Except it’s not global warming anymore. Now it’s called “climate change.” Y’see, the cold winter wasn’t a sign of warming. It was a sign of global climate change. Got that? Mankind is burning too much fossil fuel, goes the thesis. So the cold gets colder. The hot gets hotter. The wet gets wetter. The dry gets dryer. And the confusion gets what? More confusing?

So is this game rigged? No matter what the evidence is, goes the argument, just pay no attention to the man behind the curtain. It’s all climate change. And that, of course, means that the government knows best. Especially when a certain class of people — with the right policy credentials — are running the government. As in the expression, “Trust us. We’re experts from the government. We’re going to help you.” Or as the narrator used to say at the beginning of the show The Outer Limits, “There is nothing wrong with your television set.” Or as the cops say as you drive past a crash scene today, “Move along, folks. There’s nothing to see here.” Yep. No looky-loo. Just climb aboard the Climate Change Railway Express. No peeking while we raise your taxes.

Decades of Malinvestment Become Apparent

Meanwhile, over the past winter, the economy was in the tank. The deep troubles got deeper. It makes me recall many of those hard times stories I used to hear from family and friends about the Great Depression. It makes me glad I listened.

This past winter, it seemed like all those decades of what the Austrian economists call malinvestment finally found a place in the light of day. But it’s not as if the whole tale were some sort of state secret, like the Venona files at the National Security Agency or something. Really, the nation’s industrial and productive decline was fairly clear all along if you knew what you were seeing. The problem has been hiding in plain sight since August 1971, when President Nixon killed any semblance of a gold-backed dollar.

Or it’s kind of like Peak Oil. M. King Hubbert drew the fundamental Peak Oil graph back in the 1950s. Heck, I heard Hubbert give his speech in fall 1977. I saw Peak Oil in action back when I was working at Gulf Oil Co. in the late 1970s. It was no shock to me, at least, when the world’s crude oil output curve finally maxed out in 2006.

What? Nobody told you that the crude curve maxed out? Hey, the world’s marginal oil output is now mostly natural gas liquids. It means that we’re blowing down the gas caps.

It’s why I like resource and energy companies, companies that bring real stuff to the surface. It’s why I’ll keep writing about energy and resources in a publication like ESI.

Obama’s Economic Policy

I try to avoid getting too “political” in these pages, aside from my rants about issues affecting energy policy, resource policy and the like. So today I’m just going to quote my friend James Howard Kunstler, a longtime Democrat and supporter of Barack Obama in the recent election.

Kunstler just published his comments on the Obama appearance on the CBS News show 60 Minutes on Sunday, March 22. According to Kunstler, Obama “may perfectly represent the majority who elected him… because he also appears to be in full-commanding denial of the realities overtaking our American experience. Those realities include the fact that we can’t possibly return to the easy-credit and no-money-down ‘consumer’ economy, no matter how many nominal dollars get shoveled into the fiery furnaces of banks too big to fail.”

After describing the economic policies coming out of Congress and the new presidential administration, Kunstler continues: “Lending on the scale that became normal over the last decade is, for sure, the one thing that we will not recover. We turn around in 2009 to find ourselves a much poorer nation than we thought we were a year ago, especially among that broad range of formerly middle-class wage-earners who lived so luxuriously until yesterday. The public can’t process this reality, and the president, for all his relaxed charm, is either not ready to articulate it, or can’t process it himself.”

Kunstler describes the process of the Fed releasing new currency — created out of thin air — to buy up Treasury debt. He comments: “It would be sententious to explain how this destroys currencies, but wherever ‘monetizing debt’ has been tried before in history, that is the outcome. The result would be ruinous at every level and would lead straight to the second terrible force: social upheaval brought on by the conversion of economic problems into political turbulence.”

In my view, Jim Kunstler is exactly on target with his comments. I’m watching the shenanigans in Washington with something approaching utter fear. It’s why I’m recommending investments in gold and energy plays.

Spend, Borrow, Tax, Inflate

I’m truly worried about our future. The things that are going on in the U.S. economy are not sustainable, and I don’t just mean “happy motoring” into the Peak Oil future. The whole economy is on the edge. I don’t see anything on the political or policy horizon that offers any semblance of hope. Nothing. It’s just spend, spend, spend. Borrow, borrow, borrow. And tax, tax, tax.

What’s in all of this for you? What’s in it for me? A lot of inflation, most likely. That’s why you need to buy gold with 5-10% of your portfolio. And have more of your portfolio in good, solid mining firms.

Building on Kunstler’s comments just a bit more, the Obama economic policy assumes that someone out there will still buy U.S. Treasury paper. But will that happen? The best customers for U.S. debt are distinctly unenthusiastic about adding to their holdings.

The Chinese already own a trillion dollars or so in Treasury bills that are depreciating in value. Besides, China needs a continent full of new infrastructure, plus social spending for 1.3 billion people. And don’t forget the new navy China is planning, with which to police its interests from Africa to the central Pacific Ocean and onto South America. All of this will sop up funds China once used to buy U.S. securities.

Another large traditional customer for U.S. debt is Japan. But Japan is running a current account deficit. It lacks the large numbers of dollars to recycle.

In the Middle East, the petro states are no longer receiving a flood of dollars from high-priced oil ($147 per barrel last July). Don’t count on them to buy up U.S. Treasuries.

The bottom line is I don’t know — and I don’t know anyone else who knows — where the buyers will come from to absorb all the new debt that the Obama and congressional spending plans are going to generate. Something has to give. It’s going to be the long-term value of the dollar. I expect to see a lot of fuel poured onto the fires of inflation.

Source: An Unsustainable Way of Life

You see, this past Tuesday, his Investment U article caught my attention. In case you missed it, it was written about green energy. In it, Louis makes an argument for a “green energy super-bubble” that could burst in as little as two or three years, leaving unwary alternative energy investors in the lurch.

In his article, he cites four conditions that exist that make alternative energy ripe for a bubble. Those conditions may indeed be forming, but in and of themselves won’t cause a “speculative bubble.” In this case, there’s definitely more to the story.

The Defense of Alternative Energy & Green Investing

Louis: “The legislation is in place, and more is on the way.”

You’ll get no argument from me that Bush’s foray into increased ethanol production was misguided at best. But unlike ethanol, solar, wind and geothermal tax credits have been the catalysts that have energized those respective industries.

Improvements in technology have resulted in generation costs on par with – and in some cases, below – conventional fossil fuel sources. And with regard to solar in particular, costs per watt are on track to drop another 50% in the next few years. And in spite of the lower costs, industry margins will be in the 35% to 50% range, three times what they are today. That’s a recipe for increased earnings if I ever saw one.

Louis: “Money is already pouring into the sector.”

The $200 billion that Louis said flowed into the sector in the last two years is about right for a capital-intensive business like alternative energy. If it weren’t flowing into alternative energy development and deployment, where else in the energy sector would it go?

To pay for higher oil, for one, but perhaps it’s easier to describe where it won’t be going:

• No one wants a fossil fuel plant in their backyard (few are even planned, let alone being built), and you can forget about any new nuclear power plants here in the United States.
• Only a few are even in the permit stage (a 10-year process in and of itself), construction can take 10 to 15 years, and cost $15 to $20 billion. In June 2008, Moody’s estimated that the cost of power produced by a nuclear plant might possibly exceed $7 per watt, 10 times that of solar’s $0.70 per watt. And then there’s the spent fuel issue, decommissioning, etc.

Plenty of Room to Up Spending on Alternative Energy

Given that the United States alone spends over $500 billion every year on foreign oil, there’s plenty of room to up the spending on alternative energies like wind power.

Besides, we don’t really have a choice; cheap energy’s the key ingredient for economic growth. The problem with coal, oil and natural gas is that they are all finite resources, and we’ve already used all the best deposits (those with the highest energy content). Combine that with oil prices that will likely be closer to $100 a barrel by the end of the year, reigniting interest in alternatives.

Louis: “Tough credit conditions actually encourage more speculation.”

I’d argue that it’s really investment we’re talking about, not speculation. Because of the tax credits mentioned earlier, many start-ups already exist – particularly in the solar sector – where no less than 143 companies are currently playing in the thin-film segment of the industry.

There’s no question that they won’t all survive. But those that do will have viable, long-term business supplying the world with much-needed alternatives to fossil fuels.

Louis: “Green is the new black.”

Here I whole-heartedly agree, but for a different reason…

A Paradigm Shift Is Underway In Alternative Energy

There’s a paradigm shift underway in the alternative energy sector. Fossil fuels are on their way out and green is on the way in. It’s going to be a 20- to -30-year process, and that’s why it’s destined to be such a great opportunity for investors.

It’s not just a “U.S. social responsibility” thing, either. In fact, it’s just the opposite. Our alternative energy roadmap is far behind those of many other nations. Take Portugal, for instance, where over 60% of their energy comes from renewable sources. Their goal? 100%. China and Germany also have aggressive alternative energy generation plans underway.

And because of all the government tax incentives dangled in front of the myriad companies, cost-effective solar panels and wind generators are already in use, generating power that produces no greenhouse gas, and more importantly, don’t use a drop of oil when running.

Here’s the bottom-line: The global need for cheap energy is so monumental, alternative energy is destined to remain a target-rich environment for many years to come. Will some companies be better investments than others? Of course… just like they are in any other sector.

But a bursting bubble in two to three years? I don’t believe it. Actually, a mini one burst last year when oil dropped from $147 a barrel to where it is today, driving many solar, wind and geothermal stocks down as much as 80%. The valuations that these companies are sporting now are, in many cases, as low as they’ve ever been.

And that has helped to set up what could be one of the best sectors to invest in moving forward… for decades to come.

One thing you can be sure of: Both Louis and I will be watching it all unfold with an eye (or two, in this case) towards providing you with some great ideas for investing… and maybe for a few bragging rights.

Source: Alternative Energy: Why You Can’t Ignore “Green” Investing

The fast growth of the emerging world made it clear that demand for commodities of every kind was going to soar and a quick look at pretty much any part of this sector – whether precious metals or palm oil – left little doubt that supply wasn’t going to be there to meet it.

So I started being bullish on precious metals, industrial metals and any kind of fossil fuel seven years ago.

Then, three years ago, I started my love affair with soft commodities as I began to understand how people’s eating habits would change as incomes rise and, of course, as global governments decided that biofuels were the silver bullet that would kill off global warming.

Over the same period of time, it seemed obvious that the housing bubble and the consumer boom it was driving couldn’t go on for ever, something that would hit growth in the west hard.

I was far too early with much of this (I started trying to sell my own flat in 2003 – luckily no one bought it until mid-2007).

But still, when the time came, I wasn’t holding any houses, housebuilders, commercial property or retail stocks, either here or in the US. I’ve been very clear on all sorts of other things, too.

Sometimes, I’ve been right (recommending investing in Brazil for example) and sometimes completely wrong (buying uranium just as it tanked). But the point is this: it has been an easy time to have big opinions and I’ve had lots of them.

That’s not the case any more.

Sure, I still wouldn’t touch anything to do with property or western consumption with a bargepole. That bit is easy. And I wouldn’t buy most physical commodities right now, either – as oil starts to pull back from its mini bubble, other things will too.

On the other hand, I remain convinced that the commodities supercycle has many years to run as the Chinese and the Indians keep buying cars and building highways. Not being a trader, I’m not prepared to sell all my long term holdings in big oil and mining shares, either.

Then, there are stock markets themselves. Look at the numbers in isolation and they seem pretty cheap: the FTSE 100 trades on a price/earnings (p/e) ratio of a mere 11.5 times and yields 4.5 per cent.

That’s not bad. Until you think about how bad the economy might get as house prices keep falling, consumers stop spending and unemployment rises. If that means earnings don’t rise, 11.5 times is a high price to pay for equities. And then there’s inflation – now rampant everywhere.

There is an idea that equities are a good thing to hold in inflationary times – because they are a “real” asset they are supposed to hold their value. But it didn’t quite work out like that in the 1970s.

Instead, according to Barclays Capital, between 1969 and 1979 the average annual real return for UK equities was -2.3 per cent.

That’s better than bonds, but not exactly the kind of return that would have you rushing out to put your name on the list for one of Burberry’s £11,000 alligator skin handbags.

Thinking about inflation is confusing too: will prices still be rising next year?

Five years ago, it was easy to place your bets on inflation. Interest rates were low, money supply was rising far too fast around the world, commodity prices were beginning to break out, and it was already clear that the prices of jeans and DVD players imported from China couldn’t actually fall indefinitely.

So the fact that inflation is on the up everywhere shouldn’t come as too much of a surprise.

But if – as I think we can expect – the credit crunch really gathers pace and recession takes hold might we not see the return of deflation instead?

Société Générale’s number one bear Albert Edwards thinks so. He’s expecting the next few years to offer us a sample of Japanese-style deflation accompanied by a brutal bear market. Nasty.

I think I’m more inclined to expect stagflation than deflation, given how entrenched easy money policies are in the US. But, either way, there doesn’t seem to be a good reason to buy much in the way of western equities.

Now the good news. My ongoing confusion about the current state of our markets tells me one simple thing – that I should hang on to my gold.

The price of gold has already fallen 14 per cent since its peak of $1,033 back in March, and it also had a bad week as the dollar rose.

But, in uncertain environments, what we all need most is insurance. And gold is the best financial insurance you can get over the long term.

There is a perfectly reasonable fundamental case to be made for holding gold: supply is limited and demand high. However, the real point is that the future is very uncertain and not in a good way.

We could see an inflationary recession. We could see a deflationary recession. But what I think we can be pretty sure we won’t see, over the next few years, is stable growth with stable prices.

Tim Price of PFG Wealth puts the case nicely. “There are few things you can count on in a full-blown economic and financial crisis,” he says.

“Not central banks, politicians or Wall Street banks, and not paper currencies – the dollar lost 98 per cent of its purchasing power during the 20th century.”

“But several thousand years of world history point to an alternative store of value, in the form of this iconic, shiny yellow metal, whose very scarcity is its abiding strength.”

You can get exposure to said iconic metal by buying the ETFS Physical Gold ETF (PHAU).

Source: Why It Pays to Hang On to Gold

Shares in leading German solar stocks rose substantially on expectations that other big players, including oil groups, are on the prowl in a market that grew to €6.6bn last year and is forecast to top €18bn by 2020.

Germany is by far the world’s biggest solar energy market thanks to its “feed-in” tariffs, which pay a government-guaranteed premium of up to €0.47 a kilowatt hour for power produced by photovoltaic panels. It is expected to continue to grow despite government plans to cut subsidies by 8% or 9% in 2009 and 2010.

“The richest investment opportunities can be found in the fast-emerging alternative energy sector,” says Mike Burnick in The Offshore A-Letter.

“That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for US$2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel.

“The market for ALL alternative energy sources grew 40% last year alone to US$77.3 billion and will explode into a US$250 billion industry within 10 years.

“Bio-fuel grew to a US$25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just four years ago. The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into a US$81 billion business within the next 10-years!”

“The days of meeting an unchecked demand for energy through monolithic carbon intensive power stations are coming to an end. Increasingly the emphasis will be on energy efficiency, renewables, cleaned up fossil fuel plant and micro generation,” the company said in a statement accompanying its full-year results, according to Britain’s The Guardian newspaper.

SSE, which currently gets 15% of its energy from nuclear suppliers, said it believed “one more tranche of nuclear power stations will be necessary, but that the deployment of such power stations should be minimised through the maximum exploitation of renewable energy sources.”

“The richest investment opportunities can be found in the fast-emerging alternative energy sector,” says Mike Burnick in The Offshore A-Letter.

“That’s where oilman T. Boone Pickens is putting his money – his company Mesa Power just placed an order for US$2 billion in wind turbines. And there’s much more profit potential in other parts of the alternative energy sector too – especially alternative fuel.

“The market for ALL alternative energy sources grew 40% last year alone to US$77.3 billion and will explode into a US$250 billion industry within 10 years.

“Bio-fuel grew to a US$25.4 billion market last with more than 15 billion gallons of ethanol and biodiesel produced globally – more than double the output of just four years ago. The worldwide Bio-fuel industry will continue to enjoy explosive growth for years to come – expanding into a US$81 billion business within the next 10-years!”

Floyd Brown in Investment U looks at another alternative energy source: the Fischer-Tropsch process, used to create synthetic fuels.

“The process works like this: Coal is broken into its components by subjecting it to high temperature and pressure, using steam and measured amounts of oxygen. This leads to the production of synthetic gas.

“In the United States, a small firm provides technology to produce ultra-clean synthetic fuels and chemicals. It licenses its proprietary derivative process from the Fischer-Tropsch method.

“It converts synthesis gas derived from coal, petroleum coke, biomass, natural gas, or municipal solid waste into liquid hydrocarbon products. This includes ultra clean diesel fuel, jet fuel, naphtha, specialty chemicals and other fuel products. It also manufactures anhydrous ammonia, UAN, nitric acid, carbon dioxide and granular and liquid urea.”

Read on here to find out Floyd’s cashing in on this conventional energy alternative.

China, India and other nations that subsidize cheap petrol and diesel may be even less willing to raise prices than they were six months ago, aiding crude’s ascent toward $130 even as demand deteriorates elsewhere.

While Indonesia appears set to raise prices as soon as this week, the world’s fastest-growing oil users show little inclination to tackle their subsidy schemes, as fighting food-fueled inflation has become their top priority.

That’s bad news for oil consumers in the rest of the world, who face record crude costs partly as a result of demand growing unchecked in countries where pump prices have barely risen since the middle of 2006 — when crude was in the $70s.

Even as the fiscal burden of subsidies mounts with each new record high on the NYMEX, two things have changed in recent months to stay policymakers’ hands, for now.

The least harmful and most clean-burning fossil fuel, natural gas, is shooting up in price, too, says Justice Litle in Taipan Daily.

“The North American continent (both the U.S. and Canada) has been “running to stand still” for a long time now in terms of natural gas production. The rate at which new wells are coming on line is barely keeping pace with the depletion of old wells. And nor does it help that nuclear plants are looking a lot more expensive than first realized, or that natural gas and water are required in huge quantities to unlock the black treasure of Canada’s oil sands.

“As a result of these and other factors, the time has finally come for the liquid natural gas (LNG) market.”

There’s no doubt America has an energy problem… or maybe you could call it a fossil fuel problem. All the fuels we’ve relied on since time immemorial are skyrocketing in price. (Dinosaur bones just don’t take the old gas tank as far as they used to — as we personally discovered yesterday filling up at $4 a gallon here in NV.)

The least harmful and most clean-burning fossil fuel, natural gas, is shooting up in price, too. The North American continent (both the U.S. and Canada) has been “running to stand still” for a long time now in terms of natural gas production. The rate at which new wells are coming on line is barely keeping pace with the depletion of old wells. And nor does it help that nuclear plants are looking a lot more expensive than first realized, or that natural gas and water are required in huge quantities to unlock the black treasure of Canada’s oil sands.

As a result of these and other factors, the time has finally come for the liquid natural gas (LNG) market. The world desperately needs to be able to ferry natgas from one continent to another — like crude oil — and LNG technology is the way to do it. BreakAway Investor editor Andrew Mickey is right on top of this trend. Take a look.

Selling Out to the Highest Bidder (for Natural Gas)

by Andrew Mickey, Editor, BreakAway Investor

“We are not in the charity business. Whoever will give me the best price, I will follow him.”

- Abdullah bin Hamad al-Attiyah, Oil Minister of Qatar

Qatar is already taking advantage of this situation. And they’re making no qualms about their motivation: make as much money as possible.

But Qatar is just one small player in the next monster trend in the energy business. The situation is getting bad, real bad. The profit opportunity, however, is just as big as the situation is bad.

Already Exxon Mobil, Merrill Lynch, BHP Billiton, and dozens of others are getting in on the action. Now, as we put all the pieces of this complicated puzzle together, you can take your piece of the action, too.

Decades in the Making

For decades we’ve heard it’s coming — a completely new source of energy. But I’m not talking about some economically questionable alternative energy source or something with numbers that only “work” with lavish government subsidies. I’m talking about liquefied natural gas, or LNG.

The LNG market has been on the verge of a major breakout, seemingly for years. But the numbers just never made sense. It has taken years of infrastructure buildup to lay the foundation for the industry. And with oil companies required to shell out at least $5 billion just to build an LNG plant, they just weren’t going to take too big of a gamble.

That, however, is all rapidly changing.

Exxon Mobil, Merrill Lynch and China National Oil Company have combined to commit $30 billion to investing in new LNG facilities over the next five years. BHP has committed $25 billion for new LNG facilities in Australia. Worldwide, LNG investments are expected to eclipse $100 billion over the next decade. Warren Buffett, Shell, BP and Gazprom are all betting big on LNG.

Together, they’re all helping to nurse the LNG industry from infancy to maturity in short order. And with all these companies placing huge bets, you can bet they’re laying the foundation for a major win.

But the LNG market is still in its relative infancy. As a result, most investors just don’t understand all the details… yet. But that’s exactly what is creating an opportunity in the next big trend in energy.

We’ve got to understand three aspects of the booming LNG industry in order to profit from this situation. First, we’ve got to look at the basic nuts and bolts of the industry (how natural gas is turned into LNG and so forth). Second, we’ve got to realize natural gas will finally become a truly global commodity and the highest bidder will get the gas. Third, we’ve got to find the bottleneck — and who has is developing the solution. And that’s where we’ll put our money.

Natural Gas Goes Global

The United States has been getting natural gas on the cheap for decades. Most natural gas consumers (primarily power companies and utilities) have been paying very low prices for natural gas compared to the rest of the world. Despite the recent doubling in natural gas prices, U.S. utilities can still buy it for around $11 per million BTU (MMbtu).

The rest of the world is paying much higher prices. Spain pays $13 per MMBTU, Korea and India pay $14 per MMBTU, and Japan pays the highest price of about $15 per MMBTU.

The cause of the wide price range is pretty simple. Natural gas is produced and consumed locally. For instance, natural gas in the U.S. is produced from a well and transported via pipeline to the end-user.

Although there are some fairly long offshore pipelines, building a pipeline across the Pacific or Atlantic Oceans is technically and economically unfeasible. As a result, Asian, European, African, Australian and North American natural gas prices can vary widely. There was no way to trade natural gas on a global level.

The growth of the LNG industry is already starting to change all that. Japan recently paid $19 per MMBTU of LNG and China and Europe are also paying top dollar for LNG. But they’re happy to do it. The price may seem high now, but the long-term LNG contracts these countries have signed will save them a lot more money as natural gas prices continue to rise over the long term.

There is no transparent market for LNG. The LNG market is made up of privately negotiated contracts between suppliers and consumers. That lack of transparency is helping to keep this boom quiet for the time being.

Capitalism is a panacea, after all. It cures symptoms of affluence as well as poverty.

We file this report, coincidentally, from Manchester…where, according to legend, the industrial revolution began. Modern tools, steady money, and fossil fuel were put together, creating so much gas, it lifted mankind out of the mud of the Middle Ages and carried him aloft. Thrifty Scottish economists – notably Adam Smith and Adam Ferguson – saw what was happening and took note of the moral lesson: by foregoing the satisfaction of current consumption, savings could be invested in factories, machines, and new discoveries that increased the output from human labor.

In the same amount of time, thanks to his new tools, a workingman could produce more things. And, soon, the things made him rich. According to MeasuringWealth.com, during the second half of the 18th century, the typical British workingman earned about 60 pounds per year. It took only 4.25 pounds sterling to buy an ounce of gold, so he earned the equivalent of 14 ounces of gold, which is worth about 6,622 pounds sterling at today’s rates. A century later, in 1971, to be exact, his earnings had risen to the equivalent of 49 ounces of gold per year – or about 23,000 pounds sterling at today’s rate.

(Readers who are good at math will already be asking questions. The average wage in Britain today is only 23,177. In terms of gold, wages have gone nowhere for the last 37 years.)

But whatever wonder James Watt and the people of Britain’s industrial heartland wrought, their descendants in America have worked another one; in the midst of the greatest financial and technological boom ever, they have managed to actually reduce the value of their own labor.

Yes, dear reader, this week we turn our weary eyes away from the poor, the weak, and the huddled masses struggling to keep up with the price of rice…and focus on people who are struggling to keep up with their credit card payments. Here is a group of people upon whom nature piled so many blessings, she crushed the wit out of them. And, their wealth is being squeezed out too.

The United States of America has rich farmland, from sea to shining sea. Still, it is a net importer of food. In fact, it is a net importer of practically everything that can be moved. Every day that goes by it receives about $2 billion more of these moveable objects than it sends out in exports.

Prior to the Nixon administration, such an imbalance could not persist for very long; but however much God blessed America – with her purple mountains majesty and her fields of golden grain – was nothing compared to the way she was favored by the post-1971 monetary system.

“As ye plant, so shall ye reap,” it saith in the Bible. But in the period from 1997-2007, Americans could reap without planting. They could consume without earning. They could invest without saving, and spend as much as they wanted without running out of money. They were the world’s luckiest people – they had the world’s reserve currency…and access to the whole world’s credit.

The miracle that fundamentally altered the world monetary system happened on August 15, 1971, when Richard Nixon “closed the gold window,” at the U.S. Treasury. Before then, every nation’s currency was anchored to gold. Governments settled their imbalances in yellow metal; since each unit of paper currency represented an option on the treasury’s gold, it forced officials to be wary of issuing too many. But after August, 1971, the world’s monetary system upped anchor and sailed with the tide. Now, it all floats on a sea of paper money – and no one knows what’s beneath the dark ocean surface.

The Chinese merchant who sold widgets and geegaws to spendthrift Americans could not use dollars to pay his wages. He needed local currency. So he traded his dollars for yuan. And where did the Central Bank of China get enough yuan to buy up trillions of dollars? It had to create them. All over the planet, as the world’s stock of dollars rose…so did its inventories of local currencies. And then, what could it do with its dollars? Before 1971, it would have presented them to the U.S. Treasury and received one ounce of gold for every 41 paper dollars. In order to protect the nation’s gold, central bankers would have taken away the punch bowl and turned out the lights. Rates would have gone up; foreigners would have been encouraged to hold dollars (rather than exchange them for gold); Americans would have been discouraged from spending dollars – effectively stifling U.S. consumer spending and bringing the current account back into balance.

Then, in 2001, the U.S. financial authorities, led by Alan Greenspan, thought they faced a crisis. They panicked – giving Americans even more credit rope. With nothing to stop it, the supply of cash and credit rose at an even faster rate. And thus it was that Americans wrapped their good fortune around their necks like a noose. Instead of practicing the virtues that had made them rich – saving money, building new factories and learning new skills – they borrowed even more heavily than before.

And now their houses are being foreclosed and their bills are coming due. Worse, the value of their most important asset – their time – is being marked down with the dollar. According to our source, the typical American workingman in the late 19th century was already earning considerably more than an Englishman – 25 ounces of gold per year, rather than 14. He, too, became much richer as the industrial revolution progressed. By 1971, he was earning the equivalent of 82 ounces of gold, worth $76,000 today. But then he forgot his lessons. He stopped saving…his income fell…and his dollar dropped. Adjusting the average hourly wage for consumer price inflation, he earns slightly less today than he did during the Carter administration. Adjusting his wages to the fall of the euro, we find the average American earns less than the average Frenchman. And adjusting his wages to gold and we see he has lost a half century of wage progress. Today, he earns only the equivalent of 40 ounces of gold – or only about $38,000.

Enjoy your weekend,

Bill Bonner
The Daily Reckoning

Editor’s Note: Bill Bonner is the founder and editor of The Daily Reckoning. He is also the author, with Addison Wiggin, of the national best sellers Financial Reckoning Day: Surviving the Soft Depression of the 21st Century and Empire of Debt: The Rise of an Epic Financial Crisis.

Bill’s latest book, Mobs, Messiahs and Markets: Surviving the Public Spectacle in Finance and Politics, written with co-author Lila Rajiva, is available now by clicking here:

Mobs, Messiahs and Markets