thinking is part of what got us into this mess.
Energy Dependence - A Real Threat
Long-term dependence on foreign oil is a real threat to our way of life, and even our national security and sovereignty. We must attack this problem sooner than later before the looming shadow of Peak Oil becomes a stark reality. It doesn’t take much imagination to see the U.S. clashing one day with China over $500/barrel foreign oil supplies as each economy struggles to stay afloat.
At present, we import 65-70% of our energy needs. Beyond the obvious political threat, the sheer cost of paying for over 9.2 million barrels per day of foreign oil is staggering. Imagine how staggering it would be if the U.S. couldn’t just print the money to pay for it (but be forced to convert dollars to another reserve currency first) and the price is the equivalent of $300-$500 per barrel. That would clearly be an unsustainable situation. We would have to import much less oil, severely damaging our economy in the process. Nothing seems to get done in this country without a crisis. Well, we have one now.
Upgrade and Modernize the Electrical Grid
Modernizing the electrical grid is critical, both to prevent wasting electricity with an antiquated grid and to gear up for a much greater dependence on electricity. We will need a more sophisticated distribution network to accommodate nuclear, solar and wind power sources, and more efficient and available electrical power for the eventual arrival of electric cars and trains.
Modernize the Port System
Moving goods over water is the most cost-effective and energy efficient mode of transportation. A modern port system will be a critical component in a post-Peak Oil economy.
Electrify and Expand the Nation’s Rail System
Moving freight and people by rail is more energy-efficient than using our already clogged roads. An electric rail system can run off multiple sources of energy generation, unlike the current system which relies almost solely on diesel fuel, (mostly imported oil, which must then be refined and shipped around the country).
Build Nuclear, Wind and Solar Projects ASAP
The time for alternative energy sources is now. Print the money and build the plants. The time for measured debate about endangered frogs has passed. Wealthy empires can afford such niceties. Declining empires sliding toward a cliff must do whatever it takes to avoid flying off the edge.
Develop more Sources of Natural Gas and Build more Pipelines
Natural gas is cleaner-burning than oil, and it is a domestic energy source. It is imperative to make natural gas a larger part of our energy economy. In addition, serious consideration must be given to creating a comprehensive natural gas delivery-system to the nation’s gas stations. The option of natural gas-powered cars, trucks and buses would make a huge difference in the demand for imported oil if adopted on a large scale.
Drill for more Domestic Oil
It must be done. And it can be done with environmental safeguards. This could eventually save us untold billions or even trillions by reducing the need for imported oil. And if the US dollar were to lose its reserve currency status, it could even help keep us out of a significant military confrontation. All in all, the trade-off (with environmental concerns) makes sense and it could buy us precious time in developing alternative forms of energy.
There are obviously many other important areas to consider, including finding new sources of water for consumption and agricultural uses, as well as building a modern water treatment infrastructure. The lack of clean water is becoming a significant global issue, and likely to get more acute in the decades ahead.
Trillions Upon Trillions
Building a modern infrastructure will cost trillions upon trillions of dollars in new debt or printed money. But aren’t we borrowing and printing multiple trillions now, and what are we getting for it? Ultimately, a more strategic (and less political) approach to re-building America might save our nation as we have known it. We need a modern infrastructure to match what China is planning and building. We need to build things again on our own soil, and become less dependent on consumer spending.
Perhaps time will run out. This may prove too high a mountain to climb. But if we don’t at least try to solve our massive debt and infrastructure problems soon, we will very surely usher in an era of significantly lower living standards. And with time in short supply, leadership going forward will be critical.
Regaining our energy independence and creating a more efficient and modern infrastructure will of course ultimately save many trillions of dollars over the balance of this century and beyond. And it may just give our grandchildren a fighting chance at their own version of the American Dream. At the end of the day, isn’t that why we are here? The clock is ticking.
“America’s tax system and expenditure system are wildly out of whack, even in normal times. They need to do something about it soon or credibility; credibility of the dollar as an international reserve currency could ebb away really quickly.” ~ Niall Ferguson on CNN
Today’s Markets
A bleak forecast for the world economy sent stocks tumbling to their lowest level this month. Major stock indexes dropped by more than 2 percent Monday, sending the Dow Jones industrial average down 201 points, after the World Bank estimated the global economy will shrink 2.9 percent in 2009. It previously predicted a 1.7 percent contraction.
Investors began buying up stocks in March on hopes that the economy was poised to begin recovering. The grim assessment from the World Bank runs counter to hopes that have been building for months that a gradual recovery was beginning.
The dampened economic outlook also weighed on the prices of oil, metals, and other commodities. Those commodity price drops in turn sent energy and metal producers' shares falling.
The Dow fell 200.72, or 2.4 percent, to 8,339.01. The Standard & Poor's 500 index fell 28.19, or 3.1 percent, to 893.04, erasing the index's advance for the year. The Nasdaq composite index fell 61.28, or 3.4 percent, to 1,766.19.
Wishing you a good evening,
Tony Allison
