Gold News

Can You Count to a Trillion?

As the shackles of Gold slipped from the wrists of the US Treasury, America embarked on a grand experiment...

SINCE GEORGE W.BUSH first took office, the supply of newly-minted US dollars bills has doubled, writes Eric Fry of The Rude Awakening.

   Over that same time-frame, the world's known supply of crude oil has decreased by about 13%. And these two data points are part of a new macroeconomic equation that equals soaring oil prices.

The human race began sinking oil wells into the ground 150 years ago; before then, the planet's total geological inheritance of crude oil totaled about 2 trillion barrels. Now mankind has burned up about one trillion of those barrels. So we've only got one trillion left.

By contrast, during those same 150 years, America's total government liabilities exploded from $75 million to $54.6 trillion. So as the planet's supply of oil slips below one trillion barrels, and America's pile of liabilities soars above 54 trillion dollars, crazy things might start to happen – crazy things like $200 oil.

"Net of all accounting gimmicks, the actual federal budget deficit is running at an unsustainable, system-dooming pace," warns John Williams, founder of Shadow Government Statistics.

"The consolidated statements show that the actual annual federal deficit for the fiscal year ended September 30, 2006 was $4.6 trillion, up from $3.5 trillion in 2005. Total federal obligations at year-end were $54.6 trillion, up from $50.0 trillion in 2005."

America's fiscal condition, says Williams, "has deteriorated beyond any hope of a solution within the existing system.

"Raise taxes? Even a 100% personal income tax would leave a deficit. [Instead] such circumstances in the past – though no nation on earth has ever come close to experiencing the level of fiscal and financial fraud now being perpetrated on the American people – typically have been 'cured' by revving up the printing presses and creating excessive quantities of money. The end result is a monetary collapse in a hyperinflation, with the currency becoming worthless."

Williams' dire forecast might be way too pessimistic. $54 trillion certainly seems like a lot of money to owe, even for the world's "richest" nation. But maybe this monstrous IOU is manageable.

After all, we Americans still retain the "exorbitant privilege" of repaying our debts with the money we make for ourselves. The approximate cost of making each dollar bills is 4 cents. Every CEO in America would envy those profit margins.

However, as long as we American's may continue to operate the big machines in big rooms that splash special ink onto special paper, we might be able to forestall a day of reckoning. But we probably will not be able to forestall an era of soaring commodity prices.

That's because most of the things that dollar bills buy do not simply fall off of a printing press. Delivering a gallon of gasoline to the local service station, for example, requires billions of years of geological preparation, and then billions of dollars worth of exploration and development effort, and then billions of dollars worth of refining and transportation infrastructure. Furthermore, 80 million barrels of oil passes through the world's engines and power plants every day...and those barrels are never coming back again.

But crude oil is not the only natural resource that is depleting and/or in short supply. And the US Dollar is not the only currency on fertility drugs. So a forward-looking investor could expect to see the prices of most major commodities rise in terms of most major currencies. But this simple conclusion is easy to miss when most of the relevant data points contain nine to twelve zeros.

Most of us have some vague idea that one trillion is the number that lies somewhere between one billion and one gazillion. But beyond that, we have no clue. And because we have no clue, we have a hard time making a connection between the one trillion barrels of oil that lie buried somewhere inside the earth's crust and the 54 trillion dollars of liabilities that lie buried somewhere inside the US government's balance sheet.

So how much is one trillion anyway? The creative folks at provide some perspective:

  • 1 trillion seconds = 31,546 years;
  • 1 trillion dollar bills placed end to end would reach 96.9 million miles, far enough to reach the Sun;
  • the average new car costs $28,400 in the US. $1 trillion would buy more than 35 million cars;
  • the entire Federal budget is $2.8 trillion. A stack of that many dollar bills would circle the Earth more than 7 times;
  • gross Federal debt is more than $8.7 trillion, which would make a stack of US dollar bills that would reach from the Earth to the Moon and back with some to spare;
  • $8.7 trillion in one-dollar bills would cover an area larger than each US state except for Alaska and Texas.

The nearby chart shows the largely unfettered global growth in US money supply since the early 1970s. It's plotted against annual industrial production – a proxy for thr availability of "goods" in their many varieties.

The chart below includes a marker indicating President Nixon's canceling of the link between the US Dollar and physical Gold Bullion in 1971. Once this anchor was removed, all that remained was a pure fiat monetary system, or what James Grant calls the 'faith-based' system.

As the shackles of Gold convertibility slipped from the wrists of the US Treasury, America embarked on a grand experiment.

It would borrow vastly more money than it received in tax revenues, while also promising to pay even larger sums for future spending as Social Security and Medicare "entitlements".

By spending – and promising to spend – vast sums, the government would pile up multi-trillion-dollar liabilities. Which sounds horrible. But this grand experiment included an ingenious wrinkle: The government would satisfy all its liabilities with a currency that it would print for itself. And incredibly, this grand experiment has performed marvelously so far.

Americans pile up "deficits without tears," as Jacques Ruff, advisor to former French president Charles De Gaulle, famously griped. "They give without taking, lend without borrowing and buy without paying."

But the tears might now begin welling up at any moment. America's grand monetary experiment is beginning to return some undesirable results – like a slumping US Dollar and a troubling uptick in inflation. These related trends manifest themselves in the form of $900 gold and $125 crude oil.

In other words, the skyrocketing oil price is as much a monetary phenomenon as a geophysical one. Paper currencies and debts proliferate rapidly. Natural resources do not. That's why the prices of natural resources like crude oil must eventually increase over time, even if new technology – up until very recently – worked to increase their daily supply, thereby suppressing their price.

And that's why you should listen to that little voice inside your head when it tells you: "$200 crude oil may be crazy, but not nearly as crazy as a $54 trillion IOU."

Eric J.Fry has been a specialist in international equities since the early 1980s. A professional portfolio manager for more than 10 years, he wrote the first comprehensive guide to American Depositary Receipts, International Investing with ADRs. Today he reports on Wall Street from California for the renowned Daily Reckoning email service.

See full archive of Eric Fry articles

Please Note: All articles published here are to inform your thinking, not lead it. Only you can decide the best place for your money, and any decision you make will put your money at risk. Information or data included here may have already been overtaken by events – and must be verified elsewhere – should you choose to act on it. Please review our Terms & Conditions for accessing Gold News.

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