Cap and Trade: Picking Money Out of Thin Air

Fiat money. That term has been getting more and more attention as the Obama administration prints more and more money, making the dollars already in existence worth less. Some say that's a good thing, because when it comes time to pay China back for the dollars they loaned us, we will pay them back with lightweight dollars.

Think about that for a minute. Every time the U.S. Treasury prints another sheet of twenties, the value of the dollars in your wallet drops.

Those paper twenties are fiat money, dollars that are worth something because Uncle Sam says they are. So you'd better have a lot of confidence in Uncle Sam.

Money didn't always work this way. Americans used to buy things with coins made out of real gold, silver, and copper. Right through to the mid 1800s, if you wanted some spoons or forks, you would take some silver coins down to the silversmith and he would turn them into silverware for your dining table. Gold coins were "worth their weight in gold." You could bury them in your yard and dig them up 25 or 50 years later, and they would still be worth their weight in gold. Then:

[i]n 1933, during the height of the Great Depression, President Roosevelt made it illegal for U.S. citizens to hold gold. He ordered all gold coins removed from circulation and returned to the U.S. Treasury where millions were melted into gold bars. The value of the U.S. Dollar was then adjusted from $19.75 per ounce to $35 per ounce. The worldwide effect was to devalue the buying power of the dollar over 40%.

So, with all the financial hanky-panky that's going on, not to mention anxiety caused by rising unemployment and looming depression, many people are getting a bit nervous about fiat money.

Which makes it especially unnerving when financial experts start telling us that, during the process of Carbon Cap and Trade, what gets traded is a brand-new, never-before used kind of fiat money, something that has value only because the Obama administration (and Al Gore) say it has value.

Wow! A new way to print money, and you don't even have to call it money. How's that for double-speak?

The valuable thing being traded? Permission to make something that has no intrinsic monetary value (in fact, it comes out of the backsides of cattle and other critters, including humans, for free) and is as elusive as the wind, where it lives. Plants find it delicious, though, and pluck it from the air to make food, fiber, and biomass.

Bill Freeza at Real Clear Markets offered a good explanation that's not impossibly technical for me, so I thought I'd pass it along:

[B]race yourself for Cap and Trade, a bonanza for both Washington and Wall Street - as if anyone can tell the difference any more.

Congress plans to sell permission slips to businesses whose carbon footprint has attracted its attention. Some of these permission slips might be auctioned off and others might be given away to favored industries. Who gets what and who needs what will be based on “baseline” estimates of past carbon emissions, an interesting accounting challenge given that most tail pipes and smokestacks don’t come equipped with carbon dioxide meters. Sorting out the starting parameters using the scientific process of Congressional log rolling is just the beginning. Wait until the new federal carbon police begin tracking demon molecules upstream to assess the total emissions impact of production at whatever random point in the supply chain Congress decides to erect a toll booth.

If you think it’s challenging figuring out the FAS 157 fair market value for your illiquid assets, try calculating the total carbon emissions of your business. Or arguing with a carbon auditor who disagrees. Or putting a carbon footprint label on your product, which will surely be mandated as the green economy grows. “6.9 pounds of carbon dioxide was released in the manufacturing of these cornflakes.” Not counting the heavy breathing of all the audit committee members trying to stay out of Sarbanes Oxley prison.

At least our unemployment problem will disappear when armies of carbon accountants and certified greenhouse gas auditors fan out to monitor the invisible gasses that leak from the growing number of industries captured by Congress once it starts lapping up the revenue flow from this unbounded intrusion. Got Milk? Not without a cow fart permit, you don’t.

But wait, there’s more! Congress is going to reward favored companies and institutions that promise to soak up invisible gasses, or not emit them to begin with. Carbon Offsets, they’re called, yet another financial instrument that can be introduced into the mix. Al Gore buys them to assuage his guilt for burning up all that electricity he needs to warm his heated swimming pool.

How long do you think it take for the Wizards of Wall Street to cook up derivative contracts that slice, dice, and securitize these permission slips into incomprehensible combinations designed to generate fees that can be used to reignite the bonus engine? How much would you pay to short the middle tranche of the Midwest Power Producers Promise to emit less invisible gas November permissions contracts? Only your broker knows for sure.

This is much more fun than simply taxing a barrel of oil or a ton of coal, huh?

At least we’ll be in familiar territory. Remember when Congress “solved” the homeownership crisis by creating giant fishy mortgage cesspools at Fannie Mae and Freddie Mac? And then those long-term thinkers on Wall Street rushed in to build casinos on top of the mess so hedge fund speculators could bet on when the whole thing would collapse around their ears? Well yeeha, we’re going to do it again. Only this time we’re not just saving the less credit worthy from the indignity of renting. We’re saving the planet from thermal annihilation!

Hey, it will be fun getting to be a "favored company and institution," eh?

And just wait until the EU and the IMF get their fingerprints all over this one.