The chief threat to America in the near term is hyperinflation. The chief defense we have against this threat is energy dominance. How do these factors fit together?
America faces the possibility of hyperinflation because our national debt has grown beyond our projected ability to repay it. There has even been talk of America defaulting on its current accounts, which include interest payments on the debt. Thus there is a growing lack of confidence in the dollar as the world’s reserve currency. Unless the U.S. can implement a realistic plan to repay its debt, a new international monetary management system is increasingly likely to remove the dollar as the world’s reserve currency, thus removing our ability to keep printing money to cover our deficits. If this were to happen suddenly, the consequences to the American people could be a catastrophic hyperinflation.
America does have the means of reversing this trending lack of confidence in the dollar. We are on the verge of becoming an energy superpower in an energy hungry world. The connection with the currency issue is this: What we have lost in world leadership through our military drawdown we can regain by becoming the world’s largest supplier of energy. The leading importer of oil at least until 2025 is our recent rival, China, with India overtaking that position thereafter. Nobody, even China, is going to attack the currency of the country they depend on for their energy to fuel their economy, even their existence.
The U.S. dollar may not be backed by gold, but it will be supported an energy rich America.
In order to understand inflation as a major threat to America’s future, it is necessary to remember that the United States is the only country in the world which can print negotiable money on demand, because the dollar is the world’s reserve currency. In effect, this status means that all international transactions have been executed using the dollar. For this reason, all major countries and international banks and corporations have accumulated vast amounts of U.S. dollars. They therefore watch the value of the dollar very closely.
What they see is alarming. They see a country which has taken advantage of its unique status by incurring a national debt that seems far beyond its ability to repay— ever. America has been living beyond its means for generations. Were it not for the dollar’s reserve currency status, the United States of America right now could be worse off than Greece or Spain or Ireland. In fact, the desperation and hyperinflation experienced by such countries should be a wake-up call to Americans.
Here are two ways the dollar can lose its reserve currency status. One is another international monetary agreement to replace the Bretton Woods agreement of 1944, which established the dollar’s reserve status. There has been much talk about convening another Bretton Woods meeting and presumably dethroning the dollar. It has not yet happened because the opposition is not well organized. There is great fear, however, that serious inflation will accompany the Federal Reserve Board’s attempts to reduce its huge hoard of Treasury bonds. That would devalue the dollar perhaps permanently and trigger widespread dumping of the dollar, which has already begun. (For further information on this topic, see “US Corporations Dump Dollar for Chinese Renminbi to Buy Imports”, Eric Blair (Activist Post June 5, 2014) But this great meltdown hasn’t happened – yet.
The other source of possible displacement of the dollar could come from China, which not only holds $1.5 trillion of U.S. Treasury Bonds, but also has taken some steps toward substituting the Yuan for the dollar. Most notably, China has begun to demand that all its foreign contracts be denominated in the Yuan. As China continues to expand its international outreach, particularly with the BRICS countries (Brazil, Russia, India, China and South Africa), the prominence of its currency goes with it. And China is not happy with the America’s lack of fiscal discipline. As one Chinese newspaper put it, “Days when the destinies of others are in the hands of a hypocritical nation have to be terminated, and a new world order should be put in place, according to which all nations, big or small, poor or rich, can have their key interests respected and protected on an equal footing.” (Ed Flanagan at NBC.com’s Behind the Wall)
As a weapon in the “soft war”, a substitution of the Yuan for the dollar would not only cripple the United States economy, it would also elevate China to superpower status.
That is the bad news.
The good news is that the United States is on the verge of becoming the largest supplier of energy in the world. America is already expected to become the world’s leading supplier of natural gas by 2015, replacing Russia, as predicted by the International Energy Agency’s annual World Energy Outlook. That report also predicts that the U.S. will become virtually energy independent by 2035.
Others are even more optimistic. The 2013 Chamber of Commerce report Energy Works for Us presents a strategy for overall energy production which would position the U.S. as an energy superpower, provided antiquated government policies are replaced by regulations based on the new realities of American energy capabilities: energy surplus instead of energy scarcity.
In order to achieve this position, says the Chamber, the government must, among other recommendations, repeal laws prohibiting export of energy products, open federal lands and off shore locations to exploration, find a solution for the nuclear waste problem, and maintain its coal production at least until newer sources expand sufficiently to reduce or replace coal.
CNBC’s Ron Insana suggests the U.S. join with our NAFTA partners, Canada and Mexico, to form the North American Organization of Petroleum Exporting Countries (NOPEC). “With the U.S. leading the way in the fracking revolution, Canada in tar sands and with a newly liberalized energy sector in Mexico, North America could easily rival and exceed OPEC’s [energy] production, … making North America the envy of the energy world”, says Mr. Insana.
There are many other geopolitical revolutions associated with the U.S. being transformed from the world’s largest importer to the world’s leading exporter of energy (perhaps along with Mexico and Canada). Our relationships with the Middle East, with Russia, and perhaps most of all China will be turned on their head. Along with this change of positions will come foreign trade surpluses instead of deficits, the possibility of full employment, the military’s restructuring as a defensive force, and a host of other changes. The security of our currency along with new sources of tax revenues will enhance our ability to balance our budget and reduce the national debt.