Energy and the Debt Conundrum

Unprecedented national debt and unreliable sources of imported oil leave the United States in a dangerous predicament.

This article is the second in a three-part series on America’s energy crisis. See part one: How Energy Made the Modern World.

Massive, unprecedented debt burdens have been building up in America since the middle of the 1960s to facilitate ever-increasing social and military spending. The U.S. debt clock shows that the country has $117 trillion in unfunded liabilities. That total is in addition to the $20 trillion official debt when the liabilities of the nationalized Freddie Mac and Fannie Mae are included.

Indeed, similar debts exist for most Western economies, which did not distinguish between self-liquidating debt, incurred to fund projects that pay back the debt out of net revenues generated by the project, and debt incurred to facilitate consumption.

The only way to repay all of the debt incurred is to expand the economy. But the rate of economic growth required to pay the debt, even to pay all of the interest incurred on the debt, would be substantially higher than we ever have reached before for any extended period.

The U.S. gross domestic product (GDP), essentially all the goods and services produced every year, has grown at the inflation-adjusted rate of about 3 percent annually over the last one hundred years. As a result of that rate of exponential growth, the U.S. economy doubled in size about every twenty-four years. U.S. debt, however, has grown from $400 billion in 1920, in inflation-adjusted dollars, to $20 trillion today. That growth rate exceeds 5 percent per year, on average. But that average rate of debt growth over the last ninety years includes years in which there were surpluses or the debt’s rate of growth was de minimis. Today, the growth rate of the national debt is approaching 20 percent per year. According to CBS News’s August 22, 2011, “Political Hotsheet”:

The latest posting by the Treasury Department shows the national debt has now increased $4 trillion on President Obama's watch.

The debt was $10.626 trillion on the day Mr. Obama took office. The latest calculation from Treasury shows the debt has now hit $14.639 trillion. It's the most rapid increase in the debt under any U.S. president.

The national debt increased $4.9 trillion during the eight-year presidency of George W. Bush. The debt now is rising at a pace to surpass that amount during Mr. Obama's four-year term.

As of May 10, 2012, the official debt was $15.712 trillion, not including the $6 trillion in Freddie Mac and Fannie Mae debt.

Even more startling is the fact that this rate of debt growth excludes the even more rapidly rising unfunded liabilities of Social Security, Medicare and Medicaid and unfunded state-pension liabilities. When the $57 trillion present value of these unfunded liabilities is added to the “official debt," the rate of debt growth is more than twice GDP growth over the last ninety years. To repay the debt, even just to pay the mounting interest on that debt, we have to produce not only all we currently do to satisfy current demand for goods and services—we must produce much more. Take an average family, which must work to earn enough money to pay all its bills for food, clothing, heat, power and transportation. That is its current consumption. It also must pay the mortgage and credit-card bills for past consumption. If the credit-card and mortgage balances are too large, the family can never work enough hours to pay for current consumption and to pay off its debts. It has run up against the limit of time.

Similarly, if the world cannot produce enough surplus energy to expand the economy, meaning increased complexity and even greater specialization, the debt can never be repaid. It will have run up against the limit of energy. Stated another way, the economy would have to grow, ever faster, to pay off both past debt (official national debt incurred through past consumption) and accumulating, currently incurred debt for future consumption (unfunded Social Security and Medicare liabilities and unfunded state-pension obligations). But it wouldn’t be possible to produce enough conventional energy to do so.

In that event, society no longer would be able to afford the pharmaceutical research to invent that new drug to keep some folks healthy or even alive. It no longer would be able to fund research institutions and universities to develop the next big breakthrough. Society would not be able to spend scarcer resources on new technology. As a result, that technology would not be created. Food would become increasingly expensive to produce, so fewer mouths would be fed. The portion of work hours necessary to purchase food and other basics would increase. We are seeing that now throughout the Middle East. World food prices have skyrocketed, as commodity inflation, which reflects both reduced supply and increased demand, not to mention the central banks’ money printing, has put even one meal a day beyond the reach of many people there. Society will devolve along the same path on which it developed. This scenario is inevitable unless a new source of cheap, surplus-producing energy can be exploited quickly.

But America may be blessed in this regard. Between our two shining seas there lies the world’s greatest bounty of oil and natural gas. Only in the last few years has this magnificent bounty begun to be realized.