Friday, December 30, 2011

Peak Oil is Here: Supply Can't Match Demand

America's heavy reliance on foreign oil puts it in a precarious position as a super-power. In 1970, the US was still the world’s oil largest producer, but its crude production then peaked at a level never since exceeded.

Some may be surprised to discover that the US is currently the world's third-biggest oil producer, after Russia and Saudi Arabia. But America's seemingly unquenchable appetite for oil also makes it the world's largest oil importer, by far.

Each day, the US imports roughly half the crude it uses.

Unfortunately, the US is only able to supply 48.6% of the oil it consumes, while importing 51.4% (or 9.67 million barrels per day), from oil-exporting nations.

With current consumption at roughly 19 million barrels per day (down from a whopping 21 million barrels per day prior to the recession), the US uses more oil than any other nation and equals the consumption of the next four largest national consumers combined (China, Japan, India and Russia).

However, demand for oil is increasing globally — particularly in developing nations — creating a growing competition for this finite commodity. In fact, global usage is outstripping new discoveries. For every four barrels of oil consumed, only one is discovered.

The International Energy Agency (IEA) notes that the decline rate for oil production appears to have increased to about 7% annually. That's a stunning revelation. To make matters worse, the IEA says that global demand should increase by 1.4%, or 1.2 million barrels per day, every year through 2015.

What is evident is that supply and demand are moving in the opposite directions, or, more accurately, the wrong directions. And what this tells us is that prices are going to rise.

“As excess supplies … shrink, oil prices should rise,” says Michael Bodino, head of energy research at Global Hunter Securities.

That seems self-evident.

In 2010, Bodino projected a 1% growth in global supply and 2% growth in demand. Based upon those projections, Bodino predicted $90-$100 oil in 2012. However, he was off by a year. In 2011, the price of oil once again shot above $100 per barrel.

Perhaps Mr. Bodino hadn't seen the stunning IEA data about the decline rate for oil production. Yet, other analysts appear to be well-aware of the data.

According to Kevin Kerr, editor of Kerr Commodities Watch, oil prices will climb significantly higher. By next year, Kerr thinks crude’s record high price of around $147 “may seem cheap.”

“The long-term prognosis for oil prices is much higher simply due to growing global demand,” says Kerr. “While the economic turndown has slowed usage, the growth in places like China and India are increasing demand rapidly [and] as the economies of the planet improve, so will demand for oil and gasoline.”

Absent the ability to rapidly increase supply, this will result in higher prices for all of us — perhaps much higher.

Such an increase seems highly unlikely though.

In 2009, Dr Fatih Birol, the chief economist at the respected IEA, said that most of the major oil fields in the world had passed their peak production and, consequently, the world is heading for a catastrophic energy crunch that could cripple a global economic recovery.

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 running at nearly 7%.

This should have been front-page news the world over. But did you hear anything about it? Unless you are a keen observer of energy news, it's not likely.

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.

The rise in demand from China and India will create a huge supply gap that will radically alter prices, global trade and the entire global economy.

In a rather stunning development, in 2009 China surpassed the US as the world's biggest energy consumer. The tremendous growth of China's economy has been predicated on massive energy consumption, and passing the US reflects the Asian nation's rapid and enormous expansion.

With a population of 1.3 billion people, China outnumbers the US by one billion citizens. The need to provide energy for all of those people is transforming global energy markets and increasing the global demand for oil.

That, in turn, is affecting prices.

With 20 percent of the global population, China's enormous demand will continue to drives oil costs.

Given that oil is a finite resource, China's consumption and growing demand ultimately affects the US. There will be great competition for the world's remaining energy resources.

While US industrial activity has ebbed due to the recession and economic downturn, China has continued to experience annual double-digit growth rates.

In the early 1990s, China became a net oil importer for the first time as its demand finally outpaced domestic supplies. So, while China was previously a major exporter of both oil and coal, it is now heavily reliant on imports.

China is, and will long remain, one of the US's primary competitors for limited oil resources. However, in an ironic twist, America's robust appetite for Chinese exports helps the Asian giant pay for foreign oil.

China's growing energy consumption will affect the US (and the rest of the world) in manifold ways, not the least of which is economically.

Over the past century, the growth of the US economy into the global leader was predicated on energy availability and consumption. This new radical shift could put that position into play.

Whereas the US once took for granted its position as the dominant global player and energy / resource user, it can no longer do so. China is now competing with the US for vital resources, including oil. The competition will be fierce, and costly.

The US, with just five percent of the global population, currently uses 22 percent of the world's oil. But that is not a birthright. Our ability to obtain all that oil is what has made the US the world's political, economic and military leader.

Yet, the US is suddenly faced with a extraordinarily large rival that has very deep pockets, thanks to our continual purchases of cheap Chinese goods.

The US will have to increasingly rely on energy efficiency as the quest for energy resources becomes ever-more competitive.

Yet, while China plans to spend $738 billion on clean energy over the next decade, the US can't even pass an energy bill — even as Big Energy lobbyists continue to water it down.

Tuesday, December 20, 2011

Some Stunning Facts About the U.S. Economy

• The federal government continually runs a massive budget deficit. The current deficit is equal to about 10% of the nation’s GDP, a dangerously high level.

• In Fiscal 2011, the U.S. government borrowed roughly 36 cents for every dollar spent.

• A Congressional "super committee" was assigned to make $1.2 trillion in budget cuts over 10 years. The total amount on the chopping block is equal to less than one year’s deficit. Despite this, the committee still failed to agree on cuts.

• Some 43% of federal expenditures go toward health and social security programs. This slice of the spending pie is expected to rise to 51% of total expenditures by 2016. Unless something happens that suddenly disrupts this upward spiral, these two parts of the fiscal budget will bankrupt the country.

• Meanwhile, the federal government spends a mere 3% on education. Though local governments fund most education services through property taxes, the federal government spends very little on young people compared to retired people. Why? Old people vote.

• The nation’s real unemployment rate, which includes idled workers who’ve given up looking for jobs, is 22.6%.

• According to RealtyTrac, there have been 8.9 million homes lost to foreclosure since 2007, the height of the credit crisis.

• There are approximately 48 million homes with a mortgage. This means that more than 18% of the nation’s homes have been lost to foreclosure since 2007.

• More than $10 trillion in home equity has been wiped out since the June 2006 peak.

• Nearly a quarter (22.1 percent) of all residential properties with a mortgage were in negative equity at the end of the third quarter of 2011.

• The poverty rate is more than 15%, and another 20% of the population is struggling on incomes near the poverty line.

• Some 18% of the nation’s GDP is spent on health care — twice as much as in other developed economies. Yet, all that health care spending hasn’t produced a healthier population. The United States actually fares worse than other developed countries in areas such as life expectancy, diabetes and cardiovascular disease.

• The top 1% of Americans control about one-fifth of the nation’s income and two-fifths of the wealth. The top 10% take in about half of all income and have accumulated 80% of the wealth.

• According to an AFL-CIO report, salaries for big U.S. company CEOs have jumped to 343 times the average pay for their own employees, up from 42 times in 1980.

• According to the Washington Post, since the 1970s, median pay for executives at the nation's largest companies more than quadrupled even after adjusting for inflation. Yet, during the same period, pay for non-supervisory workers has dropped more than 10 percent.

• In 2010, the average American earned $26,487 — down over $2,000 in real terms from 2006.

The U.S. government is highly dysfunctional and ineffective. Politicians don't work for ordinary citizens, but rather for the Corporatocracy that now controls the nation.

Meanwhile, the U.S. has increasingly become a land of tremendous inequality, with huge swaths of the nation having lost even the hope of the American dream.

The middle-class has been virtually lost and an entire generation of Americans do not, and will not, have the quality of life or economic freedom of their parents.

This is truly a sad state of affairs.

Monday, December 12, 2011

U.S. Facing Pension Crisis

Millions of American workers are facing a stark reality; pension promises have been made that are not likely to be kept.

The U.S. is presently facing a pension-funding crisis. It’s estimated that only about 30-40% of pension plans are now fully funded, which means that many people will not get the retirement funds that they've been planning on and will find themselves cut short in their senior years. Most have no backup plan.

The Pew Center on the States, a nonpartisan research group, estimates that states are at least $1 trillion short of what it will take to keep their retirement promises to public workers.

However, that estimate was based on fiscal 2008 data; we are now in fiscal 2012.

Last year, two Chicago-area professors calculated the shortfall at $3 trillion. They weren't alone in their dire calculations.

A report from the National Center for Policy Analysis concurs. It also indicates that state and local pension funds are drastically underfunded to the tune of $3 trillion. That's simply stunning, and it's a horrible omen of what's to come.

The private sector has been eliminating defined-benefit pensions, sometimes in favor of 401(k) programs. But the private sector is also grappling with underfunded or collapsing pension programs.

A 2009 study found that America's 100 largest corporate pension plans were underfunded by $217 billion at the end of 2008. Given the state of the economy over the last three years, it's tough to imagine the situation has improved much, if at all.

And the Pension Benefit Guaranty Corporation says that the number of pensions at risk inside failing companies more than tripled during the recession.

As of 2008, just four states had fully funded pension programs. As a result, there are massive problems on the horizon.

The Illinois pension system, for instance, is at least 50 percent underfunded. Some analysts warn that this could push the state into insolvency if the economy doesn't pick up. The problem, according to Fitch Ratings, is that Illinois cannot grow its way out of the problem.

Illinois reports that it has $62.4 billion in unfunded pension liabilities. However, many experts place that liability tens of billions of dollars higher.

California's pension problems are simply breath-taking. The Golden State has an estimated $500 billion in unfunded pension obligations. That's a figure that could cripple the state for many years to come. Unless the state defaults, those are legal obligations that California must somehow pay. No one knows how that will happen.

In fact, under the law, all state and local pensions are non-negotiable. They are mandatory and will be funded at the expense of higher taxes or reduced services, such as healthcare, roads, or police and fire departments. By law, pension funding in some states will consume 25-30%, or more, of tax revenues.

However, if older pensions cannot be fixed, many legislators are determined to fix future pensions.

An initiative circulating for California's 2012 state ballot seeks to increase the minimum retirement age to 65 for public employees and teachers, and to 58 for sworn public safety officers.

Americans are increasingly living well into their 80s. Yet, many recipients of public pensions are retiring at ages ranging from 55 to 60. Police and firefighters often can retire starting even younger — at around age 50 — because of the physically demanding nature of some of those jobs.

Over the past two decades, eligible retirement ages have fallen for a variety of reasons, including contract agreements between states and government labor unions that lowered retirement ages in lieu of raising pay.

Three-quarters of U.S. public retirement systems in 2008 offered some kind of early-retirement option paying partial benefits, according to a 2009 Wisconsin Legislative Council study. Most commonly, the minimum age for those programs was 55, but 15 percent allowed government workers to retire even earlier, the review found. The study is widely regarded as the most comprehensive assessment of the issue.

Pension obligations may be the proverbial hump that breaks the camel's back. The states face huge battles with public employee unions and some may attempt to follow the lead of Indiana, which decertified its public employee unions.

How all of this plays out in courts across the nation will be both fascinating and impacting. Some very ugly fights will ensue. But for the states, those fights are worth engaging. There is no other choice; they can't get money from nothing.

Tuesday, December 06, 2011

New Report Details $7.7 TRILLION in Secret Fed Loans

Ben Bernanke should be hoping and praying right now ☛

A new report from Bloomberg Markets Magazine reveals that the Federal Reserve made a stunning $7.7 trillion in loans to struggling financial institutions during the 2008 financial crisis.

While the $700 billion TARP (Troubled Assets Relief Program) remains highly controversial, what immediately stands out from this report is that the secret loan program was ELEVEN times larger than TARP, or, to put it another way, TARP plus $7 TRILLION.

Let that digest for a moment.

The Federal Reserve and the Big Banks fought for two years to keep this information secret. It was only after going to court and using the leverage of the Freedom of Information Act that Bloomberg was able to get to the bottom and discover the truth.

What they uncovered is simply staggering.

During the financial crisis — which spanned form 2007 to 2009 — the Fed carried out a whopping 21,000 secret transactions in which it doled out $7.77 trillion dollars to financial institutions around the globe. That amounted to more than half the value of everything produced in the U.S. that year.

Through its so-called "discount window," the Fed loaned enormous sums of money to banks at rates as low as 0.01 percent. This essentially amounted to free money, allowing the banks to make an estimated $13 billion in previously undisclosed profits.

These loans, an extraordinary privilege not afforded to non-financial institutions, allowed the banks to avoid selling assets to pay investors and depositors who were withdrawing their money out of fear of collapse. That allowed the banks to continue earning interest on these assets, which they otherwise would have needed to sell.

JPMorgan Chase, for instance, borrowed nearly twice its cash holdings. Clearly, that was not appropriate collateral.

The six biggest U.S. banks (JP Morgan Chase, Bank of America, Citigroup, Wells Fargo, Goldman Sachs and Morgan Stanley) received $160 billion in TARP funds, then subsequently — and secretly — borrowed as much $460 billion from the Fed. That accounted for 63 percent of the average daily debt to the Fed by all publicly traded U.S. banks, money managers and financial services firms.

As a result of these secret Fed loans, the Big Six banks received a $4.8 billion subsidy, according to Bloomberg, or 23 percent of their combined net income during the time they were borrowing from the Fed.

When you're in the business of lending, it's difficult not to make a hefty profit on essentially free money.

Though Chairman Ben Bernanke said in April 2009 that the Fed was making loans only to "sound institutions," it is now known that Citigroup was near collapse. Citigroup hit its peak borrowing of $99.5 billion in January 2009.

Morgan Stanley borrowed $107 billion from the Fed in September 2008, while Bank of America's peak borrowing topped out at $91.4 billion in February 2009.

However, all of this borrowing was independent of the TARP funds allocated to these very same banks. Congress was allegedly kept in the dark about the previously unreported Fed loans, which raises the question of whether TARP would have ever been approved had Congress been informed.

As a result of these essentially free loans from the Fed, the biggest banks — the ones deemed "too big to fail" — had the means to grow even bigger, buying out other struggling financial institutions, as well as paying their employees huge sums in the form of bonuses.

For instance, Bank of America acquired Countrywide Financial and Merrill Lynch; Wells Fargo bought Wachovia; and JP Morgan Chase bought Washington Mutual and Bear Stearns. Each of these banks, already arguably too big, became substantially larger.

In September of 2006, the total assets of the six biggest U.S. banks totaled $6.8 trillion. Six year later, in September of 2011, their assets had jumped to $9.5 trillion — a 39 percent increase.

This has made these institutions too big and too powerful. They are not only too big to fail, but could even be too big to save. This not only jeopardizes the entire U.S. financial system, but also the entire economy. These banks are so powerful, so connected, and so well-armed with money and lobbyists that they've made themselves virtually impervious to regulation.

The Big Six banks spent $22.1 million on lobbying in 2006. By 2010, after the crisis and the bailouts, that sum had surged to $29.4 million — a 33 percent increase. Call it government for hire, or democracy to the highest bidder.

According to, a research group that tracks money in U.S. politics, lobbying by the American Bankers Association, a trade organization, increased at about the same rate.

The Big Six have created a monopoly that is anti-competitive and anti-capitalistic. This is bad for the economy, the country as a whole, and democracy itself.

These banks have, in effect, been incentivized to take on tremendous risks, to in fact be quite reckless. This is the essence of "moral hazard." The Big Banks operate with the implicit guarantee of government — meaning taxpayer — support, should they enter another crisis.

That's just the problem; the next crisis is a matter of when, not if. And the U.S. is wholly unprepared for this certain eventuality.

There is one final outrage in all of this. Ask yourself this; where does the Federal Reserve get an amount of money equalling more than half of the entire U.S. economy?

It creates it out of thin air, that's how. It's like a magic trick.

What other corporation can create its product out of thin air, without any investment in the resources needed to create that product? One quick look at the Dow Industrials is illustrative. The answer is none — other than the central bank.

The Fed has granted a rather extraordinary and outrageous privilege to banks and other financial institutions by allowing them to profit on free money, instantly created by computer key strokes.

All of this money creation devalues the existing money supply (meaning the money in your pocket and bank account) because there isn't a concurrent increase in the number of goods and services in the economy.

This is the essence of inflation; the money supply is inflated in relation to goods and services, devaluing the value of all money. The price of goods increase and the citizens suffer as a consequence of something they had no say in, and didn't vote for.

Those very same citizens are still suffering from the outrageous risks that banks took in the last decade, and the taxpayers are on the hook for all these trillions of dollars in bailouts.

That is outrageous. That is unjust. That should never be tolerated.

Wednesday, November 23, 2011

'Problem Banks' Declining, Failures Still Climbing

The FDIC says the number of U.S. banks in financial distress continues to decline.

At the end of the third quarter there were 844 “problem” institutions on the FDIC's list, down from the 865 at the end of the second quarter, and 888 at the end of the first quarter.

Though this decline is being heralded as good news, we must remember that at the end of the first quarter last year, the number of lenders on the FDIC's "problem banks list" had climbed to 775, which was the highest level since 1992.

This means there are still 69 more banks on this list than there were at the end of the Savings & Loan crisis. That provides some perspective on the magnitude of the current problem.

Martin Gruneberg, acting chief of the FDIC, said that a central concern for the agency is whether banks can generate income from a greater demand for loans, something that is still lacking.

Americans are still overwhelmingly in debt and are doing all they can to deleverage.

“The key issue is going to be can there be a pick up in economic activity and generate demand for loans, Gruenberg said.

Any rational observer knows that the global economy is getting worse, not better. The likelihood of increased economic activity and a higher demand for loans is slim or none, and that won't change for quite some time. We've entered a new economic reality where the limits to growth are finally being recognized.

One-quarter of homes with a mortgage are underwater. Unemployment remains troublingly high. Moreover, wages and incomes remain flat or depressed for the vast majority of Americans. This is not a recipe for increased economic activity or borrowing.

Last year, one-third of American consumers were considered sub-prime and couldn't even qualify for a home loan. When a third of your market is disqualified, that's obviously a very bad sign.

The problems in the European banking system could quickly and easily spill over into the U.S.

While Gruenberg said direct U.S. bank exposures to the European sovereign debt crisis is “relatively” limited, he added that a “key” risk for US institutions as well as for the global economy is the potential contagion effects that would result from a serious financial crisis in Europe.

As a result, Gruenberg said the FDIC is pressing banks to hike capital and improve their liquidity. He said that closer attention is being paid to “potential avenues of contagion” such as each institution’s derivatives exposure. However, he added that banks generally have much stronger levels of capital and liquidity than they did years before.

We can only hope.

Having 844 banks on a "problem" list is clearly an issue of great concern. It's certainly not the mark of stability.

More than 100 banks failed in each of the last two years; a total of 140 banks were shuttered in 2009 and 157 institutions failed in 2010. The trouble is not yet behind us.

A total of 90 U.S. banks have already failed this year. With six weeks to go before 2011 concludes, who really doubts that number won't reach 100 yet again?

Since the creation of the FDIC in 1933, there have been only 12 years in which 100 banks failed in a single year. The last two were among them. We made yet add to that total.

To provide some perspective, a mere three U.S. banks failed in 2007 and just 25 U.S. banks were closed in 2008, which was more than in the previous five years combined.

The banks on the "problem" list are considered the most likely to fail. However, their names are never made public for fear of creating a run on those banks.

Bank failures over the previous two years pushed the number of FDIC institutions to below 8,000 for the first time in the agency's 76-year history. Two decades ago, the FDIC insured more than 16,000 institutions nationwide.

While the number of banks considered at risk for failing may have declined, the problem can only be described as going from really, really bad to really bad.

Keep your eye on Europe's debt crisis and how that affects the banking system there. The fallout could be both catastrophic and contagious.


Thursday, November 17, 2011

Oil: Supply and Demand Reach Tipping Point

In March 2010, the Smith School of Enterprise and the Environment published a paper stating that the capacity to meet projected future oil demand is at a tipping point and that the development of alternative energy fuel resources needs to be accelerated in order to ensure energy security and reduce emissions.

The Status of Conventional Oil Reserves – Hype or Cause for Concern?, published in the journal Energy Policy, concludes that the age of cheap oil has now ended and demand will start to outstrip supply as we head towards the middle of the decade.

The report also suggests that the current oil reserve estimates should be downgraded from between 1150-1350 billion barrels to between 850-900 billion barrels, based on recent research.

Overcoming such potential oil shortages will be a vexing challenge.

The world is currently consuming more than 88 million barrels of oil daily, an annual total amounting to nearly 32 billion barrels. But with the developing world continually using ever greater quantities of oil, that amount will only grow in the coming years.

However, according to a research paper by Joyce Dargay of the University of Leeds and Dermot Gately of New York University, official forecasts by OPEC and the U.S. Department of Energy may be underestimating the future demand for oil by 30 million barrels a day.

If this is accurate, the next oil crisis is going to be life altering for all of us.

Dargay and Gately base their conclusion on the observation that the demand for oil no longer appears to respond to price. While price increases in the 1970s placed downward pressure on the worldwide demand for the fuel, the increased oil prices of the past decade had no such effect. Instead, worldwide demand for oil increased by 4% during that time.

Dargay and Gately project that per-capita oil demand will grow to 138 million barrels a day in 2030.

If that's accurate, the supply of oil won't even begin to keep up with increasing global demand.

Unfortunately, Peak Oil is upon us, and recent oil finds have been far too small to make an appreciable difference in overall supplies.

The International Energy Association (IEA) says that growth in worldwide oil demand is outstripping growth in new supplies by 1 million barrels a day per year.

According to the IEA, it’s getting harder to access and exploit conventional resources and, “The age of cheap energy is over.”

Oil companies are having to go into ever deeper waters, at ever-increasing expense, just to retrieve the finest oil. That's because the cheaper, easier to access, land-based oil supplies are clearly in decline.

For example, the once-mighty Cantarell field was the third-largest oil field in the world. Today, it is one of the chief reasons why Mexico's oil exports are shriveling. That poses a critical problem for the U.S. since Mexico is the number two exporter to our nation, following Canada.

This sort of decline is a prime reason why there is now such an interest in oil sands, which result in a heavier, lower-grade, harder-to-refine oil. Oil sands are also much more expensive to refine, resulting in higher prices for consumers.

Here's the reality; there's still plenty of oil left in the earth, just not cheap oil. Those days are over. Simple market forces are revealing that there is not enough oil to keep up with rising global demand and, as in any market, that means rising prices.

Eventually, and much sooner than most people realize, the margin of supply will shrink to the point that our lives, and our modern economy, will be irrevocably altered.

Tuesday, November 15, 2011

World Oil: The Clock is Ticking

While many Americans may believe that the U.S. gets almost all of its crude oil from overseas, that is not the case. The U.S. produces about half of the roughly 19 million barrels of oil it uses each day. And our neighbors, Canada and Mexico, are our number one and number two sources, respectively.

Every day, Canada provides the U.S. with 1.9 million barrels of oil, while Mexico sends the U.S. 1.1 million barrels each day.

What's troubling about Mexico is that it's primary oil sources are expected to be depleted by 2019.

By contrast, Saudi Arabia is the number three exporter to the U.S., sending this nation just over 1 million barrels of oil each day.

For decades, our nation's thirst for oil seemed unquenchable. However, the Great Recession and continuing economic hardship have dropped U.S. demand from 21 million barrels per day prior to the recession to the current level of 19 million barrels of oil each day, or 798 million gallons.

That amounts to 22.6% of the oil used around the world each day. And experts predict that U.S. demand will only rise over the coming decades.

But we are not alone in our increasing demand for oil.

At present, the world is using 88.20 million barrels of oil per day. That demand has been continuously growing, along with the world's developing economies. And for the world's developed economies to continue growing — a must under the perpetual-growth paradigm — oil is a requisite.

However, average annual global crude oil production has been flat since 2005. That problem is projected to worsen over the next quarter-century.

The US Energy Information Administration (EIA) has some very bad news for all of us.

The EIA projects that while world oil demand will climb to 105 million barrels per day by 2030 (a significant increase from the current level of 88.20 million bpd), the anticipated increase in conventional oil production will be just 11.5 million bpd, meeting less than half of the growth in demand.

It's also critical to note that in years recent years the EIA has been continuously ratcheting down is projections for the amount of supply that will be available in the future.

Six years ago, the agency predicted that 120 million barrels a day would be available by 2030. But it has now cut that estimate to 105 million barrels a day.

How much lower will that estimate continue to go?

The International Energy Association (IEA) says that growth in worldwide oil demand is outstripping growth in new supplies by 1 million barrels a day per year. According to the IEA, it’s getting harder to access and exploit conventional resources and, “The age of cheap energy is over.”

China and India, each with populations of over 1 billion people, are home to two of the world's most rapidly developing economies. And as such, the demand for oil in those countries is also rising rapidly.

Due to the robust expansion of these economies, the combined energy use of China and India is expected to more than double by 2035, when they will account for 31% of global energy use.

China's oil consumption is projected to rise 119% by 2025. But even then, the Chinese will still be using only about half as much oil as the U.S. will be.

With worldwide oil usage anticipated to increase to 105 million barrels a day, up from 88 million barrels today, the question most experts ask is, where will all of that additional oil come from?

Many have supposed that Saudi Arabia's giant oil fields would account for much of the supply.

But according to Matthew Simmons, the author of "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy," that is highly unlikely.

Simmons, who died last year, believed that Saudi Arabia, now producing around 9 million barrels a day, would soon begin to lose production capacity. According to his research, the Saudi oil fields have matured, leading to their inevitable decline.

As a result, Simmons concluded that worldwide oil production has peaked. Instead of increasing to the IEA's original projection of 120 million barrels a day by 2025, Simmons concluded that global production could in fact be half that rate — meaning less than what it is today.

This would be an absolutely staggering blow to the global economy. The price of oil would escalate exponentially and our way of life would be irrevocably altered.

Some have concluded that the U.S. must, in the effort to achieve oil independence, begin drilling in Alaska's Arctic National Wildlife Reserve. But unfortunately, experts have countered that such a tactic would result in 250-800 million barrels a year — the amount the U.S. currently consumes in just two to six weeks.

Obviously, that is not the answer.

Simmons asserted that the world needs to considerably reduce its consumption of transportation fuels to fend off a potential crisis, a contention other experts in the field support.

Since 70% of the world's oil is used as transportation fuel, new forms of fuel are required, as well as a reduction in the number of people and goods moved by cars and trucks.

The latter would radically alter our way of life. But it seems that such change is inevitable anyway. Why not do it on our own terms by initiating the planning and implementation immediately? Why wait for another oil shock?

Simmons called for an increase in the use of trains and ships to make shipping more efficient and to reduce worldwide oil consumption.

Obviously, the U.S. oil industry has a huge stake in seeing to it that American consumers do not decrease our gluttonous consumption of their product. But if Simmons was correct in his assertions, the clock is ticking on world oil supplies and the time to act is now.

Biodiesel, which is manufactured from vegetable oils, recycled cooking greases and oils, or animal fats, is one possibility.

Biodiesel can be used in any diesel engine, usually without any engine modifications, and is the safest of all fuels to use, handle, and store. It is also non-toxic, biodegradable and sulphur-free. Soybeans, one of the largest and most abundant U.S. crops, are one of the principle sources of biodiesel.

This fuel is already being used to power the busses and other municipal vehicles in numerous U.S. cities, such as St. Louis, Phoenix, Cincinnati, Portland, Oregon and Lexington, Kentucky.

The Department of Energy calls biodiesel the fastest growing alternative fuel in the nation, as its use has increased 5000% since 1999.

One way or the other, it's time to start exploring alternatives to crude oil for a variety of reasons: its limited, and perhaps dwindling, supply; various environmental factors; and the economic prospects that a new industry may provide, including jobs.

There are lots of good reasons to wean ourselves from our dependence on foreign oil, not the least of which is our national security. Oil imports have also created an enormous trade imbalance that is sucking billions of dollars out of the country each and every day.

So we shouldn't let U.S. oil companies stand in our way.

In fact, if they were wise, those companies would recognize the opportunities at hand and lead the way themselves.

Tuesday, November 08, 2011

Global Oil Demand Will Spike Over Next 24 Years

According to the U.S. government, global oil consumption is likely grow by more than than 25 percent over the next quarter century.

In its annual international energy outlook, the US Energy Information Administration (EIA) said world oil demand is expected to climb to 112.2 million barrels per day in 2035, a 27 percent increase from the current level of 88.20 million bpd.

Here's the kicker: the anticipated increase in conventional oil production would meet less than half of this growth, at 11.5 million bpd.

That leaves a gap of 24 million barrels each day.

Where will all of the additional oil be found to meet this growing demand? As it stands, average annual global crude oil production has been flat since 2005. That does not bode well for the future.

The EIA said that most of the projected growth in liquid fuels "is in the transportation sector, where, in the absence of significant technological advances, liquids continue to provide much of the energy consumed.”

The EIA’s projections were based on current government policies and do not include any proposed or potential regulations, including the recently announced US fuel economy standards that would force automakers’ fleets to average 54.5 miles per gallon by 2025.

However, there would need to be a massive national initiative geared toward conservation to offset the rapidly escalating global demand for oil and oil-based fuels.

The EIA sees total global energy use increasing 53 percent over the next 24 years, led by developing nations such as China and India. Last year the agency predicted a 49% increase.

As it stands, developing nations already use slightly more energy than those in the developed world. And by 2035, they are expected to use double.

The agency predicts that fossil fuels will continue to be the dominant fuel choice in 2035, with renewables constituting just 14% to the world's overall energy consumption.

So much for any hopes of a green energy renaissance that might solve the world's energy predicament, or curb the rise in greenhouse gas emissions.

The EIA sees energy-related carbon dioxide emissions rising 43% by 2035. That's because oil (29%) and coal (27%) are expected to account for a total of 56 percent of global energy output by 2035.

The agency says that most future renewable energy supply will continue to come from wind and hydropower. Nuclear power is expected to go from about 5% of overall energy consumption in 2008 to about 7% in 2035.

It's hard to feel encouraged by anything in this report. It reveals a future of continually growing oil demand that is no way matched by supply. It reveals tremendous, and increasing, global competition for finite energy resources. It reveals an explosive rise in greenhouse gas emissions and a continued reliance on dirty fossil fuels.

One obvious conclusion can be derived from this report: energy prices are sure to climb, and this will negatively affect the global economy. The oil gap, in particular, will wreak havoc — particularly in the US, which is a heavily dependent oil economy.

Another very obvious conclusion is that the future will be very different from the present world we live in.

Friday, October 07, 2011

Decline in Boomer Spending Will Reverberate Through U.S. Economy

For the past few decades, the U.S. economy has been driven by the spending habits and consumption of the Baby Boomer generation.

However, as this group nears retirement — a process that will play itself out over the next 18 years — their incomes, savings, investments, and consumption will all decline.

This trend will significantly alter our economy.

Demographic research shows that people overwhelmingly begin to spend more in their 30s and through their 40s.

According to the work of demographic trend expert and economic researcher Harry Dent, individuals typically hit their peak spending between the ages of 46 to 50.

Once a person reaches the age of 50, spending begins to fall. And after the age of 60, the decline in spending is significant, falling below that of young people in the 18-22 demographic.

Unfortunately, the U.S. — like most of the developed world — has a rapidly aging population that is well-past its peak spending years.

Obviously, retirees spend less money than working people. And due to the sheer size of the Boomer demographic — 76 million strong, or 25% of the US population — the impacts will be far-reaching.

As of 2008 — the latest data available — people aged 65 to 74 were spending 12.3% less than they did ten years earlier, in inflation-adjusted terms. Though this group typically spends less on clothes, cars, home furnishings and going out to eat, they also spent 75% more on health care and 131% more on health insurance.

This means that the health care industry is likely to be about the only “engine” for economic growth in the U.S. for the next two decades.

All we need to do is look at Japan to see what happens after the Boomers have passed their peak spending years. Japan's Baby Boomers reached peak spending in 1990, and it's been downhill ever since for Japanese stocks and real estate.

That's a bad sign for the U.S.

For roughly the past quarter century, Americans saved less and less with each passing year. The flipside of this savings decline, of course, was an epic spending boom. People saved less because they bought more — all too often on credit.

In fact, the savings rate even went negative in the last decade.

However, due to a combination of inflation, stagnant wages, high unemployment and sinking home values, those trends are now in reverse. Over-indebted Americans have pulled the plug on their formerly spendthrift ways.

Obviously, retirees aren't savers; they're spenders. Yet, as noted, they spend much less than during their prime earning years.

So the giant Boomer population will contribute a combination of less savings and less spending to the economy. Since savings are generally a requisite for local and national investment, the end result is a double-whammy.

As the baby boomers sell off their stocks and mutual funds to pay for retirement, it will likely affect both the demand for, and the prices of, those assets. Ultimately, the stock market may be headed for a prolonged downward trend.

If the economy continues to follow the decline in spending, we're in for another lean decade, as the next peak spending pickup is not scheduled until 2022. That's when the next "baby boomlet" should hit its peak spending stride.

The Baby Boomers drove the U.S. economy for the last few decades, but those days are essentially over.

The 25-year Boomer borrowing and spending binge is coming to an end. The hangover will be really bad.

Friday, September 16, 2011

The New Great Depression

Economically speaking, the U.S. remains in the midst of a perfect storm.

The nation is plagued by a vicious cycle of slower growth, leading to lower tax revenues, followed by spending cuts, ultimately resulting in even slower growth.

The economy grew a meager 0.4 percent in the first quarter and just 1 percent in the second quarter. That amounted to an annual rate of just 0.85 percent in the first half of the year.

According to the National Bureau of Economic Research — which declares such things — the economy is not officially in a recession. But it couldn't be much closer.

And to huge swaths of this nation, the recession never really ended; it morphed into a depression.

Economic growth needs to be at least 2.5% to improve the nation's dismal unemployment situation. Anything lower doesn't even keep up with population growth.

There are numerous reasons for this economic breakdown.

Since their 2006 peak, home prices have now fallen further in percentage terms than they did during the Great Depression. And it took 19 years for prices to fully recover after the Depression. That's an ominous precedent.

As it stands, some 6.5 million homes have already been lost to foreclosure. In addition, another 2.16 million properties are presently in foreclosure, representing a combined $1.27 trillion of unpaid principal.

As if all of that wasn't bad enough, there are an additional 4.3 million homeowners who are now “seriously delinquent,” meaning they are more than three months behind in their payments. Many of those homeowners will soon enter the foreclosure pipeline.

All of these foreclosures are deflating home values and sales prices. That's bad for all homeowners.

By the end of last year, about 11.1 million households, or 23.1 percent of all mortgaged homes, were underwater.

Due to the housing bust, millions of households have seen their equity wiped out. That's been a major factor in diminished consumer spending.

Additionally, after borrowing heavily for a decade, Americans are now grappling with mountains of debt. People are opting to pay with cash instead of credit and, rather than going even further into debt, are putting off purchases they can't afford.

Though the Fed has kept borrowing rates near zero for three years, there's very little it can do to stimulate demand for credit that no one wants.

Millions of Americans currently qualify for record low mortgage rates. It's just that most of them aren't interested in borrowing. No matter how low rates are, it's tough to make a monthly payment without a job. And millions more are unwilling to take on a mortgage when they're worried about losing the job they already have.

This leads us back to the other major factor crimping consumer spending; unemployment.

The government's most widely reported unemployment figure (U-3) currently stands at 9.1 percent. However, that number does not include people who have lost their unemployment benefits, or those who can only find part-time jobs even though they want full-time work.

Economist John Williams of (who provides detailed economic reports for U.S. businesses) puts the real unemployment rate at a whopping 22.8%. That's akin to the Great Depression.

With all of these factors in mind, it was little surprise that U.S. consumer confidence fell to 44.5 in August, the lowest level since April, 2009, more than two years ago.

However, when the Consumer Confidence Index fell to 47.7 in 2009, it was at its lowest level in more than a quarter century, and it is now even lower than that.

A reading above 90 indicates the economy is on solid footing; above 100 signals strong growth. Obviously, we are a long way from that.

Low confidence creates a downward spiral in which consumers don't spend and the economy continues to further weaken. Consumer spending accounts for 70 percent of U.S. economic activity, which is why consumer confidence is so critical. It is a bellwether of this nation's economy.

As long as consumers are unwilling or unable to spend enough to spur economic growth, there will not be enough demand to create new jobs. It's a vicious cycle that is very tough to break.

The lack of buying power isn't merely the result of the 14 million Americans who are currently unemployed. Many of those who currently have jobs are actually making less than workers did four decades ago.

According to the latest Census figures, the median annual income for a full-time, year-round, male worker in 2010 was $47,715. That was nearly three percent less, in inflation-adjusted dollars, than the $49,065 those workers earned in 1973.

This means that median male incomes have gone backward in the intervening decades, an absolutely stunning development.

All of these factors will keep the government hamstrung in its attempts to get the economy out of the doldrums. The $787 stimulus bill didn't work, and 37 percent of that was tax cuts (something Republicans love to ignore).

The payroll-tax cut hasn't worked either. Wage earners will take home roughly $1,000 in payroll tax breaks this year, but it hasn't made a difference in the overall economy. That's because households and small businesses tend to save a greater proportion than they spend when a tax break is only temporary.

People are naturally inclined to save for an emergency when it seems like one is lurking around every corner.

Ultimately, cutting income taxes even further will not solve our economic problems. The reality is that federal tax rates are already historically low, and it's still not stimulating the economy.

The top tax rate has varied over the decades, from an initial low of 7% from 1913-1915, to as high as 94% during WWII.

The top rate is presently 35%, established in the cuts initiated by President George W. Bush. Rates this low have not been seen in two decades.

For comparison, in 1932 the top rate was 63% and it didn't move lower until 1982, when it dropped to 50%. So, for five decades the top rate ranged from 50% to 94%, and job creation did not cease.

The suggestion that cutting taxes creates jobs is thoroughly discredited by historical facts.

According to the Wall St. Journal, Bill Clinton raised taxes and the economy created 23.1 million new jobs, an eight-year, post-war record.

On the other hand, George W. Bush cut taxes and the economy created just 3 million new jobs in eight years.

The U.S. economy experienced lengthy periods of robust growth in the 1940s, '50s and '60s, when top marginal rates exceeded 90%.

This is not an argument for higher rates, but a reality check for those whose answer to every economic problem is to simply cut taxes even further.

The Federal Reserve is now essentially out of bullets in its battle to get the economy moving again. Interest rates can't go any lower than zero, and the Fed has already flooded the financial system with over $2 trillion. Yet, the economy is just treading water and trying to stay afloat.

Without an economic resurgence, fueled by more jobs, leading to more workers paying taxes, the government's deficit and debt problems will not only persist, but will worsen.

According to the latest Census figures, about 48 million people ages 18 to 64 did not work even one week during 2010, up from 45 million in 2009.

It's understandable if your head is still spinning after reading this alarming fact.

This means that huge portion of the U.S. workforce is no longer productive, which is a death blow to any economy.

It's little surprise then that poverty hit new record in the U.S last year. The 46.2 million Americans living below the poverty line is the highest number in the 52 years of reporting.

It was not an isolated occurrence, but rather part of a disturbing trend. The number of people in poverty rose for the fourth consecutive year in 2010, as the poverty rate climbed to 15.1% — the highest since 1993 — up from 14.3% in 2009.

Sooner or later, the realization that we are in the midst of a long term depression will fully sink into the national conscience. Tens of millions of Americans already recognize this. Those who don't eventually will.

According to a CNN/Opinion Research Corporation poll conducted in June, nearly half of Americans (48%) think the U.S. is likely to slip into another Great Depression within the next 12 months.

That's not pessimism; it's realism.

Thursday, September 08, 2011

Plastic-to-Oil Converter Exemplifies Energy Ingenuity

Japanese inventor Akinori Ito sees plastic shopping bags as the “fuel of the future”. Since plastic bags are made from oil, Ito developed a machine that reverts them (and other plastics) back to their original form.

Ito is the CEO of Blest, a Japanese company that produces these intriguing machines in various sizes, with applications ranging from industrial purposes to simple home use.

At the industrial level, this is not a novel technology. However, at the consumer level, it is indeed a breakthrough.

The smallest version of the Blest Machine will fit on a countertop and currently costs $12,700. However, Ito hopes that through increased production the price will drop so that "anyone can buy” one.

This technology converts 1 kilogram (about 2 lbs.) of plastic into 1 liter (about a quart) of oil using just 1 kilowatt of power, at a cost of about 20 cents.

One liter of gas is essentially nine kilowatt-hours of energy — enough to drive a typical car eight miles, or run ten 100-watt bulbs for nine hours.

The conversion process reveals the fuel potential of plastic, which could become a coveted commodity and boost recycling efforts immensely. If plastics are viewed as a resource rather than waste, the results would be rather positive.

Non-biodegradable plastic waste is overflowing from dumps and landfills all around the world. And it's also polluting our oceans. Sadly, the global recycling rate for plastic is quite low.

For example, each year America uses 380 million plastic bags and only 7 percent of them are recycled. If we can convert an everyday waste product into a source of fuel, it would greatly decrease the amount of plastic piling up in landfills.

It's estimated that 7 percent of the world’s annual oil production is used to produce and manufacture plastic. So the idea is to utilize existing plastic waste, of which there is an abundance.

As noted, Ito's conversion system is made for households and could allow consumers some measure of energy independence. Producing fuel locally would greatly lower the carbon footprint that results from transporting petroleum from distant countries.

The Blest Machine can convert several types of plastic back into oil. This promising contraption is capable of processing polyethylene, polystyrene and polypropylene (numbers 2-4) but not PET bottles (number 1).

The result is a crude gas that can fuel things like generators or stoves. Further refining produces gasoline, kerosene and diesel, meaning it can also fuel autos.

Burning plastic trash typically creates both toxins and CO2. However, Ito's device uses an electric heater in place of a flame. So while the plastic melts, nothing is directly burned.

As a result, Ito says that no toxic substance is produced in the conversion. Though methane, ethane, propane and butane gasses are released in the process, the machine is equipped with an off-gas filter that disintegrates these gases into water and carbon.

The invention is a carbon-negative system and is therefore non-polluting. The self-contained process heats up the plastic to about eight hundred degrees Fahrenheit, traps the vapors and channels them through an intricate system of pipes and water chambers. These, in turn, cool the vapors and condense them back into crude oil.

No, the Blest Machines will not solve our energy problems. But they can be part of the solution. Yes, the fuel created does give off CO2 as part of the combustion process, like any other carbon-based fuel.

However, it encourages recycling, eliminates non-biodegradable plastic waste, and lessens our dependence of traditional oil.

Plastic is potential oil. Since it is derived from oil, converting plastic back to its original form reduces the need for further oil production.

Perhaps the best news is that Ito's invention uses less than one kilowatt-hour per batch of plastic. A power plant uses three kilowatt-hours to deliver one to the Blest Machine, but it's still a net six kilowatt-hours.

Domo arigato, Mr. Ito.

Sunday, September 04, 2011

Unemployment Remains Bleak; Challenges Are Daunting

The fact that the U.S. economy created zero jobs in August is an ominous sign for a nation that needs to create 125K each month just to keep up with population growth.

Though the unemployment rate held steady at 9.1 percent, more than 14 million Americans remain out of work and actively looking for jobs.

The economy has created less than 100,000 jobs for four straight months. As if that weren't enough, on Friday, the government also said job creation in June and July wasn’t as good as originally thought.

The government claims that the labor force participation rate — the percentage of people employed and those who are unemployed but seeking a job — is currently at 64 percent, up a tiny bit from July. That is very low by historical standards.

When the recession began in December of 2007, 66 percent of Americans were participating in the labor force.

However, if you compare the labor force participation rates with the employment population ratios (EPR) for 1973 and 2000 versus today, the current numbers don't really add up.

In a recent blog post, Vox Day put it this way:

Is it reasonable to believe that people are any less inherently willing to work in these difficult economic times than they were in the year 2000? I don't see any justification for it.

Given that the percentage of women participating in the labor force has methodically risen from 44.7% in 1973 to 59.2 in 2009, and that this increase has outpaced the exit of elderly men from the labor force since 1973, the current overall participation rate should be significantly higher than it was in 1973. But this is not the case, according to the BLS.

Dec 1973 Participation rate 61.2 EPR 58.2 U3 4.9
Jan 2000 Participation rate 67.3 EPR 64.7 U3 4.0
Jul 2011 Participation rate 63.9 EPR 58.1 U3 9.1

Now, if we simply compare the present number of reported employed to the present size of the civilian, non-imprisoned population, but calculate the labor force based on the 2000 participation rate, we get an unemployment rate that is 50 percent higher than the currently reported rate of 9.1%. Note that numbers given are in thousands as per the BLS.

239,671 Civilian non-imprisoned population x.673 participation rate equals

161,299 Labor Force minus
139,236 Employed
= 22,063 Unemployed

22,063 divided by 161,299 equals 0.13678

This means the current U3 unemployment rate according to the BLS metric should be 13.7%, not 9.1%. Note that this is higher than the "unemployment rates" reported in the first two years of the Great Depresion, 1930 (8.9%) and 1931 (13.0%). Please also note that the two historical "unemployment rates" are estimates made well after the fact as the BLS didn't track unemployment statistics until 1948. Finally, one also must take into account that the current rate would be considerably higher were it not for the 2,868,000 more people that are now employed by the federal government than were employed in 1940, much less before the New Deal of 1933. Including these extra 2.8 million government workers in the unemployed list, as one must do in order to make a reasonable comparison between 2011 and 1930-31, indicates a comparable "unemployment rate" of at least 15.5%.
It's important to remember that even if the economy simply kept up with population growth by adding 125,000 jobs each month (for a total of 1.5 million new jobs this year), it still wouldn't help the roughly 24 million Americans who are already unemployed or under-employed, meaning they can only find part-time work.

To provide some perspective of the hole we're in, consider this: the government said that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force.

Obviously, that isn't happening.

The stark reality is that there are 7 million fewer workers today than just four years ago and the number of unemployed Americans has roughly doubled, to more than 14 million.

What's most disturbing is that the government's most widely reported unemployment figure (U-3) does not include those who have lost their unemployment benefits, or those who have only part-time jobs but want full-time work.

Economist John Williams of (who provides detailed economic reports for U.S. businesses) puts the real unemployment rate at a whopping 22.8%. That's akin to the Great Depression.

The current state if affairs is nothing new; job creation has been in a long-term downturn.

Astonishingly, job growth in the last decade was actually negative. While the number of new workers entering the workforce swelled during that period, just 1.7 million new jobs were generated.

According to the Bureau of Labor Statistics, just 1.1 million jobs were created last year. Remarkably, that was nearly as many as in the previous decade combined.

The troubles go back many, many years. In fact, job creation has been slowing for decades, and that's a very bad omen.

According to the Economic Cycle Research Institute, during periods of American economic expansion in the 1950s, ’60s and ’70s, the number of private-sector jobs increased at about 3.5 percent a year. But during expansions in the 1980s and ’90s, jobs grew just 2.4 percent annually. And during the last decade, job growth fell to 0.9 percent annually.

And it's taking longer and longer to recover from each successive recession. The last time the jobless rate reached double digits, in the early 1980s, it took six years to bring it down to normal levels.

The historical precedents and current trends make it very difficult to feel optimistic about the future.

This nation's unemployment problem has truly negative consequences for our consumption-based economy, which is 70% reliant on consumer spending. Obviously, there is less consumption when fewer people are working, as there is less disposable income directed back into the economy. It also means lower tax receipts at both the state and federal levels.

If unemployment remains stubbornly high, wages will also remain stagnant. That will create a negative feedback loop of both lower both consumer spending and economic output.

American consumers remain totally strapped due to their heavy debt burdens. Consequently, we will not spend our way out of this malaise.

Our unemployment problem is huge and complex. Millions of lost jobs are never coming back. As a result, millions of American workers need new skills and new training.

Therefore, the problem is much bigger than creating the 1.5 million jobs needed to keep up with annual population growth.

Even if the nation had started adding 2.15 million private-sector jobs per year beginning in January of 2010, it would have needed to maintain that pace for more than seven consecutive years (7.63 years), or until August 2017, just to eliminate the current jobs deficit.

It's now abundantly clear that this isn't going to happen.

The U.S. is faced with a grim new reality of lower economic growth, less consumption, higher unemployment, lower wages, lower government revenues and unwieldy debt levels at the government, corporate and consumer levels.

Our present economic state is quite bleak. Sadly, for most Americans the future is virtually certain to be less prosperous than the past.

These are hard times indeed. And they are poised to remain that way for the foreseeable future.

Thursday, September 01, 2011

Food Stamp Use Rising With Poverty

The times are tough now, just getting tougher
This old world is rough, it's just getting rougher

— Bruce Springsteen, 'Cover Me'

The Great Recession has left quite a scar on this nation. Rampant unemployment has led to rising poverty and homelessness, plus an increase in the number of Americans needing government assistance just to buy food.

Since 2007, the number of people in the Supplemental Nutritional Assistance Program (SNAP) has increased by 74 percent. SNAP is the new name for food stamps, though most people still refer to the program by its former name.

At present, some 46 million people in the United States use food stamps, roughly 15 percent of the population. To put it another way, that's more than one-in-six Americans.

That tally squares with the government's revelation that 44 million Americans were living in poverty last year.

Food retailers have taken notice.

Bill Simon, head of Walmart's U.S. operations, told a conference call recently that the company had seen an increase in the number of shoppers relying on government assistance for food.

With so many people receiving assistance, the cost of the program doubled to $68 billion in 2010. That's a problem for a government as deeply indebted as ours, and one that has seen its safety net expenses spike at the same time its revenues have plummeted.

In fact, the cost of food stamps amounts to more than a third of what the government received in corporate income taxes last year.

Unemployment has had the duel effect of raising the number of Americans seeking assistance while simultaneously shrinking the tax base. It's been a real double whammy.

However, not everyone receiving food stamps is unemployed. In fact, many have jobs. The problem is that they are low-paying jobs.

About forty percent of food stamp recipients are in households in which at least one member of the family earns wages. That's a big change from two decades ago.

In 1989, a higher percentage of the program's recipients were on benefits than were working. However, as of 2009 a higher percentage of recipients had earned income.

A looming prospect for the government is that the cost of the program could grow even if the economy doesn't worsen. The government estimates that one in three eligible Americans are not presently in the program. That's a troubling reality.

The maximum amount a family of four can receive in food stamps is $668 a month. The benefits can only be used to buy food — though not hot food — and for plants and seeds to grow food.

Low wages and rising poverty are behind the large increase of Americans needing food assistance. While there may indeed be some fraud, the fact that wages have been stagnant for nearly four decades has manifested itself in some rather stark ways.

Six percent of the 72.9 million Americans paid by the hour received wages at or below the federal minimum wage of $7.25 an hour in 2010. That's up from 4.9 percent in 2009, and 3 percent in 2002, according to government data.

Due to their low incomes, minimum wage single parents are almost always eligible for food stamps. Assuming they work 40 hours every week of the year, a minimum wage worker earns about $15,000 annually. An $800 per month apartment would eat up nearly $10K of that income.

But it's not just minimum wage earners that often need food assistance. Even those who earn $10, $11 or $12 an hour typically face enormous challenges in supporting their families.

Based on a 40-hour work week, someone who earns $12 per hour would gross about $25,000 before taxes. That comes out to less than $500 per week, which obviously doesn't go far for a family of three or four.

The federal poverty level for a family of four this year is $22,350. However, it's probably fair to say that millions of families earning more than that amount are still living in poverty.

With an unemployment rate over 9 percent, many people are taking jobs for which they are grossly over-qualified, including people with advanced degrees. Workers are now competing for low wage jobs that keep them in poverty and on government assistance.

Take Walmart, the nation's largest private employer, for example. It's sales associates and cashiers typically earn around $9 per hour. For a full-time worker, that amounts to $360 per week, or $18,720 annually.

The same types of wages would typically be expected for similar retail workers and fast-food employees. The U.S. is now primarily a service sector economy, highlighted by low-paying, unskilled jobs. Service sector jobs are also the kind that don't produce anything, other than cheap, fast food, for example.

According to the Bureau of Labor Statistics, from 2008 through 2018, "The shift in the U.S. economy away from goods-producing in favor of service-providing is expected to continue. Service-providing industries are anticipated to generate approximately 14.5 million new wage and salary jobs."

That's not a good tend. The middle-class was not built on low-paying service sector jobs, but rather on well-paying manufacturing jobs with good benefits. As of last year, the service sector was responsible for $11.2 trillion of U.S. GDP.

The unvarnished reality is that the richest 1% of this nation own a third of the country's assets and the poorer 50% owns less than 2.5%.

As long as that remains true, the number of Americans receiving food stamps is only likely to grow.

Wednesday, August 24, 2011

Debt Crises are Engineered by Bankers

Fiscal austerity has arrived in the Western world and the ramifications will be brutal.

Western governments are now coming face-to-face with the crippling effects of massive budget cuts; a shrinking GDP and a diminished ability to pay existing debts.

It's a pernicious cycle.

Most of the world is in a debt trap from which there is no escape. These governments are facing a death spiral. Continual budget deficits will bleed you to death. And the solution — austere budget cuts — will only hasten that death, as the following AP story illustrates:

Greece's finance minister said Monday that the crisis-afflicted economy will shrink more than expected this year, putting further pressure on the country's ambitious deficit-cutting effort.

Evangelos Venizelos said the ministry forecasts annual output to shrink between 4.5 percent to 5.3 percent this year.

Venizelos had previously admitted that the recession might be greater than last year's 4.5 percent, a whole percentage point worse than initially estimated.

"All the measures we are taking ... are aimed to stem the recession," Venizelos said.

"We must achieve our fiscal targets -- and this has become very difficult due to the deeper recession," Venizelos told a news conference.

"There is undoubtedly a vicious cycle. We have been obliged over the past two years, and in the coming three, to implement a gigantic fiscal adjustment ... which has a negative impact on the real economy. But these are the terms under which we receive our loans and rescue packages."

Chronic debt is the device that's being used to hold European governments hostage. Bankers eagerly assist governments in taking on more debt than they can ever possibly repay.

Consequently, the banks then seize an indebted nation's income, sucking it up through debt payments. The banks also force governments to surrender their sovereignty by selling their national assets — which the banks then buy at fire sale prices.

Bankers did this very thing in Greece, taking possession of all state assets. As a result, the bankers are now profiting from a crisis they helped create.

In the midst of a debt crisis, the bankers dictate the terms — and they are never favorable to the governments involved. In fact, the terms are usually crippling.

This is nothing less than a financial coup d'etat.

In reality, this isn't truly a debt crisis. It's a well-orchestrated plan.

Tuesday, August 23, 2011

FDIC Says 'Problem Banks' Declining; Total Still Dreadful

Since the creation of the FDIC in 1933, there have been only 12 years in which 100 banks failed in a single year. The last two were among them.

Though bank failures easily eclipsed 100 in each of the last two years, the trouble is not yet behind us. With 68 so far in 2011, we are on pace for a third consecutive year of 100 closures.

A total of 140 banks were shuttered in 2009, and 157 institutions failed in 2010.

To provide some perspective, a mere three U.S. banks failed in 2007 and just 25 U.S. banks were closed in 2008, which was more than in the previous five years combined.

Looking at FDIC data can reveal the magnitude of the current problem, and just how much more fallout may be yet to come.

At the end of the first quarter last year, the number of lenders on the FDIC's "problem banks list" had climbed to 775, the highest level since 1992.

However, today we were told that 865 banks were on the "problem list" in the second quarter, which was actually an improvement from the first quarter, when 888 made this sorry list.

The decline was the first since the third quarter of 2006. Clearly, U.S. banking has been in a long pattern of instability and failure.

The report is being heralded as good news due to the decline in "problem" banks.

But consider the facts; there were 775 banks on the list in the first quarter of last year, the highest since 1992. That number has since increased by 90, and this is somehow being spun as a good thing?

The banks on the list are considered the most likely to fail. However, their names are never made public for fear of creating a run on those banks.

Bank failures over the previous two years pushed the number of FDIC institutions to below 8,000 for the first time in the agency's 76-year history. Two decades ago, the FDIC insured more than 16,000 institutions nationwide.

The problem is that many of these banks are already under-capitalized, which is the reason they are failing.

FDIC officials say the banking industry continues to struggle with flat growth in loans, which is how they make their money. Relatively few businesses or individuals are seeking loans in this environment, and fewer still even qualify.

The government changed accounting rules for banks during the financial crisis so that they no longer have to mark foreclosed properties to market values. Banks have been allowed to "extend and pretend," as they wait for the housing market to recover.

However, it is now evident that any recovery will take many years.

If the banks were compelled to mark these "assets" — which could be more accurately described as liabilities — to current market values, even more institutions would be revealed as bankrupt.

While the FDIC may view the decline in "problem banks" as good news and a step forward, the predicament has only been upgraded from "miserable" to "horrible."

The reality is that roughly 11.5 percent of all federally insured banks are now considered at risk for failing, and that is an absolutely overwhelming number.

Tuesday, August 09, 2011

Global Debt Crisis Reaching Moment of Truth

As many readers are aware, for years I've been saying that the world is awash in unsustainable, and clearly un-repayable, debt.

Europe is battling through a very public, and very troubling, debt crisis. Japan has the largest debt of any developed nation and an economy that's been stagnant for two decades. Moreover, the U.S. has just suffered the first-ever debt-downgrade in its history.

Some economists and analysts already count Japan among the walking dead, as it seem to have entered the terminal phase of its debt crisis.

That said, the biggest risk at the moment is Europe. This recent article from the Wall St. Journal spells it out quite clearly:

AUGUST 6, 2011

The European Central Bank indicated it was open to purchasing the government bonds of Italy and Spain as a way to ease mounting market pressure on two of the euro-zone's largest economies.

For months, European leaders have been working in fits and starts to convince financial markets that they had the tools to help Spain if that country tumbled into a sovereign-debt crisis. But now, it is the larger Italy that appears at the center of the maelstrom, and there is no plan in place to help it.

The joint sovereign bailout fund created to rescue ailing member states is too small to lend Italy money to cover its bills. Endowing the fund with enough firepower would impose a huge burden on Germany, France and other stronger countries, and could well imperil their own credit ratings.

If Italy falls to the same fate as other failed peripheral economies, Spain will probably go too, setting off a chain reaction across the global financial markets, said Uri Dadush, a former senior World Bank economist and now director of the economics program at the Carnegie Endowment for International Peace.

If contagion spreads to Italy, "it would generate a financial earthquake," said Domenico Lombardi, a former representative for Italy to the IMF and now an economist at the Brookings Institution. The ramifications are so potentially large, "it would be close to impossible to manage that crisis," he said.

The world is now confronted by a mega-debt crisis and the cracks have turned into fissures. A series of fiscal earthquake faults are now at risk of triggering, or being triggered by, the others.

What first revealed itself as a Greek debt crisis has evolved into a global debt crisis. Greece was just the spark that lit the fuse.

Europe can mange the failures of the Greek, Irish and Portuguese economies, but it has no means for handling a Spanish or Italian default — much less all the bad debts of both nations. The reality is, both are too big to let fail, yet simultaneously too big to save.

The consequences of the still unfolding crisis in Greece alone, which is a relatively small economy, could even affect the U.S.

I've previously written about how interconnected and how fragile the global economy is, and how the debt crisis would continue to evolve. The ripple effects from the trouble in Europe, and even the U.S., will continue being felt far and wide around the globe.

Many of the world's leading economies have entered a debt trap, from which there is no escape.

The warnings have been loud, and they have been repeated regularly. We have now reached the 11th hour, the moment or truth, and are on the eve of a massive global financial storm.

Even the Director of National Intelligence has warned that economic instability is a major threat to the U.S. and wider world.

From the beginning, Greece mattered and it had implications for the rest of the world. The trouble in Athens served as a cautionary tale. Ignoring that crisis would be to the peril of the larger world.

This global debt drama has been years in the making and has been continually gathering steam. It has now reached a critical mass.

Political leaders and central bankers around the world decided that the cure for the crisis was to add more disease. But, as we're painfully learning, you cannot cure a debt crisis with even more debt.

For many years, the U.S. has been sitting on its own enormous debt bomb, and it has been steadily ticking away all along.

The European debt crisis should have been been, and remains, a warning to the U.S.

There is no reason to trust, or have faith in, our political establishment. Though the president did offer his "grand bargain" — $4 trillion in budget cuts, including Social Security and Medicare — in exchange for revamping the corporate and individual tax codes, he was rebuffed by the GOP.

Such a deal may have been enough to keep S&P from downgrading the U.S. credit-rating. But we are now left with an epic mess that could portend outright disaster for our nation and the broader world.

Perhaps it would only have slowed our decline: The U.S. manufacturing base has been decimated. Our trade deficit is absolutely gaping; it is shrinking our GDP and sucking more than $1 billion out of the country every single day. Rampant, and unyielding, unemployment has lead to a shrunken tax base. And a massive — and soon-to-be retiring — Baby Boomer population doesn't have enough younger workers to support it.

Get this; our government's unfunded obligations now total $62 trillion. Yes, that's a "T".

It's reasonable to ask; Will the government be able to pay future Social Security benefits?

For nearly a century, politicians let bankers run our country and loot its riches by inflating away our currency. As the fiscal and monetary troubles mounted, the politicians continually kicked the can down the road for future generations to deal with. We have finally run out of road.

Under normal circumstances, the politicians would just borrow more money to pave some new road.

Those days appear to be over. The U.S. may have at long last run out of lenders.

Friday, August 05, 2011

Following Herd, Fools Have Rushed to Stock Market Slaughter

In a Manipulated Market, The Only Winners Are The Manipulators

Despite the fact that US gross domestic product and consumer spending have been limping along all year, the stock market still rode to an unfathomable rally. The market managed to soar to pre-recession highs even as the economy remained in a tailspin.

This dichotomy makes absolutely no sense whatsoever. Consumers are still de-leveraging and the flow of credit has slowed to a crawl.

The government's U-6 unemployment figure — the true jobless rate — now stands at a whopping 16.2%. Yet, the government admitted just two years ago that it had been systematically underestimating job losses for the previous three years. There is no reason to believe that anything has changed.

Additionally, one of the President's closest economic advisors, Austan Goolsbie, has noted that roughly 1% to 2% of our population's unemployed are simply unaccounted for on a monthly basis due to a variety of factors. And those who run out of unemployment benefits are no longer counted among the ranks of the unemployed.

However, according to the research of respected economist John Williams, more than one-in-five Americans (22.7%) is currently unemployed or underemployed.

The market hasn't even noticed.

After falling to 6,547 in March of 2009 (at the peak of the financial crisis), the Dow rapidly shot back above 10,000 in October of that year. None of the fundamentals had changed; the US was still reeling from the worst economic decline since the Great Depression.

Yet, that didn't make a bit of difference to the market. Wall St. seemed oblivious, overwhelmed by optimism and delusion.

In February of this year, as the economy was grappling with high unemployment, a decimated housing market, and oodles of other negative indicators, the Dow somehow managed to surpass 12,000. And it stayed there, virtually uninterrupted, until just this week.

A rational mind has to ask, How could this possibly happen?

It's the result of a herd mentality, not fundamentals. Investors were bidding up the stock market in a delirious frenzy, hoping to recoup previous losses. Many hoped to enrich themselves, buying at what was perceived as an opportune time. And when everyone else is buying, and seemingly making money, the herd will always follow.

Simply put, lots of new money was flowing into the stock market and pushing up the average, much of it the result of the Fed's quantitative easing program. This influx of funds clearly wasn't the result of any sort of recovery, which is now more evident than ever. Consequently, lots of people have gotten burned and still more will suffer the same fate.

The relatively strong earnings reports that previously lifted the markets were the result of cost-cutting and layoffs, not strong revenue growth. And that's been putting even more downward pressure on jobs and wages, resulting in weaker economic growth and lingering recessionary effects.

Ultimately, the merry-go-round will end up right back where it started.

Wall St. is a pretty poor barometer of the economy's health, since it is simply a bet on the future performance of a select group of companies listed on three major stock exchanges.

Additionally, the majority of the country doesn't have any direct investments in the stock market.

Unquestionably, the market does not reflect the personal finances of the masses or how they are faring in their day-to-day lives.

Yet, despite the litany of negative indicators, the fools continued to rush in — quite enthusiastically.

But the institutional investors, the real market movers, have already taken their profits and pulled the escape lever. The herd tried to follow, but obviously not all of them were able to squeeze through the emergency exit at the same time.

The fallout isn't over yet; not by a long shot. There will be a bloodbath.

By some estimates, "high frequency trading" is responsible for close to 70% of all volume in US markets. Wall St. computers can track hot stocks and immediately buy up all available shares, subsequently selling them at higher prices. Millions of shares can also be dumped in just milli-seconds.

Retail investors don't stand a chance. They are the mercy of the Wall St. market-makers.

The reality is that markets are manipulated. Sadly, a very heavy price has been, and will continue to be, paid because of this. Billions of dollars will be lost, yet again.