For 25 years, the “motor of the world economy” has been the American consumer. With that motor finally threatening to sputter out, the time for a “Green New Deal” is at hand...

The euphoria didn’t last...

On Monday, October 13, the Dow racked up its largest one-day point gain in history. In percentage terms, it was the largest single-day gain since 1933.

The rally was a pent-up sigh of relief as governments around the world responded to the credit crisis. The emergency backstop measures put in place by country after country -- see “The Return of FDR, Part II” -- gave investors a glimpse of light at the end of the tunnel. For one day at least, fear was put aside.

But then the economic data began to roll in, and the fear returned. Even if the credit crisis comes to an end, the market realized, the pain of global economic downturn could just be getting started.

Martin Wolf, one of the sharpest minds at the Financial Times, sees consumer outlook -- “particularly in the English speaking world, and above all the United States” -- as the most important question now.

“Are [consumers] going to be optimistic and spend,” Wolf muses, “or are they going to say, ‘We spent too much. We borrowed too much. Our wealth is falling. Houses are falling, equities are falling, we’ve got to save a lot.”

The answer to that question, Wolf believes, will tell us what we need to know about how long the downturn will last.

Time for a New Motor?

George Soros thinks the conclusion is foregone.

For the last 25 years, Soros observes, the “motor of the world economy” has been the American consumer. And not only has the American consumer been aggressively consuming, he “has been spending more than he has been saving.”

“So that motor is now switched off,” says Soros. “It’s finished. It’s run out of -- can’t continue. You need a new motor.”

The declines of that truly awful week when the Dow lost 18% were tied to the credit crisis. Before governments across the globe stepped up, there was a fear that nothing would be done.

The declines that followed Monday’s rally, however, were tied to a separate issue... rooted in fears that the U.S. consumer may, after many years and countless false alarms, be well and truly tapped out. If so, we don’t know what the new “motor of the world economy” is going to be.

Soros has a notion of what that new motor could be. Moral aspects aside, I think he is right. It’s an idea some readers will like and others will hate...

“We have [another] big problem,” Soros says. “Global warming. It requires big investment. And that could be the motor of the world economy for years to come... instead of consuming, building an electricity grid, saving on energy, rewiring the houses, adjusting your lifestyle where energy has got to cost more until you introduce those new things. So it will be painful. But at least we will survive and not cook.”

The Green New Deal

Concerns over global warming and the high cost of fossil fuels are closely aligned. Whether or not you embrace the concept of global warming -- and there is still real debate on the subject -- you no doubt remember the sky-high fuel prices the world had to deal with earlier this year.

Energy prices are falling now, mainly due to deflation fears and the phenomenon of “demand destruction.” But when global growth resumes, energy prices will go right back up again. And then there are the indirect costs, like the rampant pollution and quality-of-life issues that plague China and India.

Many top thinkers thus agree with Soros. There is a very strong feeling that the world needs a “Green New Deal”... an alternative-energy-focused motor that can get the global economy humming again.

2008 versus 1932

Let’s take a quick look at the similarities between now and the 1930s.

When FDR took office in 1932, a devastating financial crisis was in full swing. (Sound familiar?) The country was desperate for leadership. Partisan lines were blurred as the whole of America demanded change.

FDR wasted no time laying into the bankers. His harsh words were right in synch with today’s times: “Practices of the unscrupulous money changers stand indicted in the court of public opinion, rejected by the hearts and minds of men....The money changers have fled from their high seats in the temple of our civilization.”

Fled from their high seats, indeed. After declaring a bank holiday, FDR wasted no time in drafting new legislation, overhauling the system, and generally trying to get America back to work.

American farmers were a major focus of FDR’s New Deal. The general belief was that farming held the key to getting the economy back on its feet. In the end, many controversial programs and measures were put in place... more than a few that live to this day. While farming served as the linchpin back then, green energy can serve as the linchpin now.

So was the original New Deal effective? Was it a good thing? That’s a can of worms your humble editor would rather not open.

Some feel FDR did little more than dig holes so he could order men to fill them up again. The skeptics further argue it was really only World War II that brought the United States out of its epic slump. FDR’s defenders, on the other hand, feel that the programs implemented and leadership provided were absolutely necessary for the times. Your humble editor shrugs.

Pragmatic Thoughts (Not Moral Pronouncements)

We are more interested here in sussing out what’s likely to happen, rather than debating the right or wrong of whether it should. And in that regard, it looks like the pieces are in place for the new FDR (i.e., America’s next president) to implement a Green New Deal.

Consider the backdrop of current events:

• We are in a time of unprecedented financial crisis (not unlike 1932), with little or no dissent toward the assertion that free-market capitalism has imperiled its very existence (and must be reined in).

• The American public -- and the world at large -- is desperate for leadership, to a degree that is only possible in a time of true crisis. (When things are better, people focus on their day-to-day lives.)

• Political leaders have the added impetus of avoiding at all costs a repeat of the mid-to-late 1930s. Their desire to sidestep the full “Great Depression experience” creates an added sense of urgency.

• In terms of economic thought, John Maynard Keynes rules the day. When all the “guarantees” are added up, trillions have already been committed on both sides of the Atlantic. Trillions more could well follow.

• U.S. consumers account for 20% of world GDP in spending terms (Martin Wolf). Global leaders everywhere are deeply aware of the danger of John Q. Public sputtering out, and thus deeply keen to get a new “motor” up and running.

• Alternative energy is the “motor” candidate for which all the right boxes are checked. There is moral authority (via global warming concerns); global buy-in (via the energy issues all non oil-exporting countries face); massive scale and scope (projects too vast for the private sector to handle, i.e. retrofitting tens of thousands of gas stations across the U.S.); and, last but not least, a genuine need for massive spending (many trillions for new and upgraded infrastructure).

From Pelosi to Eisenhower

We are likely to see more crisis spending in the days ahead. Like the war in Iraq, the final tally for government involvement in the global financial system will only rise and rise. (Unlike Iraq, however, there is at least the possibility that taxpayers will profit... but that’s a speculative notion, and a very long-term one at that.)

On October 8, House Speaker Nancy Pelosi gave a foretaste of this with her call for a $150 billion stimulus package aimed at Main Street rather than Wall Street. Assuming an Obama win, the Democrats are planning to hit the ground running on November 5. That means breaking out the checkbooks for Round Two (and Three, and Four, and so on).

If McCain wins, the spending outlook doesn’t change that much. He, too, has plans to bail out U.S. homeowners. A Republican White House paired up with a Democratic Congress might even touch off a “top this” contest to see who can be more generous.

Whoever wins, the U.S. budget is going to be busted like never before.... and it will not be long before the “Green New Deal” starts taking shape. As it does, do not be surprised to hear a buildup of references to good old Dwight Eisenhower.

Roughly one half century ago, President Eisenhower signed the Federal-Aid Highway Act of 1956. As a result, there are just under 47,000 miles of interstate highway crisscrossing the United States today. The longest stretch, route I-90, runs a full 3,000 miles across the continent.

Ike’s highway system was not at all cheap to build, and still costs upwards of $80 billion a year to maintain. But given all we’ve gotten these past 50 years, who will dispute it was worth it? The open road is an indelible part of American life and culture -- not to mention the incalculable value of transport, or the millions of truck stops, burger joints and bedroom communities that sprang up on the new interstate.

From Roof to Shining Roof

When you start with Ike’s highways, it’s not hard to imagine the same type of grand vision applied to green energy solutions.

The soaring speeches practically write themselves. Just imagine it: Millions of proud, hard-working Americans climbing up on the roofs of their eco-friendly homes, installing the solar panels that will set them free from the burden of high energy costs, while leading an industry boom that restores and renews the nation.

Or picture fresh-faced toddlers waving from the back seats of biodegradable electric cars -- cars built by American hands in freshly capitalized Ford and GM plants, designed to travel up to 300 miles per day on near-zero emissions, plugging into the natural gas and nuclear-powered grid at night to refuel. My Country ‘Tis of Thee, Sweet Land of Li-ber-ty...

OK, that was a little cynical. But you get the idea. If the U.S. consumer is tapped out, then America -- and the world -- will need a new deal. So why not make it a green one? And on top of that... whisper it now... who wouldn’t mind another investment bubble (this time in alternative energy shares)?

Mind or not, we’re going to get one of those, too... a new bubble, that is. When the next mania comes, alternative energy is almost certainly where it will take root. Financial panics will come and go, just as they’ve been doing for thousands of years -- did you know Wikipedia has an entry for “The Business Panic of 33 AD”? -- but human nature never changes.

Who Pays for All This?

By now you might be wondering: Who’s gonna pay for all this stuff? Where will the money come from?

It’ll mainly be taxpayers, of course... the same people who always pay. But a mass investment wave in global green infrastructure will at least have some nice follow-on benefits. Like Eisenhower’s highways, we’ll get something solid in return for our investment -- unlike the trillions that simply vanished into the maw of the great Wall Street housing bubble ponzi scheme.

Over-eager investors will also voluntarily pay a big chunk of the “green” bill, too. I speak here of those who will wind up plowing their money into the green tech bubble (once it inflates) at the very height of the boom, paying for excess capacity that plummets in price to become a cheap consumer good later.

In other words, excess capacity in the short run will lead to wonderfully cheap green energy in the long run. It will happen with “green tech” the same way things are playing out now with bandwidth. A few years back, bubble-hyped telecom investors fudged the profit calculations on thousands of miles of fiber-optic cable. In result, they were forced to sell their stakes at a blowout loss, leaving the cable in the ground for you and me to enjoy at low cost.

It’s an old historical pattern. We saw it even earlier with the railroad boom and bust. After the great railroad investment debacle, the trains and tracks were still there for the country to use. On the heels of the Green New Deal will be the Green Mega-Investment Bubble -- and then, when that bursts, a wonderful glut of energy saving technologies on the other side.

But now we’re getting ahead of ourselves... There will be huge profits to be made on the run-up in all things green, likely sustainable for many years, before we circle back round to bust again. And so it goes.

My apologies... I thought we’d be able to close with a discussion of the dollar and gold as it relates to all this. But I don’t want to give such an important topic short shrift, so we’ll return to that next week.

Meanwhile, I’d love to hear from you. What do you think of Martin Wolf’s question? Is your own household optimistic or pessimistic heading into the future? Do you like the thought of a new FDR taking the reins, or does it turn your stomach? What’d you think of the old FDR? Hero? Villain? Overrated meddler? What are your thoughts on the Green New Deal? Is it a good direction for our country (and the world)?

Let me know: justice@taipandaily.com.

Warm regards,

JL

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