The Fed Is Not The Issue

Every day, I get spam that promises to make my life so much happier and fulfilling, if only I would get larger breasts. It's the same with the Fed: pumping up debt through cheap money is now as beneficial to the economy as giving D cups to the entire male population. Brassiere sales would jump, but the benefit would not last.

The main concern today is fiduciary adequacy and not liquidity. We have already borrowed so much (total debt is near 350% of GDP) that our ability to service existing debt is more relevant than access to additional debt. The importance of the Fed to the economy is thus limited, and our fixation with what it does, or does not do, is a distraction from dealing with the real issues.

Data: FRB

What are the issues?

1. Forget the Fed; there can be no monetary solutions to fiduciary problems.
   
2. Re-establish the relevance of fiscal policy as more than just discussion about tax cuts.
3. Raise earned income, instead of relying on capital gains and portfolio income; create permanent high value-added jobs, targeted to exports.
4. De-leverage.
   
5. Emphasize industry over finance and production over consumption.
   

As a trained engineer with 25 years of finance experience, I believe the way to achieve the above - at least partially - is to move with all possible urgency towards a new energy regime. Jimmy Carter was absolutely correct about at least one thing: we must engage in energy independence as in the moral equivalent of war. If nothing else, consider this: Alan Greenspan admitted that the Iraq war was about oil.

I do not pay attention to the loud, but ignorant Cassandras of doom and gloom - switching to other energy sources can be done and, what's most important, must be done. We humans are already choking on our own effluent, and that's with 2.5 billion Chinese and Indians consuming energy at a fraction of Western levels.

Data: IEA

The real obstacle to change is not technology, but powerful fossil-fuel vested interests: oil, gas and coal companies, "authoritarian" oil regimes (polite term for friendly dictators) and the military industry. Just like tobacco companies, they are cash-cow giants who fight very hard to retain the status quo. At current prices, the crude oil business alone is worth $2.5 trillion per year. So it's a very big and very profitable status quo.

The lineup fighting change is completed with the Russians who, from Peter the Great onward (1672-1725), never lost their desire for geopolitical domination. As the world's largest oil and gas exporters, they once again have the financial and strategic capital to send Navy carrier groups into the Mediterranean and bomber planes over the Atlantic.

Fossil fuel dependence transfers vast wealth from billions of consumers to a few potentates, destroys our habitat and requires huge military expense. Crucially, it also wastes our "seed corn" concentrated energy, which we should instead be sowing to harvest sustainable energy in the future. The benefits accruing to us from our oil-based dollar hegemony are increasingly being overtaken by the costs, and to keep the scheme going is bordering on criminal neglect.

How do we accomplish change? The moral equivalent of war requires that we forfeit some comfort today for the certainty of a better tomorrow. If done properly and urgently (always a challenge to do both), the "discomfort" period could be quite short - certainly less than a generation.

Here are some concrete proposals:

1. Impose a tax for all carbon-based fuels (yes, corn ethanol too) at the equivalent of $1/gal, increasing by 10c every three months.
2. Recycle the tax money into the economy as: engineering and science scholarships, R&D projects and direct subsidies to alternate energy projects.
3. Promote distributed energy systems over central power stations, e.g. solar/wind/geothermal mini-stations for the production of hydrogen through electrolysis. The model is the Internet Web vs. the large computer centers of the past.
   

The carbon tax would immediately raise approx. $500 billion per year, or 3.8% of GDP. While certainly not small, this sum is well within the ability of the US economy to absorb and recycle efficiently. Our foreign oil dependence is so high, that our oil import bill now runs nearly a trillion dollars per year, or 6.5% of GDP - approaching the percentage during the "bad old days" of 1980.

Data: British Petroleum

Some will say that this is nothing but a grand "tax and spend" scheme. Well, yes - that's exactly what it is. Real wars cannot be fought and won based solely on voluntary donations. Likewise, fundamental paradigm shifts require the enlistment of the entire society, not just that portion which is affected on the margin of supply and demand.

In closing, I would also like to point out that there will likely be significant social benefits from switching to a looser, more distributed energy regime. This could be the topic of an entire book, let alone some notes at the end of a blog, but the main thrust is that distributed energy empowers and necessitates locally participative democracy, instead of the centrally passive democracy we have now.