Debt Crises are Engineered by Bankers

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

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

It's a pernicious cycle.

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

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

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

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

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

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

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

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

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

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

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

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

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

FDIC Says 'Problem Banks' Declining; Total Still Dreadful

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Global Debt Crisis Reaching Moment of Truth

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

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

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

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

AUGUST 6, 2011

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Following Herd, Fools Have Rushed to Stock Market Slaughter

In a Manipulated Market, The Only Winners Are The Manipulators

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

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

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

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

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

The market hasn't even noticed.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

This Debt Deal 'Solution' is a Problem

The debt deal agreed to by Congress allegedly "reduces" budget deficits by at least $2.1 trillion in the next 10 years.

However, the deficit for just this fiscal year alone is projected to be $1.5 trillion, or about 71% of the size of the cuts that will take place over the next decade. And the Congressional Budget Office (CBO) projects $7 trillion in deficits over the same period.

The math simply does not add up. Reducing $7 trillion in projected deficits by $2.1 million will still leave the nation with $4.9 trillion in deficits over the next decade.

Clearly, bigger cuts were needed and the U.S. credit rating will most surely take a hit as a result.

Just weeks ago, Standard & Poors warned there was a 50-50 chance it would downgrade U.S. debt. S&P said that $4 trillion in cuts was the minimum to avoid a ratings downgrade.

This deal didn't even come close.

Though Moody's kept the U.S.'s AAA rating in place for now, it assigned a negative outlook for U.S. debt. That's not a long term vote of confidence.

Remarkably, the debt deal does not raise any new revenues, which would have helped to offset these long term deficits.

Last year, federal spending amounted to nearly 24% of GDP. However, federal revenues fell to 14.8% of GDP, the lowest intake relative to GDP in 60 years. Without question, the U.S. has both a spending problem and a revenue problem.

When Obama realized that the GOP wouldn't budge on his proposal to raise taxes on corporations and the wealthy, he pursued an option he was sure Republicans would embrace.

Like the Bush Administration before it, the Obama Administration called for much needed tax reform, including the closure of numerous loopholes used by corporations and the super rich, meaning millionaires and billionaires.

However, despite their open disdain for the nation's byzantine tax code, the GOP balked at Obama's proposal.

So, instead of solving the revenue crisis by making Wall Street pay their fair share, ending the Bush-era tax cuts for the wealthy, and closing corporate loopholes that let Bank of America pay no income taxes for the past three years, Congress passed a bill that will increase the debt by at least $7 trillion over the next decade.

For what it's worth, a tax increase and additional revenues are little more than a year away. On December 31, 2012, the Bush-era income-tax breaks for the wealthiest Americans — those households earning over $250,000 a year — will expire.

The new revenues will help, but they are not a panacea.

Due to Congress' high stakes game of debt-default chicken, the cost of borrowing is virtually certain to rise. And since the debt will continue to rise by trillions of dollars despite the agreement, that will also put upward pressure on Washington's borrowing costs.

Due to historically low rates, the government is paying less to service its debt than during the 1980s, 1990s and most of the last decade.

According to the latest figures, interest on the debt will cost roughly $250 billion for fiscal 2011. That’s about 1.6% of American output, which is lower than at any point since the 1970s – except for 2003 through 2005, when it was closer to 1.4%.

Under Ronald Reagan, the first George Bush, and Bill Clinton, payments on federal debt often got above 3% of GDP. Under Bush the second, payments were about where they are now.

In other words, these remarkably low rates have allowed the government to engage in deficit spending at very affordable costs. That cannot go on forever, and it will change soon enough.

The cost of servicing our debt will eventually reach unmanageable proportions and keep the government from addressing domestic issues, such as infrastructure, research and development, and higher education — things that could keep America competitive in the 21st Century.

Higher interest rates would add to the deficit and cause a slowdown in economic activity. That would reduce revenues, which would also add to the deficit. Such an outcome would create a vicious cycle that would be difficult to escape.

This debt agreement can only be viewed as a lost opportunity. It will make $900 billion in immediate cuts and create a special panel of lawmakers to find an additional $1.5 trillion of deficit cuts through reforms of entitlement spending and the tax code.

However, the bipartisan Simpson/Bowles Commission already issued its recommendations just seven months ago, and they were largely ignored. Another commission is nothing more than a red herring allowing Congress to avoid making tough choices, as it has for decades.

Unfortunately, the U.S. finds itself in a predicament with no good options. The current spending and borrowing levels are unsustainable. However, budget cuts will create a drag on the economy and reduce the nation's GDP.

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.

Even before these cuts have been initiated, the economy has already been limping along for three consecutive quarters, in the midst of a so-called "recovery."

Barclays has cut its forecast for U.S. economic growth this year from 2.5% to 1.7%. That's a razor-thin expansion and would essentially constitute economic stagnation. GDP needs to be 2.5% just to keep up with the number of new workers entering the work force.

However, that kind of growth is not happening and the trends are negative. Fourth-quarter GDP was revised down to 2.3 percent from 3.1 percent. First-quarter GDP was revised down to just 0.4 percent from the previously reported 1.9 percent. And the initial second quarter GDP projection is just 1.3 percent.

This economy is on very wobbly legs. Consequently, you can expect the unemployment rate to rise. That will continue to increase government expenditures while reducing revenues. It's the same bad combination the nation has been dealing with for three years now.

This pathetic debt deal amounts to half measures at a time when the U.S. needed something more substantial and significant. Aggressive measures were needed, but Congress punted as usual.

Perhaps we're already too far down the hole, but the politicians didn't even meaningfully try. The sad reality is that there are no good solutions. In fact, there may be no solutions at all.

If it hasn't already reached the point of no return, America is on a short road to insolvency. Revenues have been far too low for far too long, and expenditures have been far too high for far too long. Two wars and a prescription drug bill were put on the government credit card. It's now time to pay up.

Though the looming spending cuts aren't nearly deep or broad enough, America will soon learn just how punitive they will feel.

We now know that the Great Recession was even worse than originally presumed.

The drop in GDP during the recession from the fourth quarter of 2007 to the second quarter of 2009 was 5.1%, worse than initially projected. That marks the deepest recession since World War II.

The unfortunate truth is that we are still in a very perilous position and the worst may not yet be behind us.

Comprehensive Debt Commission Report Still Being Ignored

Despite being handed a comprehensive and impartial template just seven months ago, somehow Congress still can't agree on a plan to shrink the deficit.

Last December, the president's bipartisan debt commission (aka, The National Commission on Fiscal Responsibility and Reform) issued a detailed report titled, "The Moment of Truth."

The 10 Democrats and eight Republicans on the 18-member commission called for $2 trillion in spending cuts and $1 trillion in tax increases, plus recommended a series of long term deficit cutting measures that would cumulatively:

• Achieve nearly $4 trillion in deficit reduction through 2020, more than any effort in the nation’s history.

• Reduce the deficit to 2.3% of GDP by 2015 (2.4% excluding Social Security reform), exceeding President’s goal of primary balance (about 3% of GDP).

• Sharply reduce tax rates, abolish the AMT, and cut backdoor spending in the tax code.

• Cap revenue at 21% of GDP and get spending below 22% and eventually to 21%.

• Ensure lasting Social Security solvency, prevent the projected 22% cuts to come in 2037, reduce elderly poverty, and distribute the burden fairly.

• Stabilize debt by 2014 and reduce debt to 60% of GDP by 2023 and 40% by 2035.

In total, these measures would:

Cut hundreds of billions from discretionary spending each year over the next decade; institute comprehensive tax reform that would "sharply reduce rates, broaden the tax base, simplify the tax code and reduce the many 'tax expenditures' — another way of spending through the tax code"; contain Medicare costs through a variety of measures; cut agricultural subsidies; modernize the military and civil service retirement systems; and ensure the long term solvency of the Social Security System.

The plan calls for, "Holding spending in 2012 equal to or lower than spending in 2011, and returning spending to pre- crisis 2008 levels in real terms in 2013." Then "limiting future spending growth to half the projected inflation rate through 2020."

The report firmly states, "Every aspect of the discretionary budget must be scrutinized, no agency can be off limits, and no program that spends too much or achieves too little can be spared."

"One of the Commission’s guiding principles is that everything must be on the table," including both security and non-security spending, the report reads.

All security spending, which constitutes about two-thirds of the discretionary budget, would be on the table — including nuclear weapons, homeland security, veterans, and international affairs.

The remaining third of the discretionary budget, which is dedicated to non-security programs, would also be on the table — including education, housing, law enforcement, research, public health, culture, poverty reduction, and other programs.

The report is loaded with specifics for eliminating inefficient, unproductive spending and for consolidating duplicative federal programs. It also calls for the elimination of all federal earmarks.

Also recommended is the elimination of all income tax expenditures and a simplification of the tax code. Closing hundreds of loopholes would allow cuts in overall tax rates.

Eliminating most deductions "could reduce income tax rates to as low as 8%, 14%, and 23%," said the Commission.

Co-commissioner Erskine Bowles emphasizes that tax expenditures amount to a trillion dollars a year. That's substantial.

The corporate tax code would also be reformed, says the report, with the elimination of all tax expenditures and subsidies.

The Commission goes on to warn that, "Federal health care spending represents our single largest fiscal challenge over the long-run. As the baby boomers retire and overall health care costs continue to grow faster than the economy, federal health spending threatens to balloon."

With that reality in mind, the commission calls for numerous reforms to federal healthcare spending to slow the growth of costs and ensure long term fiscal survival.

In total, the commission's report is quite detailed and full of solutions to some very tough problems. There will be much pain, and it will be spread through much of our society. The Commission calls it "shared sacrifice."

The reality is that there are no painless solutions due to the depth of problems this nation faces.

The glaring fault in the report was the omission of a tax on the financial industry, as recommended by the IMF. Such a tax would have been a much needed source of additional revenues and may have acted as a brake on speculation.

Despite all the specifics, this plan has largely been ignored in Washington as the politicians fight, bicker and cling to their ideological convictions.

Currently, there is even discussion about additional blue-ribbon panels, with more suggestions to be overlooked. It's as if the politicians actually believe that some other commission will give them easy, pain-free solutions to the mess they and their forebears have gotten us into.

For example, the Reid-McConnell plan proposed in the Senate would cut a mere $1.5 trillion in spending over 10 years. That's the size of this year's deficit. The plan would also set up a new congressional panel to explore ways to reduce the debt.

That's just what we don't need; yet another debt commission to ignore — just like the last one.

Even if Deficit Deal is Reached, Long Term Projections For U.S. Look Stark

Even if Congress and the White House reach a deal to raise the debt-ceiling and make large budget cuts, the long-term projections for the U.S. economy simply aren't good.

Unfortunately, whether you look at economic growth, tax revenues or unemployment, the future doesn't look bright.

The Congressional Budget Office (CBO) Website notes the following:

Federal debt will reach roughly 70 percent of gross domestic product (GDP)—the highest percentage since shortly after World War II. The sharp rise in debt stems partly from lower tax revenues and higher federal spending related to the recent severe recession. However, the growing debt also reflects an imbalance between spending and revenues that predated the recession.

Federal spending has increased not due to pork-barrel projects, but from supporting Americans who have been hit particularly hard by the Great Recession. The spending was for long-term unemployment benefits, food stamps (the SNAP program) and increased applications for disability insurance.

It's hardly a surprise; one-in-seven Americans were living below the poverty line in 2009. Consequently, one-in-seven Americans now receive food stamps.

While recession-related expenditures went up, tax revenues collapsed as unemployment soared. Even before the Great Recession, the government's balance sheet was already in tatters as a result of two rounds of tax cuts (2001 & 2003), two concurrent, unfunded wars and the unfunded Medicare prescription drug law.

It all added up to a very bad recipe.

According to the CBO, the national debt will be 70 percent of GDP by the end of this year and will reach 77 percent of GDP by 2021. In total, the CBO projects $7 trillion in deficits over the next 10 years.

Yes, despite the best intentions of some in Congress, deficits will continue for the next decade.

"To prevent debt from becoming unsupportable, the Congress will have to substantially restrain the growth of spending, raise revenues significantly above their historical share of GDP, or pursue some combination of the those two approaches,” CBO Director Douglas Elmendorf announced in January.

Simply put, the only meaningful, substantive solution includes cutting spending and raising taxes. There are no other choices. We are now way past that.

Even the most aggressive budget cutting plans still leave the nation with massive deficits over the next decade.

The House-GOP-passed budget would generate deficits for more than a decade into the future, according to the CBO, and add about $9 trillion to the current debt in 10 years.

Yet, that plan was viewed as too draconian by many in Congress (including some Republicans) and by most voters who were polled on the topic. Consider that for a moment; the most far-reaching plan would still result in massive additions to the deficit.

It's important to remember that the U.S. economy is now totally reliant on federal spending and reducing that spending, though vital, will inevitably shrink the economy.

The deficit plans now being discussed in Washington include raising the debt ceiling by $2.4 trillion. That would push the national debt to $16.7 trillion by next year. And, according to CBO projections, that ceiling will have to be continually raised over the next decade.

One of the primary challenges for the government is that high unemployment results in lower tax revenues. And unemployment will remain at high levels for years to come. Millions of jobs have been outsourced and are never coming back. And in a stagnant economy, businesses won't hire.

Economic growth of 2% isn't enough to even keep unemployment constant, much less reduce it. In other words, unemployment will go even higher if growth remains at 2%. As Fed Chairman Ben Bernanke told 60 Minutes, " It takes about two and a half percent growth just to keep unemployment stable. And that's about what we're getting."

However, GDP expanded at just 1.9% in the first quarter. Projections for second quarter growth range from 1.6% (Macroeconomic Advisers) to 2% (Goldman Sachs).

When the economy grows, tax revenues also grow. But when the economy contracts during a recession, tax revenues also contract. And when the economy is stagnant, revenues remain stagnant. However, in the latter two cases, government expenditures typically increase because more people need government assistance of one form or another.

The primary problem for the U.S. has been, and remains, slow economic growth.

The U.S. economy has been slowing for several decades. Economic growth averaged 3.2 percent from 1965 through 2008. However, over the past 20 years, growth averaged just 2.5%.

That decline really isn't surprising.

Over the 20th Century, the U.S. went from a growth era in which it was a post-emerging market with a dominant manufacturing sector, to a mature post-industrial economy. The rate of growth would normally be expected to slow even without a crippling recession.

This pattern is expected to continue well into the future.

According to a recent McKinsey Global Institute study, the economy is likely to remain slow for decades to come.

McKinsey argues that the economy is likely to slow because as labor force participation drops—as more and more baby boomers retire and the number of new women entering the workforce slows—Americans who do work will have to support the increasingly large proportion of Americans who don’t.

Unless the unemployment problem improves, government revenues won't improve. And if government revenues don't improve, annual deficits will continue adding to the nation's already massive debt.

Here's a rather simple formula: No jobs = no spending = no growth = lower tax revenue = higher deficits = higher debt = higher tax rates & interest rates = no growth.

It's a vicious cycle, and the U.S. is caught squarely in the middle of it.

Where it stops, nobody knows.

Italy & Spain: Too Big to Save

The European debt crisis has finally revealed itself to be about something much bigger than Greece... or Ireland or Portugal.

And the crisis is poised to become epically expensive.

Italy and Spain are the third- and fourth-largest economies in the eurozone, and they are now at the center of the crisis. Bailing them out would far exceed the European Union's rescue funds.

Paradoxically, both nations are too big to fail, yet too big to save. If either nation were to default, the impacts would be absolutely historic and would be felt worldwide.

Italy's debt equals 120 percent of its economic output and is the second biggest in the eurozone, after Greece.

That's the reason for concern.

Spain’s public debt equalled 63.6% of the country’s GDP at the end of the first quarter.

The European Stability and Growth Pact — an accord agreed to by all Eurozone member states — imposes a 60% limit on debt. But that hasn't stopped either nation from plowing itself further into indebtedness.

“Spain and Italy are nearly five times the size of Greece, Portugal and Ireland and carry nearly four times the volume of debt,” says Michael Darda, economist at MKM Partners in Stamford, Connecticut.

In other words, Italy and Spain are the real reasons to worry. Either nation has the potential to blow up the Eurozone and the euro itself.

This has started to worry investors and jack up interest rates on Italian and Spanish debt.

The yield – or interest rate – on Spanish 10-year bonds has hit 6.2 percent. Meanwhile, Italian 10-year bond yields recently eclipsed 6 percent for the first time since 1997. That's a clear warning signal.

According to analysts, the 6 percent rate will present serious challenges for Italy, but 7 percent bond yields would be unsustainable. Greece, Ireland and Portugal all sought international assistance after their 10-year yields rose past 7 percent.

It seems that Italy is now uncomfortably close to the danger zone.

Italy has more than 500 billion euros of bonds maturing in the next three years — about twice the 256 billion euros extended to Greece, Ireland and Portugal in their three-year aid programs. This provides some scale to the magnitude of Italy's debt burden.

Italy’s economy, which has been sluggish for the better part of a decade, is not growing fast enough to cover its massive debt load.

The International Monetary Fund expects Italy's economy to grow 1.3 percent in 2012, a significant increase from this year. Growth was 0.1 percent in the first quarter, a fraction of the 0.8 percent for the euro region.

The problem for all countries with high debt loads is that even as they impose strict austerity measures to shrink and eventually balance their budget deficits, they still have to contend with unyielding and expensive debt costs.

Both Moody's and S&P have issued warnings about Italy's ability to trim its debt. An economy of that size, facing problems of this magnitude, is nothing short of alarming.

Despite all of that, Spain is thought to be the bigger risk at the moment.

If a full-blown debt crisis breaks out in Italy or Spain, the euro union would face disintegration — a cataclysm far beyond anything it has grappled with to date.

Such a crisis would also create a domino effect of imploding banks.

Barclays Capital says European banks have total claims and potential exposures of 998.7 billion euros to Italy, more than six times the 162.4 billion euro exposure they have to Greece.

Think about that; Greece already has the whole world spooked, yet its debts are relatively tiny.

Italy, however, is a big fish. And so is Spain.

European banks have 774 billion euros of exposure to Spain and 534 billion euros of exposure to Ireland.

However, the problem is not just Europe's alone.

U.S. banks are more exposed to Italy than to any other euro zone country, to the tune of 269 billion euros, according to Barclays. American banks’ next biggest exposure is to Spain, with total claims estimated at 179 billion euros.

So, the problems in Italy and Spain will have far reaching consequences and will send shock waves through the global economy.

This is no longer a debt crisis involving lesser countries with small economies; the big fish are now in the fryer.

Latest Unemployment Data Reaffirms America's Dire Economic State

The hits just keep on coming.

The U.S. was dealt yet another dose of bad economic news today when the Bureau of Labor Statistics announced that a mere 18,000 jobs were added to the American economy in June.

Despite the meager increase in jobs, the unemployment rate still rose to 9.2%. That's because the ranks of the newly unemployed exceeded those of the newly employed.

By now, we've all become accustomed to negative economic data, but this news took even Wall St. by surprise.

The "Street" had projected that between 90,000 and 140,000 jobs would be added in June, still a paltry sum.

But that wasn't the only bad news; the May employment numbers were also revised downward today; only 25,000 jobs were added to the U.S. economy in May — less than half of what was originally projected.

This sort of tepid job growth is really problematic.

Labor experts say a bare minimum of 125,000 jobs must be added each month simply to keep up with population growth. This means that 1.5 million jobs need to be created this year just to employ all of the new high school and college graduates, plus recent immigrants.

However, even if the U.S. were to achieve that kind of growth, it still would not address the roughly 24 million Americans who are already unemployed or under-employed, meaning they can only find part-time work.

To provide some perspective of the hole we're in, consider this: the government says that 1.3 million jobs needed to be created every year from 2006-2016 just to keep up with the growing labor force. Obviously, that hasn't happened.

In June, the labor force participation rate fell to a 27-year low of 64.1 percent, as more Americans gave up looking for work altogether. An individual has to run up against a wall at every turn to entirely give up looking for work. It's a sign of utter hopelessness.

Largely out of fear of losing their jobs, American workers have become so productive that companies are now doing more with less. That has eliminated any incentive for them to hire.

When so many people are out of work, there is also no incentive for employers to offer wage increases or high starting salaries. Many professionals are now working in jobs for which they are considerably over-qualified. Beggars can't be choosers

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

What's most disturbing is that the government's unemployment figures don't include those who have lost their unemployment benefits, or those who have only part-time jobs but want full-time work.

Economist John Williams of ShadowStats.com (who provides detailed economic reports for U.S. businesses) puts the real unemployment rate at a whopping 22.7%. That's akin to the Great Depression.

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

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

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

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

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

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

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

The long-term projections for younger workers, in particular, do not look good. Many older workers are putting off retirement out of necessity, leaving fewer positions available for younger workers.

The employment statistics for the last three classes of college grads have been, and will continue to be, quite bleak.

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

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

American consumers are already strapped and heavily burdened by debt. Consequently, we will not spend our way out of this malaise.

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

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

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

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

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

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

These are hard times indeed. And they are poised to get even tougher.

Health Insurance Incentives May Improve Costs & Health

The US health care problem is a fairly complex one with multiple challenges.

First, our healthcare system is highly advanced and technological. That makes makes it inherently expensive.

Second, health insurance is very costly and beyond the reach of the average American.

From 1999-2009, health insurance premiums for families rose 131%, while the general rate of inflation increased 28% over the same period.

As a result, one in seven Americans did not have health coverage in 2009.

However, those people don't go entirely without healthcare; they just don't pay for it much of the time. People with insurance end up subsidizing them through higher premium costs.

Third, the US is the fattest country in history. Fully two-thirds of Americans are overweight or obese. Consequently, the nation is plagued by lifestyle diseases, such as heart disease, strokes, Type II diabetes, high blood pressure and high cholesterol.

Though these diseases (and many cancers) are preventable through lifestyle changes, too many Americans are unwilling to undertake them.

According to the Centers for Disease Control and Prevention (CDC), 50 percent of a person’s health status is a result of personal behavior and choices.

Consequently, it seems self-evident that the incentive to maintain one's own health is both inherent and self-fulfilling. But somehow it isn't.

Insurance giant UnitedHealthcare, the nation's largest health insurance provider, decided to provide the incentive a few years ago.

United makes those who disregard their health pay more for insurance. And it rewards those with positive health profiles by charging them less.

It seems quite reasonable that overweight people, smokers, and those with high cholesterol and high blood pressure should pay more. It's both fair and practical that Americans take more responsibility for their own health.

Here's how the program works: Employers offer a high-deductible insurance plan through UnitedHealth, such as a policy that requires single workers to pay their first $2,500 in annual health costs before insurance kicks in; for families it's $5,000.

Workers who want to lower their annual deductible can volunteer to have blood tests and other evaluations once a year to see if they smoke and if they meet target goals for blood pressure, cholesterol and height/weight ratio.

For each of the four goals they meet, workers would qualify for a $500 credit as individuals or $1,000 as families toward the deductible. If they qualify for all four — and UnitedHealthcare estimates that few will initially meet all four — their annual deductible would fall to $500 for individuals or $1,000 for families.

The key is that the plan is voluntary. People can always choose to not participate and to pay more.

Those who don't meet the health standards can sign up for weight loss and other health management classes through United.

This program makes sense in the same way that a good-driver policy discount makes sense.

Some people may need help, guidance or education. But we all need to take responsibility for ourselves and for our health outcomes as well.

Ultimately, this type of policy only considers the things an individual personally controls.

Rewarding people to take care of themselves may seem counter-intuitive, yet this is the current state of affairs in America.

Free Trade Isn't Really Free; It's Been Very Costly to American Workers

Free trade was sold to the American people as a tool that would open global markets to American goods and increase opportunities for American businesses and workers.

It hasn't quite turned out that way.

Because workers in developing nations make a fraction of what American workers earn, U.S. jobs have been outsourced by American companies seeking to reduce labor costs and increase profits.

The average wage in developed economies is about 10 times the average level in emerging economies. That's the inherent flaw in "free trade".

These developing nations are often absent the unions, environmental regulations and worker protections found in the US.

In short, the playing field is anything but level and American workers are on the wrong end of the field.

What Americans have come to realize — as they were warned of in advance by people such as Ross Perot — is that free trade is not free at all. In fact, it's been very costly to American workers.

Jobs in manufacturing, the kind that built the American middle-class, have been hit particularly hard. Largely due to outsourcing, the number of workers in manufacturing dropped by one-third over the past decade.

Manufacturing has declined from 14.2% of GDP in 2000 to just 11% of total output today. According to the Bureau of Economic Analysis, in 2009 U.S. GDP was $14.2 trillion. Manufacturing contributed just $1.5 trillion to the total.

One of the consequences of the contracting manufacturing base is that exports now represent just 12% of the economy. On the other hand, the U.S. has led the world in imports for decades. As a result, the U.S. has a massive trade deficit and is the world's biggest debtor nation.

The nation is faced with a real unemployment rate of 22.3 %. The official unemployment number does not include the millions who have stopped looking for work or are working part time. If you add these numbers together, the actual number of Americans without a real full-time job is close to 24 million.

The U.S. will never overcome its unemployment problem as long as American jobs are continually outsourced to developing nations. Sadly, the U.S. is hampered by the fact that it treats its workers much better those nations treat theirs. This amounts to a huge disadvantage for the U.S.

Domestic competition is waged on a more level playing field. In the U.S. we have worker's rights; a minimum wage; over-time; coffee, lunch and bathroom breaks; holidays and holiday pay; vacation time; medical leave; maternity leave; worker's compensation; unemployment insurance and whatever else I'm leaving out.

We even have a few private labor unions left.

Foreign workers, in the developing countries where American jobs continue to be outsourced, have none of the above. In short, it costs a lot less to employ foreign workers, and that makes profit margins much higher for the American corporations that employ them.

In many developing nations, worker safety, proper care and fair treatment are after thoughts — as are environmental regulations. These things cost U.S. employers a lot of money and make them even less competitive internationally.

With jobs so scare, American workers are often forced to take whatever they can get and are competing for lower paying jobs. Consequently, over the past six months, the purchasing power of the average American's paycheck has fallen at a 3.2% annual rate.

This will have unintended consequences for American companies. Americans need jobs and money to make the U.S. economy tick. However, these things are not nearly abundant enough; consumer spending declined in May.

This is a big problem for an economy that is 70% reliant on consumer spending.

So while outsourcing American jobs may have short-term benefits, it will likely have long-term negative consequences for the very businesses responsible for it.

The current system is short-sighted. But, beyond that, it is simply unsustainable.

Why the Greek Debt Crisis Matters

The Greek debt problem may seem like a distant concern, but it could swiftly become an American problem. That's because American banks hold plenty of Greek debt.

U.S. banks had a total exposure of $41 billion to Greece by the end of 2010, according to the latest figures from the Bank for International Settlements.

If Greece defaults on its payments, U.S. banks risk losing tens of billions of dollars.

That risk is growing. On Monday, S&P said there is “a significantly higher likelihood of one or more defaults.”

Much of Greece’s precarious debt is held on the books of large European banks, which obviously puts them at risk. French banks, in particular, hold lots of that debt — to the tune of nearly $57 billion.

However, those French banks raise substantial amounts of money by selling debt to the ten largest U.S. money market funds, which has spread the risk across the Atlantic.

The problem with global markets being so interconnected is that financial risk follows the flow of capital. Consequently, U.S. banks are highly exposed to the stresses on European governments and banks.

A default by Greece could spark a chain reaction. The U.S. financial crisis in 2008 was ignited by a relatively small pool of subprime mortgages. A Greek default could cause wider defaults by subprime government borrowers like Portugal, Spain and Ireland.

Aside from the risk to French banks, a Greek default could also severely impair British and German banks, which hold copious amounts of Greek debt. The German banks alone have about $34 billion in exposure.

However, European banks are not the only ones at risk.

If American banks have to cover the bad bets of investors who insured themselves with credit default swaps — which are supposed to pay off if Greece defaults on its bonds — those Americans banks would also be in big trouble.

Such an outcome could overwhelm the U.S. financial system.

Yet, Greece is not the only concern for the U.S.

According to a recent report by the Bank for International Settlements, U.S. financial institutions have nearly $200 billion in direct and indirect exposure to the debt of Greece, Ireland, and Portugal.

The structural weaknesses in the U.S. financial system were never addressed after the 2008 crisis; they were just papered over. The banks are still too leveraged and hold too little capital in case of another emergency. In fact, there's a big fight going on over this very issue right now in Washington.

Since Wall Street and its allies spend $1.4 million a day and have about 3,000 lobbyists working for them, they will get what they want — as always.

The major concern is that the "too big to fail" banks have become even bigger since 2008. Bank of America bought Merrill Lynch and Countrywide; JP Morgan Chase bought Washington Mutual; and Wells Fargo bought Wachovia. You could now call them "too bigger to fail."

Most astonishingly, six megabanks collectively control assets amounting to more than 60 percent of the country's gross domestic product. These banks operate under the implicit, if not explicit, guarantee that the taxpayers will once again bail them out in the next crisis.

So, if you weren't sure how or why the European debt crisis affects the U.S. — and maybe even your bank — perhaps you're now seeing the big picture. And if you weren't paying attention before, perhaps you will be now.

It may not be long before we witness Financial Crisis 2.0.

OPEC Holds the Line, Saudis Break Rank, Prices Will Remain Elevated

With oil prices hovering around $100 a barrel for the past few months, the resulting impacts are being felt throughout the global economy. Some OPEC members have even expressed concern that rising prices could hurt demand for their product.

Crude prices rose 25 percent from January to April, while US gas prices were up 28 percent in that period. Surveys show that Americans have already cut back on their driving in response.

Since OPEC supplies about 40 percent of the world's petroleum, it has the power to impact global oil prices.

Consequently, oil importing nations were hoping that OPEC members would decide to hike oil production quotas at their meeting in Vienna on Wednesday.

But it didn't turn out the way most had hoped and expected; divided OPEC ministers decided to leave production quotas where they are at present.

Higher oil prices lead to higher prices for food and all consumer goods, and they further constrain consumer spending. Higher oil costs result in less driving and traveling for motorists in the summer months. And higher oil prices also add the enormous US trade deficit, sending billions out of the country every month.

But in a bold step, Saudi Arabia decided to act unilaterally yesterday.

The world's biggest oil exporter reportedly plans to increase production from 9.3 million barrels per day to 10 million barrels, the highest level in 30 years.

This is a critical commitment because the fighting in Libya has taken 1.3 million barrels off the world market and the unrest in Yemen and Syria has subtracted an additional 300,000 barrels.

As a consequence, the Saudis need to raise output by 1.6 million barrels per day just to match former production levels. But even that won't balance global supply with a global demand of 89 million barrels per day.

Though any production increase will be welcomed, the Saudi decision will not solve the supply/demand problem.

OPEC says that world demand will exceed supply by 1.45 million barrels per day in the third quarter. However, the U.S. Energy Information Administration puts the shortfall at 1.81 million barrels per day.

That's significant enough to keep prices well over $100 a barrel. In fact, analysts now expect oil to average $130 a barrel for the rest of this year.

The tightness in global supplies is perhaps best illustrated by the following: among the 12 OPEC members, all but Saudi Arabia, Kuwait and the United Arab Emirates are said to be at capacity.

Is it any wonder, then, that they voted to maintain the status quo? Perhaps an increase wasn't even an option for most of them.

Under current OPEC production quotas — in effect since January of 2009 — 11 of its 12 members are allowed to produce 24.85 million barrels per day.

However, many of those members simply ignore their production quotas and pumped an average of 26.18 million barrels per day in April — more than 1.3 million above the set target, according to a Platts survey of OPEC, oil industry officials and analysts released in May.

That's a sign of a weak and divided cartel. Saudi Arabia's decision to act alone, and against the wishes of their fellow cartel members, only affirms this.

Interestingly, OPEC doesn't officially count the 1.3 million additional barrels that its members are pumping above the approved target.

Saudi Arabia, OPEC's biggest producer, doesn't follow production quotas and it is the only OPEC member that has any considerable spare capacity. But even that is the subject of much suspicion.

In his 2005 book, "Twilight in the Desert: The Coming Saudi Oil Shock and the World Economy," oil analyst Matthew Simmons questioned Saudi Arabia's ability to raise production.

After much analysis, Simmons contended that Saudi Arabia may 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 already peaked and could in fact be less than it was in 2005.

WikiLeaks reinforced this contention just this year when it released secret US cables revealing that a senior Saudi government oil executive warned that the kingdom's crude oil reserves may have been overstated by as much as 300 billion barrels, or nearly 40%.

This indicates that Saudi Arabia does not have enough reserves to prevent oil prices from escalating.

Saudi Arabia's total production has been estimated to be as high as 12.5 million barrels per day.

However, the executive, a geologist and former head of exploration at the Saudi oil monopoly Aramco, told the US consul general in 2007 that Aramco could not reach a 12.5 million barrel-a-day capacity. The executive also noted that as early as 2012 global oil production would hit its peak.

Almost all of the new demand growth is coming from emerging countries, such as China and India.

Last year, global energy consumption rose at the fastest pace since 1973. That's a worrisome development considering OPEC's limitations.

China increased its energy consumption by 11.2 percent, moving ahead of the United States as the world's biggest energy consumer. China accounted for 20.3 percent of global demand compared with 19 percent for the U.S.

However, most of China's energy consumption was in the form of coal. The U.S. is still the world's leading consumer of oil, using 21 percent of the world's supply, double China's consumption.

Importantly, the top suppliers to the U.S. are Canada and Mexico. But since oil has a global market, and since the size of the pie seems to be fixed, any production constraints or demand spikes affect the U.S. as much as anyone else.

What is evident is that demand is continually rising and that all of the world's oil producers, including OPEC, may be unable to meet it. In the absence of a significant rise in production, oil prices will continue to increase, unsettling the global economy even further.

Unfortunately, higher prices are the new normal.

Government's Unfunded Obligations Reach $62 Trillion

There's been a lot of focus given to the country’s $14.3 trillion debt, which has now reached the government's legal borrowing limit.

However, that amount is chicken scratch compared to what the government really owes.

The federal government's total unfunded obligations — the gap between spending commitments and revenue — has reached a record $61.6 trillion, or $534,000 per household.

These unfunded commitments include programs like Medicare and Social Security.

The federal debt only includes what the government owes to Treasury holders. It doesn't take into account what's owed to seniors, veterans and retired government employees.

This problem — this liability — is so big that it's hard to comprehend.

For perspective, $61.6 trillion represents more than one-third of the market value of all the goods and services produced in the United States.

It's also more than five times the amount that Americans have borrowed for ALL other debt, including mortgages and car loans.

The government has promised pension and health benefits worth more than $700,000 per retired civil servant. Yet, the government has no money set aside to pay for those benefits.

For example, military health care costs more than doubled in the past decade. They account for $52.5 billion in next year's proposed budget. Retired veteran's pay represents another $50 billion or so a year.

But the problem of unfunded obligations isn't just limited to civil servants and veterans.

The number of people on Medicare and Social Security is going to double in the next 10 years. The Baby Boomers — roughly a quarter of the US population — begin retiring next January and will swamp the Social Security and Medicare systems over the following two decades.

While Social Security collected $2.6 trillion more in revenues than it paid out in benefits over the past three decades, that surplus — the infamous Social Security "Trust Fund" — has already been spent by the government on other programs.

The Social Security trustees say this "Trust Fund" — which amounts to nothing more than IOUs, or government bonds — will be exhausted in 2036.

But remember, this money doesn't even exist. The government will have to make budget cuts, taking money from other programs, to come up with the $2.6 trillion (plus interest) to repay the American people the money it owes them.

The takeaway here is that the government has made promises it cannot possibly keep. It will never be able to come up with $62 trillion. Those monies do not even exist.

That's why they are referred to as "unfunded" obligations.

Remember, these unfunded obligations amount to $534,000 per household. So every American household could sell their home (if they even own one), plus all of their worldly possessions, and it still wouldn't cover the amount due.

The government's choices are to simply not pay the future medical and retirement costs of its senior citizens, or heavily tax its citizens to acquire the money needed to repay them for the previous debts it already owes them.

Either choice is a horrible one for the American people.

Government of the Corporations, By the Corporations. For the Corporations

On Thursday we got word that the Manhattan District Attorney's office subpoenaed Goldman Sachs over its activities that led to the financial crisis.

Goldman marketed risky investments betting that the housing market would continue to climb just before the whole thing melted down. The bank simultaneously reaped billions of dollars from its own bets that the housing market would collapse.

Though many Americans are looking for justice to finally be served on Wall St., this subpoena is essentially a request for information from Goldman and does not necessarily mean the company will face any charges.

Since Goldman is part of the oligarchy that rules America, I'll wager that this investigation will go nowhere.

That doesn't mean that Goldman isn't as guilty as sin, because the facts indicate they're as dirty as hell.

In April, the Senate released a 639-page report showing that Goldman had steered investors toward mortgage securities it knew would likely fail.

The report found that Goldman marketed four sets of complex mortgage securities to banks and other investors. It also found that Goldman failed to tell the banks and investors that the securities were very risky, even as they secretly bet against the investors' positions and deceived them about its own positions. The report concluded this was part of Goldman's effort to shift risk from its balance sheet to those of investors'.

This is the smoking gun that reveals Goldman to be a criminal organization that should be put out of business. But that would require justice, which we no longer have in America. Goldman has bought our government and it now owns it.

It doesn't play by the rules; it makes them.

Last summer, Goldman agreed to pay $550 million to settle civil fraud charges by the SEC of misleading buyers of mortgage-related securities. It amounted to chump change for the multi-billion dollar investment bank. The fine was a mere slap on the wrist, making the government appear to be serious and committed.

However, it isn't. The investigation is nothing more than a charade.

Goldman acknowledged that its marketing materials for the deal in question omitted key information for buyers. But it refused to admit legal wrongdoing.

When you rule the world, you never have to admit wrongdoing. And when you make the rules, you're always right.

Goldman has paid off the regulators and the Congress. And it's convinced them all that if it were to face criminal charges, it would destroy the financial system and the economy. Goldman has the whole world believing it is too big to fail.

You can call it economic blackmail. You can also call it nonsense.

This kind of chicanery and fraud isn't unique to Goldman Sachs. It's pervasive on Wall St.

Does anybody remember Repo 105? It was the arcane mechanism by which Lehman Brothers hid its debt (leverage) from the world.

Using Repo 105, Lehman temporarily swapped assets (such as bonds) for cash. A Repo, or repurchasing agreement, is a way to borrow money. But an accounting rule allowed Lehman to book the transaction as a sale and reduce its reported borrowings, according to a report by the court-appointed Lehman bankruptcy examiner last year, a former federal prosecutor.

Wall St. gets away with these outrages (or criminality) because of ineptitude at best, or complicity at worst.

The government's most basic duty is the defense of its citizens, from both foreign and domestic forces. Fraud should be regarded as one of those forces.

A robber uses force to take what is not rightfully his. A fraudster uses stealth to take what is not rightfully his. The difference comes down to force versus stealth. However, the result is the same: the loss of property by its owner and the disordering of civil society.

In refusing to hold Wall St. to the letter of the law, and revealing a willingness to be bought, conned, manipulated, connived and controlled, our government has failed miserably to perform its basic function of defending its citizens.

That has undermined the Republic and further diminished the public's waning faith in our government.

The Land of the Free Has Become the Land of the Lost

The America of this nation's forefathers is a relic of the past. It is long gone, though its legacy will remain a subject for history books. Its ghost will haunt us, while providing a cautionary tale for future generations.

America is no longer the land of the free. It is now ruled by oligarchs and corporatists. And it is no longer governed by the rule of law. The rich, the powerful and the politically connected abide by their own, very different, set of laws.

The corporatocracy has taken hold of our government. We are now the United States of Corporate America.

The Supreme Court has even validated huge, powerful and influential corporations, ruling that they are the equivalent of individual citizens and thereby subject to all the same rights and privileges.

As absurd as this proposition is on its face, it is now affirmed as law.

The pharmaceutical industry wrote the Bush prescription drug law. Big Energy wrote the Cheney energy policy. Regulatory agencies are run by officials from the very industries they are supposed to regulate.

Officials from the Minerals Management Agency (MMA) were having drug-fueled sex parties with oil industry lobbyists before the BP spill predictably occurred. Good times.

The government regulators have been co-opted and now need their own regulators. The corporatists and oligarchs own them. The MMA, FDA and SEC are just some examples of failed regulators who have chosen to protect their corporate overlords rather than the public interest.

After Obama was elected, there was a public effort to draft author/journalist Michael Pollan as the next Agriculture Secretary. Pollan, an astute and learned man who knows all about the food and farming industries, said he would never take a job in which industry lobbyists would be in the same room as him writing laws.

The fact that such a state of affairs would preclude such a worthy candidate from serving in government tells you all you need to know about how corrupt and dysfunctional it is.

As of 2009, there were 185 former members of the House and Senate registered as Washington lobbyists. Congress simply serves as a gateway to the money and influence-peddling of lobbyists.

America is ruled by greedy Wall St. financiers, massive insurance companies, powerful real estate corporations, huge pharmaceutical companies, media conglomerates, Big Agribusiness and Big Energy companies.

These massively powerful and uber-wealthy special interests have turned our elected leaders into their servants.

However, most Americans remain apathetically unaware. They are asleep, ignoring serial injustices and outrages. This lax attitude only allows the downward spiral to continue.

There is little or no public outrage over the continual loss of our freedoms or the usurpation of the rule of law.

There is no outrage over the power and reach of the Military-Industrial Complex or of its Wall St. backers.

There is no outrage directed at the oligarchy that rules us and shirks our laws.

There is no outrage over the revolving door between Washington and Wall St.

There is no outrage over the cozy relationship between Washington and the private sector that it is supposed to regulate.

An FCC Chairwoman recently voted to approve the merger of Comcast and NBC/Universal, and subsequently took an executive position with that company. Somehow this was permissible. Only in a rotten, corrupt government would this be acceptable or legal.

The vote was a mere formality; all mergers and acquisitions are approved. No company is too big anymore. Competition no longer exists, and it doesn't even matter to our government. Big Business gets whatever it wants.

Small companies are the engines of innovation and job creation. But big companies buy them, exploit their ideas, ingenuity and inventions, then lay off their employees in the aftermath.

The public's trust has been destroyed. The people don't trust the media, politicians, government, bankers, corporations and most institutions in general.

Perhaps it's this lack of trust that has manifested itself in the form of apathy. It's too bad because that's what the corporatists and oligarchs count on, and how they corrupted and co-opted our government and its laws in the first place.

This country is broken in so many ways, yet we are never lacking for blind, jingoistic patriotism. Somehow America manages to maintain an over-abundance of self-esteem.

Too many Americans are intellectually lazy, incurious and brainwashed by propaganda. They don't know what they don't know, and they don't even care to find out. As long as they are fed a steady diet of trashy TV, celebrity gossip and televised sports, they're satisfied.

Where is the outrage at all of the injustice? It's nowhere to be found. This country has lost its soul. We're a pathetic bunch.

In a republic, you ultimately get the government you deserve.

"How Long Can They Keep The Charade Going?"

My dear friend, Mike, sent me an e-mail yesterday in response to the latest post, "Dollar Declining Amid Mix Of Bad Long Term Trends & Uncontrollable Events."

He asked a very salient and, perhaps, rather obvious question about the timing of a dollar collapse.

I thought it was worthwhile to post Mike's question in full, along with my response.

As always, your responses are welcome in the comments section.


Sean,

Good stuff. Question; what sort of timetable do you THINK we are looking at in terms of an 'apocalyptic' event concerning the dollar and/or the economy? I am just curious because, truth be told, I am surprised we've made it this far. But with the media complicity, and corruption on all levels of the market and government, I wonder how long they can keep the charade going.

- Mike


Honestly, Mike, I have no idea. Like you, I am simply amazed that Atlas is still managing to hold up the world. This whole thing should have come tumbling down already.

The key is this; how much more debt will China buy, and how much longer will they buy it? The international trade system is so reliant on the dollar, and almost all trade debts are settled in dollars. But, really, what good are dollars to the Chinese? They don't use them in China.

As long as the Chinese continue exporting to the US, the only alternative they have is to start buying US assets, such as land, golf courses, resorts and huge commercial properties — the sort of thing that Japan was doing in the 1980s.

Actually, I'm surprised they haven't been doing more of this. Perhaps they feel, or have been told, that the US will prevent at least some of these actions.

This is what Chris Martenson reported this afternoon:

The first-quarter economic results for Japan were grim, revealing an annualized rate of contraction of -3.7% over the first three months. Note that the earthquake struck on March 11, so there really are only a couple of weeks of "earthquake impact" in that number.

The next quarter’s numbers will be even grimmer (that’s a prediction), and this will catapult the Japanese deficit and sovereign-debt readings into brand-new territory.

Japan has been a net exporter of goods and debt for decades. That is all changing now. The flow of funds will be going in reverse, and that will have huge implications for the US. Simply put, they will no longer be buying our debt. That's a game changer.

The US is now left with the oil exporting nations, who get paid in dollars and convert them into Treasuries. Aside from that, the only other alternative is to print. No one in their right mind would buy Treasuries at these pathetically low yields, combined with the fact that the US is so interminably in debt.

Many international observers now seem to recognize that the US has no choice but to print, and to thereby continue devaluing the dollar even further. It's a death spiral.

China's purchase of Portuguese, Australian and New Zealand debt will send a signal to other nations that they are losing confidence in the dollar, and in the reckless US fiscal policy in particular. Confidence is everything in markets. Any remaining Treasury debt buyers are sure to follow them to the exit.

As the Bibe says, "No one knows the day or the hour." However, I think there will be clear signs in advance. I don't know if there will a "boom" moment, or just a slow ride to the bottom, like a bowling ball steadily rolling down a flight of stairs.

One thing I do know is that we will be witnesses to an epic historical event.

- Sean

Dollar Declining Amid Mix Of Bad Long Term Trends & Uncontrollable Events

Axel Merk, the manager of the Merk Funds, is very bearish on the dollar. The greenback has been declining in value and Merk sees the problem getting worse. The issue is the the structural deficit problems in the U.S.

So Merk is steering his currency-focused mutual funds away from the U.S. in favor of countries with greater fiscal discipline and a commitment to getting their budget affairs in order

“In the U.S., we’ve lost the will to engage in reform,” Merk told Market Watch. “We have not fixed the underlying structural issues. It may require our bond market to get derailed before policymakers engage in the reforms that Europe is making.”

Merk questions how much longer the dollar can keep its status as the world’s reserve currency.

“The U.S. dollar is no longer risk-free,” Merk said. “The balance sheet of the U.S. is deteriorating at a faster pace than other countries."

Merk is particularly bearish on the dollar because he foresees deeper and more serious economic struggles ahead for the U.S.

“The U.S. is trying to weaken the currency intentionally and get a recovery through that,” Merk said. “We’re going to keep the printing machine in full gear until and unless the bond market tells the Fed to change course, and at that stage it’s very late to change.”

Merk is not alone in his view that the dollar is no longer a good store of value. Hedge fund managers, currency traders and analysts around the world have taken the same view.

Bill Gross of PIMCo., the world's biggest bond fund, made global headlines when he dumped U.S. government-related holdings in February and began shorting them in March.

According to Gross, the reason was simple.

“There is really no way out of this [debt] trap and this conundrum at this point,” he said.

That seems to be the growing consensus.

Last month, the People's Bank of China announced that the country's excessive stockpile of US dollar reserves needed to be urgently diversified. China's foreign exchange reserves included more than 3 trillion in US dollars at the end of March.

Subsequently, the Xinhua news agency reported the following:

Xia Bin, a member of the monetary policy committee of the central bank, said on Tuesday that 1 trillion U.S. dollars would be sufficient. He added that China should invest its foreign exchange reserves more strategically, using them to acquire resources and technology needed for the real economy.

This was a clear indication that China plans to "diversify" (read: liquidate) itself of $1 trillion in US holdings. It was bad news for the U.S. and the exact opposite of what it is seeking, whIch is buyers — not sellers — of its debt.

China didn't wait long to begin its diversification plan.

The Financial Times newspaper reported late Wednesday that China is interested in buying Portuguese bailout bonds when the European Financial Stability Facility starts auctioning the securities next month.

The New Zealand press also reported that the China Investment Corp., a huge sovereign wealth fund, may have set aside up to 1.5% (or 6 billion New Zealand dollars) of its foreign-exchange reserves to invest in New Zealand assets, including government bonds, companies and, potentially, dairy farms. The same report noted China is also thought to have allocated 2% of its reserves to invest in Australia.

This clearly indicates that China, a primary creditor of the U.S., intends to make good on its well-reported plan to buy fewer U.S. Treasurys.

Such moves will hurt the dollar and affirm the bearish sentiments of Axel Merk and others like him around the world.

The U.S. dollar has been in long term, or secular, decline. In fact, the dollar has recently been trading near it's all-time lows, established during the 2008 financial crash.

Low interest rates, concerns about inflation and the massive federal budget deficit are all to blame.

Investors can find higher interest rates abroad. The Federal Reserve is fighting like hell to maintain low rates to encourage capital investment, but it isn't helping the U.S. economy much at all. It's also hurting savers and discouraging new savings.

Inflation has built up a head of steam in the commodities sector and is affecting oil and food prices. Any consumer can affirm this. The culprit is the dollar's declining value. Simply put, it's purchasing power is falling.

And the U.S. budget problem is so bad that Standard & Poor's recently threatened to take away the U.S. government's coveted AAA rating status. That would be a first in our history.

All of these things are undermining the dollar and the solutions will produce their own ugly results.

Though the Fed has been remarkably effective in setting and controlling interest rates, a worried bond market may soon begin setting those rates for the U.S. Buyers may need heavy inducements to continue allowing the U.S. to pile up such interminable debt.

This is a tough position for the U.S. to be in, but one it will have little control over. After all, beggars can't be choosers.

Higher rates will affect businesses and consumers alike, thwarting investment and making things like mortgages, auto loans and credit card rates all spike.

The Fed actually wants, and is encouraging, inflation. The opposite is deflation — an economic contraction, or recession. No one wants that. The question is, when do events (inflation) spin out of control and beyond the Fed's reach?

The Fed's massive currency printing schemes, such as QEI and QE2, have undermined the value of the dollar, and the longer term outlook is especially ugly. The Fed has crossed the great divide and there's no going back. All that's left to do is print, print, print away!

The budget deficit is the prime example of how political problems can become fiscal and economic problems.

Congress is hopelessly divided and recently engaged in huge battles to cut just $38.5 billion from a $1.6 trillion deficit. It amounted to just 2.4% of the deficit. Now they just need to cut another $1.56 trillion to eliminate that deficit.

The battles over raising the federally mandated debt ceiling and the fiscal 2012 deficit will be epic, and they will be nasty. They are sure to worry the bond markets and further undermine the dollar.

Cutting the budget will shrink the U.S. economy, which is totally dependent on federal spending at this point. Budget cuts may poll well, but when Congress actually gets down to brass tacks and begins hacking away, Americans will hate it. That's because their quality of life and standard of living will begin falling.

The problem for the U.S. is that so many of its problems are now beyond the control of the fiscal authorities in Congress and the monetary masters at the Fed. In some cases their hands are tied, while in others their control is simply slipping away.

The long term outlook for the U.S. dollar and Treasuries and interest rates and inflation just isn't good. The U.S. is facing a panoply of concerns that will have the effect of slamming the emergency brake on our economy.

There's no getting around it; there are some very tough times ahead, the likes of which most Americans have never seen.