From an investment newsletter:
According to Bill Gross, who manages the world's largest pile of fixed-income assets at PIMCO, the Federal Reserve is going to resume large-scale quantitative easing at the rate of $100 billion per month. News of this plan has been leaking out for the last two months following an important speech Bernanke gave in Jackson Hole, Wyoming this summer. He said, essentially, we needed a lot more inflation.
If the Fed does resume quantitative easing at the $100 billion-per-month range, it would be buying the equivalent of all of the new debt the U.S. Treasury is issuing ? all of it. This represents an increase of roughly
30% to the money supply in the first year? an extraordinary amount of new cash.Trade and capital flows are transferring most of the inflation the Fed is creating to the Chinese economy. U.S. politicians continue to stimulate consumption in the U.S., while most of the production to meet this demand comes from China. We borrow and spend. They produce and profit. Hopefully, you understand printing more money and buying government bonds won't change this dynamic. It simply results in still more money being sent to China.
What will China do with the flood of capital? Lots of things. But one thing it will certainly do is build more coal-fired power plants. Coal-fired plants produce 80% of the electricity in China, and demand for electricity is growing roughly 9% a year. It's hard to comprehend how fast demand for coal is growing in China, but consider these facts?
China is now the world's second-largest consumer of electricity, after the United States. A decade ago, China's installed generation base was only 315 gigawatts. Today, it's 900 gigawatts ? and 78% of its production is still coal-based.
Today, China consumes three times more coal than the U.S. ? more than three billion tons. But China only has about half of the U.S.'s coal reserves. And that means it must import a lot of coal.
At current growth rates, China would exhaust its current reserves in only 16 years. Obviously that's not going to happen ? more mines will be dug. But just as obviously, it will take a long time to build the mines and lay the railroad infrastructure required. In the meantime, China will need a lot of coal.
Current market surveys show China will import 150 million tons of coal this year. That's only 5% of China's total coal demand, but it represents 15% of the total U.S. demand. Right now, almost all of this coal comes from Australia, where China takes up about 60% of the export supply of coal.
And here's the crucial fact: China's coal imports doubled in the last year.
We know total power production in China is scheduled to double over the next eight years. It's building a new coal-fired plant nearly every week. The United States has built only 12 new coal-fired power plants since 1990. Assuming China's coal imports double again (and they will), Chinese demand will exhaust Australia's export capacity. And when China's import demand doubles again after that (to 600 million tons per year), it will exhaust the world's total export supply.
China's not the only problem? Don't forget about India.
India's installed power base exceeds 600 gigawatts, and demand is growing at about the same pace as in China. India also relies on coal for most of its power (70%). It currently burns 500 metric tons of coal a year, mostly from domestic sources. But Vinay Kumar Singh, the CEO of India's Northern Coalfields, says the country will need to import at least 250 million tons of coal a year by 2020. India's imports of coal from South Africa rose 74% last year.
It's no exaggeration to say China and India's demand for electricity is the future of global power. Already China's coal production represents more than twice the amount of energy produced from all of Saudi Arabia's oilfields.
What's fueling all of this demand for coal-fired power plants? Huge urban populations in China and India. Consider these figures. In America, the baby boomers ? the 50 million Americans born in the years after World War II ? produced the demand for vast amounts of new infrastructure in America.
There are 300 million newly urban Chinese people. And 300 million newly urban Indians. That's 600 million people moving out of the Stone Age and into the modern world ? a group 12 times bigger than the baby boomers. While it's true these people will want to buy lots of things ? from Cokes to Buicks ? the thing they need most is electricity.
Americans don't yet realize the Fed's attempts to paper over our debts come with serious consequences. As our money loses its purchasing power, costs will rise ? especially power costs. Undoubtedly, our politicians will blame "speculators" for the soaring price of coal. But the truth is, the paper that will push prices higher came from the Federal Reserve, not from any hedge fund.
Whether we realize it or not, we compete with other nations around the world for resources. Historically, our currency ? as the world's reserve currency ? has given us an enormous advantage. Coal, for example, is priced in dollars. But we stand on the verge of losing that advantage? and the consequences will be drastic. We will face higher prices for coal, among other sources of energy.