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Getting There

What is the greatest technological advancement of the last ten years? Most would probably say the smartphone, or perhaps social media sites. I think it is directional drilling and what is referred to as ‘fracking’. Vast reserves of natural gas through this new technology have become economically producible throughout the Midwest. Further west, rich oil reserves can now be accessed.

“…energy resources are primarily a function of technology, not of geology. Technology unleashes resources, resource wealth creates capital, and capital is reinvested in new technology that, in turn, unleashes resources.” Link

“So dramatic are America’s finds, analysts talk of the US turning into the world’s new Saudi Arabia by 2020, with up to 15m barrels a day of liquid energy production…” Link

This technology has the potential to change America’s future. It has the potential to drive our GDP out of recession and return us to full employment. We could dramatically cut both our trade and fiscal deficits. Cheap energy could also revitalize other American industries. Lower electricity bills could help every homeowner. Tax receipts could expand painlessly.

In addition, while natural gas is still a carbon-based fuel, it is far cleaner than what is currently in use.

“…the biggest advances have been in power generation. A technological breakthrough, the combined-cycle gas turbine, a spin-off from the aviation industry, has transformed the economics of the industry. Not only has it made it cheaper to generate electricity from gas, but the process releases up to 50% less carbon dioxide than does coal. As governments strive to cut greenhouse-gas emissions, replacing coal with gas will bring fairly swift results.” Link

Billions of consumers are coming online around the world. This reality demands that clean, renewable energy technologies be developed. But for now….

Niall doesn’t get it

Niall Ferguson is one of the best historians of our time and was recently quoted saying that the Euro must hold and Greece should not leave the currency. ” I am not a federalist,” said Ferguson, “But the costs of the single currency disintegrating are really so high and would impact so many people, that the only responsible thing for me to do is to argue urgently for the next step to a federal Europe. I see no alternative at the moment that isn’t a great deal worse.” Link

Mr. Ferguson is not an economist and I believe he misses the point. This is not a debt crisis, it is a current account crisis. The debt is a result of southern European nations being unable to compete with their northern neighbors. To over simplify, the Greeks have been buying everything German while no one was buying anything Greek. To finance these purchases with no international earnings coming in the Greeks borrowed, and borrowed, and borrowed some more. Since Greece is part of the Eurozone, lenders mistakenly lent, and lent, and lent some more.

“So the problem for the euro is the capital flows between the creditor nations and the debtor nations. What caused the problem? The culprit is the current account imbalances.” Link

Europe is strapped into a common currency designed for political reasons which is totally unworkable for economic reasons. Federalizing Europe would create one nation out of many countries. This would lock in the current uncompetitive reality. Germany would be forever sending transfer payments to their unproductive southern brothers.

In order to compete, the south must lower their costs. The current plan of remaining in the Eurozone and the accompanying ‘austerity’ of grinding down wages, benefits and everything else will not work and will most likely end in revolt. On the other hand, if Greece left the Euro and had its own currency, it would devalue. Devaluation immediately realigns relative prices. The cost of goods and services of debtor nations such as Greece becomes cheaper while the costs of creditor nations goods and services become more dear. Thus Greeks buy less German goods and services while Germans buy more from Greece. Debt too revalues. Creditor nations and their banks are forced to write down what is owed to them to the new currency.

Creditor nations and their banks face huge losses when their debtor devalues. This is where we are now. The creditor will do everything it can to hold off devaluation and deny the realization of huge losses.

“…financial panics do not cause the destruction of wealth, financial panics merely tell you the extent to which wealth has been destroyed…” link

Further loans, massive injections of newly created money, and whatever it takes to ‘kick the can down the road’ will be done to avoid the pain of a solution. While this may not solve the intended problem, It will probably keep interest rates low and markets high for an extended period.