Alex Macris wrote an incredible four part series on the history of the petrodollar which included some prescient projections regarding the future of the US dollar. I featured his work on this blog, and then Alex invited me to write Part V explaining what you could do to protect yourself from coming problems. Running on Empty has now been published as a book, and I’m pleased to let you know that I wrote the forward. The book is available here.
If you want to know what I think, here’s my forward for the book:
“Running on Empty” is a work of genius for its multi-disciplinary conclusions. Many economists and stock market participants understand the long-term damage done to economies by institutions like the US Federal Reserve. However, fewer know the history of how the US abandoned the gold standard and replaced it with the oil of other countries. Until now, I have not seen anyone tie the creation of the petrodollar to the hollowing out of the US manufacturing sector, the decisions by the US to enter or avoid military conflicts, and to the implications for the ability of the United States to maintain its status as the world’s only super-power (as of this writing). People often talk about the US going to war “for oil”, but Alex is the one who explains the role of the petrodollar in these decisions.
Alex’s expertise in history and military strategy are apparent. As someone who has spent a lifetime in the financial markets, I’m sorry to inform you that his economic and financial conclusions are equally sound. All empires end, and all fiat currencies fail and go to zero. This always happens through over-expansion, war, excessive debt, and debasement of the currency. “Running on Empty” takes you through the story of how decisions by senior US government officials aided by Congressional overspending and Federal Reserve mismanagement have accelerated this problem over the past 50 years.
We’re facing two intertwined financial problems right now. First, between massive government overspending and monetization of trillions of dollars of Covid-related “stimulus” benefits by the Federal Reserve, the US is experiencing high inflation. To deal with that, the Federal Reserve is raising interest rates. With over $31 trillion of “official” debt, those higher interest rates will lead to higher interest payments which will squeeze out currently planned spending. Congress will be faced with either cutting spending, raising taxes, or pushing the Federal Reserve to increase the money supply.
The first two of those lead to angry constituents and politicians being voted out of office. The third leads to more inflation causing higher interest rates and intensifying the problem. Over time, this can become a self-fulfilling “death spiral” leading to greater issuance of less valuable currency. Alex writes about the necessity of living within our means because we’re “Running on Empty”, and unfortunately, he is correct. For those of you who want to see an advance version of what the US is facing, keep an eye on Japan which is starting to deal with this problem.
The second problem the US faces is that real debt is far in excess of the widely reported $31 trillion. Once we include promised obligations like Medicare, Medicaid, welfare, and pensions, the real liabilities of the US are closer to $250 trillion. That’s a quarter of a quadrillion dollars! It’s more than can possibly be paid. So, the US will either join modern nations like Greece and Argentina, and default on its obligations, or will continue to debase the currency in what we’ll refer to as a “stealth default”. The US will pay its obligations, but do so in dollars that have little value.
In addition to his clear understanding of how the petrodollar first enriched then ruined the finances of the US, Alex provides his readers with valuable insight into military strategy and spending. The press often compares the spending levels of different countries as a proxy for military strength. We’re told that because the US spends much more on defense than China, we have a much more powerful military.
While I have great faith in the capabilities and resourcefulness of our troops in uniform, Alex brings up two crucial points I want to highlight. First, all military spending is not the same. If China can build an aircraft carrier for one-fifth the price of what it costs the US, then we need to apply a discount to the value of US military spending. Dollars spent is what’s reported, but value received is Alex’s more-appropriate focus.
Second, different countries have greater or lesser priorities. The US has military bases in approximately 80 countries and is trying to maintain worldwide influence. Russia is attempting to maintain military influence and control over a much smaller part of the globe and much closer to home. The Russian military has its own problems, but it also has smaller more manageable goals.
Running on Empty also provides some well-founded criticism of the anti-Russian sanctions. While the western press likes to present the issue as the world united against Russia, the truth is far from that. Over 100 nations comprising more than half the world’s population have declined to participate in the sanctions and continue to do business with Russia.
Even among the coalition sanctioning Russia including the US, the EU, Canada, and Australia, the sanctions have been designed poorly. Denied access to the SWIFT payment system, Russia simply joined the Chinese version. Denied access to the US credit card system, the Russians brought in millions of Chinese ones. Told they couldn’t receive (petro)dollars for their gas, the Russians informed the EU they’d accept rubles, gold, or Bitcoin. European governments complained, and then folded. Of greatest concern, the US froze Russian dollar-denominated reserves, and sent a message to the rest of the world that the dollar is a safe reserve currency only as long as your country remains in the good graces of Washington DC; a place that changes political control every two to four years. The anti-Russian sanctions may have been well-meaning, but had the practical effect of reducing the value of the dollar as the world’s reserve currency.
Inflation is properly described as what happens when too much money chases too few goods. It represents theft by governments against their own people. It’s how government agencies reduce the value of your savings. In this book, Alex has described for you the method by which the US exported trillions of dollars which were then held in reserve by governments and used to buy energy.
Russia has succeeded in getting paid for oil and gas in rubles. Saudi Arabia is openly negotiating with China to sell oil in yuan. As I write this, a coalition of countries headed by Brazil, Russia, India, China, and South Africa are discussing creating a new reserve currency to compete with the dollar and backing it with commodities like gold, copper, oil, and gas. If the petrodollar falls, and countries can start to use other currencies to buy energy, those countries will no longer have the same need for dollars they currently have. If you think inflation is a problem now, imagine what happens when those dollars held by other nations come back to the US to buy buildings, land, goods, and services. We have a lot of liabilities outstanding in dollars held overseas.
Alex writes a fantastic blog called “Contemplations on the Tree of Woe” in which he provides readers with carefully calibrated doses of woe and regret. I run Deep Knowledge Investing; a firm that helps investors get better market returns. Our approach is to understand any policy, no matter how poorly designed, and come up with strategies to help our clients and subscribers make money from it.
Alex originally wrote Running on Empty as a four-part piece, and he kindly invited me to write “Part V – What to do Now” in which I outlined for readers things they could do to not only protect their portfolios from the destruction Alex predicted; but also, to profit from it. Those investment ideas have outperformed the market by a huge margin, and as of this writing, my firm continues to stand behind those suggestions.
While most of you reading this won’t be able to take action to stop the harmful fiscal and monetary policies of the United States, you can still take action to protect your household and portfolio. Either way, once you’ve read this book, you’ll have a much better understanding of the forces that have shaped our financial past and how those same influences will affect our shared future.
