U.S. Economy Still Facing Many Obstacles to Recovery

Weakness in home building and state and local government spending are major obstacles to recovery, according to the annual Economic Report of the President.

While this is true, these are not the only obstacles the nation is facing as it struggles to rebound from the effects of the Great Recession.

New housing starts remain at roughly one-third of their long-term average levels. Without price stabilization and an uptick in housing starts, a stronger recovery of GDP will be difficult; residential real-estate construction accounted for 4 to 5 percent of U.S. GDP before the housing bubble burst.

Housing also spurs consumer demand for durable goods such as appliances and furniture, boosting the manufacture and sale of these products.

The housing bubble of the last decade gave a huge boost to all of these purchases. What people couldn't afford outright, they financed. And home equity was the primary resource.

From 2001 to 2007, families took advantage of easy credit to subsidize a national spending spree, often buying houses that have since fallen in value. Due to stagnant incomes, many families were only able to maintain their lifestyles by borrowing heavily against their homes.

From 2003 to 2007, US consumers extracted $2.2 trillion of equity from their homes. That amounted to an enormous economic stimulus, which is no longer available.

Excluding the economic impact of home equity extraction, real consumption growth in the pre-crisis years would have been around 2 percent per year — similar to the annualized rate in the third quarter of 2011, according to the McKinsey Global Institute.

This clearly illustrates just how reliant on home equity extraction the U.S. economy was in the previous decade. It was jet fuel for the nation's GDP.

However, consumers are now paying down all that debt, which is restraining consumption and economic growth.

Since consumer spending accounts for 70 percent of GDP, the economy will be held back as long as Americans continue paying off those accumulated debts, are limited by stagnant or falling wages, or are grappling with unemployment.

The annual report says that two million jobs will be created in 2012, slightly above the 1.8 million pace last year.

Such growth will be important to getting out of the enormous jobs deficit the nation is confronting. The government previously reported that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force.

Economic growth needs to be at least 2.5% to improve the nation's dismal unemployment situation. Anything lower won't even keep up with population growth. There are still 22 million Americans who are either unemployed or underemployed.

The president's report also projects that economic growth will accelerate to a 3 percent annual rate in 2012 and 2013, from a 1.6 percent rate over the four quarters of 2011.

The U.S. surely needs output of that magnitude. But it doesn't appear likely.

The nation's massive trade deficit shrinks GDP because we're consuming more from abroad than we're selling abroad.

And the federal government is about to embark on a major budget cutting initiative that is certain to shrink GDP. Over the past 15 years, or so, the economy became overly reliant on government spending to spur growth.

With all of that in mind, it's not a given that the economy will expand by 3 percent this year, much less in 2013, when most of the budget cuts will go into effect.

Moreover, almost all the states are still struggling economically and fiscally. Most continue to operate with significantly lower revenues and are still in the process of cutting spending. Austerity measures have led to a lot of suffering at the state level. Widespread state budget cuts are also reducing GDP and will continue to do so for the foreseeable future.

As I've said repeatedly, any sort of meaningful recovery is tied to housing and employment. Unless and until both rebound significantly, the rest of the economy will continue to lag.

Debt Deal Will Leave Greece Permanently Indebted

After much debate and delay, Eurozone finance ministers have finally agreed on a second bailout for Greece, granting the struggling nation loans worth more than 130 billion euros ($170 billion).

A first rescue package of 110 billion euros in 2010 was not enough to halt Greece's deepening crisis.

After five straight years of recession, Greece's debt currently amounts to more than 160% of its Gross Domestic Product.

Yet, in return for these new loans, Greece has only pledged to reduce its debts to 120.5% of its GDP by 2020.

So, under this plan, eight long years from now Greece's debt will still be more than 20% bigger than its entire economy.

Does that sound like a solution to you?

Within the next two months, Greece will also have to pass legislation that gives priority to paying off the country's debts over funding government services.

That won't go over well with a Greek public that is already rioting. The citizenry will feel that it is paying taxes and getting nothing in return.

Many Greeks don't even bother to pay taxes, which only compounds the country's problems.

That said, after raising taxes last year, Greece will raise them yet again next year. But all this has done, and will continue to do, is shrink demand and drain money from the economy. Greek consumers have less to spend, which is shrinking GDP. And the situation will only worsen next year when taxes are raised yet again.

Given the country's massive debt burden, it seems reasonable that the government would spend less and collect more taxes in an attempt to get out from under all that crippling debt.

However, successive rounds of deep budget cuts (or austerity measures), which were demanded by Greece's international creditors, have failed to restore growth. In fact, the economy has continued to shrink considerably. Last year, Greece's GDP fell 6.8%.

This sets up the likelihood that Greece will remain unable to service its debts in the future.

In fact, a February 15 report obtained by Reuters says that the Greek economy will likely remain unstable for many years and that Athens will likely need international aid for an indefinite period.

Most worrisome, the report states that continued delays in highly unpopular structural economic reforms and privatizations could worsen the already lengthy recession.

"This would result in a much higher debt trajectory, leaving debt as high as 160 percent of GDP in 2020," said the report's authors.

That would put Greece right back where it is today; facing a nearly insurmountable calamity.

Despite all the austerity measures already undertaken, the Greek government still spends more than it receives in taxes. That's because the contracting economy is shrinking tax revenues. Government spending is the last cylinder still firing in the Greek economy.

And therein lies the problem: as the Greek economy continues to contract, tax revenues will continue falling, thereby increasing the deficit.

Additional budget cuts are in the works, and though necessary, they will just cripple the economy even further.

The government plans to dramatically cut the minimum wage. Some 30,000 public sector workers are to be suspended. Pay will be cut. Many bonuses will be scrapped. And monthly pensions of above 1,000 euros will be cut by 20%.

But all of this may be for naught.

The only solution to Greece's problems are grants that never have to be repaid. Anything short of that will leave Greece in a hole it can't climb out of. But no one is going to give the country a free ride of that magnitude. Greece created this historic mess, and now it must clean it up.

Yet, these loans merely push Greece's debt further off into the future, with the added burden of interest. The only chance Greece has to repay these loans is to undergo a massive social and political restructuring, and then hope it's economy somehow manages to experience robust growth.

However, that is highly unlikely.

This Greek tragedy should serve as a cautionary tale to the rest of the world's heavily indebted nations. When sovereign debts become this cumbersome, they become unserviceable. The treatment often worsens the symptoms, and things generally don't turn out well.

The Greek economy is small enough to bail out. But there's a likelihood that more than just the private bond investors will eventually take losses.

The larger issue is what to do if an economy the size of Italy's needs a bailout? Italy is simply too big to rescue. There isn't enough money in the European Stability Fund to save it.

What if Japan, the world's third biggest economy and the biggest debtor of any industrialized economy, needs to be rescued? What then?

Such scenarios were previously unthinkable, yet it is time to start thinking of them.

Debt is like the unrelenting monster at the end of a horror movie; it just keeps coming back.

Reducing National Debt Will Be A Long, Painful Process

New McKinsey Global Institute research shows that the unwinding of debt—or deleveraging— is a drag on a nation's economic growth. Historical experience, particularly with nations attempting to reduce debts in the post–World War II era, reveal that the deleveraging process is both long and painful.

That's bad news for the U.S., where the national debt now exceeds the entire economy.

The combination of too much debt and too little growth has repeatedly proven to be toxic, as is now seen in eurozone countries.

Growth has been, and will likely remain, a challenge for the U.S. The economy grew just 1.7 percent last year, roughly half of the growth in 2010 and the worst since the recession.

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.

Yet, the economy will have to expand much faster than that just to keep up with the nation's continually mounting debt. The U.S. needs a combination of growth and inflation to pay off years of already accumulated debt.

Long-term projections indicate the debt will grow faster than the economy, which would have to expand by at least 6% annually to keep up. However, the historical average for annual GDP growth since 1948 is only 3.25%.

Given its current constraints, there is absolutely nothing to indicate that the U.S. economy can nearly double the growth rate it experienced over the previous 64 years — a period that saw an enormous post-war expansion.

Net interest payments on the government debt are already one of the fastest rising categories of government spending, yet interest rates are still quite low.

And there's the rub; once interest rates begin to climb, servicing the debt will become quite burdensome and will take precedence over other critical spending needs, such as education and infrastructure.

According to the latest estimate from the Congressional Budget Office (CBO), the federal deficit will be $1.1 trillion this fiscal year. That would mark the fourth straight year of trillion-dollar deficits.

Yes, a significant portion of those deficits has been driven by the recession and post-recession hangover; meaning a shrunken tax base and more safety net payments, such as unemployment benefits and food stamps for the growing number of Americans who have fallen into poverty.

The Census Bureau reports that 44 million Americans were living below the poverty line in 2009, or one in seven people — a rather remarkable statistic. That figure perfectly matches the one-in-seven Americans currently receiving food stamps.

This means that one-in-seven Americans are not supporting the federal tax base, but are instead drawing from it.

The nation is also still paying for the massive costs of the wars in Iraq and Afghanistan. As of two years ago, the cumulative cost of both wars had already surpassed $1 trillion.

According to Defense Department figures, by April of 2011 the wars in Iraq and Afghanistan — including everything from personnel and equipment to training Iraqi and Afghan security forces and deploying intelligence-gathering drones — had cost an average of $9.7 billion a month, with roughly two-thirds going to Afghanistan.

A CBO study said that if the Bush-era tax cuts were allowed to lapse, the deficits would drop sharply. But eliminating these cuts still won't eliminate the deficit, and even eliminating the deficit will not eliminate the underlying debt. That will require years of surpluses, and we are a long way from that.

The U.S. desperately needs economic growth in order to expand its contracted tax base. The nation is still grappling with a serious unemployment problem that will have to be solved by the private sector, not the government.

As economist John Williams of Shadowstats notes, "The January 2012 payroll employment level remains below the level that preceded the 2001 recession, more than a decade ago.”

The government previously reported that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force. That hasn't happened. Incredibly, job creation was negative for the entire 2000s decade. There's still a long way to go and a lot of ground to be made up.

Even those who have jobs are facing major income hurdles, and that is impacting the tax base.

The median income has declined 7 percent in the last 10 years. More worrisome, Americans' incomes have fallen more during the recovery than they did during the recession. Incomes dropped 6.7 percent during the recovery between June 2009 and June 2011, compared to a 3.2 percent drop during the recession from December 2007 to June 2009.

This decline in incomes is the likely reason that Americans have stopped their debt-spending and are instead beginning to pay down existing debts.

Outstanding household debt in the United States fell by $584 billion (4 percent) from the end of 2008 through the second quarter of 2011. That deleveraging process is still ongoing.

This means that U.S. consumers will not be the powerful growth engine they were prior to the financial crisis and recession.

According to McKinsey, historical experience shows that overextended households and corporations typically lead the deleveraging process. But governments can only begin to reduce their debts later, once they have supported the economy into recovery.

However, the U.S. economy remains weak and is still quite dependent on government support. Unfortunately, that has been the case for many years.

Private-sector GDP is roughly where it was in 1998. The economy has only grown because a substantial portion of GDP the last few years was the result of government debt.

That's about to change.

After the November elections, Congress will have nine weeks to decide on $5 trillion worth of tax and savings decisions. This is the moment Congress has been avoiding for years. There will be more ugly public battles fought by the political class. Regardless, no matter how those battles are resolved, the outcome will be harsh.

As the government begins the absolutely necessary process of deleveraging, it will have serious and unintended consequences. Budget cuts will undoubtedly shrink the economy.

McKinsey gives three recent examples of nations that went through the deleveraging process: Finland and Sweden in the 1990s and South Korea after the 1997 financial crisis.

All of these countries followed a similar path: bank deregulation (or lax regulation) led to a credit boom, which in turn fueled real-estate and other asset bubbles. When they collapsed, these economies fell into deep recession, and debt levels fell.

In other words, the U.S. should have seen this coming.

In all three countries, growth was essential for completing a five to seven-year-long deleveraging process. That's the challenge now confronting the U.S.

Absent a sovereign default, significant public-sector deleveraging typically occurs only when GDP growth rebounds. And that usually doesn't occur until the later years of deleveraging.

That’s because the primary factor causing public deficits to rise after a banking crisis is declining tax revenue, followed by an increase in automatic stabilizer payments, such as unemployment benefits.

That same pattern has played itself out in the U.S. over the past few years. Now Washington is tasked with the challenge of eliminating its mountainous debt burden, potentially allowing the economy to resume more robust growth.

Finland, South Korea, and Sweden could rely on exports to make a substantial contribution to growth. However, due to its massive trade imbalance, the U.S. will not be so fortunate.

U.S. economic growth will be held back by the enormous, and still growing, public debt and by the massive trade deficit, which shrinks GDP.

The Federal Reserve could simultaneously create an export boom and reduce the national debt by devaluing the dollar through the process of money printing, or quantitative easing. And this may in fact be the underlying intention of the Fed.

But every nation seeks to be a net exporter, with an under-devalued currency that is favorable to that goal. Such a strategy can't work for every nation; someone has to buy. Traditionally, that has been the role of the U.S.

As McKinsey notes, during the three historical episodes discussed here, the housing market stabilized and began to expand again as the economy rebounded. However, a similar outcome in the U.S. is not likely for many years to come.

By the end of the third quarter of last year, some 12.6 percent of homeowners with mortgages — or more than 6 million homeowners — were either delinquent on their payments or in foreclosure, according to the Mortgage Bankers Association. And roughly 22 percent of residential properties with mortgages were underwater at the end of the third quarter, according to CoreLogic.

Housing prices have declined to levels not seen since February 2003 and the equity in residential real estate has fallen severely as a result.

According to RealtyTrac, 8.9 million homes have been lost to foreclosure since 2007, the height of the credit crisis. In the process, more than $10 trillion in home equity has been wiped out since the June 2006 peak.

Additionally, lending standards are now tighter and are keeping many people out of the market. In 2010, 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.

An economic recovery in the U.S. will have to be led by a major rebound in employment and housing. Yet, both appear to be a long way off. Until they bounce back to pre-recession levels, the U.S. will continue to muddle along, at best.

At worst, we could be headed for our own "lost decade", much like Japan, which has actually been economically stagnant for two whole decades.

When the bond market determines that the U.S. debt is unstable, and that economic growth cannot possibly allow the repayment of those debts, it's game over. Finding buyers for Treasuries will become difficult and prohibitively expensive.

At that point, the government will have no choice but to let the Federal Reserve print, print away, destroying our currency and standard of living in the process.

Sadly, such an unthinkable outcome may be just a few short years away, well before the end of this decade.

U.S. Wealth & Income Disparity Reach Alarming Proportions

In America today, wealth and income inequality have reached levels not seen in generations — specifically, the years leading up to the Great Depression.

The current statistics are simply stunning.

The top 400 individuals now own more wealth than the bottom 150 million Americans and the top one percent earn more income than the bottom fifty percent.

This disparity has gotten the attention of an increasingly frustrated and struggling American public. In recent decades, things have gone from bad to worse.

Today, the top 1% of Americans controls 40% of the country’s wealth. Twenty-five years ago, the top 12% controlled 33% of the country’s wealth. Meanwhile, the poorer 50% now owns less than 2.5% of the nation's wealth.

The middle class has disappeared before our eyes.

This matters for reasons above and beyond fairness. In an economy that is 70 percent reliant on consumer spending, such massively unequal income and wealth levels don't bode well for growth, now or in the future.

It is abundantly clear that American consumers will not spend the nation out of its economic doldrums. Two-and-a-half years after the recession "officially" ended, unemployment remains stubbornly high and home values continue to sink.

However, the American middle class had already been in long-term decline, even before the Great Recession took hold. Worker's paychecks have been stagnant for decades.

Yes, that's decades.

According to Census figures, the $47,715 median annual income earned by a male, full-time, year-round worker in 2010 was less than the $49,065 a male earned in 1973, adjusted for inflation.

This means that median incomes have actually gone backward over the previous four decades. That's simply stunning.

Meanwhile, the Census reveals that during the same span, the top 5% of earners saw their earnings increase by over 40%.

The evidence is abundant: Over the past few decades, the richest Americans have managed to become continually richer, even as the vast majority have regressed.

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. This figure includes females and part-time workers who may be looking for full-time positions.

The above income level amounts to roughly $500 per week. Think about that for a moment; that's the average American income.

There is still plenty of money in the U.S. economy. The problem is that most of it is going to a select few at the top.

Last year, a remarkable report from the AFL-CIO got widespread media attention.

The report found that in 2010, the CEOs of just 299 companies received a combined total of $3.4 billion in pay — enough to support 102,325 jobs paying the median wages for all workers.

Most troubling, perhaps, the report found that in 2010, CEO pay had grown to 343 times workers' median pay — by far the widest gap in the world. Back in 1980, CEO pay was 42 times the average blue collar worker's pay.

In just three decades, inequality has grown to extreme proportions. As Federal Reserve Chairman Ben Bernanke noted, the U.S. now has the biggest income disparity gap of any industrialized country in the world and this is "creating two societies."

In America today, the divide between the haves and have-nots has become enormous. The statistics seem fantastical.

The top one percent of American earners control 40 percent of the country's wealth. Most shockingly, the total net worth of the bottom 60 percent of Americans is less than that of the Forbes 400 richest Americans.

Obviously, wealth can be passed on generationally. There will always be some level of inequality. However, incomes are not inherited. Yet, even there, the level of inequality is astounding.

The top one percent saw their incomes rise by 275 percent between 1979 and 2007, according to the Congressional Budget Office. Meanwhile, the bottom fifth of earners only saw their incomes grow by 20 percent during that same period.

This stark divide worries most Americans.

A new survey finds that 66 percent of Americans see strong or very strong conflicts between the haves and have-nots, up sharply from the figure in 2009. This has become a contentious matter and will surely be a campaign issue this year.

The concerns aren't simply about the differences between the upper class and what's left of the middle class. The concerns are about how fast so many people have fallen into the lower classes and into poverty.

In 2010, poverty hit a new record in the U.S. The 46.2 million Americans below the poverty line was the highest number in the 52 years of reporting. The number of people in poverty rose for the fourth consecutive year, as the poverty rate climbed to 15.1% (the highest since 1993), up from 14.3% in 2009.

In December of 2007, there were 27.385 million food stamp recipients. However, according to the latest data, this had ballooned to 46.268 million. In L.A. County, alone, one million residents subsist on Food Stamps.

While the Great Recession and its lingering after-effects have had a particularly devastating effect on huge segments of American society, the upper class has carried on largely unaffected. Sales of luxury goods at high-end retail stores are booming.

From 2000 to 2010, median income in the U.S. declined 7% after adjusting for inflation, according to Census data. That marked the worst 10-year performance in records going back to 1967.

According to a Wall Street Journal survey of economists' forecasts, incomes won't return to year 2000 levels until 2021. That's a two-decade span. How will all of these millions of Americans hang on that long, even as all their expenses continue to rise?

Between June 2009, when the recession officially ended, and June 2011, inflation-adjusted median household income fell 6.7 percent, to $49,909, according to a study by two former Census Bureau officials.

The typical household now has at least two workers. That's because, at current income levels, two workers are a necessity in most households.

Keep in mind, the above income decline continued even after the recession was declared over. So, things have indeed gone from bad to worse. That's why most Americans are still asking, What recovery?

From the start of the recession in December 2007 to June 2011, incomes dropped 9.8 percent, apparently the largest in several decades, according to other Census Bureau data. The result has been a significant reduction in the American standard of living.

Ultimately, less disposable income is being redirected back into the economy, which hurts economic growth.

But while so many millions of Americans are struggling just to pay their mortgage, rent, food and prescription costs, the rich have carried on as if the recession never happened.

While the wealthiest Americans continue buying second and even third homes, plus high-end, luxury vehicles, millions of young Americans are contending with the fact they they will have a lower standard of living than their parents, a start contrast to most of the 20th Century, at least. For the majority of Americans, the American dream has slipped away.

A recent study by Dan Ariely, James B. Duke professor of behavioral economics, found that 20 percent of Americans rake in 84 percent of the nation’s wealth, while the bottom 40 percent only owns a low 0.1 percent. The study found that the U.S. has one of the worst levels of income inequality—not just in the West, but in the entire world. U.S. inequality is now comparable to that of China and some South American nations.

What a sad and disturbing development; instead of China becoming more like the U.S., we're instead becoming more like China.

America is no longer the "land of opportunity" it once was for previous generations.

A report from the Organization for Economic Co-Operation and Development (OECD) finds that America is 10th in social mobility between generations, dramatically lower than in nine other developed countries.

This means that America is now 10th in the world in the American dream.

It wasn't supposed to be like this. The current state of affairs seems so... un-American.

Fed Announces Record Profits for Second Time in Three Years

The Federal Reserve paid the federal government $76.9 billion in 2011, the second highest amount in history. In 2010, the Fed paid the government an all-time record of $79.3 billion.

And in 2009, the Fed paid $52 billion to the government, which was, at the time, the highest earnings in the central bank's history.

Are you sensing a pattern here?

The central bank says it "earned" the money from investments made to bolster the U.S. economy. The Fed began buying Treasury bonds and mortgage-backed securities during the 2008 financial crisis and subsequent recession to try to lower long-term interest rates.

The Fed makes money from interest earned on its portfolio of securities. After covering its expenses, the Fed makes a payment of the remaining amount to the Treasury Department.

Well, that's the official story.

The reality is that the Fed has been legally granted the license to print money by the U.S. Congress. The Fed is able to conjure money out of nothing — in essence, out of thin air — to buy Treasuries.

This allows the government to fund its deficit spending, even when there aren't enough available buyers on the open market to meet the government's absolutely massive borrowing needs.

All the Fed's purchases have pushed the central bank's balance sheet to $2.9 trillion, more than three times the size of its balance sheet before the financial crisis struck in the fall of 2008.

This means that the money supply has increased by more than 300 percent in roughly three years. That should scare you because it is the textbook definition of inflation.

Such massive increases in the money supply, especially over such a brief period, raise the specter of rapidly rising price inflation. This is especially true if the central bank is unable to tighten, or mop up all that excess money, when the economy eventually recovers.

There are many who doubt that the Fed has sufficient tools to stabilize inflation over the longer term since the federal funds rate is already at zero. You could say that the Fed may be fighting a battle without any further ammunition.

Inflation is simply the increase of the money supply. When all of this money is brought into creation without a corresponding increase in goods and/or services, inflation ultimately results.

Our money is being devalued and, ultimately, that's all inflation really is.

The $2.9 trillion expansion of the Fed's balance sheet is only what it admits to publicly. The Fed is in the business of secrecy and operates in the most opaque manner.

Bloomberg recently reported that the Fed secretly loaned $7.7 billion in freshly created money to banks and financial institutions around the globe during the financial crisis. A sum that large is just mind-boggling.

The Fed's entire method of operation is a charade. It prints money backed by nothing, lends it out to global financial institutions and is able to legally profit from it. This is outrageous because the Fed is a cartel of privately owned banks and actually has shareholders.

Interest earned on the Fed's portfolio of securities should not qualify as earnings. It is nothing less than manipulation — a rigged game. What other industry has the extraordinary privilege of creating something out of nothing, at no cost, and is then able to then profit from it?

The legal ability to create money out of thin air amounts to larceny and counterfeiting on a massive scale. It should be viewed as a criminal activity by a criminal enterprise.

But the Fed was granted this extraordinary privilege by the U.S. Congress back in 1913. Since that time, particularly since the U.S. went off the gold standard in 1971, the value of the dollar has been steadily losing value.

The dollar declined 40% in the 25-year period from 1985 to 2010, and 80% since 1970.

That is the end result of unchecked, unfettered money-printing.

And that's the business of the Federal Reserve.

Trade Deficit Forces U.S. to Borrow Billions

The U.S. is now confronted by a massive $15.23 trillion national debt. However, it is also facing another serious debt problem — its massive trade deficit.

In 2010, the total U.S. trade deficit was $497.9 billion, resulting from $2.3 trillion in imports minus $1.8 trillion in exports.

Countries with big, persistent trade deficits have to borrow to fund themselves. This is a reality that many deficit hawks aren't considering in their quests to shrink the U.S. budget.

Even if Washington somehow managed to balance its budget, the trade imbalance alone would continue sucking billions out of the U.S. each and every day.

The U.S. trade deficit surged to more than $50 billion in May of 2011, marking its largest gap since October 2008. And by October of last year, the latest month of available data, the U.S. trade deficit was still a whopping $43.5 billion.

A surge in exports was one of the lone bright spots in a string of negative economic indicators last year. Exports have been aided by a declining dollar.

The problem is that imports continue to exceed exports each and every month, resulting in an ever-expanding trade gap.

More than half of that deficit is with China.

The U.S. trade deficit with China swelled to a record $273.1 billion in 2010, from about $226.9 billion in 2009. The cumulative Jan-Oct 2011 deficit with China, of around $245.5 billion, was on track to top that.

China aside, one of the biggest drivers of the U.S. trade deficit is imported crude oil. Since oil is priced in dollars, the weakened dollar is punishing Americans every time they fill up their tanks. Simply put, the dollar is buying less these days.

In 2001, the U.S. Dollar Index traded around $120. Today, the U.S. Dollar Index is trading at $81, about 32 percent below the 2001 high. That's a serious decline in value.

Though a declining dollar makes U.S. exports cheaper overseas, our No. 1 import is oil, which is also priced in dollars. A weak dollar makes oil, and ultimately gasoline, more expensive, forcing the trade deficit further into the negative.

As long as the U.S. remains so reliant on foreign oil, the trade imbalance will remain a source of trouble, leading to billions of dollars flowing out of the country every day.

Moreover, as long as the trade deficit continues, the U.S. will also continue borrowing from abroad to pay the difference.

Since imports shrink the nation's gross domestic product, U.S. GDP will continue to face downward pressure. Every $1 billion of a larger deficit subtracts about 0.1 of a percentage point from the annualized growth rate.

This means that the trade gaps in May and June of last year, alone, likely reduced GDP by more than half-a-percent. As it is, the economy was already growing at an anemic pace through most of the year.

U.S. GDP expanded 1.8 percent in the third quarter of 2011, and just 1.3 percent in the second quarter.

The trade deficit just makes maters worse.

The flow of imports into the U.S. is also displacing American jobs. We're buying all these foreign goods instead of making them here at home.

The U.S., the world's No. 1 importer, has been able to run continual trade deficits for many years because it has been receiving an inflow of capital from surplus nations, such as China, Japan and Saudi Arabia. If these surplus nations ever hope to get repaid (i.e. to reverse those capital flows) then those trade imbalances must be reversed.

Every nation would love to be a net exporter. This simply isn't possible.

Countries cannot run surpluses forever, just as they cannot run deficits forever. Unless deficits and surpluses are ultimately reversed, debt eventually builds to unsustainable levels in the deficit countries — like the U.S. That time seems to have finally arrived.

Trade deficits are nothing new to U.S. In fact, the U.S. has run deficits in the trade of goods every year since 1976.

The U.S. has long since reached the point of unsustainability. No nation can continually buy more from abroad than it sells abroad. It's simple arithmetic. Where will the money for all the purchases come from?

The trade deficit has helped make the U.S. the world’s biggest debtor nation. Balancing the federal budget won't even begin to address the nation's trade deficit.

That will require less consumption, more saving and more production here at home, plus more consumption and less saving in places like China.

Those will be tough trends to reverse.

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.

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.

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.

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 OpenSecrets.org, 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.

'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.

Gesundheit!

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.

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.

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.

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.