Cheap Energy: Vital Fuel for the Economic Growth Engine

In our travels around the world, somewhere…somehow…we lost the re-charger to our laptop.

So…this will have to be short…we’re running out of juice!

Yesterday, the Dow fell again. Oil is still below $100. And gold is sinking.

In other words, everything is happening as it should. It’s too early to draw a conclusion or spot a near-term trend. We’ll have to wait to see.

But we have a strong suspicion that if you’re betting on making money from the stock market, it’s high time you became a seller rather than a buyer. Yes, we know. You did all right so far, by ignoring our advice since the dark days of 2009. The stock market is up. This year, it’s up even more than gold.

But this time, ignore our advice at your peril.

Buy gold on dips; sell stocks on rallies. That has been our advice for over ten years. It hasn’t been the best thing you could do every year – far from it. But it’s been the best thing you could have done over the whole period. If you’d stuck to the formula from the beginning (we wish we had!) you’d have 5 times as much money.

What about the years ahead?

Still guessing…but it looks like the whole commodity complex, energy, and gold are about to take a breather. We wouldn’t be surprised to see gold go down from here…and stay down for months, or even years. Major trends take time. This one has been remarkably consistent – so far. It’s given us profits every year from our gold. There’s no guarantee that will continue. But odds are good that the real payoff for gold is still ahead – perhaps far ahead.

Remember, a bet on gold is a bet against Ben Bernanke and the geniuses at the Fed and the Treasury. That’s a bet we’re happy to make. And we don’t mind suffering the slings and arrows of contrary fortune for a few years before the bet comes good.

But we don’t have much time this morning…so let’s change the subject. Something has been on our mind…just a stray thought, really, probably with not worth mentioning…

In the vast pre-history of mankind, those dim beasts that were our ancestors lived on only what they could catch or gather up. Humans spread out, exterminated the easy prey…and probably the competing hominids…and populated the livable earth. Then, mankind increased his range by harnessing fire. It gave him more energy to work with – warmth, that would allow him to move to colder, more marginal climates. Next, he figured out that he could tame wild animals…and plant wild seeds. This gave him even more energy – calories – to support larger numbers of humans. Populations increased – up to the limit of what their energy-capturing technology would allow, and no further.

Man’s rate of progress was painfully slow – with incremental improvements taking place over centuries or millennia. And then, each time he discovered a breakthrough – fire, domesticated animals, agriculture – he took a big leap forward…to where he had completely played out the advantage.

Arguably, the biggest leap forward of all came in the 18th century, when Europeans found that they could get a lot more energy – first out of coal…and then from oil. This new, condensed energy allowed them to make steel…and build ships and factories. It also permitted agriculture on an industrial scale.

What we’ve seen in the West – and Japan – over the last three hundred years has been nothing more than the adoption of this new breakthrough technology…and the expansion of living standards with it. And now, what we are seeing in China and much of the developing world is just the continuation of the trend – using oil and coal to power a modern, fully built-out economy. A simple way to look at it is just to look at energy use per person. Rich people use a lot of energy. That’s what it means to be ‘rich’ – to have the things you make, deliver and service out of steel, plastic and other energy-intensive products. It means living in a house that consumes a lot of energy too – in appliances, heating and air-conditioning. And it means traveling – in energy-swilling trains, planes and automobiles.

Looked at this way, it is easy to understand what is going on in China, for example. People are merely catching up in their use of energy.

But wait. What will happen as 3 billion people try to use as much energy as we do? This is the question that aggravates worriers all over the planet. But we’re going to ignore it and ask a different, but related question:

What happens when these 18th and 19th century energy breakthroughs are fully realized?

It is essentially the same question, but from a different angle. Yes, as more and more people increase their use of energy, we should see energy prices rise. Energy will be rationed by price – like everything else. People who use it efficiently and effectively will get more mileage out of it. They will go a little further.

In this respect, the USA is lucky. It is one of the more wasteful users of energy. People live far from one another. They live in big houses and drive cars about twice as big as they need to be. They put on the AC rather than open a window.

Besides, America – unlike most other countries – is rich in energy. Coal, wood, wind, sun – it’s got it all. Americans can use substitutes…they can improvise. They can make do.

But the point we’re reaching for is this: yes, you can stretch out energy…yes, you can use a lot less of it and still maintain your standard of living…and yes, you can probably increase your quality of life extensively – simply by getting some energy-related garbage out of your life.

But can you expect a big increase in your standard of living, when the real source of it – cheap energy – is exhausted?

US wages stopped growing at about the time of the first oil shock in the early ’70s. Since then, US standards of living have improved…but only by stealing time. More people spent more time working. And much of what they consumed was borrowed or stolen from the future.

Even those additions of ‘phony growth’ largely came to an end after the NASDAQ crash of 2000. In terms of real, private sector growth, the US has been flat for a decade.

And look at what happened in Europe and Japan. Almost all developed, mature economies enjoyed a big growth spurt in the ’50s, ’60s, and ’70s. The “thirty glorious years,” they call it. And then what? Growth rates slowed down. Japan goosed its economy with lower interest rates, after the Plaza Accords of the mid-’80s; its bubble economy blew up in ’89. Since then, Japan has made almost no progress economically. France is locked in its own social welfare delusions; it seems to think it can make people better off by adding labor law protections. England grew in the ’90s and ’00s largely by offering the world ‘financial services’ whose real effect was mainly to increase debt levels. Only Germany seems to have come up with a formula for sustained growth – by selling capital goods to the growing economies. Almost half the rolling stock of China seems to have a German mark on it – either Audi, Volkswagen or Mercedes.

And now America’s manufacturers are stirring once again too. The falling dollar has lowered real US wages. As long as the developing nations continue to use more energy, exporting energy-rich products will almost surely be a good business for those who can do it.

But what about the rest of the economy? What about the economies of the mature, energy-satiated nations? Are the days of real, rapid growth over? Are we just trying to become more efficient…and hope for small increments of growth? Are we merely hoping to hold onto our standards of living, while reducing the inputs of energy and raw materials?

Are we all retired now…counting our pennies and our btus until we finally adjourn.

Are the glorious years over?


Bill Bonner
for The Daily Reckoning

The Daily Reckoning