There has been much talk of stimulus and easing quantitatively since the 2008 financial crisis. Helicopter Ben created four trillion dollars of Monopoly money on the Fed’s balance sheet, President Obama spent another trillion (although the money was primarily wealth redistribution for government coffers and very little went to actual infrastructure spending), interest rates have gone negative in many developed countries due to monetary policy, and now the European Central Bank is firing up its printing press to fight the dreaded deflation in the Eurozone.
What has all of this smoke and mirrors gained us–Debt, debt, and more debt. The problem is we don’t even know how all of this fiscal and monetary manipulation will resolve itself. One could be forgiven for thinking this will not end well. But there is good news! The Lone Ranger riding to save the economic day is good old North American technology, hard work, and entrepreneurship. It’s called the shale oil boom.
Politicians talk of stimulus. Really what they mean is taking money from one person to give to another (to someone usually who will vote for them to be reelected). However, did you know that the average family in poverty spends the largest portion of their income on energy? In some cases upwards of fifty percent? What if you could significantly reduce their energy bills? What if you could add ten, twenty, or thirty percent to their annual income, without spending any money? Talk about an economic stimulus! At the same time, what if you reduced corporate expenses significantly as well? With that type of monetary injection, maybe small businesses and large corporations alike would start spending again. Maybe, they would start hiring again. Maybe economic growth and unemployment would start to improve despite misguided government policies that encourage economic stagnation and malaise.
This is what is happening today, in front of our eyes. The private sector is riding to the rescue as only capitalism can, to save us from our Keynesian death spiral. Oil prices are plummeting, providing real economic stimulus to the world economy. The fact that there is an added benefit of depriving aggressive dictators of oil revenue to instigate trouble is a nice bonus. This is all happening in spite of the American government’s best efforts to stop it (but that won’t stop them from taking credit).
Entire global orders are being disrupted. The Middle East is just now trying to come to grips with the new energy, and therefore power, realities on the world stage. Despite their soon to be announced efforts at collusion to prop up oil prices, North America will keep on pumping. The Keystone Pipeline will be constructed within a few years. LNG terminals will be approved in the U.S. like casino permits on the Mississippi. North America is here to stay as the largest energy producing region of the world, at least in our lifetimes. The world has only begun to realize this new paradigm.
How will this new reality effect the USD and the Loonie? Most likely, North American economic growth will accelerate, interest rates will have to rise, and this will add to the bid for these currencies. I have written much over the last few years about the loss of reserve currency status for the USD and the danger of overwhelming American sovereign debt. However, I am just now realizing the strength and ferocity of the shale oil explosion and its effects on global markets. Perhaps shale oil will save America from herself. Hi ho Silver, away.
L Todd Wood is a former emerging market debt trader with 18 years of Wall Street and international experience. He is also an author of historical fiction thriller novels. His first of several books, Currency, deals with the consequences of overwhelming sovereign debt. He is a contributor to Fox Business, Newsmax TV, and others. LToddWood.com