Discovery

OCTOBER 2011 THE QUARTERLY NEWSLETTER OF KOCH COMPANIES Precision agriculture As the world’s population grows, so Many of these investments also benefit Both Nitamin® and AGROTAIN® prod- does the demand for food, animal feed, the environment. Advanced technology ucts reduce nitrogen losses and extend fiber and energy. in Enid, for example, reduces energy the amount of nitrogen available for Without chemical fertilizer, meeting those and water use while increasing opera- healthier plants and higher yields. tional reliability. demands would be impossible. “Agrotain International is an outstanding Koch Fertilizer, one of Koch Industries’ But as big as it is, Koch Fertilizer wants company with a long history of provid- fastest-growing companies, is a major to create even more value. ing value-added products,” Packebush player in global fertilizer markets. But “What we’re doing,” explained Packe- said. “It also has a very dedicated, that wasn’t always the case. bush, “is evolving beyond a typical fertil- customer-focused workforce.” izer producer and wholesaler. “We were a pretty traditional commod- Packebush believes the combination of ity-based producer for many years,” said “We certainly want to optimize and Agrotain International with Koch Fertil- Steve Packebush, president of Koch grow our existing fertilizer business, but izer’s assets, research capabilities and Fertilizer. “And modestly sized, too.” we also want to broaden our distribu- global footprint “lends itself to significant All that began to change eight years ago, tion channels and develop or acquire growth opportunities in the enhanced- when Koch Nitrogen purchased Farm- enhanced-value products. efficiency fertilizer market.” land’s nitrogen fertilizer business in the “We want to research and develop the Outlook U.S. and then began acquiring interna- tools and technologies that will lead to tional assets. better products for our global customers. Given the rapid growth in global fertilizer Today, Koch Fertilizer is the world’s “Our head of agronomy, Dr. Greg Schwab, markets, Packebush sees several areas of third-largest maker and marketer of calls that a ‘precision agriculture’ strategy.” opportunity in 2012, including hiring. “To expand our business the way we nitrogen fertilizer and has expanded its Agronomic services reach to Africa, Asia, Europe and North want, we’ll need to hire a lot of new em- and South America. To help accomplish all this, Koch Fertil- ployees next year,” Packebush said. “What changed,” Packebush said, “was izer has created a new subsidiary: Koch “We need that talent to continue devel- our vision, which enabled us to see Agronomic Services, LLC. oping our step-out concepts, such as greater opportunities.” It has already completed two significant Koch Agronomic Services and a new Investments acquisitions this year. business called Koch Methanol.” Packebush knows that rapid growth can The first, which closed on April 20, was In Enid, Okla., home of Koch Nitrogen’s create its own set of challenges. largest U.S. fertilizer plant, employment the purchase of Nitamin® and Nitamin is up by 20 percent following a multi- Nfusion® slow-release fertilizers from “It’s so easy to forget about watching your million dollar modernization project. Georgia-Pacific Chemicals. costs, but we’ve got to maintain efficiency. That project is part of a North American The second was the Sept. 30 acquisition “And when you’re successful, it’s easy to growth effort involving more than $250 of Agrotain International, a St. Louis- lose your humility. million in investments since 2005. Such based fertilizer maker. Agrotain is the “That’s why Charles Koch is always re- investments have generated more than world’s largest producer of Stabilized- minding us to never confuse brains with 100 new jobs at Koch facilities. Nitrogen™ fertilizers. a bull market.” www.kochfertilizer.com

this issue… Charles Koch’s 50th service award pg 2 The Acme of Gypsum pg 7 Eagle Ford: Opportunity knocks pg 4 Perspective: CFO Steve Feilmeier pg 8 Postal Pipeline

I am an undergraduate I am a student at D.C. Everest High School junior in chemical en- in central Wisconsin. I have a feeling you gineering at Penn State may be receiving a lot of unpleasant mail University and would like from my state, but that’s not what this let- to thank the Fred C. and ter is about. Mary R. Koch Foundation In keeping up with the news the last few for its generous scholar- months, I’ve heard all the things they’ve ship contribution to been saying about you, your brother and my education. your company. I see the good in what I hope one day to be- you’re doing. come a professor and to I just finished reading your book,The help future students have Science of Success, and I wanted to express the same positive experi- my amazement at what you’ve done. You’ve ence that I have had as taken the company your father started, an undergraduate. infused steadfast principles and built it up. I thank the Fred and Mary Now you’ve taken the wealth you worked Koch Foundation for its so hard to create and you’re using it to cre- scholarship assistance; its ate value in society. You’re trying to create help has already given me what this country can’t comprehend it Labor Day weekend wildfires in central Texas (above) so much, and will make my goals for the needs. I respect that. came perilously close to FHR’s Bastrop terminal. Although future achievable. Very few men have taken rock-solid prin- some employees in that area were ordered to evacuate, there were no reports of damage to their homes. Michael Howard ciples and risen to the level you have. Even Wilmington, Del. fewer would be willing to share them with aspiring entrepreneurs like me. In the January issue of Discovery, there As I continue on my path to create value was a photo of David and Charles Koch on in society and create my own business, I page eight. In it, Charles wears a lapel pin. hope to work with Koch Industries. I’m curious to know what Charles is Thank you, Mr. Koch, for everything displaying. you’ve done for my state and our country. Dr. Ralf Fischbach I am amazed at what you’ve done. Koch Membrane Systems God bless, Aachen, Germany Tyler Ebert Weston, Wis. What you noticed is a Koch Industries service award pin. It has one diamond for each decade of service. On Nov. 1, Charles will celebrate his fiftieth anniversary at Koch. To “like” and follow Koch companies and leaders – Thanks for sharing the link to the very including Georgia-Pacific, INVISTA, Flint Hills intriguing video demonstrating the im- Resources, Matador Cattle Co. and Charles and portance of economic freedom (http:// David Koch – visit Koch Industries’ Facebook page. economicfreedom.org). Letters and other submissions become the property of Koch It’s a shame Mr. Koch is not running for Industries, Inc., and may be reproduced in whole or in part, President. Actually, he can probably have including your name, for any purpose and in any manner. more influence where he is. Letters may be edited for length or clarity.

D. Dale Fowler, president Discovery October 2011 | Volume 17 | Number 4 Victoria Economic Development Corp. Editorial board Questions? Comments? Philip Ellender Contact: Rod Learned Victoria, Texas Rich Fink 316.828.6136 Jeff Gentry [email protected] Dale Gibbens Publication design A new video, “How to Create a Job,” is now available at Greg Guest Amber Vogts Charles Koch this site, as is the video mentioned above: “Economic Koch Creative Group Freedom and Quality of Life.” Jim Mahoney Dave Robertson www.kochind.com ©2011, Koch Industries, Inc. Koch is an EOE. M/F/D/V 2 International News

©2011 Canterbury of New Zealand, Ltd. Auckland – Players in the Rugby World Cup wore uniforms Zhangjiagang – PURON® modules, made by KMS Matador - These Japanese cattle have been raised on all three Koch containing INVISTA’s LYCRA® SPORT fabric. are treating this city’s municipal wastewater. ranches in Kansas, Montana and Texas.

New Zealand – Like the Olympics or 2 million – and growing – wastewater Brazil – Few people would associate World Cup, the Rugby World Cup is an treatment is an important issue for Portuguese—let alone Japanese—with international competition held every Zhangjiagang, especially since much of a Texas ranch, but both languages were four years. New Zealand hosted (and the area’s surrounding economy relies on heard when Brazilian ranchers came to won) this year’s RWC, which featured fishing and water-based agriculture, such see some Akaushi cattle at Koch’s Mata- 20 teams playing a total of 48 matches, as rice paddies. dor Ranch in June. including the Oct. 23 final. In choosing where and how to build a new Akaushi originated in Japan and are closely Because the game involves fierce and wastewater treatment plant, city officials related to the cattle that produce world- very physical competition, the uniforms had to deal with high property costs, the famous Kobe beef. can take a beating. Durability is a must, close proximity of their preferred site to Akaushi beef, marketed in the U.S. by as are good looks and comfort. residential areas and strict wastewater Heartbrand Beef, is praised for its mar- Players are also interested in customized, discharge standards. bling, flavor and heart-healthy characteris- position-specific designs and fabrics that Taking all these factors into account, the tics, including lower cholesterol. A recent can actually help them evade tackles. engineering company responsible for sampling of Akaushi steaks and burgers In creating the uniforms for this year’s building Zhangjiagang’s new wastewater at the Koch Café in Wichita created long competitors, Canterbury of New Zea- plants chose PURON® membrane mod- lines but plenty of smiling faces. land helped meet those goals by choos- ules from Koch Membrane Systems. With the help of translators, Bob Kilmer, ing INVISTA’s LYCRA® SPORT fabric. PURON® MBR 1500 modules are specifi- manager of the Matador Ranch, and LYCRA® SPORT technology was an cally designed for large-scale membrane Heartbrand officials helped explain to their especially important component of the bioreactor projects like the one underway visitors how an Akaushi program works. body panels and shoulders of the jerseys, in Zhangjiagang. These projects – which “They may not have had cowboy hats or which need to be not only close-fitting have become much more common in boots,” Kilmer said, “but they were certainly but also hard-wearing. China in recent years – have the capacity cattlemen. They were very focused on pro- National teams from the United States, to handle at least 10,000 cubic meters of duction numbers and operational issues. water flow per day. Russia, Japan, Scotland and defending “The first thing that impressed me about champion South Africa all wore Canter- Because PURON® modules have a very them,” Kilmer said, “was how open-mind- bury garments for the competition. compact footprint, the lack of open space ed they were. They weren’t boxed in by a As a college student at MIT, Charles for the city’s new facility was less of an paradigm of ‘this is how it should be done.’ Koch, KII’s chairman and CEO, was issue for KMS. “The second thing that impressed me was vice-captain of a rugby team that won PURON® modules are also more energy- their intense focus on marketing. They the New England league championship. efficient than other systems, have a more also asked lots and lots of questions. They “I enjoyed playing rugby,” Koch said. reliable braided-fiber design and require weren’t afraid to learn.” “But we never had this kind of competitive fewer piping connections. What sort of impression did the Brazilians advantage back then.” When this KMS installation becomes have of the Matador? China – Zhangjiagang is a large and rap- operational in early 2012, it will be able to “They were amazed at how we did so idly changing city on the Yangtze River, handle an annual average flow of 25,000 cu- much with so few people. That was a real about 150 kilometers from Shanghai. bic meters (more than 6.6 million gallons) eye-opener for them.” With a metro population estimated at per day, with peaks of up to 36,000m3/d. www.heartbrandbeef.com 3 Eagle Ford takes flight Nothing has changed the outlook for for state and local governments – a big That pipeline now transports the American petroleum industry – and plus at a time of chronically high unem- more than 30,000 barrels of several Koch companies – quite like ployment and a struggling economy. Eagle Ford crude every day. recent shale discoveries in the United In Corpus Christi, where much of the new Although KPL already has States, including the Eagle Ford Shale in production is refined, the local newspaper 540 miles of active crude oil South Texas. estimates that Eagle Ford already supports transportation lines in Texas, it Eagle Ford is an underground rock 13,000 full-time local jobs and has the has developed plans involving formation that stretches from just north potential to support as many as 70,000. more than 100 miles of new of Laredo to a point halfway between San In short, all of this new, profitable activ- pipeline construction. Much of Antonio and Houston. ity involving shale plays in South Texas, that could be in the ground by Large quantities of crude oil and natural North Dakota and elsewhere, is contribut- the end of next year. gas have been found in this area at depths ing to the overall prosperity of the U.S. Construction on a station in ranging from 4,000 to 14,000 feet. Thinking big, bigger Helena with connections to nearby Efforts to reach those deposits have storage tank batteries is nearing comple- prompted the deployment of hundreds These effects are clearly visible at Koch tion, and a pipeline from Helena to Pettus of drilling rigs. As of mid-September, Pipeline Company, the largest transport- is almost finished. er of South Texas crude oil. there were more than 200 active rigs in “Because there is so much new produc- the area, most of them drilling for oil. Bob O’Hair, executive vice president tion, we’ve had to think in terms of bigger Almost all of these rigs use horizontal of Koch Pipeline, says new production pipe,” O’Hair said. “Before, our largest drilling techniques and multi-fracking from domestic sources has had a dra- pipe in the Eagle Ford area had a 12-inch technology, developments that make ef- matic effect on the size of KPL. diameter. Now we’re talking anywhere ficient oil and gas extraction possible. “In the past year, we’ve upped our overall from 16 to 20 inches.” The Eagle Ford Shale is considered ideal pipeline employment by at least 20 per- That difference is bigger than it may for this type of extraction, especially cent,” O’Hair said. “In Corpus Christi, at seem. Depending on pressures, pump when compared to other shale forma- least 35 new employees have been hired. stations and other factors, a 20-inch pipe- tions, such as the Marcellus in northeast- And as more and more production line can carry four times more product ern Pennsylvania. comes online, those numbers will only than a 10-inch pipeline. increase.” O’Hair estimates KPL’s new 20-inch Pet- Pipelines such as tus-to-Corpus Christi pipeline will have EAGLE FORD SHALE those operated a carrying capacity of at least 250,000 by KPL in Texas barrels per day. It would take more than Oil “Wet” Gas (with liquids) and Minnesota are 1,200 tanker trucks to move that much “Dry” Gas essential to the suc- crude oil over surface roads. Existing KPL Crude Line cess of petroleum “That’s a staggering amount of increased Future KPL Crude Line producers. Before volume,” said Brad Razook, president of crude oil or natural Flint Hills Resources. “It took our largest gas can be processed refinery, Pine Bend, more than 35 years to at a refinery or gas get big enough to process that much crude.” liquids plant, it must be collected and Refined perspective safely stored. Flint Hills Resources, which owns and The Eagle Ford Shale formation in South Texas is roughly 50 miles wide and 400 miles long. Pipelines are, by operates a refinery and chemicals com- far, the safest, most plex in Corpus Christi, is also thinking of A new strategic reserve economical and most efficient transpor- how to serve Eagle Ford customers. The ability to produce substantial quanti- tation medium for petroleum products. “We are very focused on supporting mar- ties of oil and gas at a lower cost than The first step in serving Eagle Ford produc- ket and infrastructure solutions for Eagle imported petroleum (especially from un- ers was to take advantage of existing assets. Ford producers,” said Brad Urban, FHR’s senior vice president of crude oil. stable regions) is quite helpful to the U.S. In Bee County, Texas, where KPL has Increased domestic oil and gas production a relationship with NuStar Energy, a When Eagle Ford crude arrives in Cor- can also lead to increased job opportuni- dormant 10-inch pipeline from Pettus to pus Christi, several things can happen. ties for Americans and increased revenues Corpus Christi was restarted in June. Typically, it is processed by refineries 4 makes most of its products from natural gas. That feedstock is now more plentiful and less costly. Shale developments have also prompted Georgia-Pacific to expand its capabili- ties in Lufkin, Texas, where it produces resins used to coat proppants (used in well completion to prop open micro-frac- tures, allowing oil or gas to flow through). The big picture Ron Vaupel, head of Koch’s business development group, is excited about the KCTG’s Optimized Process Designs was chosen to design and build this plant for processing gas liquids from Eagle Ford. potential for all of Koch Industries as a into a variety of products, such as fuels for Enterprise Products. result of new shale production. and building-block chemicals, including “Enterprise,” explained Jim Kuehler, “What’s important about this is not just those used for many popular plastics. president of O.P.D., “wants a plant with the prolific amount of new domestic Crude oil can also be stored at tank farms three trains that will handle a total of 900 petroleum production, it’s also seeing how or directed to terminals where it can be million cubic feet of gas per day. Koch companies are working to provide offloaded onto ships and barges. the best solutions for shale producers, “We’ve been working in the field with whether they’re in Texas or North Dakota. FHR recently purchased a small craft pier them for six months and expect the first and wharf next to its existing crude oil of three trains to come online in April “We’re having to adjust and be very terminal in Ingleside, Texas, which already 2012. This is easily the largest project entrepreneurial about this to capture the has access to Eagle Ford production. we’ve ever worked on – by a factor of opportunities,” Vaupel said. FHR expects those assets will enable three or more.” “Buying an existing asset is relatively large volumes of outbound waterborne O.P.D. is also helping several other simple. Adapting to an unexpected op- shipments of Eagle Ford production by clients whose plants were not designed portunity like this is more challenging.” the middle of next year. to process the “wet” gas coming out of FHR, for example, wants to enable its “We have several long-term purchase Eagle Ford. “With all this demand, we’ve Corpus Christi refinery complex to han- contracts with producers and are in discus- tripled our employment,” said Kuehler, dle the different grades of crude produced sions with many more,” Urban said. “We “with most of that increase directly re- from Eagle Ford. That effort is likely to want to reach terms with them that add lated to Eagle Ford.” cost hundreds of millions of dollars. value for the producers and also FHR. Eagle Ford and other shale plays are also benefitting FHR’s olefins facility in Port Arthur, Texas, by increasing the supply of natural gas liquids used as a feedstock. Koch connections The number of Koch companies involved in Eagle Ford production is significant. Koch Supply & Trading, for example, is already trading Eagle Ford crude to help supply FHR’s Corpus Christi refinery complex and other customers. Corpus Christi - The widely varying characteristics of Eagle Ford crude pose a processing challenge for many South Texas refineries. KS&T and FHR have also announced plans to transport Texas crude from the John Zink, another Koch Chemical Tech- “Doing all of this successfully means Permian Basin via a rail line. nology company, will provide the flares we’ve really got to pull together all our Optimized Process Designs, a part of for KPL’s new terminal in Helena. capabilities if we want to be competitive,” Koch Chemical Technology Group, The large quantities of natural gas coming Vaupel said. “Tackling that kind of chal- designed and is building a gas liquids from domestic shale formations have lenge across so much of Koch Industries processing facility near Yoakum, Texas, been a boon to Koch Fertilizer, which is really exciting.” 5 Energy Team update When Charles Koch mentioned the Georgia-Pacific and INVISTA met to world will be invited to that event. importance of teamwork in his recent share knowledge and ideas for establishing Topics for the meeting will be built Founder’s Day video for employees, one and promoting a long-term energy goal. around the theme “Accelerating energy of his examples was Koch Industries’ That interaction helped INVISTA crys- value creation through MBM®.” Energy Team initiative. tallize its thinking about how to organize “When you get right down to it,” Schutt and roll out its “20 by 2020” said, “this effort is all about MBM Guid- goal of reducing overall energy ing Principle 6: Knowledge. intensity by 20 percent. (See page six of July’s Discovery to “We’re trying to capture the best knowl- learn more.) edge and share it as widely as possible. In Asia, INVISTA’s energy teams “When we succeed in that effort, we cre- have already succeeded in reduc- ate enormous benefits for the company, ing energy consumption by 3.31 our communities and the environment.” million BTUs per ton of produc- Principles in action tion at the company’s facility in Sakra, Singapore. Jim Mahoney, KII’s executive vice president for operations excellence and In turn, GP is now learning from compliance, sees this energy initiative INVISTA’s experience in build- as a great example of Koch Industries’ ing a long-term plan for energy MBM® Guiding Principles. INVISTA employees at the Maydown plant in the U.K. have captured efficiency improvement. an energy reduction of 9.94 million BTUs per ton of production. Late last year, several members “This energy initiative is a great of the KII Energy Team were “We now have energy teams from every invited to visit GP’s tissue mill in Camas, example of our principles in action.” Koch company,” Koch said, “working Wash., where they attended the kickoff - Jim Mahoney together to develop and share ideas for of the Camas Energy Team and helped conserving resources and improving develop initial rollout plans. “These energy teams are generating real energy efficiency.” That visit also provided an opportunity value (Principle 3) by sharing knowledge Those teams are in their second year of for the entire KII Energy Team to learn (Principle 6) and proactively sharing tracking energy-saving projects and activ- from the Camas team as they provided and challenging each other to identify ities from Flint Hills Resources, Georgia- additional knowledge and support. The opportunities (Principle 4) for Koch,” Pacific, INVISTA, Koch Fertilizer and KII Energy Team made a follow-up visit Mahoney said. Koch Pipeline sites. to Camas in August. “This is all about our principles in action.” The goal is to better understand how to Similarly, based on takeaways from the To view a summary of Energy Team suc- create value through improved energy 2010 conference and interaction with cess stories, visit http://khcwss.khc.local/ efficiency at each site. other energy team members, Flint Hills kiioe/energy/Success%20Stories/Forms/ According to Energy Team leader Ernie Resources has launched the develop- Schutt, KII’s global director for operating ment of an energy vision for fully capability and energy, there are at least 32 optimizing its existing energy assets notable success stories so far this year. and systems. “Our site energy leader network,” Schutt FHR calls this “optimizing the base said, “has not only documented those case.” The vision is intended to provide success stories, but worked hard at shar- guidance to FHR’s sites on “doing the ing best practices across the organization best with what we have” as a starting so others can benefit. point for energy efficiency programs. “Last year, our sites contributed almost What’s next? $50 million in new energy-saving ven- The KII Energy Team has already tures. So far this year, we’ve captured an started planning its 2012 KII Energy additional $35 million.” Conference, scheduled for next Sep- 20/20 Teamwork tember in Atlanta. Following last year’s first-ever KII Energy More than 150 site energy leaders and Employees at INVISTA’s Tuas plant in Singapore have reduced Leader Conference, representatives from energy team sponsors from around the energy intensity by 5.1 million BTUs per ton of production. 6 Looking Back

Noteworthy kciefforum.com and kochfacts.com When the federal government’s 2011 fiscal year ended on Sept. 30, was total spending for the year up, down or about the same? Given all the heated debates about debt ceil- ing limits, threats of government shutdowns 1922- The Acme Gypsum plant was built in 1890. 1914- Fred Koch had a summer job at the “cement” mill. and new budget agreements, it would be easy to assume that federal spending was the same or even slightly lower. From tough times to ToughRock® But if you’re a regular visitor to www.kcief- About four miles west of Fred Koch’s As the demand for plaster declined, forum.com, you already know that federal birthplace in Quanah, Texas, stands ownership of the plant changed hands spending actually hit a record high, jumping the biggest and oldest manufacturing and its output evolved. Certain-Teed by $120 billion. That’s a 5 percent increase. facility in Hardeman County: The Acme Company gets credit for being the first to That’s why kciefforum is such a valuable Gypsum plant. use the facility to make wallboard. resource. It provides helpful perspective and As Charles Koch mentioned in last month’s The Acme plant fell on hard times in the opportunities for discussion on important Founder’s Day message, that plant has lots early 1960s, but was revitalized after be- issues each week. of Koch – and Kansas – connections. ing acquired by Georgia-Pacific in 1965. Recent postings have discussed taxing the It was built in 1890 thanks to the efforts GP wanted it to ensure a steady supply rich, job creation and environmental policy. of James Sickler, who moved his business of gypsum wallboard for the company’s building products division. Just the facts, ma’am from Kansas to Texas after discovering a large gypsum deposit along Grosbeck Today, GP uses gypsum to make not Another site, www.kochfacts.com, is an Creek west of Quanah. only wallboard, but specialty panels, excellent resource for correcting the some- fire-door cores, industrial plaster and times horrendous misinformation about Sickler’s company, the Lone Star Cement joint compound. Koch that appears in popular media. Plaster Co., eventually generated enough jobs to support a small community, GP’s new ToughRock® paper-faced Whenever a television show, magazine named Acme. Its population would peak gypsum panels are significantly lighter article, newspaper editorial or major blog at about 400 in 1945. and stronger than previous half-inch posting gets it wrong, kochfacts helps set the gypsum boards. record straight. The gypsum excavated at the Acme site was not only plentiful but unusually pure. This site also provides dozens of links to inde- Old and older pendent resources that can confirm the truth. Some of the rare impurities were actu- The 111-year-old Acme gypsum plant ally historic objects, such as mastodon Few things are more powerful than accurate is not the only business in Hardeman remains (reportedly shipped off to St. and timely information. That’s why these County that has been around a long time. Louis museums). two websites were created. In 1891, Harry Koch, the grandfather of When you want helpful perspective, visit Customer focus Charles and David Koch, settled in Qua- www.kciefforum.com Throughout its first decade of existence, nah, where he bought a modest newspa- per business. He owned and edited the When you want to know the facts, visit demand for the plant’s gypsum products local paper until his death in 1942. www.kochfacts.com kept increasing. In 1903, a short line railroad – the Quanah, Acme & Pacific Harry’s newspaper, now known as – was built to help move the plant’s the Quanah Tribune-Chief, is still products to market. published today. “There are laws to protect the freedom In those days, the plant’s primary output of the press’s speech, but none that are was plaster of Paris, which is why most Contributors to this story include: Scarlett Dougherty worth anything to protect the people locals referred to it as a “cement” plant. of the Hardeman County Museum; Carol Ann Whitmire, from the press.” That’s what Fred Koch called it when he editor of the Quanah Tribune-Chief; the Texas State Too True Too - Mark Twain got a summer job there as a teenager. Historical Association; and Dr. Fred Koch. 7 Steve Feilmeier Perspective Executive Vice President & Chief Financial Officer - Koch Industries, Inc. The credit rating of the United States was But what if future dollars are worth less debt (measured as a percentage of GDP) recently downgraded by Standard and and will purchase only 40 yen? exceeded 60 percent. Poor’s from AAA to AA+, moving from At that exchange rate, Toyota would have It took a decade, but the Canadian gov- the best possible rating to the second- to double the dollar price of the car just ernment was successful in reducing its highest out of 19 possible ratings. to maintain the same price in yen. This is dependency on debt. Canada’s external The creditworthiness of a government why when currency devalues, the prices federal debt-to-GDP ratio fell to 29 borrower is measured by its likelihood of for goods and services eventually increase. percent in 2002, the year its AAA rating default (the inability or unwillingness to Does it really matter? was restored. repay debts). Canada improved its creditworthiness the Today nearly 30 percent of all trade is For sovereign nations that issue debt in old fashioned way: by cutting govern- between nations. their own currency, the risk of default is ment spending and balancing the budget. less about the inability to repay as it is This trade has not only led to greater When government spending was cut, the whether that currency will be worth the global prosperity, but more and better economy then grew as amounts previ- same in the future as it is today. goods, and a higher standard of living for ously spent by the government, including billions of people. Governments interest expense on the debt, were instead that do not take As a part of this process, capital is ex- invested to improve the capacity and steps to preserve changed between countries in the form of productivity of the nation. the value of borrowing and direct investing. But when Time to act their currency the borrowing goes too far, trouble arises. are – by defini- About $4.5 trillion of the $15 trillion in Today, the amount of U.S. debt owned by tion – unwilling federal debt is held by foreign investors third parties is estimated at 73 percent of to preserve the such as China and Japan. GDP. If you include the $5 trillion Social value of national Security trust fund surplus that has also If the U.S. dollar is worth less in the been borrowed by the federal govern- debt held by future, the willingness of those investors investors. ment, the current debt exceeds 100 to continue lending will decline. The percent of GDP. Credit counts! same will be true for anyone – including employees or retirees – who are paid in Of course, these calculations don’t even A government U.S. dollars. begin to include the trillions of dollars can choose to in government promises for increased repay its debts by simply turning on the As debt increases, interest rates (the cost of entitlement spending down the road. printing press. Today, that can happen time and creditworthiness) will go up and This is why our elected officials and electronically in a matter of seconds. our overall standard of living will decline. policymakers must act quickly, before But when a government prints more After all, the amount of wealth in the U.S our debt grows even more out of control money, that money will soon be worth is finite. If we must pay more to service and we see further reductions in our less. After all, money is a commodity. our debts, there will be less left over for standard of living. anything else. If the supply of a commodity goes up The best first step is to reduce and demand remains constant, the price S&P downgraded In the long run, inflation borrowing by cutting actual (value) of the commodity will decline. If the U.S. for one spending – not just the rate of supply goes down, the price goes up. It primary reason: leads to higher interest spending increases. really is just that simple. the potential in- ability of the U.S. rates and less prosperity All of us need to understand Unfortunately, the U.S. has been printing to repay its debts that our fiscal sovereignty is a lot of money lately. That devalues our with dollars that will be worth the same being compromised and that currency, which leads to inflation, less in the future as they are today. tough choices are required to reverse prosperity and less purchasing power. this trend. If S&P is right, and the U.S. government To understand why, let’s look at what There are currently 17 nations and three does not start living within its means, our might happen if we allow the U.S. dollar to territories (Hong Kong, Guernsey and standard of living will most certainly decline. devalue as a result of government policy. the Isle of Man) with a AAA debt rating At an exchange rate of 80 yen to the Can this problem be fixed? from S&P. dollar, buying a Camry for $25,000 gives Canada lost its AAA rating from S&P When the United States of America isn’t Toyota the equivalent of 2 million yen. in 1992. At the time, Canada’s national on that list, it’s time for change! 8