Wednesday, December 30, 2009

Sprott Wonders If Treasury Has Created Its Own Epic Ponzi Scheme

Sprott Asks If Treasury Has Created Its Own Epic Ponzi Scheme

Sprott Asset Management, which has about $4 billion under management, just released its December newsletter. To say the least, it's quite provocative.

Titled, "Is It All Just a Ponzi Scheme?," the newsletter makes the case that the Treasury Department has invented its own bond market.

This isn't an entirely new thesis; Dr. Chris Martenson has been saying the same for months. But Sprott's research is very compelling.

In fiscal 2009, foreigners scooped up $698 billion of Treasuries while the Fed upped its holdings by $286 billion. But the public debt increased $1.9 trillion.

So who bought all the rest?

According to Treasury, “other investors” bought $510 billion, up from just $90 billion in 2008.

Can the Treasury maintain this charade in 2010? If they can't conjure up more phantom buyers, the bond market will dry up and the only alternative will be the Federal Reserve's printing press.

Either way, it's an ugly and frightening scenario.

Like any pyramid or Ponzi scheme, the system is in continuous need of new money to refinance debts and keep itself afloat.

I encourage everyone — all concerned citizens — to read this crucial report, which can be viewed here in PDF form.

Monday, December 28, 2009

US GPD Fueled by Debt

In what should hardly come as a surprise, US third-quarter GDP has once again been revised downward from the initial projection of 3.5% annual growth. The figure was initially revised downward to 2.8%, and now it has been further revised down to 2.2%.

That means the government overestimated the nation's third-quarter economic performance by 37%, a rather large error.

GDP numbers are often revised, seemingly at will, allowing the government to control the message and spin the story. After six consecutive quarters of negative GDP, the government was desperate to create some good news. As it turns out, that news was too good to be true.

Our meager third-quarter growth was largely the result of further government spending, not private sector spending. Auto purchases were in fact undergirded by government support.

Under the latest revision, the government's Cash for Clunkers program now accounts for 66% of the remaining GDP "growth," up from 47% in the initial report. This is an error of $185 billion, which is larger than the $152 billion Bush stimulus package of 2008.

The reality is that this 2.2% growth was fueled by even further government debt, as well as consumer debt. The latter is exactly what got us into this economic malaise in the first place, and the average US household is still overburdened and saddled with debt.

According to data released in July by the Federal Reserve Board, revolving consumer debt in the United States totals about $928 billion.

Federal Reserve surveys suggest that about 75% of households have at least one credit card and 25% have none. If we count only those households that report actually having one or more credit cards, the average household credit card debt is $10,482.

However, the Federal Reserve puts total household debt, including mortgage debt, at about $13.7 trillion, or 125% of annual after-tax income, a burden that many economists believe will take several years to pare down to what is viewed as a more sustainable level of 100%.

When one considers that consumer spending makes up more than two-thirds of the U.S. economy, and about one-fifth of the global economy, you realize it won't be able to play a leading role in any recovery. Seventeen percent of US workers are either unemployed or under-employed.

The federal government has jumped into the breach to try to make up for the resulting decline in consumer spending. But that is only increasing an already whopping federal debt.

U.S. government debt has reached 85% of annual economic output and is showing no signs of slowing; the White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, it has to service all that debt – in addition to current debt – with interest.

Paying down this enormous national debt will eventually require Americans to pay more taxes. That will only hamper consumer spending even further. Consumers will ultimately feel the combined burdens of private and public debt because we all owe a share of the national debt.

A 1998 Congressional Joint Economic Committee study concluded the optimal size of government to maximize economic growth was about 18% of gross domestic product.

However, in May, Business Week reported that, even before this year's unprecedented debt and spending, all levels of government in the U.S. controlled 37% of GDP. Recent federal spending will drive up government’s share to more than 40%.

Our entire economic system is based on perpetual growth. However, there is no real growth; there is only more debt.

Tuesday, December 22, 2009

Unemployment Benefits Extended Up To 99 Weeks; May Cost $140 Billion

Unemployment has been so widespread, so lasting and so costly that the federal government projects that 40 state programs will go broke within two years and need $90 billion in loans to keep issuing benefit checks.

Collectively, states are projected to run a $57 billion deficit in the program in 2010 alone. The federal government is obligated to lend them the money to cover that gap.

Many states will be faced with the unpleasant choice of raising taxes, cutting benefits, or both. Nationally, the average tax is about 0.6 percent of payroll; the average weekly check is about $300.

Currently, 25 states have run out of unemployment money and have borrowed $24 billion from the federal government to cover the gaps.

Unemployment benefits are typically paid for 26 weeks. But, due to the length and severity of the recession, Congress has repeatedly extended that period since June 2008.

The emergency extensions had previously allowed laid-off workers to collect benefits for up to 46 weeks in some states. But in other states the benefits had stretched up to 79 weeks, the longest period since the unemployment insurance program was created in the 1930s.

However, that period has now been extended up to 99 weeks in some states.

Saturday morning, the Senate approved a $626-billion defense bill that included a two-month extension of unemployment benefits for the long-term jobless.

The benefits of 1.5 Americans were set to expire at the end of this year. Those benefits will now be paid through the end of February.

According to AP, the costs of another extension of unemployment benefits will reach $100 billion. The estimated price tag includes the costs of extending unemployment benefits through 2010 for those who have been unemployed for more than six months, as well as costs to provide subsidies to assist in paying health insurance premiums.

This is in sharp contrast to the unemployment benefit costs of just two years ago. Back in 2007, the cost of unemployment benefits was only $43 billion dollars. Since that time, unemployment has ballooned from 4.8% to 10%.

Obviously, the unemployment problem will not improve significantly in the next two months, and Congress will once again be faced with the task of extending benefits further. The cost to the federal government and the states will be burdensome, and require taking on even further debt.

Even before the last round of extended benefits in November, the White House estimated the cost of unemployment compensation to exceed $140 billion for fiscal 2010, which began in October.

The Labor Department projects that eight million Americans will exhaust their regular 26 weeks of unemployment benefits in 2010.

Sunday, December 20, 2009

The 10 Countries Most Likely To Default

The recent economic meltdown in Dubai may turn out to be the proverbial canary in the coal mine.

The Emirate's massive debt problem may ultimately serve as a warning of the troubles brewing in other nations. Could other sovereign debt defaults be on the horizon?

Remarkably, there are countries even worse off than Dubai.

The Business Insider recently ranked "The 10 Countries Most Likely to Default."

#10 Lebanon
Cumulative Probability of Default: 17 %

Reuters: "Lebanon, one of the most heavily indebted states in the world, completed a debt swap in March for around $2.3 billion of foreign currency paper maturing this year.

Strong economic growth has helped reduce Lebanon's ratio of debt to gross domestic product to 153 percent in June from around 180 percent three years ago. The country's gross debt stands at $48 billion."

#9 State of California
Cumulative Probability of Default: 18 %

Though it is just a U.S. state and not an independent nation, the Golden State has the world's eighth largest economy, and it is a mess. California’s budget deficit will balloon to $20.7 billion during the next year and a half, the nonpartisan Legislative Analyst’s Office predicted in a November report. As of November, year-to-date revenues were more than $1 billion below what had been expected.

According to The Press Enterprise, “California will pay $6 billion in debt service in the current fiscal year, or nearly 7 percent of the state’s general fund. And that expense is only for part of the bonds voters and legislators have approved: California has $83.5 billion in outstanding debt, including $64 billion in general obligation bonds. But the state has $47.5 billion in already authorized bonds that it has yet to sell, too.”

#8 Lithuania
Cumulative Probability of Default: 19 %

Bloomberg: "Lithuania will probably miss a 2011 European Union deadline to bring its deficit in line with the bloc’s budget threshold, ruling out euro adoption before 2013, Finance Minister Ingrida Simonyte said..

The former Soviet state’s budget shortfall will swell to 9.8 percent of gross domestic product this year, and narrow to 9.7 percent in 2011"

#7 Iceland
Cumulative Probability of Default: 23%

Bloomberg: "Iceland’s economy contracted the most on record last quarter after the island’s banking failure left locals poorer and as businesses lacked funds for investment.

Gross domestic product shrank an annual 7.2 percent, after contracting a revised 6.2 percent in three months through June, Reykjavik-based Statistics Iceland said on its Web site. From the previous quarter, GDP shrank 5.7 percent."

Iceland’s banking collapse last year plunged the Atlantic island into its worst economic decline since gaining independence from Denmark in 1944 and forced the government to seek an international bailout to avert default."

#6 Emirate of Dubai
Cumulative Probability of Default: 29%

Dubai's inability to pay its debts on time forced it to request a six-month extension on loan repayments. That news rocked world markets and sent shivers throughout the financial world. Dubai may simply be the beginning of further sovereign defaults in the coming year.

#5 Latvia
Cumulative Probability of Default: 30%

Bloomberg: "Latvia’s economy contracted a preliminary 18.4 percent in the third quarter, the biggest decline in the EU. The country’s banks may have the highest need for new capital in eastern and central Europe along with Lithuania because they rely on collateral that’s been falling in value amid house price declines, Fitch Ratings said in a report today...

The country is rated two levels below investment grade at BB by Standard & Poor’s. Moody’s Investors Service ranks Latvia at the lowest investment-grade level of Baa3."

#4 Pakistan
Cumulative Probability of Default: 36%

Business Recorder: "The country's external debts and liabilities have posted a raise of some three billion dollars to a new peak of 55.2 billion dollars by end of September 2009."

#3 Argentina
Cumulative Probability of Default: 49%

WSJ: "Fitch Ratings said Argentina's credit ratings are likely to remain in highly speculative territory even if its planned $20 billion debt exchange is executed successfully, noting the country's continuing economic and financial pressures as well as high debt ratios.

Argentina's Senate voted to approve a bill that would allow the government to reopen a 2005 debt restructuring. At issue are about $20 billion in face value of bonds that weren't included in a 2005 transaction. Economy Minister Amado Boudou said recently that the government plans to reopen the offer under similar terms to try to attract as many of those investors as possible."

#2 Ukraine
Cumulative Probability of Default: 55%

Bloomberg: "Ukraine will keep its B2 credit rating, with a negative outlook, the ratings company said in a statement released late yesterday, after Ukrzaliznytsya defaulted on a principal payment on a Barclays Capital-led syndicated loan on Nov. 20...

The B2 rating reflects “weak macroeconomic fundamentals, a banking system that remains under strain, and distinctly poor coordination between fiscal and monetary policies,” Moody’s said. “While some of these problems may well reflect political in-fighting in the run-up to the presidential election, the fiscal loosening inherent in recent legislation -- which may raise the budget deficit by up to 7 percent of gross domestic product in 2010 -- is a serious concern. Hence, the negative outlook on the B2 sovereign rating remains in place.”

#1 Venezuela
Cumulative Probability of Default: 60%

WSJ: "one week ago, the government was forced to begin shutting down seven small banks that together represent up to 12% of banking system deposits, after the public began to get wind of some of the banks allegedly using depositors' funds for corrupt ends.

Those takeovers alone would have frayed nerves in financial markets. But Chavez piled on by saying he would nationalize the entire banking system if needed. The comments, last Wednesday, sent Venezuela's bolivar currency and sovereign bond prices tumbling."

Somehow, Greece didn't make this list. Perhaps it should have.

Late Wednesday, Standard & Poor's downgraded Greece to a BBB+ rating, matching a downgrade from Fitch Ratings just over a week ago, on concerns the country will struggle to rein in a deficit that stands at more than 12% of gross domestic product.

U.S. Already $296 Billion in Red for 2010

According to the Congressional Budget Office, the government spent $292 billion more than it took in during October and November.

It was a record 14th straight monthly deficit.

However, according to the Treasury Department, the budget deficit was $176.4 billion in October and $120.3 billion in November, meaning that the deficit actually amounts to more than $296 billion.

The 2010 fiscal year began on October 1, meaning that just two months in, the nation is already nearly $300 billion in the red.

The deficit was even worse than the same period last year, when the government was on its way to posting a record $1.4 trillion deficit for the fiscal year that ended Sept. 30.

Tax revenues have plunged just as spending on safety-net programs like unemployment insurance and food stamps have skyrocketed.

The CBO noted that government outlays through the first two months were $559 billion, meaning that the government had already spent more than double what it had taken in.

The Obama Administration expects the 2010 deficit to set a new record at $1.5 trillion.

There is a widespread sentiment among economists that all of this red ink will lead to higher interest rates and borrowing costs. That outcome would hinder any potential recovery, though it would reward savers.

The National Debt is presently $12.1 trillion, and climbing at a rate of $1 million every minute.

Meanwhile, the gross domestic product has been shrinking during the economic contraction, and will be $13.7 trillion for 2009.

Obviously, the National Debt and the GDP are moving in opposite directions. We've been warned repeatedly that this situation is simply unsustainable. None other than the government's former top accountant, David Walker, has made this point numerous times.

The meager economic growth in the third quarter was the result of nothing more than government spending. Any further growth in the fourth quarter will be the result of even more than the same.

No matter how deep the hole gets, our elected leaders can't stop digging.

One in every six dollars in the U.S. economy is now the product of government spending. At a minimum, that is both unhealthy and unproductive.

The government, and the public, can continue to ignore this for a little while longer, but at our own peril. Sooner or later, there will be very uncomfortable, and destructive, implications.

The U.S. debt clock can be seen here.

Saturday, December 19, 2009

Bank Failure Tally Reaches 140

Seven banks across six states were shut down on Friday, bringing the total number of failed banks this year to 140.

Friday's closures will cost the FDIC an estimated $1.7 billion.

An average of 11 banks have failed every month this year. The spike in failures has raised concerns about the FDIC's deposit insurance fund, which has slipped into the red for the first time since 1991.

This year's tally of bank failures is the highest number since 1992, when 181 banks failed. But the total is far from 1989's record high of 534 closures which took place during the savings and loan crisis, when the insurance fund also carried a negative balance.

FDIC Chair Sheila Bair told CNBC that bank failures will continue to accelerate into next year despite "some encouraging signs" that things are turning around for the battered industry.

The continuing bank failures will be driven by unusually high unemployment that is expected to lead to more foreclosures and other commercial loan failures.

So far, the total cost of these 140 failures to the FDIC fund is more than $30 billion.

Wednesday, December 16, 2009

U.S. Debt Bomb Ticking Away

According to Morgan Stanley, total U.S. credit market debt as a percentage of GDP is higher now than at the peak of the Great Depression.

Now, as then, the government and financial sector are attempting to stave off the economic contraction through debt-financed spending.

But, at present, the collateral supporting much of our public and private debt is worth less than the debt it is supposed to be supporting.

The U.S. is by far the world's biggest debtor nation. US private sector debt is now 350 percent of GDP.

Currently, there is about $3.75 in debt for every $1 in national income. Yet, the national economy can normally support around $1.50 in debt for every dollar of income.

The fact that U.S. and global debt levels are higher now than during in the 1930s leads to the conclusion that the current deleveraging will likely be a staggering economic event.

The dollar has declined 40 percent in value in the last seven years.

Meanwhile, the national debt is soaring and the monetary base has increased by 142 percent over the past two years.

Yet, government spending continues, unabated. Our national debt now exceeds $12 trillion. Military and war spending are a significant aspect of our excess.

In real dollars, defense spending in both the Korean war and the Vietnam conflict, was not as high as it is today. According to Lawrence Korb, the former assistant secretary of defense in the Reagan administration, the indirect costs of our two current wars — veterans benefits, long-term care of the physically and mentally wounded, and interest on the national debt — could bring their total cost to $5 trillion.

President Obama's latest Afghanistan troop increase will bring total forces to nearly 100,000 — at a cost of $100 billion a year. That's nearly $1 million per soldier.

The U.S. dedicates more money to military spending each year than the rest of the world combined. That kind of spending has unintended consequences.

This week, the House will vote to raise the U.S. debt limit by as much as $1.9 trillion. This will raise the cap on government borrowing to about $14 trillion, or equal the size of our nation's GDP.

It will be the ninth hike since 2002, and the fourth in just 18 months. The government has raised the debt limit more than 90 times since 1940.

Such an increase would be more than twice the size of each of the past three debt limit increases. The move will allow lawmakers to avoid having to raise the limit again before next year’s midterm elections.

A surging budget deficit has pushed US government debt to nearly 98 percent of the gross domestic product. If the U.S. was forced to conduct its finances like a corporation, it would be nearly insolvent.

About 46 percent of America’s debt is held overseas by countries such as China and Japan. Interest payments on those debts consume about a tenth of the United States budget.

Remarkably, that percentage is actually down from recent years as interest rates have dropped. When rates eventually go back up, as they inevitably will, the interest payments will rise in response.

Debt payments are already larger than the budgets for NASA ($19 Billion), the Department of Energy ($25.5 billion), the Department of Education ($53 Billion), and Department of Transportation ($73 Billion).

To fund this overspending (aka federal budget deficits), the U.S. Treasury makes and sells a fresh batch of IOUs every quarter. It then uses the cash from these sales to pay off old Treasury debt that has come due, while also maintaining the interest payments on the rest of the paper that is still outstanding.

The government cannot raise enough revenue through taxation to satiate its unwavering desire for rampant spending. The public wouldn't tolerate it and would vote incumbents out of office. So, the Fed prints money (backed by nothing) and then buys Treasuries to finance our government's relentless deficit spending.

And even if the government tried to raise taxes (largely on the highest income earners), it might forestall any potential recovery.

These record deficits have arrived just as the long-feared explosion in spending on Medicare and Social Security begins. As a result, the hole we're in will just keep getting deeper.

The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead.

The Treasury Department’s private-sector advisory committee on debt management has warned of the risks ahead.

“Inflation, higher interest rate and rollover risk should be the primary concerns,” declared the Treasury Borrowing Advisory Committee in November.

In essence, we've been warned.

"Right now, this year, we have 1.6 trillion in debt coming due. That's roughly twice individual income-tax revenue. Our only plausible strategy for paying that back is to borrow more money." – Leonard Burman, an economist at Syracuse University

Bank Failures Reach 133

Three more U.S. banks were closed on Friday, bringing the total number of bank failures this year to 133.

Apparently, things will get worse in 2010.

FDIC Chair Sheila Bair told CNBC that bank failures will continue to accelerate into next year despite "some encouraging signs" that things are turning around for the battered industry. Bair did not quantify how bad the failures would get, but said the worst isn't over yet for institutions that will suffer even as the economy improves:

The continuing bank failures will be driven by unusually high unemployment that is expected to lead to more foreclosures and other commercial loan failures.

So far, the total cost of the 133 failures to the FDIC fund is more than $28 billion.

The FDIC recently announced that 552 banks are at risk of going under.

Tuesday, December 08, 2009

Horizontal Drilling Expands Natural Gas Reserves

Using a relatively new new technique, oil engineers and geologist are now able to drill horizontally to extract natural gas from shale.

The technique has been used across Texas, Oklahoma, Louisiana and Pennsylvania for the past decade, resulting in a 40 percent increase in U.S. natural gas supplies in recent years.

The increased production has created a glut of the gas in the U.S., helping to drive down gas prices and utility costs.

Daniel Yergin, chairman of IHS Cambridge Energy Research Associates, calls the new method of producing gas “is the biggest energy innovation of the decade.”

Natural gas produces fewer emissions of greenhouse gases than either oil or coal, making it a favorable alternative.

Now Europe is seeking to expand in its reserves of the cleanest fossil fuel. The hope is that the continent can reduce its dependence on Russian natural gas.

Initial estimates of recoverable shale gas in Europe range up to 400 trillion cubic feet. Though that is less than half the industry’s estimates of what is recoverable in the United States, it could eventually drive down prices, which are sometimes twice as high as those in the U.S.

By some estimates, the horizontal drilling technique could result in at least a 20 percent increase in the world’s known reserves of natural gas.

One recent study by the Cambridge consulting group, calculated that the recoverable shale gas outside of North America could turn out to be equivalent to 211 years’ worth of natural gas consumption in the United States at the present level of demand, and maybe as much as 690 years.

The low figure would represent a 50 percent increase in the world’s known gas reserves, and the high figure, a 160 percent increase.

If the U.S. can convert more of its transportation fleets to use natural gas rather than gasoline, it would increase energy independence and security, as well as reducing costs and carbon emissions.

On a global scale, those benefits would obviously be greatly magnified.

Amidst all the dire peak oil news, this at least provides us with some semblance of hope.

Monday, December 07, 2009

Number of Failed U.S. Banks Reaches 130, and Counting

Six more U.S. banks were closed on Friday. These latest failures are expected to cost the FDIC's insurance fund at least $2.3 billion.

A total of 130 U.S. banks have now failed this year. The cumulative cost of all these failures to the federal deposit insurance fund is more than $28 billion, and counting.

The problem is that this fund has been in the red for over two months.

Last week, the FDIC announced that 552 banks are at risk of going under.

This begs the question: Is your bank safe?

The FDIC is counting on struggling banks to pay three years worth of insurance fund fees (amounting to $45 billion) to help offset the continuing losses.

Yes, the FDIC is relying on insolvent banks to come up with money they don't have, in order to save themselves.

It boggles the mind.

Friday, December 04, 2009

Declining Job Losses Nothing to Celebrate

The good economic news today was that the economy only shed 11,000 jobs in November, giving Wall St. cause for celebration.

However, it was the 23rd consecutive month of job losses – the longest losing streak since the 1930s.

Indeed, jobs losses must decelerate before ceasing, and losses must cease before net job creation is realized. But amid all this hubbub, one thing cannot be overlooked: the U.S. economy is still losing jobs every month.

Two years since the start of the Great Recession, nearly 8 million jobs have been lost. In fact, all job creation for the entire decade has been destroyed and is now negative. That hasn't happened since the Great Depression of the 1930s.

The fact is, there are twice as many unemployed people today as there were two years ago at his time.

Though the labor market has seen a steady decline in first-time jobless claims, and Initial claims have fallen five weeks in a row, it's not the layoffs that are hurting us as much as the lack of hiring.

In essence, while fewer people are being laid off, fewer are being hired as well.

Nearly six million of the 15.7 million people officially classified as unemployed have been out of work longer than six months. And that doesn't count the part-timers who cannot find full-time work, or those who have simply given up looking.

About 2.3 million persons were not in the labor force, wanted and were available for work, and had looked for a job sometime in the prior 12 months. They were not counted as unemployed because they had not searched for work in the 4 weeks preceding the survey.

There are 9.28 million people working part time, but who want a full time job. A year ago the number was 7.3 million. Employers will start increasing the hours of part-time workers before they start hiring full-time workers. This should give us pause.

Truthfully, all of these facts should temper some of the jubilation about a potential recovery.

The so-called U-6 unemployment figure still remains above 17%. This figure counts all the people that want a job but gave up, all the people with part-time jobs that want a full-time job, all the people who dropped off the unemployment rolls because their unemployment benefits ran out, etc.

Many of these job losses will be permanent. Millions of Americans will have to find new jobs or even new careers, which will be a lengthy process. The economy is both restructuring and recovering at the same time.

Service-producing industries added 58,000 jobs, while goods-producing industries cut 69,000 jobs. This is exactly the wrong kind of job creation, and the continuation of a decades-long pattern.

For far too long we've consumed too much and produced too little. We need to recover our manufacturing base in a hurry.

Unfortunately, there are continually fewer high-skill, high-paying jobs. In their place are evermore low-skill, low-paying service jobs.

"Hi, welcome to Wal-Mart," and "Hello, welcome to McDonald's, can I take your order?" have become all too common refrains for far too many educated and overqualified workers.

According to Lawrence Katz, a labor economist at Harvard, for every job that becomes available, about six people are looking. That creates an enormous amount of competition and leaves many out of luck.

Here's the reality check:

The government says that 1.3 million jobs need to be created every year from 2006-2016 just to keep up with the growing labor force. The hole we're in is very deep. Experts note that it will take years to reverse these massive losses.

Even if the nation could add 2.15 million private-sector jobs per year starting in January 2010, it would need to maintain this pace for more than 7 straight years (7.63 years), or until August 2017, to eliminate the current jobs deficit.

Washington, Wall St. and the mainstream media should hold of on the celebrating for now. The recovery hasn't really started yet. And whenever it does, there's still a very long road ahead.

Thursday, December 03, 2009

Worldwide Economic Instability a Major Threat

The U.S. Director of National Intelligence, Dennis Blair, has told Congress that instability in countries around the world caused by the global economic crisis and its geopolitical implications, rather than terrorism, is the primary near-term security threat to the United States.

And another leading figure on the world stage has voiced similar concerns.

In March, Dominique Strauss-Kahn, the head of the International Monetary Fund, warned that the global economic crisis threatened millions of people with being pushed into poverty.

At a meeting of the International Labour Organisation, Mr Strauss-Kahn issued this warning:

"'Bluntly the situation is dire. All this will affect dramatically unemployment. And, beyond unemployment, for many countries it will be at the roots of social unrest, some threat to democracy, and maybe for some cases it can also end in war."

He also warned governments against ploughing even more fiscal stimulus into their ailing economies.

"You can put in as much stimulus as you want. It will just melt in the sun as snow if at the same time you are not able to have a generally smaller financial sector than before, but a healthy financial sector at work."

The Federal Reserve didn't heed the warning; instead it has increased the monetary base by 142% over the last two years.

Meanwhile, bank balance sheets continue to deteriorate as home foreclosures spiral, and as the commercial real estate collapse gains momentum.

And people are noticing.

Standard & Poor’s has given warning that nearly all of the world’s big banks lack sufficient capital to cover trading and investment exposure, risking further downgrades over the next 18 months unless they move swiftly to beef up their defences.

Every single bank in Japan, the US, Germany, Spain, and Italy included in S&P’s list of 45 global lenders fails the 8pc safety level under the agency’s risk-adjusted capital (RAC) ratio. Most fall woefully short.

And then there's the Dubai default / debacle, which sent a shockwaves through markets around the world. Dubai is likely the canary in the coal mine, signaling the weakness of the global financial system, and the limits of debt.

It appears that 2010 isn't shaping up to be a very happy new year.

Monday, November 30, 2009

The High Cost of Dying

In 2008, Medicare paid $50 billion just for doctor and hospital bills during the last two months of patients' lives. That's more than the budgets of the Department of Homeland Security or the Department of Education.

There's an important distinction to be made here; this spending wasn't geared toward saving lives. All of these patients died within two months.

Such a protocol isn't a matter of prolonging life; it's a matter of prolonging death.

According to Dr. Ira Byock, 18 to 20 percent of Americans spend their last days in an ICU.

Despite the fact that a vast majority of Americans say they want to die at home, 75 percent end up dying in a hospital or a nursing home.

Dr. Elliott Fisher, a researcher at the Dartmouth Institute for Health Policy, says that 30 percent of hospital stays in the United States are probably unnecessary.

The resulting costs are massive.

Overall, healthcare in the U.S. is the most expensive in the world, costing about $2.4 trillion last year.

And government economists expect healthcare costs to account for 17.6 percent of GDP this year.

Part of the problem is that most doctors get paid based on the number of patients they see, and most hospitals get paid for the patients they admit. This amounts to what might be termed a "perverse incentive."

"In medicine we have turned the laws of supply and demand upside down," says Dr. Fisher. "Supply drives its own demand. If you're running a hospital, you have to keep that hospital full of paying patients in order to, you know, to meet your payroll. In order to pay off your bonds."

In essence, the current system often rewards excessive care. Efficacy and outcomes are not rewarded. But excessive care is.

By law, Medicare cannot reject any treatment based upon cost. It will pay $55,000 for patients with advanced breast cancer to receive the chemotherapy drug Avastin, even though it extends life only by an average of one and a half months.

And it will pay $40,000 for a 93-year-old man with terminal cancer to get a surgically implanted defibrillator if he happens to have heart problems too.

On a national basis, the costs are enormous.

Projections released by economists at the Centers for Medicare and Medicaid show health care outlays rising from $2.4 trillion in 2008 to $4.4 trillion by 2018, or 20.3 percent of the GDP.

Comparatively, healthcare costs are considerably less expensive across the industrialized world, ranging from 7.2 percent of GDP in Ireland to 11.6 percent in Switzerland.

The current level of U.S. spending is simply unsustainable.

David Walker, the government's former top accountant, puts it this way:

"The one thing that could bankrupt America is out of control health care costs. And if we don't get them under control, that's where we're headed."

Sunday, November 29, 2009

One in Eight Americans Now Receiving Food Stamps

The use of food stamps has reached a record high and is climbing every month.

Due to the recession, the number of recipients has soared. One in eight Americans, and one in four children, are now fed by food stamps. That amounts to more than 36 million people.

Virtually all have incomes near or below the federal poverty line, and include single mothers and married couples, the unemployed, the chronically poor, longtime recipients of welfare checks, and workers facing reduced hours and/or low wages.

Almost 90 percent of food stamp beneficiaries live below the poverty line.

However, the federal poverty level has a very conservative definition, and is set according to the number of persons in a family.

1 person: $10,830
2 people: $14,570
3 people: $18,310
4 people: $22,050

Individuals earning $11,000 annually are not considered in poverty. And the government does not define a family of four subsisting on $23,000 as living in poverty either.

Despite the strict definitions of poverty, the number of people receiving "nutritional assistance" has been steadily rising. The program is currently expanding at a rate of 20,000 people every day.

The stigma once associated with food stamps has eroded, and even large numbers of "red state" voters are beneficiaries.

In fact, the food stamp program is now officially known as the Supplemental Nutrition Assistance Program, or SNAP.

For many recipients, that acronym probably has a much nicer ring to it than "food stamps" ever did.

While the number of recipients of the federal cash welfare program has remained flat, the number of food stamp recipients has been steadily climbing.

According to an analysis done by the New York Times, there are 239 U.S. counties where at least a quarter of the population now receives food stamps.

And in 205 counties, the number of people receiving food stamps has risen by at least two-thirds since the recession started two years ago.

Yet, incredibly, the program will almost surely grow considerably larger; only two-thirds of eligible recipients are presently enrolled nationwide.

As it stands, roughly 12 percent of Americans receive food aid.

Professor Mark Rank, of Washington University, recently found that half of Americans receive food stamps at some point by the age of 20.

In Ohio alone, the cost of food stamps to the federal government was $2.2 billion last year. That's just a microcosm of the larger national cost.

According to the government, in 2008, SNAP served 28.4 million people a month at an annual cost of $34.6 billion.

But since that time, the ranks of recipients have swelled by some six million people.

And with it, so have the costs.

Saturday, November 21, 2009

Bank Failures Continue to Mount

As of November 20, a total of 124 U.S. banks have been closed by regulators. That's the highest total since 1992, when 181 banks failed at the tail end of the S&L crisis.

An average of 11 banks per month have failed this year. Just 25 banks failed last year, and only three in 2007.

The 124 closings have cost the FDIC's insurance fund more than $28 billion this year. The fund's balance went negative as of the end of the third quarter.

The FDIC estimates that the total cost of failures will be $100 billion from 2009 through 2013.

The number of banks on the FDIC's "problem list" stood at 416 at the end of June. The agency will hold a briefing next week to reveal how many banks are currently on that problem list.

The FDIC says that bank failures will remain elevated through next year. Experts suggest we could be no more than 10% of the way through this cycle of bank collapses.

CreditSights, which tracks bank failures, predicts that in the current cycle, from 2008 through 2011, as many as 1,100 banks will fail. That would wipe out 13.4% of all U.S. banks, representing 7% of U.S. banking assets.

Most of the troubled banks are concentrated at the regional and community level, and are weighed down by commercial real estate and construction loans.

Between now and 2012, more than $1.4 trillion worth of commercial real estate loans will come due, according to real estate investment firm ING Clarion Partners.

However, the collateral value underlying many of these loans is depreciating. That means many borrowers will have trouble rolling over their loans.

"Another wave of prolonged losses driven by weakness in commercial real estate could prove catastrophic to many of these weakened banks," CreditSights said.

The banking system has deteriorated considerably since last fall. Banks that regulators deemed healthy only months ago have started to fail.

This month, three banks that received taxpayer money have failed. The three received a total of $2.63 billion from the $700 billion financial bailout program. All of that taxpayer money will likely be lost.

When the TARP legislation was enacted last October, then-Treasury Secretary Henry Paulson said, "there is no reason to expect this program will cost taxpayers anything."

In all, more than two dozen banks that received taxpayer money have faced regulatory actions, suggesting they are not stable and could fail. All were deemed "healthy banks" when that money was granted.

More than $5 billion in taxpayer money could be lost, depending on which of these shaky banks survive.

Hold on to your hats, your checkbooks, and your wallets; the worst is yet to come.

Tuesday, November 17, 2009

Hunger Growing Across U.S.

On Monday, the Agriculture Department reported that 17 million American households, or 49 million individuals, “had difficulty putting enough food on the table at times [this] year.”

That was an increase from 13 million households, or 11 percent, in 2008.

This is a disturbing development, and amounts to the highest total since the government began surveying in 1995. It points to the distress that millions of American families are facing as a result of the recession.

In its simplest terms, what this means is that one in seven households is now struggling to put enough food on the table.

Agriculture Secretary Tom Vilsack called hunger “a problem that the American sense of fairness should not tolerate and American ingenuity can overcome.”

However, Vicki Escarra, president of the nonprofit organization Feeding America, says the Agriculture Department is probably understating the problem.

Food banks in her network reported an average increase in need of nearly 30 percent this year over 2008.

It would hardly be a surprise if the government is fudging the numbers; it recently admitted it had overestimated employment figures by 824,000 jobs between March of 2008 and March of 2009.

Food — the most basic staple of life, and of dignity — is simply unaffordable for millions of Americans.

The government reports that one in eight Americans now collects food stamps.

This is a stunning figure. And that number will continue to grow; nearly 16 million Americans are now said to be unemployed, and more than 100,000 additional people join their ranks each week.

When workers who can only find part time jobs are added to the mix, we find that 26.5 million Americans are either unemployed or under-employed.

Sadly, their is no letup in sight.

We are living in hard times and this latest Agriculture Report only serves to remind us that, for millions of Americans, the basic act of buying food has become all too challenging.

For these families, the recession is anything but over.

Monday, November 16, 2009

Military Spending Weighs Heavily on Bloated Budget

Research Shows That it is Robbing Jobs From the Private Sector Too

With the National Debt about to exceed $12 Trillion (which will require Congressional approval), major budget cuts will most certainly ensue and significant tax hikes won't be far behind.

But much of the federal budget is mandated by law — the product of Social Security and Medicare — or is otherwise non-discretionary, such as interest payments to holders of the U.S. debt.

The War Research League performed an analysis of the “Analytical Perspectives” book of the Budget of the United States Government, Fiscal Year 2009.

It found that 54% of federal spending is allocated to the military. This includes veterans spending, the cost of the "war on terror", as well as the cost of two concurrent wars.

The Center for Defense Information reports the military portion of the budget at 51%.

Either way, military spending represents more than half the federal budget.

The Center for Economic and Policy Research published an op-ed last week titled, Massive Defense Spending Leads to Job Loss.

The piece notes that defense spending removes resources from the economy, thwarting the free market. Defense spending is a direct drain on the economy, reducing efficiency, slowing growth and costing jobs.

A few years ago the Center for Economic and Policy Research commissioned Global Insight, one of the leading economic modeling firms, to project the impact of a sustained increase in defense spending equal to 1.0 percentage point of GDP. This was roughly equal to the cost of the Iraq War.

Global Insight’s model projected that after 20 years the economy would be about 0.6 percentage points smaller as a result of the additional defense spending. Slower growth would imply a loss of almost 700,000 jobs compared to a situation in which defense spending had not been increased.

Defense spending has now grown to 5.6 percent of GDP. By comparison, before the September 11th attacks, the Congressional Budget Office projected that defense spending in 2009 would be equal to just 2.4 percent of GDP. That's a difference of 3.2 percent. So, the Global Insight projections of job loss are far too low.

In fact, the projected job loss from this increase in defense spending is closer to 2 million. The analysis also projects a roughly $250 billion reduction in GDP due to defense spending. This is at the expense of the private sector.

Upon his departure from the White House, President Eisenhower so famously warned of the dangers of the Military-Industrial Complex.

Useless, unwanted, unwarranted, and unnecessary weapons systems are continually approved and appropriated. The entire defense-contracting industry has dedicated itself to forever increasing government spending on its assorted wares.

About $50 billion in defense spending (or about 7.5%) is now classified, or part of the so-called "black budget."

According to Aviation Week’s Bill Sweetman, this makes the Pentagon’s secret operations, including the intelligence budgets nested inside, “roughly equal in magnitude to the entire defense budgets of the UK, France or Japan.”

While America debates how soon we can bring home our troops from Iraq, it's worth noting that — more than 60 years after the end of WWII — the US still has more than 50,000 troops in Germany and 30,000 in Japan.

In fact, the US has over 500,000 military personnel deployed on over 700 bases, with troops in 150 countries — including 37 European nations.

As Ron Paul suggests, in this time of deep economic crisis, why not just bring them all home?

"We are bankrupt and cannot afford it," says the Texas Representative.

The truth is, he's right.

Saturday, November 14, 2009

Monumental Oil Scam Robbing Consumers Every Day

Investor and consultant Phillip Davis has written about a giant global oil scam amounting to some $2.5 TRILLION.

Davis notes that investment giants Goldman Sachs, Morgan Stanley, Deutsche Bank and Societe Generale teamed with oil giants British Petroleum, Total, and Shell to found the Intercontinental Exchange (ICE) in 2000.

The ICE is putting billions of dollars into oil futures contracts without ever taking delivery of the oil. It's nothing more than a shell game.

"They just ratchet up the price with leveraged speculation using your TARP money," writes Davis. "This year alone they ratcheted up the global cost of oil from $40 to $80 per barrel."

In 2003, Congress discovered that ICE was facilitating "roundtrip trades," in which one firm sells energy to another and then the second firm simultaneously sells the same amount of energy back to the first company at exactly the same price. No commodity ever changes hands.

This indicates demand to the market, which pushes up the price. Yet, it amounts to nothing more than smoke and mirrors.

Over the course of an average month, 5 BILLION barrels of oil are traded on the NYMEX. A fee is collected on every single transaction, and this is ultimately passed down to US consumers. Yet, less than 40M barrels is actually delivered. That is just 8 tenths of 1 percent of actual demand for the product being traded. So, 99.2% of the oil transaction fees being paid by the American people amount to nothing more than fees for traders and record profits and bonuses for the trading firms.

"Before ICE, the average American family spent 7% of their income on food and fuel," writes Davis.."Last year, that number topped 20%. That’s 13% of the incomes of every man, woman and child in the United States of America, over $1 Trillion EVERY SINGLE YEAR, stolen through market manipulation. On a global scale, that number is over $4 Trillion per year."

This amounts to a truly massive scam, an epic scam.

ICE members Total and JP Morgan are currently storing 125 million barrels of oil in offshore tankers. That amounts to 15 days of US imports that have been ordered, but not delivered.

Speculators have stockpiled the equivalent of 1.1 million barrels of oil via the futures market. That amounts to eight times the amount added to the Strategic Petroleum Reserve over the last five years.

There is an extraordinary amount of manipulation going on in the oil markets, and consumers the world over are being gouged by all of this illicit behavior.

There is no oversight and no regulation. We're all being robbed.

Back in January, 60 Minutes ran a similar story, noting that oil speculation seemed to be fueling wild swings in oil prices. That can be seen here.

To read Davis' article, click here.

Wednesday, November 11, 2009

World Oil Reserves Running Out Much Faster Than Previously Believed

A whistleblower from the International Energy Association (IEA) has told the Guardian UK that the agency has been deliberately misleading the public about oil reserves in order to avert a panic on world markets.

The senior official, who was unwilling to be identified for fear of reprisals inside the industry, says the US encouraged the IEA to underestimate the decline in worldwide oil reserves while overestimating the potential for new reserves.

World oil production is currently 83 million barrels a day. Since 2005, the IEA has had to downwardly asses its projections for 2030 from 120 millions barrels per day to 116, and then to 105.

But even that is highly inflated, according to the official.

"Many inside the organisation believe that maintaining oil supplies at even 90m to 95m barrels a day would be impossible but there are fears that panic could spread on the financial markets if the figures were brought down further. And the Americans fear the end of oil supremacy because it would threaten their power over access to oil resources," he told the British paper.

A second IEA source, no longer with the agency, backed his former colleague's claims. "We have [already] entered the 'peak oil' zone. I think that the situation is really bad," he said.

The implications for the US and the rest of the industrial world are stark.

International observers have long suspected that the IEA's projections for future oil output were misleading.

Yet last summer, the IEA's chief economist publicly stated that most of the world's major oil fields have already passed their peak production.

Dr Fatih Birol said the world is heading for a catastrophic energy crunch because oil is running out far faster than previously predicted. He noted that global production is likely to peak in about 10 years.

The Guardian's latest report reveals this projection to be overly optimistic.

The first detailed assessment of more than 800 oil fields in the world, covering three quarters of global reserves, found that most of the biggest fields have already peaked and that the rate of decline in oil production is now 6.7%.

It's worth noting that the doubling rate of 7% is 10 years. In other words, anything growing or shrinking by 7% will see a doubling effect in 10 years.

In its landmark assessment of the world's major oil fields, the IEA concluded that global consumption of oil was "patently unsustainable", with expected demand far outstripping supply.

Dr Birol said that even if demand remained steady, the world would have to find the equivalent of four Saudi Arabias to maintain production, and six Saudi Arabias if it is to keep up with the expected increase in demand between now and 2030.

That assessment was quite sobering. But in light of the new warning from the IEA whistleblowers, the future of oil production and supply appears downright scary.

It seems that production will in no way be able to meet growing world demand, and that our lives in the heavily oil-dependent modern economy are simply unsustainable and need to change quickly.

Eventually, there will be major disruptions and shortages. Such events will cripple the world economy and radically alter our way of life.

In a grim and perhaps tacit warning last summer, Dr. Birol said the following:

"One day we will run out of oil. It is not today or tomorrow, but one day we will run out of oil. And we have to leave oil before oil leaves us. And we have to prepare ourselves for that day. The earlier we start, the better, because all of our economic and social system is based on oil. So to change from that will take a lot of time and a lot of money and we should take this issue very seriously."

Monday, November 09, 2009

Bank Stresses Mounting; Commercial Real Estate Crisis Looming

As if mounting residential housing defaults weren't enough of a problem, banks are expected to face an even bigger crisis next year: commercial real estate defaults.

Banks hold roughly $1.8 trillion of commercial real estate debt on their books. Many of those loans were made in the same fast and loose manner that home loans were during this decade.

Loans that never should have been issued were ultimately granted under very unrealistic scenarios anticipating endless growth and appreciation.

The parties involved seemed to believe the market could never go down, and loan portfolios expanded rapidly.

Banks underwrote and held $11 billion in commercial real estate loans in 1997; by 2007 that figure had skyrocketed to approximately $190 billion.

The problem is that the $6.4 trillion commercial real estate market is under duress as businesses across the country go under. Stores are closing, mall vacancies are increasing, and office space is all too available.

Between now and 2012, more than $1.4 trillion worth of commercial real estate loans will come due, according to real estate investment firm ING Clarion Partners.

However, the collateral value underlying many of these loans is depreciating. That means many borrowers will have trouble rolling over their loans.

Kenneth P. Riggs Jr., CEO of Real Estate Research, told BusinessWeek that the market won't fully recover until 2020, and in cases where "values were over the top...maybe never."

Commercial real estate prices have dropped 41% from the beginning of 2007 through October. Meanwhile, the housing market has dropped some 31%.

Since banks are not required to mark their loans to market prices, no one knows the values of the loans on their books. But as the commercial real estate market nose dives, many banks will go down with it.

Consider this; $6.4 billion in commercial real estate investments didn't qualify for refinancing in the first ten months of this year.

The tidal wave of defaults will begin next year and banks can hardly take any additional stresses without breaking.

So far, 120 U.S. banks have failed this year, the most since 1992. There were just 25 banks failures last year, which was more than in the previous five years combined. Only three banks failed in 2007.

Things are poised to get much worse.

Currently, there are 2.8 million active interest-only home loans nationwide, worth a combined total of $908 billion. In the next 12 months, $71 billion of interest-only loans will reset. Even after mid-2011, another $400 billion will reset.

That means there will be a massive number of additional defaults over the next two years.

Amherst Securities estimates that 7 million housing units are destined to default, only to be seized by lenders. That number represents well over a year's worth of home sales. When this "shadow inventory" eventually hits the market, home prices will be pushed further downward.

That is truly bad news for already distressed banks.

We can expect bank failures to continually worsen in coming months, and throughout the next two years, at the least.

Saturday, November 07, 2009

Mortgage Giants Teetering

Developments this week revealed the increasing troubles in the home-mortgage industry.

On Thursday, Fannie Mae, the nation's largest mortgage provider, reported a whopping $18.9 billion third-quarter loss and said it would need $15 billion from the U.S. Treasury.

Then, on Friday, Freddie Mac, the second largest provider of residential mortgage funding, posted a third-quarter loss of $5 billion and predicted it would need more government support amid a "prolonged deterioration" in housing.

"I would say we are just beginning to see the impact of the chargeoffs on their guarantee book," said Janaki Rao, vice president of mortgage research at Morgan Stanley in New York.

In its filing, Fannie Mae said that losses will continue and that it remains “dependent on the continued support of Treasury to continue operating,”

Results at Freddie Mac and Fannie Mae are widely watched as a barometer of the U.S. housing market since they own or back nearly half of the nation's $12 trillion mortgage market.

In September 2008, examiners said the two lending giants may be at risk of failing due to the housing slump.

Freddie Mac has taken $51.7 billion in government support since that time, while Fannie Mae's draw will rise to $60.9 billion.

Fannie Mae’s net worth was negative $15 billion as of September 30. The lender has been given a $200 billion emergency lifeline by the Treasury Department.

“They’re going to need that $200 billion in capital, if not more, when this thing’s all said and done,” said Paul Miller, an analyst at FBR Capital Markets in Arlington, Virginia.

“In absolute dollar terms, you’re still looking at outlandish growth in nonperformers, which tells you that reserves will continue to increase,” said Miller.

Banks are supposed to make provisions against future loan losses by estimating future defaults and then putting that amount of money into reserves in response. When the defaults occur, the bank has the cash to deal with the crisis.

But this presumes that banks actually have the massive amounts of cash to put aside in preparation for the coming onslaught.

According to RealtyTrac, a record 2.6 million defaults, scheduled foreclosure auctions, or bank repossessions occurred in the first nine months of this year.

That was a 22 percent increase from a year earlier, as unemployment climbed and temporary programs delaying foreclosure expired.

The ratio of inventory to sales remains high and additional foreclosures may put further pressure on home prices, Fannie Mae said.

Nationwide, about 3.9 million homes are for sale.

According to the Mortgage Bankers Association, an equal number of homes with mortgage payments that are at least 90 days past due (the so-called “shadow inventory") will eventually come onto the market.

This portends the trouble yet to come.

There will be more government rescues and more bailouts of the banking and lending industries.

Housing inventories will continue to rise, and prices will continue to sink.

We are a long way from the bottom.

We are deep in the woods, looking for a way out.

Wednesday, November 04, 2009

Oil and Gold are Up; the Dollar is Down and on it's Way Out

With crude oil prices bouncing above $80 per barrel once again, even OPEC leaders are saying this price is too high given the fragile state of the global economy.

The slumping US dollar is the primary reason.

The demand for gasoline in the United States is flat compared with last year. Yet, gas prices hit a new high for the year last week; the national average price for a gallon on Wednesday was around $2.68. That is 22.3 cents more expensive than last month, according to AAA, Wright Express and Oil Price Information Service.

Even the demand for jet fuel is down.

Since crude is bought and sold in dollars, those holding holding euros or another strong currency can get more crude for less.

Simply put, the price of oil is climbing as the dollar is falling. In fact, oil seems to be tracking the run up in gold prices.

"Oil is following the lead of gold as a hard asset," said Ellis Eckland, an independent analyst. Commodities are "alternative forms of currencies, especially gold," he said.

Inflation fears stoked by the massive liquidity pumped into the financial sector by central banks recently have pushed investors toward commodities to protect the value of their assets.

As a result, the dollar is under assault.

Last month, the British paper, The Independent, reported the following:

"Gulf Arabs are planning – along with China, Russia, Japan and France – to end dollar dealings for oil, moving instead to a basket of currencies including the Japanese yen and Chinese yuan, the euro, gold and a new, unified currency planned for nations in the Gulf Co-operation Council, including Saudi Arabia, Abu Dhabi, Kuwait and Qatar."

The story's author, Robert Fisk, called this "the most profound financial change in recent Middle East history."

What this would mean, in essence, is that oil will no longer be priced in dollars. The unique status has been an extraordinary advantage to the US, and that advantage now seems poised to disappear.

Is it any wonder? Oil exporting nations are being negatively affected by the dollar's decline.

The plan may help to explain the sudden rise in gold prices. Chinese banking sources told The Independent that the transitional currency in the move away from dollars may well be gold.

The so-called BRIC nations (Brazil, Russia, India and China) have publicly voiced a particular interest in collaborating in non-dollar oil payments.

The dollar's position as the dominant global reserve currency has given the US extraordinary control of international finance and trade. The BRIC countries, in particular, don't like this sort of hegemony. And now they are apparently moving to end it.

The current deadline for the currency transition is 2018.

With the US importing two-thirds of the oil it uses (14 million of the 21 million barrels used daily), and China importing 60 percent to support its rapidly expanding economy, there is growing competition for this finite commodity.

Sun Bigan, China's former special envoy to the Middle East, has warned there is a risk of deepening divisions between China and the US over influence and oil in the Middle East.

"Bilateral quarrels and clashes are unavoidable," he told the Asia and Africa Review. "We cannot lower vigilance against hostility in the Middle East over energy interests and security."

Against that backdrop, China's recent oil negotiations have been particularly interesting.

The US has fought two wars with Iraq, and is still engaged there, largely over oil.

Nobel economist Joseph Stiglitz estimates that the total cost of the current engagement will amount to $3 trillion, a staggering sum. The war has already exceeded the cost of the Vietnam conflict.

There has always been the belief that the US would at least secure long term oil contracts with the new Iraqi government, and establish stable supplies of oil for decades to come.

When the war started nearly seven years ago, experts said it would virtually pay for itself through increased Iraqi oil exports. That has not turned out to be the case. In fact, China is benefitting from America's loss in blood and treasure.

On Tuesday, Iraq signed a deal with British energy giant BP and China's CNPC to almost triple oil production at a giant southern oilfield.

"The two companies will invest 50 billion dollars in the project," Iraqi Oil Minister Hussein al-Shahristani told reporters.

The 20-year contract is expected to boost production at the Rumaila field from the current one million barrels per day to around 2.8 million bpd within its first six years, the minister said.

The costs of war have impacted the US economy and compounded the size of our continually growing national debt.

And now the dollar is tumbling as the price of oil rises in accordance.

Call it unintended consequences.

Tuesday, November 03, 2009

Treasury Ponzi Doomed to Fail

U. S. Securities and Exchange Commission Ponzi Pyramid Diagram

In the early 1980s, a major recession and massive military spending resulted in huge government borrowing. The sale of U.S. Treasury bonds financed all that massive spending.

Many of the long term bonds issued at the time will begin to mature next year, and will continue to do so in large numbers over the next few years.

To pay its bills, the federal government floats its debt, meaning it issues new bonds to obtain the revenue to pay off old bonds as they reach their maturity dates.

Consider that: the federal government – so deeply, perennially, and perhaps terminally in debt – continues to issue Treasury bonds not just to maintain its deficit spending, but to pay back previous bond holders.

So, in essence, our government is literally perpetuating its own Ponzi scheme, whereby it is borrowing from Peter to pay Paul.

The U.S. Treasury Department now conducts more than 200 sales of debt by auction every year. All of it will eventually have to be paid back – with interest.

The US deficit for fiscal 2009 was $1.42 trillion, pushing the national debt to roughly $12 trillion. All that deficit spending has been financed with borrowed money.

According to the Office of Management and Budget, the National Debt is projected to skyrocket in excess of $14 trillion in the current fiscal year.

That will likely exceed GDP. And if it doesn't, any growth will simply be the result of additional government borrowing to finance further deficit spending.

That is not a solution. It is simply more of the same poison that's already slowly killing us.

But that's not the whole story.

The federal government assumed $6.8 trillion in new debt last year—a 12 percent increase—pushing its total debt to a record $63.8 trillion, according to USA Today. That amounts to $545,668 for each household.

The government does not have the capacity to ever repay that debt. Its obligations far exceed its means. And the hole is only getting deeper.

As a result of the recession, tax revenues in FY 2009 fell nearly 17 percent, the biggest decline since 1932. That will only result in even deeper borrowing.

For three decades, foreign governments have facilitated much of that borrowing.

The surplus cash deposits of exporters like Japan, Taiwan, South Korea, the oil exporters of the Middle East, and China – the world’s biggest exporter – have financed the U.S. public debt since 1980.

China alone holds an estimated $1 trillion in U.S. Treasury bonds and other government debt.

These nations liberally purchased U.S. Treasury bonds and left their money in U.S. banks, believing their money was in safe hands. But it now seems that doubts about that course of action are beginning to mount.

The Chinese and other big-time U.S. creditors have expressed concerns that Treasuries are becoming more risky. And they are starting to demand higher interest payments for further bond purchases.

Creditors have reasonable worries that inflation in the U.S. will gain momentum, lowering the value of the dollar and all dollar-based assets, including U.S. Treasuries.

The fear is that these investors might respond by reducing their purchases of U.S. Treasuries, or begin dumping their holdings altogether. That would also cause the dollar's value – already declining – to drop even further. The government would have to start paying higher interest rates to try to attract investors and bolster the dollar.

There are signs that this scenario is already starting to develop.

Driven by inflation fears, bond investors – especially international investors – have slowly begun selling Treasuries, pushing long-term interest rates up and the dollar down. The resulting danger is that bond investors will begin selling Treasury bonds faster than the Fed can buy them.

The Fed will surely continue its futile attempts to print its way out of trouble. Consequently, the huge international Treasury bond market, already trying to absorb a huge supply of new bond issues, could react accordingly and start a selloff. Realistic fears of hyperinflation could create a self-fulfilling prophecy.

The federal government, the biggest borrower in the world, has been the prime beneficiary of today's record low interest rates.

However, in Fiscal Year 2009 (FY09), the U. S. Government spent $383 Billion of your money on interest payments to the holders of the National Debt.

That made it the fourth biggest expense in the entire federal budget. We get nothing for it. It merely pays interest.

Yet, the debt continues to soar.

Interest payments to all bond holders over the past 30 years (the longest term of Treasury bonds) don't begin to payoff the bonds themselves. The government counts on bond holders rolling over their holdings and reinvesting. That is becoming increasingly less likely with each passing day.

Furthermore, bond interest is compounded, meaning that even if the government stopped its deficit spending, the total debt would continue to grow as a result of interest on the portion that already exists.

Despite this, our government's deficit spending continues unabated. Congress continually raises the debt ceiling to accommodate all of this additional debt burden.

Historically, the sale of government bonds makes less money available for private investment. That may not seem like much of an issue right now since much of the private sector is simply unwilling to go further into debt in these uncertain times. Businesses are determinedly paying off debts instead.

But any U.S. business, any entrepreneur, or any average citizen seeking credit will eventually be saddled by higher interest rates as a result of all this massive government borrowing and debt. That will spur higher prices across the economy.

When the government issues new debt, the supply of bonds increases, lowering the price and raising the interest rate. When there is deficit spending, the supply of bonds held by the public increases and interest rates increase as well.

The economy is always retarded by government debt. The larger the debt, the greater the damage.

For years, we've been warned that our government's irresponsible spending and mounting debt would come back to haunt us. It seems that time is finally arriving.

Old debts are coming due. In response, the government will continue to issue new debts to pay them off. We're on a carousel of debt.

The government is attempting to print and borrow its way out of crisis. Yet, it is only making its problems – our problems – interminably worse.

It is not hard to imagine that foreign bond holders will cease renewing. The Chinese have already warned us about this. How can anyone realistically expect us to payoff all our debt?

The jig is up. Get ready for price inflation, higher interest rates, and higher taxes. Get ready for further economic stagnation.

When the other shoe drops, it will feel like a boot in the face.

Friday, October 30, 2009

The Recession is NOT Over

Mainstream economists, and many in the mainstream media, have declared that the alleged 3.5% third quarter growth (the first in over a year) means that the recession is now over.

Did you get that? It's over! Thank God, it's finally over!

How many Americans really believe that? According to this story, there are plenty of disbelievers, and this comes from the mainstream media.

How much do you want to bet that this report will revised in the weeks or months ahead?

Any economic growth was exclusively the result of absolutely massive deficit spending by the federal government – not by US businesses and consumers.

The US deficit for 2009 has reached $1.42 trillion. Adjusted for inflation, it is the largest deficit since 1945. Federal tax receipts are down 17%, while spending is up 18%.

No nation has ever borrowed its way to prosperity. The government is sacrificing our future prosperity for false, contrived, growth.

The recession is by no means over.

Job losses continue to mount and foreclosures will spread through 2010 and 2011. US banks have failed at a rate of 2.5 per week so far this year.

The truth is, we haven't even seen the worst of it yet.

Job creation for this entire decade is negative, resulting from 7.6 million lost jobs that will need to be made up. In addition, the government says that 1.3 million jobs need to be created every year from 2006-2016 just to keep up with the growing labor force.

The hole is very deep. Experts note that it will take years to reverse these massive losses.

Currently, there are 2.8 million active interest-only loans nationally, worth a combined total of $908 billion. In the next 12 months, $71 billion of interest-only loans will reset. Even after mid-2011, another $400 billion will reset. That means there will be a massive number of additional defaults over the next two years.

Amherst Securities estimates that 7 million housing units are destined to default, only to be seized by lenders. That number represents well over a year's worth of home sales. When this "shadow inventory" eventually hits the market, prices will be pushed further downward.

Household credit has utterly collapsed, experiencing a year-over-year decline for the first time on record (since 1953). Simply put, we are not going to spend our way out of this recession.

The Consumer Confidence Index now stands at 47.7 on a scale of 100, the lowest level in more than a quarter century. Americans are rightfully worried, even scared.

But the government has to spin the story. They have to control the message. Most of all, they have to control public fear, anxiety and even the possibility of outright panic.

We've seen this movie before. But most Americans are too young to remember it.

However, our government made these same rosy forecasts, completely detached from reality, during the Great Depression.

Does any of this seem familiar, or similar to the present?

"We will not have any more crashes in our time." - John Maynard Keynes, 1927

"There will be no interruption of our permanent prosperity." - Myron E. Forbes, President, Pierce Arrow Motor Car Co., January 12, 1928

"There is no cause to worry. The high tide of prosperity will continue." - Andrew W. Mellon, Secretary of the Treasury, September 1929

"Stock prices have reached what looks like a permanently high plateau." - Irving Fisher, Ph.D. in economics, Oct. 17, 1929

"Secretary Lamont and officials of the Commerce Department today denied rumors that a severe depression in business and industrial activity was impending, which had been based on a mistaken interpretation of a review of industrial and credit conditions issued earlier in the day by the Federal Reserve Board." - New York Times, October 14, 1929

"This crash is not going to have much effect on business." - Arthur Reynolds, Chairman of Continental Illinois Bank of Chicago, October 24, 1929

"...despite its severity, we believe that the slump in stock prices will prove an intermediate movement and not the precursor of a business depression..." - Harvard Economic Society (HES), November 2, 1929

"The Government's business is in sound condition." - Andrew W. Mellon, Secretary of the Treasury, December 5, 1929

"President Hoover predicted today that the worst effect of the crash upon unemployment will have been passed during the next sixty days." - Washington Dispatch, March 8, 1930

"The spring of 1930 marks the end of a period of grave concern... American business is steadily coming back to a normal level of prosperity." - Julius Barnes, head of Hoover's National Business Survey Conference, Mar 16, 1930

"While the crash only took place six months ago, I am convinced we have now passed the worst and with continued unity of effort we shall rapidly recover. There is one certainty of the future of a people of the resources, intelligence and character of the people of the United States - that is, prosperity." - President Hoover, May 1, 1930

"The worst is over without a doubt." - James J. Davis, Secretary of Labor, June 29, 1930

Gentleman, you have come sixty days too late. The depression is over." - Herbert Hoover, responding to a delegation requesting a public works program to help speed the recovery, June 1930

"We have hit bottom and are on the upswing." - James J. Davis, Secretary of Labor, September 12, 1930

"President Hoover has summoned Colonel Arthur Woods to help place 2,500,000 persons back to work this winter." - Washington dispatch, October 21, 1930

"I see no reason why 1931 should not be an extremely good year." - Alfred P. Sloan, Jr., General Motors Co, November 1930

"The depression has ended." - Dr. Julius Klein, Assistant Secretary of Commerce, June 9, 1931

"I believe July 8, 1932 was the end of the great bear market." - Dow Theorist, Robert Rhea, July 21, 1932

"All safe deposit boxes in banks or financial institutions have been sealed... and may only be opened in the presence of an agent of the I.R.S." - President F.D. Roosevelt, 1933

Sunday, October 25, 2009

Expert: $80/Barrel Oil Could Re-Trigger Recession

Steven Kopits runs the New York office of Douglas-Westwood, an independent energy analysis company.

Kopits has written a new paper on Peak Oil and the economy.

In it, he notes that the worldwide oil supply of has not improved much since the 4th quarter of 2004. Yet, demand has continued to rise.

“And I don’t see anything on the horizon that makes it appear that we’re going to break out into a really new level of production that’s far different than what we have today. So if we’re talking about practical Peak Oil, my view is that it started in late 2004.”

Kopits says that China’s rapid growth will make it difficult for supply to keep up with demand, even if supply somehow manages to grow. But an increasing supply doesn't seem likely.

The International Energy Agency has pointed out that the decline rate appears to have increased to 6-7%.

But the most pressing issue at present is that rising oil prices could worsen the US recession.

This is a concern that Kopits shares with many economists.

“The US has experienced six recessions since 1972. At least five of these were associated with oil prices. In every case, when oil consumption in the US reached 4% percent of GDP, the US went into recession. Right now, 4% of GDP is $80 oil. So that’s my current view: If the oil price exceeds $80, then expect the US to fall back into recession.”

Right now, oil is already trading at over $80 per barrel, its highest level this year. Given Kopits’ analysis, that’s reason for genuine concern.

It requires great optimism to believe the US is currently coming out of recession. So that precludes the possibility of “falling back” into one. But, clearly, things can get worse.

Americans have cut oil consumption in response to the recession. The Federal Highway Administration reported that, as of September, Americans had traveled up to 112 billion fewer miles in the previous 13 months.

Yet, the price of oil continues to rise. In fact, prices have surged 25 percent in less than a month.

The plunging US dollar is largely to blame. Oil is traded in dollars, which are dropping in value. That makes oil more expensive in the US.

But rising demand in the developing world, particularly China, is also creating inflationary pressure on oil.

Kopits expects Chinese demand for oil to eventually stabilize at about 50 million barrels per day around 2032-2035. That's more than twice what the US – the world's biggest consumer of oil – currently uses.

But where will all that oil come from?

"If you have a flat—or heaven help us, declining—supply of oil, then the emerging and fast-growing economies will have no choice but to start bidding away the oil from the advanced or slow-growing economies. That is consistent with what we’ve seen in the data starting in about 2006. For China to grow, it will have to take away the oil of Japan, the US and Europe, just as it has in the last three years.

"If I run out the projections, this implies that US consumption is likely to drop by about one-third, from its peak at 21 mb/day before the recession, to about 14 mb/day in 2030. That will potentially be a long and painful adjustment.”

That's a stunning projection. It implies no growth in the US economy over the next two decades, but instead a massive contraction.

According to Kopits, the global economy cannot sustain oil at any price.

“Beyond a certain threshold, the result is likely to be stagflation or recession rather than perpetually increasing oil prices.”

Kopits says that we are in the midst of the first Peak Oil recession. The implications of that reality will be burdensome.

At a minimum, Kopits and other analysts believe that $4 a gallon gas is on the horizon.

Between a declining dollar and increasing Chinese energy demands, the American economy will be additionally impacted by the rising cost of oil.

The fact that it is a finite resource will become abundantly, and uncomfortably, clear.

Friday, October 23, 2009

US Banks Reach Grim Milestone: 100 Closures

Seven more US banks were shut down by regulators on Friday, bringing the total for this year to 106. It's the most closings since 1992, when 122 banks were shuttered.

Yet, it's only October.

The occasion also marked just the 11th time since the creation of the FDIC in 1933 that 100 banks have failed in a single year.

To provide some perspective, just three US banks failed in 2007.

And last year, 25 US banks were closed, which was more than in the previous five years combined.

But this year the problems in US banking have been growing steadily worse; a total of 416 banks were on the FDIC's troubled list as of the end of June.

With more and more mortgages continually going into default, those numbers are expected to steadily rise over the next couple of years, putting ever greater pressure on the entire US banking system.

However, this doesn't even account for the looming fallout in commercial real estate failures.

Investors in commercial mortgage-backed securities are holding assets with a delinquent unpaid balance of $29 billion, up more than five fold since June 2008, according to a report issued by the Congressional Oversight Panel.

Under a worst-case scenario, the panel estimates that commercial real estate and construction loan losses through 2010 may total $81.1 billion at 701 banks with assets of $600 million to $80 billion.

Consider the implications of that scenario; the potential losses could exceed the total assets of the banks involved.

According to Jim Rounds, senior vice president and senior economist at Elliott D. Pollack, the problems in commercial real estate are just getting started and they will hinder any possible economic recovery.

The resulting losses, on top of the already heavy losses in residential real estate, will be devastating.

Veteran bank analyst Gerard Cassidy of RBC Capital Markets expects as many as 1000 banks to ultimately go bust. And the money to cover those losses doesn't exist at present.

As of March 31, the FDIC's deposit insurance fund had $13 billion to cover pending bank losses. However, the agency has shelled out more than $25 billion to pay for all the bank failures so far this year. That meant the insurance fund that allegedly insures your accounts was officially in the red.

As a preventative measure (as futile as it may be), the FDIC's board took an unusual step on September 29, asking banks to pay $45 billion in fees up front. The money was to have been paid over three years. But the FDIC is in dire straights, so it has resorted to rather desperate moves.

The $45 million in fees amounts to putting a band-aid over a bullet wound. The FDIC purports to insure $4.83 trillion in deposits. Does $45 billion seem adequate for the task?

At the end of 2008, the FDIC expected bank failures to cost its insurance fund around $65 billion through 2013, up from an earlier estimate of $40 billion. However, its problems have grown continually worse. As a result, the FDIC keeps revising it cost estimates ever higher.

The agency now expects to spend $100 billion on bank failures in the next few years.

However, analyst Andy Laperriere, Managing Director of the ISI Group, thinks that's a lowball number.

"I think the FDIC is going to continue to increase their estimated losses and this short-term measure of having the banks pay their fees up front probably is not going to hold us over through this cycle of bank failures. And I think ultimately, the FDIC is probably going to have to go to the Treasury and ask for a loan."

Due to their massive losses, US banks have a diminished capacity to increase lending, which will affect any recovery. According to the IMF, in both 2009 and 2010, US banks will have a negative lending capacity of approximately 3%.

And bank losses will only worsen.

Nationwide, there are 2.8 million active interest-only home loans, worth a combined total of $908 billion. In the next 12 months, $71 billion of interest-only loans will reset. Even after mid-2011, another $400 billion will reset. For instance, in 2004, nearly half of all buyers in California took out an interest-only loan.

That means there will be a massive number of additional defaults over the next two years.

And banks will continue to fall like dominoes as a result.

History and context of bank failures:

- In 1930, 1300+ banks failed, 600 in just the final two months of the year.

- During the savings-and-loan crisis (1986-95), 2,377 banks failed.

- In 1989, 534 banks were closed, the most since 1934.

- According to the FDIC, since 1934, the only two years with no bank failures were 2005 and 2006.

- From 2000=2007, only 32 US banks failed.

Friday, October 16, 2009

Dollar's Decline Presents Bernanke With Faustian Bargain

This week it was revealed that the euro and the yen have supplanted the dollar as the currency of choice at foreign central banks.

This is a major development, but one that has been a long time coming.

According to Barclays Capital, over the last three months, banks put 63 percent of their new cash into euros and yen, and just 37 percent into dollars. A decade ago, the dollar's share of new cash in central banks was two-thirds.

The once mighty dollar has fallen considerably as the currency choice.

The IMF says that dollars currently account for about 62 percent of the total currency reserve at central banks -- the lowest on record.

The printing of trillions of dollars by the Federal Reserve – the very definition of inflation – has sparked concerns that the value of the dollar is eroding. That has sparked a worldwide flight to other currencies.

Investors and central banks are also snubbing dollars because near-zero interest rates are keeping the currency too weak.

Those investors and central banks are getting paid back by a currency that is worth 10 percent less in the past three months alone. In a decade, it's down nearly one-third.

The only thing that will stem the tide is for the Fed to raise interest rates – considerably. Some economists think that rates may have to spike to the high single digits to make the dollar attractive once again.

That would kill any economic recovery by halting investment and growth. Stocks would nosedive and housing would be further crippled.

The massive amounts of excess liquidity floating around world markets would also have to be mopped up by the Fed – a considerable task.

According to Peter Schiff, president of Euro Pacific Capital, Ben Bernanke's other choice is equally stark.

"Bernanke's other choice is to keep rates at zero, print even more money and sell more debt, but we'll see triple-digit inflation that could collapse the economy as we know it."

It's hard to decide which is the lesser of two evils. Either choice seems like a Faustian bargain.