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I.O.U.S.A. Worth a Peak, er Peek
Pete Peterson, the former Treasure Secretary and co-founder of The Blackstone Group, has donated $1 Billion of his IPO receipts to a fund devoted to trying to save America from drowning itself in debt- a sort of super-Common-Cause (of which he was also a co-founder). One project of the fund is a traveling road show of “Town Meetings” on the subject of America’s apparent desire for financial self destruction. Another is the recently released feature documentary on the subject called I.O.U.S.A. which has a lot of Town Meeting footage and which I just saw today.
The film has slick production values. Even though it’s half hour’s worth of content is shoe-horned into a 1 hour and 25 minute film I’d still encourage anyone to see it, especially investors, because the problems it highlights truly are scary and we all should focus more on them as investors and just plain citizens. It specifically suggests that the U.S. is now on the brink of meeting the same fates as the Roman and British empires partly because of fiscal irresponsibility.
The hard content features an historical review of how our national debt became engorged going back to the Founding Fathers. It notes our generally consistent practice of promoting savings and repaying national debts that were required by military crises, once the crisis is resolved - until recent times. It pounds on the foolish idea of Ronald Reagan (abetted by the now discredited “Laffer Curve”) and particularly Bush 43 that lowering tax rates would actually raise government revenues. (Fact: it reduces government revenues as common sense tells us it would.) The film gives what seemed to me to be grudging credit to the fine work of the Clinton administration in balancing the budgets and creating surpluses. All of that information is presented is as non-partisan a fashion as the facts could possibly permit.
I found two aspects of the film particularly noteworthy. First, it highlights the role of unfunded off-balance-sheet liabilities as key to the U.S. debt problem. On a near-term basis, social security surpluses have been offsetting budget imbalances to a major degree during the past 25 years. But social security is starting to provide less cushion every year and will cross over to cash flow negative in 2015, just seven years from now. When the even larger looming problems of Medicare and Medicaid are added the projected national deficit and debt, the numbers begin to look truly horrific.
The second astounding part of the film - to me - is its lack of virtually any reference to oil as a problem, other than in general terms as contributing toward the trade deficit. But there is no mention of the impending Peak Oil problem. The fact that at the same time that Social Security turns cash flow negative in 2015 the country will also be fighting the gigantic problems caused by Peak Oil (which looks to be here sometime in the 2010 - 2012 time frame) is perhaps too much reality even for this film to contemplate. Or maybe Peterson does not understand Peak Oil. But for those of us who are focused on the impact of Peak Oil, the meaning of Peterson’s film is even more trenchant.
The film makes a stab at trying to impress the audience with the danger of massive debt owed to foreign countries, but it could have done a better job, I thought. The key to that concept is that a county’s currency value is a function of both trade and financial flows. That is, when a country begins to run a trade deficit, the consequent reduced value of its currency tends to correct trade imbalance by making its goods more affordable to foreigners and making foreign goods less affordable to be imported.
But when a country runs massive trade deficits for many years, as the U.S. has been doing, a large amount of currency in the hands of foreign governments can stop the trade deficit re-balancing from righting the currency value because foreign holders of the currency may lose confidence and begin to reject increased levels or even current levels of ownership of the currency. That creates more sellers of the currency among government and financial institutions that can more than offset a better trade balance among buyers and sellers of real goods.
In fact, this is exactly what seems to have been happening to the U.S. dollar recently. We are starting to see a reversal of the trade imbalance as more goods are starting to be made in the U.S. and fewer goods imported, due to the fallen value of the dollar (and the high price of oil which makes transporting goods more expensive). Nonetheless, there are so many dollars in the hands of the Chinese, Japanese and oil exporters that those countries may continue to sell dollars, driving down the currency, even as the actual supply and demand for products begins to favor U.S. domestic producers. Thus, financial flows can overwhelm trade flows to distort the value of a currency far in excess of what “purchasing power parity” would suggest is the “right” level.
The problem of too many dollars in foreign hands is exacerbated greatly by the high price of oil given America’s need to import about 14 million barrels of the stuff every single day. In fact, oil could cause a vicious cycle of selling the U.S. dollar to occur. That would happen if the price of oil goes higher and keeps growing. At some point there will be so many dollars held by oil exporting countries that some of them may try to lower their dollar exposure regardless of the value of the dollar. That would tend to drive the dollar lower, which would raise the price of oil (which is denominated in dollars), thus putting even more dollars in foreign hands and thus creating even more desire on the part of foreigners to sell their dollars…which would lower the value of the dollar further and increase the dollar value of oil further, etc., etc.
Bottom line for an oil investor: the perilous condition of U.S. fiscal imbalances is likely to push the value of oil in dollar terms higher over time, which tends to generate stagflation in the U.S. As it does so, the risks to owners of U.S. stocks as an asset class become greater. Eventually, with a high enough price of oil, a general stock market crash seems likely. We are already seeing a tendency for stocks to rise or fall in inverse relationship to the movement in the price of oil.
Tags: peak oil energy investments
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22 responses so far ↓
1 paultaut // Aug 23, 2008 at 10:53 pm
Buffet was on CNBC Friday morning talking about this Documentary. Apparently he disagrees totally with the conclusions reached. Even though he is also totally unwilling to purchase any Financial Sector Stocks YET. He was approached on LEH.
He believes derivatives are a useful tool but because they were used so extensively and in ways that they were not originally designed for, he is not ready to “stick” his toe in the waters yet.
Why is it that no one has mentioned the 8% earnings decline in Buff’s stock.
2 Robert Essian // Aug 24, 2008 at 6:50 am
Jim. it all looks like a “wash and rinse” cycle as Paul K. describes.
So many serious problems so what to tackle first.
Would it be logical to address the oil import issue first by beginning a strong push to remove ourselves away from crude imports now? If we don’t it seems that we would quickly get deeper and deeper in debt leaving us exhausted in terms of dealing with everything else. My head is spinning at all the serious issues confronting us.
We can’t just do nothing.
In your opinion what do you expect our next Presidents 100 hundred days agenda looks like? If anyone out their has an opinion I would like to hear it. Thank you
3 Jack Leonard // Aug 24, 2008 at 6:53 am
How are energy service stocks likely to fare in that enviroment? Most of the largest are US based but earn substantial amounts overseas. I believe that service stocks will be big winners in the peak oil crises but this is complicate d by the currency problem.
4 fran // Aug 24, 2008 at 12:03 pm
mr. peterson has been on this justifiable campaign since the earl 1990s[concord coalition–i still have my membership card and bumper flag somewhere in the house]. he was joined by a vermont ex-senator[name?]. paul tsongas[1991 pres hopeful joined in for his brief lifetime.
peterson et al have valid message played out by a new cast. i doubt the public will heed any better this time around. if they understood any of significant basis[and cared], they wouldn’t be in their personal financial mess. if the animals don’t find things bad/wrong/abyssmal, why should the zoo keepers act?
but hope springs eternal…etc,etc. or is it–…past is prologue…
some parents may gain satisfaction from taking their “youngn’s to view; stopping to use the last of this month’s credit card balance on gasoline for suv, quick shopping/snack at the mall on way home[picking up latest movie/game cds first.
hey! it’s the American way, right??
5 paultaut // Aug 24, 2008 at 12:57 pm
fran:
I am very pleased with your arrival. While we may agree to disagree at times, I hope they will be few.
6 fran // Aug 24, 2008 at 2:50 pm
warren rudman[nh, not vermont] was co-chair of original coalition[with bob kerrey, nebraska]
also for those interested in history of our financial dilemmas–
1-unified budget processed by l. johnson& congress to pay for another war by hiding its expense behind ssa trust fund.
2-fiat currency by tricky dickie nixon to pay nations debts with promissory notes-backed by the full promise of years/generations of taxpayers. one of the great “scams” of our history..gold anyone?
these were acts by our cooperatve politicos of that era. maybe devisive is better in the end?
sign me–
gerry mander
7 Simon // Aug 24, 2008 at 6:17 pm
Thanks for this post Jim. It contains linkages that I have not heard of before anywhere. I’m gonna print it and put it in my folder.
PS since you mentioned them I’ve been visiting the Statfor site. Very worthwhile, thanks.
8 paultaut // Aug 24, 2008 at 11:55 pm
1 Warship has docked in Georgia, 3 more on way all delivering Med Supplies.
We cannot afford another conflict zone using our ground forces. If Nato or UN provide them, Naval and Airforce will provide support.
An escalation of conflict in this area bodes ill for the economies of the EU and by proxy, our economy as well. Georgia can be called a nexus of pipelines which bypass Soviet Oil with feeds to the EU. If they are evicted involuntarily, I can only hope that this nexus isn’t damaged or destroyed. It would be in China’s self interest to side with the West.
Our Financial worries will fade away in the above context since I believe, my opinion, that money will flow into our system to get away from the area of conflict.
PS Foreign Debt reserves are now 20% higher than last year. This weeks Barron’s. Thats 400 Billion in 12 months. I do not see how this can possibly be sustainable without outside intervention, aka War.
9 paultaut // Aug 25, 2008 at 6:36 am
A guy by the name of Steve Hansen has just posted an article in Seeking Alpha titled $200 Oil is Good, etc.
Instead of being able to punch holes into his reasoning, I found myself agreeing with almost every aspect of his conclusions.
IMHO, I believe everyone should give it a read.
10 KV // Aug 25, 2008 at 7:32 am
On a personal level, I do not carry debt. However, I am going to write about virtues of debt!
1. It provides liquidity to present by borrowing from future. That is, I could buy car, home, expand my business, provide services, have a family etc.
2. Debt, especially fixed rate, fixed principal, is a depleting resource! It becomes easier to pay from devalued dollar, and increased income!
3. Debt acts to provide a cohesiveness – we are all in this together! Borrowers and lenders!
4. Most of third world countries did not grow until they figured out how to borrow from future!
5. Soviet Union collapsed only because they could not sell their Ruble based treasury bonds to finance the massive defense expansion!
6. In short, debt used to expand economy is OK, provided the debt is paid from future growth, not from liquidating the assets.
What is our problem: basically a political philosophy that the government has no business in providing safety nets for various human functions – education, medical, retirement, etc. – except for defense. In my view, present administration is trying to dismantle the safety nets by basically defaulting the country. If we take over FNM and FRE, it will add over two trillions in new debt. There is no way we can serve this debt without higher taxes, inflation, and reducing services. As we go on spending by printing dollars and exporting all that produces income, we live off our assets and in 10 to 30 years, most of the US will be owned by foreign entities.
High oil prices accelerates the inevitable.
The issue in front of us is: can we manage the mess created by the present administration which fundamentally believes in mine is mine and yours is mine?
11 Robert Essian // Aug 25, 2008 at 8:06 am
KV, nice article.
The issue in front of us is we better start managing this mess because oil prices will not go South of $100.00 again.
The Chinese Government are loosening strings (anticipated) to allow their citizens easier access to credit which will be used to purchase more cars, homes, etc…Stuffs!
As we all know the Chinese people will find that hard to pass up so consumption will rise and all commodities with it.
Like everyone the World over they will want what the Jones have and will learn quickly how the Jones were able to do it.
Personally, after the best Olympics I have ever watched they should feel awfully proud of themselves and will reflect psychologically on there spending habits going forward…
Now that the Olympics are over they will begin to fire up their factories, over 1 million cars will be driving around town now that they are allowed to and they finish the projects started before the games. They will have to build millions of homes and many more apartments to house the folks leaving the farms etc…All energy intensive.
So again we better start managing and quick because I’m with you we may be owned by many more foreign entities and sooner rather than later…
12 fran // Aug 25, 2008 at 9:32 am
kv– many financial actions are acceptable if properly managed with risks controlled. certainly controlled/managed debt can make the world go round. agree!
your item 5–recognize any prospective gov’ts well on the similar path?
today’s mess started many years back,accelerated/made worse by unified budget act under lbj to hide viet nam and other expenses behind our many[at that time] overfunded trust[ssa], highway, ports funding. kinda like borrowing from retirement funds–401k, ira, etc–ok if paid back promptly, potentially catastrophic if not. do only as last resort/costly finance.
but we did it and every executive and congress since have made a bad situation worse.
we the citizens stood by, enjoying the circus acts, etc
13 jkingsdale // Aug 25, 2008 at 10:12 am
“we the citizens stood by, enjoying the circus acts, etc” - some of us knew but the huge mass of the electorate had no idea - they are truly innocent lambs having been led to slaughter. Remember Gore’s “lockbox” for social security. A very good idea for reform in retrospect - but for the electorate at the time he might as well have been speaking Swahili. No clue.
In a way, this is all about the sophistication of modern economics over-running the growing economic illiteracy of the electorate at large. It’s less and less apparent to me that the American electorate has the brains of yeast, to quote someone else. We get the govt. we deserve, I’m sorry to say, emphasis on the “we”.
14 robert essian // Aug 25, 2008 at 11:56 am
Why hope, why tomorrow, why give a sh…t!
This next election WE will vote on a man that is feeding us the same crap based on some pole that tells him to speak to what the poll says to get elected and then sticks it to WE the people. We get blamed because WE voted for them.
SAD, SAD commentary.
WE have this to look forward to: High inflation, falling dollar, high energy, food, high everything. We will have lower home values, lower credit, lower wages and a slew of lows.
WE will go to the polls and vote for the man who promises to correct all these issues then fails to act on any of these issues and WE get what we deserve.
How on earth do we blow this thing up and start over so WE can take charge again.
Brains of yeast, hell we’re toast.
15 jkingsdale // Aug 25, 2008 at 12:07 pm
I misquoted. I meant to say that it’s less apparent to me that Americans are smarter than yeast. Not you of course. I’m speaking of the electorate as a whole. That would be apropos of our getting the government we deserve.
16 robert essian // Aug 25, 2008 at 1:08 pm
Frankly Jim, I believe the original quote is better and closer to the truth.
17 paultaut // Aug 25, 2008 at 1:33 pm
I really, really have gotten to the stage, where all of your comments are starting to hearten me. I have been way too morose.
Lets look at the other side of the Coin. With $220 Oil America will be taking a few severe punches to the kidneys.
The Medics will arrive in the form of a few hundred million very preturbed voters. There will be massive Demand Destruction. Add a sharply falling dollar and we have the basis for the repatriation of the manufacturing facilities which left our shores.
Made in America will stick this time around because Foreign goods will be much more expensive. The Jobs created will be in the Millions. Drilling, Solar, Wind, Biofuels, you name it, WE will be able to make it.
Hyperinflation? Sure, for a while but only if we continue to buy non- american made products. We would have a renewal of hope and will again arise from the ashes.
The Sleeping Giant will be Awakened from his Slumber.
Thank you all for waking me while in the midst of my nightmare.
18 Robert Essian // Aug 25, 2008 at 3:24 pm
Hell Paul, it don’t matter what we think, how we feel, our kindness to our fellow man, our work ethic, doing what’s right it only matters that we take what we want, cheat whom ever we can, kick the man on the ground so long as we achieve the American dream and that is screw everybody cause it don’t matter because our votes don’t matter and WE are the blame.
Just kidding, I’ll just go around feeling guilty all the time because it’s my fault…Peace to all that are hopeful
19 paultaut // Aug 25, 2008 at 9:43 pm
You scared me there for a second. I voted for Goldwater, my first Chance to vote.
The BO “Change” is the right Idea. I just don’t like the direction of his changes. “Life is hard and then you die.”
Personally, I don’t like the man. I DO NOT like the fact that he abandoned his Pastor to avert criticism.
I wouldn’t, he did. What person goes to church and does everything his pastor instructs?
Be that as it may, the alternative is just as bad since it seems to reflect the Status Quo.
The American Dream was that of freedom. At least for my parents it was.
So why not Freedom from Oil. I like the new ads TBoone has.
The US needs a cataclysm of some sort to unite across party lines. $220 oil will do it.
20 robert essian // Aug 26, 2008 at 3:39 am
Change is coming very soon whether we like it or not.
It is going to be tough times and require a leader that relies on the very best this country has to offer.
If this energy issue isn’t addressed in the first 100 days of the next Presidency then we and the World are about to suffer some serious economic pain.
Talk is over…This is it…
21 robert essian // Aug 26, 2008 at 9:05 am
Paul, it concerns me more that McCain already can’t remember simple things in his own life.
At 72 and counting are we looking at a President who will not remember hostages for weapons? I loved Reagan and I mean no disrespect but…
Obama’s pasture deserved to be thrown under the bus…If anything Obama took longer than I would have to have done it.
22 Bookmarks about Peak // Jan 15, 2009 at 6:30 am
[…] - bookmarked by 6 members originally found by handongho on 2008-12-20 IOUSA Worth a Peak, er Peek http://www.energyinvestmentstrategies.com/2008/08/23/iousa-worth-a-peak-er-peek/ - bookmarked by 3 […]
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