The Cure For The Crisis Was To Add More Disease

During the financial meltdown in the fall of 2008, central banks around the world — led by the Fed — pumped huge amounts of liquidity in the world financial system to stave off collapse. Much of the money was doled out to the biggest banks. Whatever wasn't printed out of thin air was financed through bond sales.

But the origin of the crisis was debt, and that problem has never been solved. It was just papered over by an absolutely massive government intervention.

The U.S. government, like others around the world, bailed out over-leveraged banks and initiated stimulus programs with borrowed money in the form of bonds. That simply deepened the debt problem and pushed it off into the future. In effect, while treating the symptoms, the disease itself was fueled.

For now, the U.S. continues to assume — or hope — that investors will continue to buy the bonds that finance its habitual deficit spending. That assumption may be overly optimistic.

In a recent discussion on the global role of the US dollar, Zhu Min, deputy governor of the People’s Bank of China, told an academic audience that, “The world does not have so much money to buy more US Treasuries.” He went on to say, “The United States cannot force foreign governments to increase their holdings of Treasuries… Double the holdings? It is definitely impossible.”

With interest rates near zero, a national debt exceeding $12 trillion (a sum so large that it can never be repaid), and a dangerously loose monetary policy, why would foreign governments, or citizens, maintain their faith in the U.S. and continue loaning it such massive sums of money?

What's more, the dollar has been in steady decline for years, causing it to lose value in relationship to foreign currencies. This has effectively increased the price of imports and resulted in Americans buying fewer foreign goods. That means there are fewer dollars available for foreigners to purchase future Treasury securities.

However, the weak dollar has tempted foreign investors, and even central banks, to pour their money into the stock market, excessively inflating its value. It is presently trading at 20 times earnings.

Though the dollar increased by 40 percent between 1995 and 2002, it then began a descent in 2003. That ultimately resulted in a 21 percent decline over the last decade, measured against a basket of six other currencies. Only a perceived flight to safety during the 2008 credit crisis kept the dollar's performance from being even worse.

But the dollar's decline in the last decade was only part of a much longer trend. Over the 25-year period since 1985, the dollar has lost more than half of its value.

That has not gone unnoticed. According to the IMF, around 40% of global reserves are now in dollars compared to 55% a decade ago. The difference has been lost to a range of currencies such as the euro, the yen, and particularly the Swiss franc.

Meanwhile, China has been adding to its gold holdings as an alternative to the dollar, which has clearly been losing favor.

Since the end of WWII, the U.S. has had the unique and extraordinary privilege of being the issuer of the world’s reserve currency. That position inspired confidence in the rest of the world and compelled them to buy our bonds. But those bonds look a lot less appealing these days.

The U.S. sold $2.1 trillion of notes and bonds last year. However, Treasuries were the worst performing sovereign debt market in 2009, losing 3.5%, on average. That won't encourage buyers this year. And the low yield on Treasuries only serves to further diminish their appeal.

Australia and Norway have already begun to raise interest rates, making their bonds more alluring to investors. And other central banks are expected to follow early this year. The Federal Reserve will try to hold the line in a futile effort to stimulate the U.S. economy. But sooner or later, it will have to cave to the demands of investors.

When the Fed eventually does raise rates, it will have a variety of consequences. Rising market interest rates automatically devalue older bonds issued at lower fixed rates. That will be none too pleasing to current holders of Treasuries.

Yet it appears that there may not be nearly as many of those bond holders as the Treasury would have us believe.

Last month, Sprott Asset Management told its investors that the Treasury is essentially creating its own debt market by conjuring up phony investors. According to Treasury data, a group cryptically referred to as "other investors" purchased $510 billion of Treasuries in just the first three quarters of last year, after buying just $90 billion in 2008.

This makes no sense whatsoever. Who on the planet, in these times, could afford to — or be willing to — increase their Treasury holdings more than five-fold, year-over-year? The whole claim appears to be a ruse for the Fed, as it printed half a trillion dollars to buy Treasuries.

So it's just a Ponzi, or pyramid, scheme. And like all, it's doomed to collapse.

By Sprott's analysis, America isn't finding enough investors to buy its massive supply of bonds. China's warning that there isn't enough money in the whole world to support the U.S.'s enormous appetite for debt sales seems accurate.

But the U.S. is not alone in its monumental debt problem.

If Portugal, Ireland, Iceland, Greece or Spain (known as the PIIGS) should default on their debt this year, or next, it could prove to be the canary in the coal mine for the rest of the world, including the U.S.

Ultimately, nothing has changed. The solution to the credit / financial crisis simply amounted to rearranging the deck chairs on the Titanic; nothing is different, except appearances. In the meantime, the problem of unsustainable debt has only grown worse, except that now much of the burden has been shifted to the taxpayers.

Politicians may crow about the need to reduce spending, but that won't get at the structural deficits that we are stuck with. And "pay as you go" won't chip away at our staggering debt burden, or pay the whopping interest payments on that debt.

As stated, our problems are structural, and they will haunt us for years to come.

Populism Rising Against Bernanke

There is so much populist rage against Wall Street, that Ben Bernanke's confirmation -- once thought to be a foregone conclusion -- is now in jeopardy.

Senators of all stripes have publicly stated that they will vote against Bernanke. These include Independent Bernie Sanders, Democrats Russ Feingold, Barbara Boxex, and Byron Dorgan, plus Republicans Richard Shelby, David Vitter, Jim Bunning, John Cornyn, and Jim DeMint.

All told, at least 17 senators have indicated they'll vote against Bernanke, according to Reuters.

It seems that Scott Brown's victory this week has senators fearing a backlash, and consequently no Senate seat is deemed safe this fall.

Simply opposing President Obama may be the motivation of the Republicans. But many senators may seek to appear allied with ordinary Americans disgusted with Wall Street's greed and manipulation.

No Fed chairman has been rejected by the Senate. Sixteen senators opposed Paul Volcker in 1983, the most "no" votes ever cast against a Fed chairman. He was eventually confirmed by a vote of 84-16.

But more Americans than ever are dubious about the Fed's role, its intentions, and whether it really cares about the interests of the American people.

A recent poll found that 47 percent of Americans think Bernanke cares more about Wall Street than Main Street, while only 20 percent think he works for Main Street. Independents, who swung heavily for Brown in Massachusetts, are even more opposed to Bernanke than Democrats or Republicans. Fifty percent of independents think he cares first about Wall Street; 15 percent think he prioritizes the needs of Main Street.

The rising tide of voter rage may result in a growing sense populism in Washington.

But the Fed's spin machine is working hard to spread fear of a double-dip recession, and a stock market collapse, should Bernanke be defeated.

The amount of fear-mongering being spewed is remarkable. As the spin goes, if Bernanke goes down businesses will cut spending and investing, and stop hiring. Higher interest rates and inflation will follow. Uncertainty, anxiety, and shaken confidence will spread like a contagion.

Oh, the humanity!

The casual observer will contend that all of those things are already happening. And an informed observer knows that they will continue to do so, regardless of Bernanke's eventual fate.

Don't believe the hype.

The Fed is the root of our economic problems. It has continually created the bubbles and abysmally failed in its mission to control inflation, maintain full employment, and successfully manage both credit and interest rates, which are continually manipulated with devastating consequences.

Bernanke's confirmation would be an endorsement of the status quo, and that is not acceptable.

Fed "Profits" are a Counterfeiting Fraud

Earlier this month, it was reported that the Federal Reserve made record profits in 2009, amounting to $52 billion.

The Fed says it will return $45 billion to the U.S. Treasury — the highest earnings in the central bank's 96-year history.

This is a rather stunning explanation, since the Fed simply prints money out of thin air, and did so to the tune of $142 trillion over the two year period ending in November.

Did that just blow your socks off? That means the money supply more than doubled. In fact, it went up nearly 2 1/2 times, devaluing our money in the process.

This chart is quite staggering.

And that's only what the Fed admits to. But we know that the Fed continually, institutionally, and pathologically lies.

The U.S. Treasury sold more than $2.1 trillion in Treasury bonds and notes last year, much of it bought by the Fed with it's freshly created funny money.

By the end of 2009, the Fed owned $1.8 trillion in U.S. government debt and mortgage-related securities, up from $497 billion a year earlier.

The whole thing is a charade. The Fed prints money backed by nothing and calls it a profit. This is ridiculous to the point of absurd. These are not earnings. It is manipulation, a smoke and mirrors campaign.

The Fed is referred to as a quasi government/private hybrid. But it acts entirely as a private enterprise, not a government agency.

What other government agency buys government debt? The State Department? The Labor Department? Education? Housing and Urban Development?

The answer is no, no, no, and no. That's because it would amount to a shell game, a ruse of borrowing from Peter to pay Peter.

Fed profits are nothing more than a lie. It's the same thing as "loaning" yourself money and calling it earnings, or profit.

When all of this money is brought into creation without a corresponding increase in goods and/or labor, inflation ultimately results.

Inflation is simply the increase of the money supply. That has occurred at an alarming and unprecedented rate. The subsequent increase in prices, most commonly viewed as "inflation" by the media and general public, is only a matter of time.

Hundreds of years of history prove this. It's happened over and over again, around the world.

The Fed's actions amount to larceny and counterfeiting on a massive scale. It is criminal activity by a criminal enterprise.

And we should never forget that. It's more evidence that the Fed's and government's books are cooked, and that neither can be trusted for honesty or objectivity.

There will be an enormous price to be paid. Our money is being devalue and, ultimately, that's all inflation really is.

All of this Fed printing will have some rather regrettable associated costs. We need to prepare ourselves for eventual and looming price inflation.

And that will cost us greatly.

Our Corporatocracy Is Now Official

In the 2008 election, Barack Obama and John McCain combined to spend about $1 billion. And the combined expenditures of the entire 2008 cycle came to a record-shattering $5.3 billion in spending by candidates, political parties and interest groups on the congressional and presidential races.

But with the Supreme Court's latest ruling on corporate financing of federal campaigns, that tally will amount to a mere pittance. The floodgates have officially been opened.

And how did the Supreme Court arrive at its ruling?

Well, according to the Court, a humongous, multi-billion dollar corporation is the equivalent of a single, individual citizen.

Go figure.

At least one justice disagrees, quite sensibly.

"Corporations are not human beings... corporations have no consciences, no beliefs, no feelings, no thoughts, no desires.... they are not themselves members of 'We the People' by whom and for whom our Constitution was established." — Justice John Paul Stevens

What we as a nation have to face is that the last plank of democracy has been shattered.

We are now officially a corporatocracy.

A World Upside Down: on Wall St., Down is Up and Bad is Good

JP Morgan Chase was the first big bank to post fourth-quarter results. Revenue fell short of excpectations and the stock fell 87 cents, or 2%, to $43.81.

However, JPMC also reported its profit rose more than four-fold to $3.28 billion in the last three months of 2009.

Got that? Revenues were nearly $1 billion below expectations, yet profits were up in a huge way.

How can this rather incongruous pair of events coincide?

For starters, record-low interest rates — set at near zero by the Federal Reserve — have allowed banking companies to profit while lending money at higher rates.

Secondly, the bank's earnings resulted from profits in its investment banking and asset management business, which flourished during the now 10-month-old stock market rally. The New York mega bank brought in billions just through trading in the booming financial markets.

In Wall Street's strange world, the stock market thrives even as the economy remains anemic. Go figure.

Banks reduced lending in 2009 by about 18%, year-over-year. Much of the money that wasn't lent ended up in the stock market, and the returns have been good for Wall St. — so far.

To celebrate, the overly indulgent fat cats at JPMC announced that they will be handing out bonuses totaling $9.3 BILLION to themselves. That amounts to an average bonus of $379,000 for all of JP Morgan's investment bankers, sales staff and traders.

However, despite all of its own good news and great fortune, JP Morgan Chase made some rather grim projections for larger economy, warning that defaults on mortgages and other loans may not have yet peaked. The Wall St. giant also said it remains cautious about the potential for a second downturn in the economy.

Part of that may be due to the fact that the bank lost $306 million during the fourth quarter in its credit card services business, and predicted losses will remain elevated in the first half of 2010.

So, in summary: JPMC's revenues fell short of expectations, and its stock priced dropped. But profits were way up, allowing for bonuses nearly four-fold higher than last year. The stock market is booming. But the overall economy remains feeble. Looking forward, the projections for the economy aren't good and a second downturn may loom.

So, there's good news for JP Morgan and its Wall St. cronies, and lots of bad news for the rest of America.

Is your cup half full, or half empty?

Debt Market Collapse Could Worsen in 2010

The debt-securitization markets have been the source of roughly 60 percent of all credit in the United States in recent years. These markets finance corporate loans, home mortgages, student loans and more.

The private securities market — backed by home mortgages — has collapsed, from $744 billion at the peak of the housing boom in 2005, to $8 billion during the first half of 2009.

Many of these markets have been operating only because the government is propping them up. And now the Fed has put them on notice that it plans to withdraw its support this spring.

The hope is that private investors will return to the markets, which they abandoned during the financial crisis.

The government has since spent more than $1 trillion trying to restore the markets. So what happens when it finally extricates itself?

The Fed is virtually the only buyer for mortgage-backed securities, purchasing about 80 to 85 percent of the market.

As it stands, banks are not lending. And later this year, they face accounting rule changes and capital requirements that could further restrict their ability to make loans.

As a result, much will be revealed this spring, and throughout the year. The worst may lie ahead.

The Fed’s trillion-dollar intervention got it a mess of toxic mortgage securities. And it refuses to reveal exactly what it paid for them and from whom they bought them.

Removing these toxic mortgages from bank balance sheets recapitalized and reinvigorated both the banks and markets, allowing home-mortgage rates to remain low for both purchases and refinancing. Most of those mortgages are guaranteed by US taxpayers through the tanking mortgage giants Fannie Mae and Freddie Mac.

In addition, the Fed has maintained artificially low interest rates of nearly zero for an extended period. That, combined with the government's home buyer credits, may simply being re-inflating the housing bubble all over again.

When the government support finally ends, and when interest eventually go up (which they indeed will), home prices will fall even further as inventories increase.

The government expects foreclosures and losses in the housing sector to be so large that it recently removed the $400 billion cap on bailout money to Fannie and Freddie. That is an alarm signal by the Treasury about what lies ahead.

This year will lead to further turmoil in the mortgage and other debt markets. The government support will end, and there is no other entity that can sustain these markets. Credit has dried up, and will continue to do so.

Banks reduced lending in 2009 by about 18%, year-over-year. All indications point to a continuation of this trend in 2010.

Instead of lending, banks have pumped up the stock and bond markets with oodles of speculative cash fed to them by the government.

And as the nation has witnessed with great distress, what goes up eventually comes back down.

Is China's Growth an Illusion?

"China is Dubai times 1,000 — or worse.” — James Chanos, founder and President of Kynikos Associates

There are quite a few economists and academics who question China's rapid and astounding growth, among them Bob Chapman, Gordon Chang, Richard Duncan, Jim Grant and Jim Chanos, a millionaire hedge fund manager.

After all, China's 8% GDP growth is quite remarkable in these times of worldwide economic contraction.

The problem is that, with a totalitarian government, how can you believe any of their "official" data? You can't even believe U.S.government data, so how can you put any faith in China's?

There is so much contradictory information regarding China.

New data this week show China continuing its ascent into economic superpower status, rising above Germany as the world’s top exporter and overtaking the U.S. in domestic auto sales.

However, the IMF says China is #100 among world nations in per capita income; the CIA says China is #106.

China has considerable problems: One billion of its citizens are still peasants. It has one-fifth of the world's population and it has to feed all those people. Much of it's landscape is an ecological wasteland and an environmental disaster.

With worldwide consumer demand continuing its long decline, China appears at risk of overproducing goods that no one wants.

"Demand in China is over-inflated, that is clear," says Chanos.

And bank lending is estimated to have doubled last year from 2008. That, combined with enormous flows of speculative foreign capital into China, may have created enormous asset bubbles.

If China tanks, we can only hope that the era, and the widely accepted policy, of speculation and debt will finally come to an undignified end.

“Bubbles are best identified by credit excesses, not valuation excesses. And there’s no bigger credit excess than in China,” says Chanos.

The Christmas Surprise, aka The Christmas Heist

Call it the Christmas surprise.

The Treasury Department announced it had removed the $400 billion financial cap on the money it will provide to mortgage giants Fannie Mae and Freddie Mac to keep them afloat.

Taxpayers have already shelled out $111 billion to the pair. Now there is no end in sight.

A senior Treasury official said losses are not expected to exceed the government's estimate last summer of $170 billion over 10 years.

However, the government has not been accurate, or forthcoming, about the true scope of the problem or about the reality of potential losses.

At this point, we should not believe any government estimates or claims.

It's important for us to reflect on the fact that in July 2008, the Congressional Budget Office said that the government rescue of Fannie and Freddie would cost $25 billion, at most.

The Budget Office said there was a better than even chance that the rescue package would not even be needed before the end of 2009 and would not cost taxpayers any money.

Instead, what has happened is that losses have been so spectacular that the $400 billion cap was quietly removed on Christmas Eve, a traditionally slow news day when most Americans were busy celebrating the Christmas holiday and not paying attention.

The Treasury made the change before year-end to avoid having to ask Congress for another bailout, which would be politically risky in the 2010 election year.

It's also worth noting that the head of the CBO at the time was Peter Orszag, who is now White House Budget Director. What this proves is that being wildly incompetent, or grossly misleading, is actually rewarded.

Bert Ely, a banking consultant in Alexandria, Virginia, said that lifting the cap raises significant concerns and could spell big trouble ahead.

"The companies are nowhere close to using the $400 billion they had before, so why do this now? It's possible we may see some horrendous numbers for the fourth quarter and, thus 2009, and Treasury wants to calm the markets."

Exactly. Sudden moves of such magnitude don't occur in a vacuum. The government clearly knows what's coming and it is preparing for a tsunami of losses.

Without government aid, the two firms would have already gone under, leaving millions of people unable to get a mortgage.

Together, Fannie Mae and Freddie Mac own or guarantee almost 31 million home loans worth about $5.5 trillion, or about half of all mortgages.

The combination of high unemployment, adjustable-rate mortgages that will reset this year, and a likely increase in mortgage rates, will all combine to result in further foreclosures this year.

Currently, there are 2.8 million active interest-only loans nationally, worth a combined total of $908 billion. This year, about $70 billion of interest-only loans will reset. That will result in a massive number of additional defaults.

If the news of unlimited taxpayer support isn't disturbing enough, here's something additionally outrageous: The CEOs of Fannie and Freddie could get paid as much as $6 million apiece for 2009, despite the companies' dismal performances last year.

How's that for justice?

What's clear is that there is no justice. Bankers and lenders have created a "heads I win, tails you lose" environment, and our government has aided and abetted them.

This is no moral hazard anymore. There are no consequences for poor decision-making. There are only private gains and public losses. A government-backed, corporate socialism has arisen in modern America. This is not true, democratic capitalism.

All this latest news should do is lessen America's already diminished view of our government, its competence, and its truthfulness. The government's loss estimates have proven to be wildly inaccurate.

The reality is that without the huge government subsidization of the US housing market through Fannie and Freddie, the enormous housing bubble probably wouldn't have occurred in the first place. The balance sheets of Fannie Mae and Freddie Mac have grown by a stunning $4 trillion.

We, the American taxpayers — including those of us who didn't overextend ourselves, those who bought homes they could actually afford, those who didn't view their home as a financial investment or get-rich-quick scheme, and those who never even bought a home — are all stuck with this gargantuan bill.

It will just be added to the already existing national debt, which will never be successfully paid off. It just keeps growing, and accruing additional interest.

We will remain perpetually in debt, much to our own detriment.

Populist Bank Reform

Since April, the Big Four banks -- JP Morgan/Chase, Citibank, Bank of America, and Wells Fargo -- all of which took billions in taxpayer money, have cut lending to businesses by $100 billion.

These big, bailed-out banks then spent millions of dollars on lobbying to gut or kill financial reform -- including "too big to fail" legislation and the regulation of the derivatives that played such a huge part in the meltdown.

The five largest US banks control roughly half of the industry's $13.3 trillion in assets. The 8,176 community banks control just 15%.

But local banks often have a positive impact on their communities. So, why not move your money out of one of the big banks and put it into a community bank?

If enough people who have money in one of the Big Four banks move it into smaller, more local, more traditional community banks, then collectively we, the people, will have taken a big step toward re-rigging the financial system so it once again becomes the productive, stable engine for growth it's meant to be.

The FDIC deposit insurance is just as good at small banks as the behemoths.

Watch Eugene Jarecki's amazing video at www.moveyourmoney.info to learn more about how easy it is to move your money. And pass the idea on to your friends (help make this video – and this idea – go viral!).

JP Morgan/Chase, Citi, Wells Fargo, and Bank of America may be "too big to fail" -- but they are not too big to feel the impact of hundreds of thousands of people taking action to change a broken financial and political system.

Let them gamble with their own money, not yours. Let's turn big banks into smaller banks. We'll all be better off – and safer – as a result.

Sprott Wonders If Treasury Has Created Its Own Epic Ponzi Scheme

Sprott Asks If Treasury Has Created Its Own Epic Ponzi Scheme

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

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

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

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

So who bought all the rest?

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

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

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

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

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

US GPD Fueled by Debt

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

The 10 Countries Most Likely To Default

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

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

Remarkably, there are countries even worse off than Dubai.

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


#10 Lebanon
Cumulative Probability of Default: 17 %

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

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

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

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

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

#8 Lithuania
Cumulative Probability of Default: 19 %

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

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

#7 Iceland
Cumulative Probability of Default: 23%

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

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

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

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

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

#5 Latvia
Cumulative Probability of Default: 30%

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

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

#4 Pakistan
Cumulative Probability of Default: 36%

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

#3 Argentina
Cumulative Probability of Default: 49%

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

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

#2 Ukraine
Cumulative Probability of Default: 55%

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

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

#1 Venezuela
Cumulative Probability of Default: 60%

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

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

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

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

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

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

It was a record 14th straight monthly deficit.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Bank Failure Tally Reaches 140

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

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

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

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

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

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

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

U.S. Debt Bomb Ticking Away

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

In essence, we've been warned.

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

Bank Failures Reach 133

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

Apparently, things will get worse in 2010.

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

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

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

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

Horizontal Drilling Expands Natural Gas Reserves

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This begs the question: Is your bank safe?

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

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

It boggles the mind.

Declining Job Losses Nothing to Celebrate

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Here's the reality check:

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

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

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