Energy Independence the Hard Way, Part 2

Read Part 1 here.

Yesterday's post asserted that the United States will painfully achieve energy independence in the coming years, through economic collapse and demand destruction so pervasive and deep that it boggles our mind. Nevertheless, we see this eventuality as a certainty for the U.S. Today we give details.

The 2007 Depression, as we have said many times before, is lowering income; that is the nature of an economic depression. In the United States, one can expect to see income on par with the global average ($10,000 per person). This means an approximate loss of 78% of present United States average income ($45,800).

This destruction of income will come hand-in-hand with several other, global trends. The first is peak oil: the unstoppable decline in oil production, ever since production peaked in 2005. Oil exporters, like Saudi Arabia, are already beginning to divert more of their production for domestic use, and less for exports. Once the fall in global oil consumption, due to the Depression, is overtaken by the fall in oil supply, the price of oil will inexorably rise.

Additionally, the U.S. Dollar is rapidly facing its demise as the world's reserve currency. As the world savours one last economic violation at the hands of Bretton Woods, the call has gone out for Bretton Woods II, and a global central bank. This is the death knell for the privileged position the U.S. Dollar enjoys, and the end of inexpensive imports for the USA.

Putting these trends together, everyone will be poorer in the United States. Gasoline will be far more difficult for the average American to buy. Because of both these trends, personal vehicles as they are known today (i.e. gas-sucking commuter tanks) will no longer be affordable for all but a tiny minority. We posit mopeds will be the more attractive option, or motorcycles, if one feels affluent.

This change in income and transportation will necessarily bring a change in living space (see an earlier post). In 1950, the average American enjoyed 292 square feet; the McMansion binge makes today's number around 900 square feet per person. A 75% drop in today's average living space per person seems about right to us. This, taken together with improvements in energy efficiency, will greatly diminish the need for home heating, lighting and cooling. Commercial space, especially retail, can expect a equivalent slimming down.

In conclusion, we come back to President-elect Barack Obama's economic stimulus programme at change.gov. Billions of dollars, if not trillions, are going to be thrown at the "energy problem"... but we will bet good money it will have no lasting effects. The economic collapse we've outlined is an unstoppable force that has a programme of its own.

Smell that in the air? That's change.

An Introduction to the Gold Standard

There is some talk on the fringes of the media about a "Bretton Woods 2" being developed. If it sees the light of day, this system would be similar to the financial treaty established at the end of World War II. Put simply, the original Bretton Woods made the U.S. Dollar backed by Treasury Bills and gold (initially fixed at $35 an ounce), while the member nations pegged their currencies to the U.S. Dollar. This system was effectively gutted by President Nixon, when he effectively took the Dollar off the gold standard.

The United States' gold standard, loosely, was a monetary program where a bank issues paper notes (the certificate notes of yore). These certificates were backed by a preset quantity of physical gold, held by the bank. Due to other banking regulations (which we will discuss in a later post) the banks were not required to hold enough gold to cover all of their issued certificates, merely a certain percentage of them.

One of the reasons the United States went off the gold standard, and indeed one of the primary criticisms of gold-as-money, is that there is not enough gold physically in the world to have a smoothly-circulating monetary system. This is indeed true, both now and in the past. Historically, gold was not a form of money which circulated. Rather, it was more of a store of value, or for exceptionally large purchases (say, an apartment building or two). Gold has always been too scarce to serve as a day-to-day form of money.

To remedy the problem, one can turn to 'lesser' metals, such as copper, nickel, and silver. These metals are more commonly discovered. Discussion of these other metals as money will be for a later post. Let it suffice to say that gold, due to its inherent scarcity, will never, ever work as the day-to-day money of any economy.

Indeed, the idea that it could work is foolish, and is a definite reason the entire world has entered the 2008 Depression (to say nothing of the 1929 Depression). The idea that a paper currency could be 'as good as gold,' and that gold could function as a day-to-day money, are both flawed. We will explore this concept, as well as others, in the near future.

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We've posted more discussion about problems with gold standards on the Silver Money Report.