The Changing Face of Economic Power

It is our ongoing opinion that the financial hegemony of the United States Government is firmly on the wane. Between two costly and unwinable wars, massive bailouts, and grossly distended off-balance-sheet liabilities, we don't see anything other than a collapse of the U.S. Dollar at some point in the future. We can't say when, though... we are only certain that such a collapse will happen.

An interesting sign of the change in monetary power is the news that Brazil, Russia, India, and China (known as the BRIC) are holding their first-ever economic summit together. According to this article, the BRIC group together represents around 15% of the world's economy, and hold approximately 40% of the world's currency reserves. Such numbers make the BRIC group, if the member nations can act in concert, an economic force to be reckoned with.

Considering that the BRIC group is apparently weathering the Depression better than most nations - at least so far - that suggests the group will become a larger force in deciding the landscape of the world's economy. Specifically, we suspect the group will be taking a long, hard look at the U.S. Dollar's hegemony, and whether or not those little pieces of paper will have any value as a reserve currency for the future.

Frankly, we suspect not. The United States is going down a fiscal and monetary path blazed by Japan and Zimbabwe, among others. However, the meltdown of Zimbabwe and the constant doldrums of Japan weren't such a big problem, as those nations did not enjoy having the world's major reserve currency. The United States, on the other hand, does. Whether it goes the way of Japan or of Zimbabwe, will make it extremely painful for any nation to hold Dollars as a currency reserve.

It may take awhile for the collapse of the U.S. Dollar to sink into the collective minds of the BRIC group, as well as the European nations. But we expect that, sooner or later, it will; that will signal the end of the United States' credit line from the BRIC group, as well as the eventual collapse of the Federal Government's ability to grossly deficit-spend like mad.

When Governments fail, the currency need not. However, when a currency fails, the Government which issues said currency does fail. In the short term, we really can't say what will happen to the Dollar, nor of its status as reserve currency. Perhaps the world economy likes the abuse, and will therefore keep the Dollar around for awhile longer... or perhaps not. Whatever the case, though, we suspect the U.S. Dollar has a long-standing date with repudiation. The only question, in our mind, is when.

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.