Before getting to energy stuff, several interesting government schemes have developed over the past decade. One particularly noteworthy grew out of the financial crisis like a Harry Potter-world beast. This thing is real though, and worthy of some considerable attention.
First, here’s a precursor to illustrate a point. A pillar of the modern financial world is credit rating agencies. These firms are, in theory and purpose, very simple machines. They act as impartial judges in assessing creditworthiness. What should make their business simple is the requirement for absolute integrity in their work. Market participants, all of them, have a vested interest in the quality of their ratings, and if they turn out to have been compromised everyone suffers because credit ratings become meaningless. It is in a way a perfectly self-policing business – to undermine their own standards invalidates the business model. If there is any sphere in business where integrity is to be expected, this is it.
This turned out to be a naïve view, because in the lead up to the financial crisis they were found to have rubber stamped garbage as AAA in a bid to gain business. In 2007 two very important people in my worldview believed that credit rating agencies would never sell out like that because it was suicidal. One was myself, and the other was Alan Greenspan, former Chairman of the US Federal Reserve. I don’t matter, but Alan Greenspan does (or did) since he controlled the economic free world, and his erroneous trust was instrumental in bringing the financial world to its knees. (The damage caused by my own errors of thought was limited to a bruised ego and a beaten up investment portfolio, neither of which is destined for anyone’s history books.) More on Mr. Greenspan in a second.
We are now entering a new global economic world where trust is going to be an even bigger deal, but the stakes are probably even higher than in the financial crisis.
The issue has roots that go back a century. Modern global commerce really only began with with mass manufacturing and distribution about a hundred years ago; before that international trade was largely colonial looting. What facilitated true global trade was the gold standard and burgeoning foreign currency markets. Printed money was generally backed by gold reserves, which limiting government spending. Governments realized that was no fun so abolished the gold standard. This allowed them to borrow like kids with credit cards.
For several decades however there was a sort of fiscal discipline imposed in international currency markets. If governments borrowed too much, the world’s investors turned up their noses at new debt issues and borrowing became prohibitively expensive or simply was not available. This happened to Canada in the 1990s when capital markets deemed the national debt level unmanageable. A near-crisis ensued, and the country was forced to instil fiscal discipline. That check and balance worked fairly well.
The financial crisis of 2008 changed everything however. Debt levels soared as central banks bailed out the world economy. Financial discipline became a funny concept that old people talk about, that has been replaced by “quantitative easing” which is another name for “bailing frantically.” Governments around the world have been printing money and using it to buy up assets, good ones and crappy ones. The goal is to drive down interest rates and keep stock exchanges floating at record highs to induce people to borrow more and feel wealthy while they do it. The sum is staggering – the total is estimated at $14 trillion, mostly in acquired debt but also in stocks. A confusing aspect of the whole mess is that central banks “expand their balance sheet” by buying debt; the debt side grows but so does the asset side because they simply print money. That’s a gross over simplification, but in effect governments are buying debt (and stocks) with newly printed money in an effort to keep interest rates low and stock markets booming. Either way, government debt has soared (US government debt is almost $20 trillion), and cheap interest rates are necessary to fuel growth and keep governments from bankrupting themselves on interest payments.
These desperate measures were put in place to prevent the global economy from collapsing after 2008. It worked, at the cost of massive government debt. But bankers realized something else: excess debt is terrible if one country does it, but if all of them do…nothing bad happens. Yet.
Now, back to Alan Greenspan. He was, for a number of years, considered to be the best Fed chairman in a long time. He was famous for living and breathing statistics, one legend being that he could quote trends in vacuum cleaner sales in Ohio. I don’t know if that’s true, but his autobiography hints at that sort of zeal.
That attention to detail though was ultimately as effective as studying railroad ties by laying on the tracks. Greenspan missed the real estate-led meltdown spectacularly, assuming that companies and ratings agencies couldn’t possibly be stupid enough to do what they did.
So what, you say, no one is infallible. Well, the reins to the global economy have now been handed over to a small group of central bankers, who are racking up debt in an inconceivable manner, and quite proud of it. This confidence has been passes on to elected governments, who are quite comfortable not just with debt but with crazy schemes like handing $10,000 cheques to people who buy Teslas, and borrowing vast sums simply to feed seniors. Neither are what most people would consider “good” government debt, that is, debt to build infrastructure.
What if they’re wrong? What if this global Rube Goldberg machine goes off the rails?
Well, according to the geniuses, that won’t happen, because they now have a firm grip on two of the major things that could go wrong – interest rates and energy prices. By keeping both low, the theory is that economic growth will generate jobs and taxes, more than enough to handle these bizarre debt levels. It’s a pretty shaky plan though. Interest rates may well be in their control, for now, but their faith in low energy prices is heart-stoppingly dangerous.
Take a moment to consider the miracle in your life that is cheap energy. Look around you. Almost everything derives from cheap energy. We can hop on a plane and fly to Europe and back for a few days’ wages at many jobs. We can buy countless consumer goods (including electric vehicles) that couldn’t have been made or even dreamed of without cheap energy. We couldn’t have built hydroelectric dams without cheap energy. That doesn’t mean that the energy industry gets a free pass to do what it wants, and no one expects that.
What we do need to realize though is that cheap energy holds up this whole house of cards. Don’t fool yourself or let others fool you. A global oil shortage that sent oil prices to $150/ barrel again would gut the world’s economies and this debt madness would be unsustainable. Think very hard before concluding that several oil fields in the southern US can feed global consumption growth, like the media and the government contend. They can’t come close.
The economic growth central banks are counting on to sustain this madness is held up by low interest rates, which they can control, and cheap energy, which they think they can.
Think about how wrong Greenspan, the mightiest of the might, was. The current band of his contemporaries has gone all in with the worlds economies, excited like puppies about this new gadget they figured out that can work miracles.
Nothing funny here today folks.
Read more insightful analysis from Terry Etam here