If there is one thing that Republicans and Democrats can agree on, it is that no one has any good ideas about how to solve our deficit problem. The sheer scale of the deficit ($1.1 trillion and 7 percent of GDP in 2012, according to the Congressional Budget Office) means that neither spending cuts nor tax revenues can really get us to a balanced budget without destroying our economy in the process.
The problem is that in our current system of currency, known as the fiat system, the U.S. dollar derives its value from the supply and demand of money, goods, and services -- as opposed to having any intrinsic value. Another way of saying this is that we are essentially a paper economy where money does not always translate into the actual value that it represents, thus paving the way for excessive spending and also making our currency increasingly worthless as a means of trade.
At the same time, the fiat system is far superior to the old gold standard, in which the price of gold was fixed and currencies pegged at set exchange rates, which imposed fiscal discipline but also made it harder for the government to respond to sudden monetary shocks and stifled potential economic growth. Another byproduct of the standard was that it created trade imbalances amongst nations since gold is concentrated in only some parts of the world. This is why the standard was eventually abandoned everywhere and has never again taken hold.
It should be obvious from these two extremes that what we really need is a system that is fluid while being disciplined, expansive without being prodigal, and one that employs a carrot along with the stick to move the U.S. back towards economic sanity.
The trillion dollar question is: Does such a system exist?
It could. Some might call it a wild idea but sometimes wild ideas form the basis of much-needed innovation which, in this case, might help our economy return to its health without compromising the valuable infrastructure and systems that our nation has put in place over the last century.
The idea is a Clean Energy Standard, which would impose fiscal discipline on the U.S. while providing a clear monetary incentive to develop clean energy and reduce our dependence on foreign oil.
This will be achieved by fixing the U.S. dollar not against the price of energy but against the units of clean energy produced by our country. The basic unit of energy is the kilowatt hour (kWh), which is equivalent to 1000 watts of power delivered for one hour and is the unit used by electric utilities to charge consumers. Under a clean energy standard, a single U.S. dollar could be pegged to an agreed-upon multiple of a kWH, let's say $1 to 10 kWh, so that if the Treasury wanted to issue $100 more in currency, they would need to produce 1000 kWh more of clean energy to justify it.
The benefits from this are easy to see. If our government wants to increase money supply or expand the economy, they will need to invest more heavily in clean energy generation, or even better, provide more incentive for private industry to do so. This will push us faster towards energy independence, promote environmentally friendly means of producing energy, such as solar, wind and hydroelectric, and also encourage the private sector to increase its productivity -- as their own profits, government incentives, and the economic health of their customers, will all depend directly on their energy output.
Conversely, when energy output falls, the U.S. government will have to purchase clean energy from other nations to bring money supply back in line with clean energy output, but since energy is difficult to store and expensive to transport, the high price-tag of such purchases will force Washington, as well as the energy industry, to find innovative solutions to increase output -- such as investing in advanced technologies and production methods. All this, in turn, will increase American competitiveness on the global stage.
Another benefit to us would be a drastic reduction in the price of oil as countries like Saudi Arabia and Russia are forced to slash prices due to decreasing demand for their product and lose their stranglehold on the world economy. Not to mention that those countries will themselves have to invest in clean energy in order to secure valuable dollars, thereby reducing the emission of fossil fuels as well.
Finally, such a system would help developing nations achieve higher levels of prosperity and make them more valuable trade partners. While inflation spurred by a fiat currency can create income inequality and recession and the limited availability of a fixed commodity like gold can restrict a nation's economic growth, a clean energy standard is expansive in nature and makes progress achievable through effort and innovation. Also, the availability of more energy in those countries would enable industry and motivate them to open their markets to foreign investors as they grow.
Does all this sound too good to be true? Perhaps, but then most new ideas do until they are tried, tweaked, and perfected; and as I said earlier, even ideas that cannot be taken at face value can still provide a foundation for further innovative solutions. In any case, a clean energy standard (or some derivative of the same) has the advantage of aligning the interests of both the public and private spheres towards the achievement of a socially and economically worthwhile goal, and certainly beats putting our faith in paper money or a shiny piece of metal whose quantities cannot be increased by any amount of human effort, unless you are an alchemist.
SANJAY SANGHOEE has worked at leading investment banks Lazard Freres and Dresdner Kleinwort Wasserstein as well as at a multi-billion dollar hedge fund. He has an MBA from Columbia Business School and is the author of two financial thrillers, including "Merger" which Chicago Tribune called "Timely, Gripping, and Original". Please visit his Facebook page for more information.
Follow Sanjay Sanghoee on Twitter: www.twitter.com/sanghoee