On Wednesday, May 19, Nick Deiuliis served as the Pennsylvania Independent Oil & Gas Association’s (PIOGA) keynote speaker for its annual spring meeting.
The Pittsburgh Post-Gazette covered the meeting and Nick’s remarks, writing, “They [attendees] knew what to expect when CNX Resources’ CEO Nick DeIuliis took the podium for his keynote address. He would be the one to speak for them, unapologetically…A self-styled advocate for capitalism, the middle class and for developing nations — which he says will be hurt most by a move away from fossil fuels — Mr. DeIuliis predictably went after the ‘elites’ and ‘academia’ in his speech and said the pursuit of renewable energy gives power to the Chinese Communist Party…”
Over the past 150 years, starting with post-Civil War Reconstruction, America has delivered to the world the largest improvement in quality of life in history. Capitalism, free enterprise, and individual rights were the ideological columns that allowed the edifice of the human condition to rise.
As you sit in your climate controlled home, streaming movies, using Door Dash for dinner, and waiting for your vaccine of choice, you might ascribe all this technological innovation and progress to the behemoths of big tech: Apple, Google, Amazon, and so on. Certainly, these modern-day FAANG titans sit at the fore of the idea economy.
Yet our modern economy of services and ideas consists of tiered levels, with the prior tier serving as a necessary and supporting base to the next tier. No internet, no digital streaming. No electricity, no internet. No carbon, no electricity. And so on, back to the most fundamental building blocks of an economy.
Americans have lost sight of this fundamental economic truth, blinded by the mesmerizing clicks and taps of apps. Add to the mix fabricated mistruths about the demise of the “old economy” spewed by the elite and the Left in academia, government, and monied foundations, and many of us today are transitioned from uninformed to misinformed when it comes to drivers of the economy and our lives.
A historical refresher is in order.
Our modern economy is built upon five successive pillars, each one rests atop predecessor pillars and supports subsequent pillars. Lose one pillar and you lose the pillars above it. Let’s meet the new bosses, same as the old bosses.
Pillar #1: Don’t Call Them Robber Barons
Everything we enjoy in our modern life traces its roots back to, and continues to depend on, the founding fathers of our economy. Most of them rose to prominence in the period of American history after the Civil War and before World War I; a time where industry rebuilt and then drove America to global prominence.
The three faces that sit on this pillar’s Mount Rushmore are Cornelius Vanderbilt, John Rockefeller, and Andrew Carnegie. Vanderbilt built, integrated, and consolidated the transportation network, specifically rail, that allowed a nation to grow and its industry to thrive. Rockefeller took the fragmented and disorganized industries of oil and refineries and brought order that spurred the innovation of new products, including gasoline. Carnegie was the visionary who saw the need for a new product to build our cities and structures: steel.
Innovating from their home bases of New York, Cleveland, and Pittsburgh, these three men along with others fused a backbone of the American economy that we depend upon to this day. They were far from perfect, as incidents like the Homestead Strike painfully illustrated. But they were great, and we owe them a debt of gratitude.
Most importantly, they set the stage for Pillar #2 of our modern economy.
Pillar #2: Finance Powers Innovation
As railroads, steel mills, and refineries grew into industrial titans, finance evolved into a powerful catalyst to accelerate progress and spur more innovation.
J.P. Morgan revolutionized finance as an instrument to optimize commerce, and he was not afraid to get in between Rockefeller and Carnegie where he saw opportunity to create value (for example, Morgan bought out Carnegie and created U.S. Steel). Morgan showed how the purse could be a force to be reckoned with, even for the world’s most powerful industrialists.
J.P. Morgan also funded new innovators and innovations, playing Thomas Edison and George Westinghouse against each other as they demonstrated and commercialized electricity generation. Edison brought us light, he and his competitor Westinghouse established electricity generation at scale, and Morgan provided the capital to enable all of it (Morgan eventually took control of Edison’s company and recast it as General Electric).
But if no rail, oil, or steel, then no modern finance and electricity. Once these two pillars were in place, it set the stage for the next pillar that would fundamentally reshape the world.
Pillar #3: The Societal Impact of the Modern Assembly Line
Thankfully, at about the time politicians and bureaucrats were working to take down the Standard Oils of the world, a new breed of creators appeared on the scene to keep progress moving. Henry Ford took the recipe ingredients of steel, gasoline, finance, and electricity to revolutionize manufacturing with the modern assembly line.
Ford’s assembly line made automobiles affordable. His manufacturing innovations also established an eight-hour workday and a living wage for workers, who would then have both the time and money to purchase and enjoy cars. That drove up the demand for cars, making Ford more profitable. Policy makers have been trying to replicate this virtuous circle ever since.
Others took note of what Ford was doing in autos and looked to copy it for other products. Hershey figured it out for candy while others applied it across a spectrum of industries. The worker and consumer both benefitted, with increasingly worker and consumer being one in the same. In many ways, the American middle class was the most impactful innovation of this pillar.
All of Ford’s necessary ingredients came from predecessor pillars. Without them, there would be no assembly line, all the consumer benefits that derived from it, or a middle class. Nor would there be the benefits of the next pillar that Ford and his peers made possible.
Pillar #4: Rise of the Service Economy
The prior three pillars of the economy provided the feedstocks to efficiently manufacture consumer goods. Workers increasingly were able to enjoy and afford these products, driving up demand. And technology expanded the gameboard of what and when things could be enjoyed.
All of this birthed what we know today as the service sector of the economy. Mechanics were in demand to repair cars. Beauticians were wanted to assist with application of makeup and hair care products. Entertainment became a massive industry as movie theaters and television became ubiquitous.
Before you knew it, the service economy was as big, or perhaps bigger than, the manufacturing sector of the economy. But without a strong manufacturing base, there would be no service economy. If you don’t build it, you won’t service it. If you lose the large number of high paying jobs in manufacturing, people won’t be able to afford services. Obvious to most, but frustratingly foreign to many politicians and policy makers today.
Everything was now in place for the fifth and final pillar.
Pillar #5: The Idea Economy
The prior four pillars set the stage for increased specialization, innovation, and widespread technology diffusion. Suddenly everyone had computers, cell phones, and internet access. Entrepreneurship blossomed and the largest corporations in history were created by thinkers tinkering in garages.
Big tech and the idea economy are awesome innovators and innovations. Yes, at times their power needs to be checked when impeding individual rights such as free speech. And these entities must be constantly reminded that their initial and ongoing success hinge on the underlying pillars they rest upon. But like Rockefeller and Carnegie before them, we are much better off with today’s tech titans than without them.
Donald Rumsfeld famously referenced “known knowns” (things we know that we know) and “known unknowns” (we know there are some things we do not know). Our 150-year American economic journey of prosperity has definitively proven Rumsfeld’s two axioms true.
Our “known knowns” are that if you sabotage any of the underlying economic pillars, you will unleash the widespread collateral damage of ruining the subsequent pillars. That’s true even when the aspiring destroyers are trumpeting the need to do so under the banner of the public good or saving the planet.
The “known unknowns” are the future pillars to be created and brought to society. We don’t know what they are or when they will appear. But we do know the frequency and timeliness of them will hinge on our ability to protect the current pillars and nurture the ideological columns that made them possible: capitalism, free enterprise, and individual rights.
CANONSBURG, PA. — Thirty years ago, Jason Capps was a young man with ambition, but when he looked around this town near Pittsburgh, where he grew up, all he saw were opportunities slipping away. The coal mines where his father worked were dying; the glass, steel and manufacturing industries were on their last legs.
In 1987, when Capps graduated from high school, the unemployment rate was at a staggering 12 percent.
“My ability to carve out a future here was limited at best, impossible at worst,” he said. “So I left.”
Capps, 51, became a chef and traveled the country honing his skills. But then an unexpected rebirth happened here in Western Pennsylvania with the discovery of the Marcellus Shale, an ancient rock bed that offers an abundant source of natural gas.
Eventually, Capps moved back to his hometown and, in 2006, he founded Bella Sera — a successful event space resembling a grand Tuscan villa — which he still owns and operates.
Legendary Federal Reserve Chairman Alan Greenspan knows a thing or two about the history of financial crashes. He often stated that every financial crash in U.S. history can trace its roots to a cause that was unanticipated and unexpected prior to the calamity. That held true from the Panic of 1873 through the financial crisis of 2008.
However, Greenspan’s adage no longer holds true, because today we are teetering on the edge of an economic abyss in plain view for all to see.
The next financial calamity will be a seismic one, claiming a full spectrum of victims. The root causes will be self-induced through ill-advised policy instituted by government across local, state, federal, and international levels.
The looming crisis will be catalyzed by a handful of massive missteps that share one thing in common: this country lacking the political will and leadership to stop unsustainable fiscal and monetary policies that are doing irreversible harm.
Any one of these missteps has the potential to wreak economic damage on its own. Together, they offer a toxic cocktail.
Let’s meander through a rogues’ gallery of economic fright.
Monster Government Debt
Start with the biggest – federal debt level. The national debt sits at nearly $28 trillion (within a few weeks of posting this commentary, it will likely exceed $28 trillion). That’s over $84,000 per citizen, over $220,000 per taxpayer, and over 130% of annual GDP. These numbers should shock anyone with a sense of financial acumen.
Today, everyone on all sides of political and ideological spectrums knows only one thing: government spending more than it brings in.
Here’s an even more shocking metric to put the level of federal government debt in perspective: debt-to-revenue ratio. The federal government carries a debt-to-revenue ratio over 8. The S&P 500 index of public corporations posts a debt-to-revenue ratio less than 0.5.
That’s right, our government carries over 16-times the proportional debt load that the companies in the S&P index carry. If the federal government were a corporation, it would be in default of its debt obligations today.
Worst of all, government debt is only going to continue to grow, because of the following problem.
Perpetual Government Budget Deficit
Remember the good old days, when conservatives and Republicans advocated for balanced budgets and when liberals and Democrats pushed for budget deficits only during times of duress or crisis? Such days are long gone.
Today, everyone on all sides of political and ideological spectrums knows only one thing: government spending more than it brings in. Budget deficits are now a wired-in reality during all economic cycles, in good times and in bad. After all, that’s how we racked up $28 trillion in national debt.
The current annual “official” federal deficit, counting only president- and Congress-approved expenditures, is projected at over $3.2 trillion. The actual annual federal budget deficit, which adds off-budget expenditures to the tally, will exceed $4.6 trillion. Every dollar of outspend grows the national debt.
Balancing the federal budget will require many things, including getting the administrative state out of the path of economic growth. But most of all, it will require meaningful entitlement reform to Social Security, Medicare, Medicaid, and so on. To say the will of the political leadership to take on entitlement reform is weak borders on misleading. The fact is there exists no political will to perform necessary entitlement reform in Washington, D.C.
The Higher Education Racket Lays a $1.7 Trillion Egg
The American higher education system has been collaborating with government to bilk trillions of dollars from students, their families, and taxpayers. Student loan debt sits at over $1.7 trillion, or almost $40,000 per student. The portfolio is a dumpster fire in the process of imploding.
Many of those carrying the largest student debt loads earned degrees that don’t garner anything close to a wage in the job market that will cover the loan debt payments, let alone a legitimate rate of return on the student’s invested time and money. Academia sold students and families a fiction about job prospects that never had a hope of materializing.
Government played along by offering endless subsidy to colleges and universities and student borrowers. The government interventions created an inflationary bubble, with tuition doing nothing but exponentially increasing and administrative bloat at colleges ever expanding. Students were goaded into borrowing more and more, while the probability of being able to get a job to pay the debt off went lower and lower.
The federal government took over wide swaths of the student debt portfolio, at the time promising that taxpayers would enjoy a return on the “investment.” With default and forbearance levels at epidemic-crisis levels, that promise looks ridiculous today. The reality is taxpayers are going to have to absorb a gargantuan loss across the more than $1.7 trillion toxic portfolio, making the government debt situation worse.
All of this is about to come crashing down. When it does, don’t expect the higher education system to reform or our political leaders and government bureaucrats to own up. Instead, expect a lost generation of workers and taxpayers having to eat another bailout.
Poking the Inflation Bear
Economists, the Fed, and government bureaucrats assure us constantly that inflation is tame, despite the government turning the money printing press at a dizzying pace. Many of these experts cite modest consumer-price-index (CPI) levels as evidence that inflation is held firmly in check. The experts have nuzzled into an all-is-well on the inflation front slumber.
Yet common sense tells us something quite different than this pleasant inflation narrative. Everywhere we look, the inflationary warning signals are blinking red. We already discussed how college tuition levels have escalated at fantastic rates. Real estate prices are once again raging in regions and cities all over the nation, creating speculation and extended, heavily mortgaged homeowners. The prices of art, rare coins, expensive wine, and other collectibles continue to skyrocket.
Even commodities are experiencing price run-ups. This is noteworthy when you consider the pandemic and global shutdowns of economies throttled the demand for virtually every traditional commodity. Yet the prices of commodities such as oil, copper, and gold are percolating up. Even the prices for prior owned vehicles (what we used to call used cars) sit at elevated levels.
If wage rates experience similar increases once workers are allowed to return to job sites, it will only further stoke the inflation flames. Bureaucrats and politicians hand out pay raises to the public unions they answer to throughout the pandemic and shutdowns, stoking wage inflation in the public sector.
Everything is getting more expensive, no matter what the experts tell us about the CPI. The inflationary bear is coming out of hibernation.
Monetary Policy Morphs Investing Into Online Gambling…and the House Always Wins
Stock market indices sit at all-time highs. Debt prices are also at historic highs while bond yields sit at historic lows. That’s true for Treasury, municipal, corporate investment grade, or junk bonds. Rank speculation (GameStop) and day trading (Robinhood) have become normal as millions of investors gambling on laptops believe the market can only go in one direction.
Fed monetary policy induced this crazed, herd behavior. When the Fed cuts interest rates to zero and signals it has no intention to raise rates for years, it is eradicating traditional investment options in portfolios. Options like bonds and cash savings accounts provide little-to-no yield, forcing the smallest to largest investors to pile into riskier asset classes like equities and alternative investments to chase returns. Inflows into those asset classes drive their valuations higher, destroying the risk-reward balance.
Most markets, including equity and debt, increasingly feel like they are balanced on a precarious bubble. The slightest of jitters could precipitate a quick rush for the exists, leading to a rapid and severe popping of the bubble(s).
The Fed’s Cred Crumbles
The Federal Reserve convinced global markets far and wide that the United States can continue to pump money supply at unprecedented rates, purchase trillions of dollars in bonds to place on its balance sheet, and perpetually outspend revenues so that debt runs up. Amazingly, the global markets have witnessed all this largesse and have been perfectly comfortable receiving next to nothing in yield for lending to the U.S. federal government.
That magic trick is poised to fray, with dire consequences.
Money is nothing more than a barometer of value in society and confidence in the government printing it. If value is vilified or appropriated by government or if government acts irrationally, a central bank will go from the entity setting the terms to the one having the terms dictated to it.
The Federal Reserve may be rapidly approaching that point. As its balance sheet bloats and it inflates asset bubbles, it looks to expand its already multi-faceted mandate under pretense of everything from fixing economic inclusion (worthy but not exactly in the Fed’s wheelhouse) to tackling climate change (creating a mandate of “weather”).
If the Fed loses the trust of the market, it loses control of the value of money. That will surely equate to much higher interest rates. Higher interest rates will drown this nation in more debt and larger budget deficits, since interest payments on our massive accumulated debt pile will expand.
What to Do?
The cumulative headwinds facing our economy have never been stronger.
Massive national debt, huge annual budget deficits, growing student loan defaults, awakening inflation, risky market bubbles, and a Fed spread way too thin are all parading in the open, staring us in the face. Wrap all of it in the government-induced economic coma of the pandemic-justified shutdowns and the Left now setting economic policy in the corridors of federal power, it is amazing that things have held together for as long as they have.
But that may change quickly. What to do? Perhaps it’s time to pay down debt, tread lightly in riskier investments, think twice before you pay-up for that mint rookie Jordan card, and instead build a little cash. To do otherwise ignores those red-blinking signals and puts your personal full faith and credit in government bureaucrats and politicians.
Nick joined the Pennsylvania Cable Network (PCN) for an “On the Issues” interview on Feb. 11, 2021. Nick discussed a range of issues, including the economic impact of the natural gas industry, natural gas pricing, the environmental benefits of greater natural gas utilization, federal and state energy policy, and much more.
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