golden cityHouston, Texas sure is entering a golden era. It seems that everyone is moving to the town (the nation’s fourth biggest) these days. The largest construction project in the nation is just north of the city, a campus for Exxon Mobil. Houses are getting thrown up like suburbanization is some new fad. Maserati cars (remember that luxe brand?) prowl the streets. All for good reason, it seems. The city is free-form and friendly. And the oil boom that is hitting the nation, and the petroleum capital of Houston, is the biggest ever.

Meanwhile, as the Wall Street Journal has reported, Jeff Immelt might call it quits as General Electric CEO before 20 years at the helm, the magic number that people were expecting his tenure (which began in 2001) to last. GE’s stock has been parked at the same number, give or take some variation, throughout the Immelt years. Not that the company doesn’t make money. Its lowball figure for the tax man is some $16 billion in yearly profits.

Back in the 1980s and 1990s, Houston had a rough time. The oil patches in Texas, and elsewhere as managed by the engineers and executives at headquarters in Houston, dried up. The reason was that it was no longer profitable to pump oil. Oil crashed in price in the early 1980s from $40 per barrel to about $18 and stayed there for two decades (in the context, mind you, of acute world economic growth). Property values plummeted and there was out-migration. The city had to reinvent itself as a medical center.

The 1980s and 1990s for GE? The greatest run by any corporation ever. The stock went up 100-fold (this no start-up, but a charter member of the Dow Jones Industrial Average), as the company introduced the world to products like noiseless turbines and now-ubiquitous MRI machines.

But back prior to that, in the 1970s, there had been another flip. GE down and Houston up. GE’s stock did zilch in real terms from the late 1960s to 1980. In Houston, it was growth, growth, growth. Half the architecture which the builders have to squeeze around and tear down in town just now dates from the days of disco. That’s when oil went from $3 to $40.
And prior to that, before the 1970s, all was stability. Houston and GE both prospered consistently.

The control, it would very much appear, is the fiat dollar. Prior to the United States’ abrogation of the gold standard in 1971, there was little reason to speculate in hedges against the dollar, such as oil. Petroleum’s price stayed low and stable. This left investment capital to flow to outfits that promised to make a profit by introducing useful products and services to the world at large.

GEGE might be thought of the quintessential proxy, as a single business, of the real economy. It makes things that people need and want, and anticipates real uses, as in those MRI machines that nobody had ever heard of while under development in the 1970s. Lighting, appliances, generators, turbines, medical devices, the gamut of stuff is what GE has characteristically striven to make, with an eye to the cutting-edge.

As for management, GE’s is generally understood to be the best, the top of the list. No CEO is more revered than Jack Welch, who ran the conglomerate during the 1980s-90s surge. Reginald Jones before him was himself widely regarded as the best executive in the land. And Jeff Immelt is manifestly no slouch, nor is the GE management bench, which routinely gets pillaged by other major companies looking for CEO’s.

What gives? It appears that investment capital powers into businesses that have good ideas about and prospects for making useful things, when there is little or no concern about hedging the currency. When there is such concern, these businesses no longer attract significant capital, as instead it prefers to migrate to hedges in the universe of commodities and so forth.

GE is of course not unwise to this problem. For a while, as one wag analyst put it, GE was a “hedge fund in drag,” setting up a unit to play the markets and currencies, a unit that for a while booked big money. And as Tim Carney has reported, since Barack Obama became president, GE has explored opportunities in the area of cronyism. GE is probably responsible for the odious light-bulb-type switch that Congress forced upon the country a few years ago.

In other words, GE lost heart as it came to have trouble attracting investment in the usual way, namely being good at fulfilling and anticipating market aspirations. Of course it did. From late Alan Greenspan era on, from early 2000s to today, the Federal Reserve has produced the dollar without any regard for keeping it de facto collateralized against real things like commodities, gold, and oil. So GE has had to get into the hedging and government game. No wonder a talented real-world CEO might fall for the siren call of the Nantucket retirement manse.

Back in Houston (where I happen to live, among the busyness and the rain of money), you have to wonder about all the incredible talent that is plugging away at geology and fracking and machine tools. If oil were at $40 a barrel, which it would be if the Fed took seriously commodity-price signals, these very capable people would be fanning out across the land bringing their talents to other industries, indeed ones that made things that people actually could use in life. It is a contradiction, after all, to have a renaissance in oil production technology and capacity, as we do now, along with a sustained price surge over $100 per barrel.

The United States kept the dollar stable against the main commodities, gold and oil, through the 1960s, and the prosperity that GE and Houston experienced in tandem was that of the nation as a whole, namely fabulous stuff. In the 1970s, the government foreswore that successful formula. Great dislocations occurred, in the context of diminished economic growth.

The government reconsidered in the 1980s and 1990s and chose to ape the pre-1970s dollar policy for twenty years, causing dislocations of another variety, out of hedges back into the real economy. Economic growth was much higher. Somehow in the 21st century, government fell in love with the 1970s again.

state_of_the_dollar-website_0It is quaint—and sad—to see all this argumentation about the inflation rate, about the government’s ludicrous statistic, the consumer price index. Academics and progressives are saying if there’s no movement in the CPI, as there has not been lately, dollar policy is just fine. Wrong. The harm of the fiat dollar comes primarily, if not wholly, in the goosing it gives to the misallocation of capital into non-real investments. And this effect is massive.

There are two big boom towns in America right now: Houston and Washington, D.C. The mega millions who are moving there and furnishing those places with their abilities, every one of them represents a far less efficient allocation of human capital than would be the case if investors did not have to worry about hedging this dumb dollar. Hence our nation grinds ever more into economic mediocrity. And poor GE has to sit there and think about cutting down on real-market businesses and get on board with what works in an era of Obamanomics carve-outs and Ben Bernanke and Janet Yellen scrip.

Books on the topic of this essay may be found in The Imaginative Conservative Bookstore. This essay first appeared in Forbes and is republished here by gracious permission of the author.

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