Notes From Underground: U.S. to be the Top Energy Producer (Then Fiscal Compromise is a No Brainer)

The Financial Times headline played up the report from the International Energy Agency (IEA) that by 2017 the U.S. will become the world’s largest energy producer. The use of fracking and other newly developed technologies has enabled the exploitation of previously uneconomic carbon deposits. In 1974 I sat in an economic geography class in which the professor claimed that the U.S. was full on shale oil and gas and its development was merely a matter of price. Being a know-it-all about the Club of Rome studies on the limits of growth, I entered into a lively debate with the prof about why he was wrong and the effects of the energy crisis was going to lead to the demise of Kapitalism. If I could remember his name I would send an appropriate apology.

If the IEA is correct in its analysis it should make the resolution of the fiscal cliff easy to compromise. The FT article raises the issue of the U.S. being free of imports from the Middle East, thus requiring a much diminished presence of the U.S. in guarding the world’s sea lanes. (The free ride for Europe and the Chinese would be over.) If defense spending could be pared–a victory for Obama and the country–then compromise on other spending issues would fall right in line. Defense spending has been the lynchpin of Washington’s carefree spending since LBJ bought off the anti-war democrats with the War On Poverty. It was President Eisenhower in his farewell address who warned of the evils of the Military Industrial Complex as it greases the wheels for so many other discretionary appropriations.

This is the perfect opportunity to begin to peel back government spending for as the sacred cows of the defense sector get gored everything else will become the subject of cuts. This is a no brainer unless of course the INTELLIGENCE AND DEFENSE POLICY MAKERS ARE THINKING WITH THE WRONG HEAD.

***Another erroneous headline today. MNI/Deutsche Borse News released a headline late morning: ECB BROADENS ELIGIBLE COLLATERAL FOR GREEK ELA. It seems that since the proliferation of algorithmic headline trading models the market gets fallacious headlines much more frequently. This story would be very important if the news were actually true but soon after its release the story was denied by the ECB. The MNI piece said the ECB had widened the collateral pool that Greek banks would be able to use to access Emergency Liquidity Assistance. The EURO went bid as it should for a brief moment but sold off on the story being denied. The peripheral bonds took a brief bid but also faltered soon afterward. This is an issue that banks and exchanges are going to have to look into for at what point are fabricated news reports and headlines subject to questions of market manipulation?

***An issue that needs to be studied is how the FEDERAL RESERVE and its QE policy is playing havoc with the jobs situation. Analysts like Steve Liesman keep insisting that the jobs situation will improve as the baby boomers begin to retire, thus creating openings for recent college grads and those who have suffered unemployment because of the Great Recession. In a recent LISCIO REPORT from Doug Henwood and Phillipe Dunne they revealed some disturbing data. They studied the employment/population ratio (EPR) and found the rate fell to 58.2% at the end of 2009 from 63.9% in early 2007. The bounce off the low as been a mere 0.5%, which as Henwood/Dunne point out is a very sub par performance. The bigger worry from the data is that the prime-age population (age 25-54) has fallen to 51.0% in September 2012 from 56.7% in 2001. “THE 55+ crew, however, rose from 27.2% of the working population in 2001 to 33.1% today.”

This is a very damaging effect of the FED policy. With no interest income the 55+ year olds are having to put off retirement and work much longer as savings and wealth have been dramatically impacted by what Carmen Reinhart and M. Belen Sbranica have called a policy of “financial repression.” I have cited this study before but will keep returning to it as the FED’s models fail to take into account the deleterious effects of the QE program. Remember, “In effect, financial repression via controlled interest rates, directed credit and persistent, positive inflation rates is still an effective way of reducing domestic government debts in the world’s second  largest economy –China.” There is much in the Reinhart piece–“The Liquidation of Government Debt”–but as the authors remind us, during times of the gold standard, inflation was “not a policy variable available to policymakers in the same way that it was after the adoption of fiat currencies.” For the present, I just wish to call the question about the insidious way that the FED’s QE policy is harming the jobs picture for the heavily indebted college graduates.

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11 Responses to “Notes From Underground: U.S. to be the Top Energy Producer (Then Fiscal Compromise is a No Brainer)”

  1. rohrintl Says:

    Hi Yra-
    Another tour de force… especially liked the mea culpa on being a know-it-alll. Sounds vaguely familiar.

    But the pernicious effect of QE on the overall jobs picture is something you cannot revisit too often. Have seen it before, and even more than the inflation potential it is a telling reminder of the fallability of central banks.


  2. I'm Not Here Says:

    You can see why the US will suffer eternal damnation far worse than Japan’s lingering.

    New coming taxation will further bolster the illusion that we can pay out debts as the US dollar continues its upward movement. Our stated lies of gold in vaults dwarfs everyone except Euroland’s gold consolidate. US citizens will suffer no saving returns and attrition of fiat valve. If our standard of living wasn’t so high before the derivative meltdowns, we would be a third world country now.

    Not counting capitalism, the free markets continue producing commodities as needed no matter how many road blocks Congress sets up or allows administrations to interfere with using agenda’s to save us from ourselves.

    Hopefully the banking system fails but US citizens continue to persevere.

  3. arthur Says:

    Mad Hedge Fund Trader: “If anything, the winner of this election was bipartisanship. Each party is now well aware of the political capital they have to work with. The outcome will be a fiscal cliff resolution and quickly, and entitlements reform on the calendar for next year. For the markets, any solution is a big win, with a decidedly northward direction in the cards.”

  4. raymack1999 Says:

    Yra, when are you running for office, I got your back. Keep up the great work my friend.

  5. yra Says:

    Ray–first you had better destroy all of those negatives from years ago

  6. kevinwaspi Says:

    Great piece again, every topic! On the QE/Jobs topic, not only is QE making it less likely for the boomers to retire, when one does, the skills lost are not being met with available workforce replacements having the skills needed. Here, I need to point your readers to another good work, seemingly off-topic of global/macro, but actually fundamental to our future. The title of the book is “Academically Adrift” by Richard Arum and Josipa Roksa. The Higher Education industry should be shot for failing to teach the basic skill of “critical thinking”. AD is must reading for any parent or student in today’s world.

  7. yra Says:

    The GOOD PROFESSOR rises to the rescue again–thanks Kevin Waspi

  8. kevinwaspi Says:

    Thanks Yra, I’ll lend you my autographed copy to read next time I’m in town to see you!

  9. Mario Says:

    Great read….Such a true story…My father and I discussed that very thing….Side note: Indonesia prime age population (60%+ younger than 39) is astonding to our own in the US….”world’s seventh-largest economy by the year 2030.”WSJ… We will see about that…..

  10. jt Says:

    Base closures? I hear there is some bi-partisan support but I’ll believe it when I see it. The cold war ended 20 years ago and we’re still protecting Europe. They should be paying us! What kind of empire are we running?

  11. yra harris Says:

    JT–this will be an ongoing discussion and it will be apolitical and only seen from a way forward on how to deal with looming disaster of the fiscal crisis —again ,if defense gets cut it begins a long overdue process in coming to terms with the growth in government spending

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