Last week your humble writer was awoken by a dream of the Federal Debt Limit being increased and the dollar value crashing.  Dreams are inexact things that might portend the future – perhaps they are early warnings systems of the unconscious or subconscious.  Dreams are surely nothing to do with energy and fuel, and nothing worth sharing, but two things have happened that deserve some thought in the energy and fuels fields.

The first is the sheer insanity of Moody’s Investor Service, the bond rating company‘s analyst Steven Hess, making the completely insane suggestion there need not be a debt limit for the U.S. government.  If anything could be a more irresponsible idea your humble writer has no imaginative concept for self-destruction more powerful than that.

Imagine where some of the people you know could get to if credit cards had no credit line.  From the performance to date of the United States government with the essentially symbolic debt ceiling in place so far, with a bond debt close to about the same as the whole nation’s gross domestic product, the government’s sense of responsibility is already in dire straits.  The U.S. debt isn’t being used to buy an asset such as a house or car – it’s being used to pay the everyday bills of about 40% of the whole U.S. government budget in the current year.

What would we say to a friend or family member, a business manager, or think of another country getting into such a spot?  Cut back on the spending seems a survival tactic – a means of financial self-preservation.

What’s happening is the Federal Reserve Bank is “printing money” by using a computer to make an entry on its balance sheet of a loan to the U.S government, then moving that phantom entry over to the U.S. General fund – and presto!  The checks don’t bounce.

Everyone in the U.S. wonders why the price oil is so high – it’s because the exchange rate of the U.S. dollar is so low and oil is priced internationally in dollars.  People who live in nations with highly valued currency don’t see oil prices as so high – a little bit of their money buys lots of dollars – so oil seems cheap.  It’s Americans that are getting gouged, and it’s not a gouging by the oil companies, it’s a gouging by the value of the dollar being driven ever lower by the Federal Reserve allowing the government to spend about $1.4 trillion phantom borrowed dollars in a $14 trillion dollar economy.  Ten percent new money into the U.S. economy looks like dollar value destruction racing over a cliff.

Just consider the price of gasoline or compare your usual grocery product prices over the past three years or Walmart’s Chinese product prices over the same period.

Where the action to be seen is in the markets that operate worldwide. The currency exchange market adapts nearly instantly – more dollars will simply push the dollar value down and no amount of pontification, political posturing, spilled ink or server hard drive files will overcome that reality of more phantom dollars flooding the economy.

Remember, more of anything makes each one cost less and that applies to dollars like everything else.

President Franklin Roosevelt famously said, “. . . the only thing we have to fear is fear itself.”  Your humble writer will offer there is a choice: the fear of the cost to fix the problem of government debt and spending or the fear of the economy continuing its malaise in more recession or depression, inflation becoming a fact in public consciousness, and an ever steeper fall of the devaluation of the U.S. dollar.

The eminent Geoffrey Styles has written on his Energy Outlook Blog about the ‘Energy Implications of a Federal Default’.   The post explores some suggestions on where the ax may fall if the choice is to fix the problem.  Its going to be hard, but it won’t be so long and drawn out.  Mr. Styles’ post deserves a read.

Yet there will be other consequences – a great deal of grant money will dry up, too.  Many of the great ideas in research and development are going to be slow tracked or shelved until things settle down into more confident and predictable forecasting.  Getting back will come sooner if the problems are in fix mode – they would be delayed even longer if recession and inflation come to rule indefinitely.

There are thousands of articles, editorials, posts and other views published to examine the debt limit matter. Your humble writer is still looking for the “Franklin Analysis” of the “pros and cons” for both passing a higher limit and not passing one.  If you find one – that has demonstrable basic facts – please add a comment.


6 Comments so far

  1. MattMusson on July 19, 2011 7:19 AM

    Welcome Back Carter.

    Those of us who were old enough to remember the Carter years remember 10 and 12 percent annual inflation. We also remember 15% car loans and 12% home loans.

    Clearly, this is on the horizon. Under Obama the national debt has soared and he clearly wants to keep on spending.

    The only difference is that during the 70’s and early 80’s – home prices appreciated 10 to 15 percent a year. So, even if wages fell in real terms, net value increased substantially.

    This time, home prices will not buffer us. We are simply going to be a much poorer people.

    So, find a job producing something with tangible export value – like food, raw materials, pharmaceuticals, etc. And, tighten your belt, because in the immortal words of Al Jolson, “You ain’t seen nothin’ yet!”

  2. MattMusson on July 19, 2011 7:22 AM

    One hopeful note: if just one of the garage mechanic fusion groups (Focus Fusion, IEC, Tri-Alpha,etc) actually comes through with a workable product – it will trigger the start of an entirely new Kondretief wave of economic expansion World Wide.

  3. Mitch on July 19, 2011 10:38 AM

    Dammit- I dare not sleep now. Keep in mind that a few things offset the newly printed money, such as the equity lost in homes, reduced credit card balances and other debt/money reductions. That’s what has kept inflation out of the news. Those aren’t going to go on forever and the equity loss is about factored in. Also lots of foreign interests are cheering the the whole process along both as a way to make their money go further and as a way to make economic war. So who thinks America’s enemy (inflation) is my friend?

  4. Benjamin Cole on July 19, 2011 1:51 PM

    Stick to energy commentary.

    As for inflation, I hope we see a long moderate dose of it. The Chicken Inflation Littles have been squawking about inflation for years, but we have core CPI at 1.6 percent for last 12 months, and that may overstate the case.

    Oil is a global commodity, and prices set by international demand and supply, and speculation on the NYMEX.

    I guess we should credit the Fed with the collapse of oil from $147 to $37 in 2009?
    Or only the price rises?

    If you want to get fearful, study Japan. The yen has appreciated for 20 years, and the Japanese economy has stagnated for just as long. Asset values–equities and real estate–have fallen by 80 percent in that time frame.

    Tight money does not work, unless you like Japan.

  5. MattMusson on July 20, 2011 8:13 AM

    Certainly, deflation is the monster that turns Recessions into Depressions.

    But, we are going to be stuck in an inflationary period with no recovery in employment – until something happens. And, it is going to have to be something BIG.

    The Trillion Dollar Stimulus program had very little impact. And, the four Trillion dollars in deficit spending did nothing more than confirm that John Maynard Keynes was wrong.

  6. MattMusson on July 20, 2011 1:49 PM

    Btw, oil prices change with either an increase or decrease in the supply of Oil…

    or, an increase or decrease in the supply of Dollars.

    So, if the 2009 drop was related to oil supply – don’t credit the Fed.

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