America is in the Midst of a Retirement Savings Crisis

One topic I’ve covered repeatedly over the past decade is the lack of retirement readiness for most Americans. This is really a societal issue. What will become of all the seniors who have no means to cover even basic needs in retirement?

How many years will millions of seniors be able to work beyond the customary retirement age, and what types of jobs are suitable for people in their 70s?

The retirement savings of the typical American is neither healthy or adequate. In fact, the issue has reached crisis levels.

According to the Employee Benefit Research Institute, nearly half of Baby Boomers born between 1948 and 1954 are at risk of not having enough money to pay for basic expenditures in retirement.

When it was conceived, Social Security was intended to be just one leg of a three-legged retirement-support system, also consisting of savings and a pension.

Yet, among elderly Social Security beneficiaries, 53 percent of married couples and 74 percent of unmarried persons receive 50 percent or more of their income from Social Security.

Moreover, 21 percent of married couples and 46 percent of single people receive 90 percent or more of their income from Social Security.

This provides a picture of just how reliant most Americans are on Social Security.

However, the average monthly benefit for the 40.5 million Social Security retirement beneficiaries is just $1,345 at present.

That amounts to just $16,140 annually, which obviously doesn’t go far. Add in near-zero interest rates, and you can see the problem for so many retirees.

For decades, seniors were able to live off interest payments from certificates of deposit (CDs), plus money market and savings accounts. That is no longer the case.

Pension plans have become quite rare in the U.S. Most companies have stopped offering defined-benefit programs altogether.

Today, just 18 percent of private-sector workers are covered by a defined-benefit pension, down from 35 percent in the early 1990s.

The shift from defined benefit pension plans to 401(k)s is largely to blame for the retirement crisis.

The Center for Retirement Research at Boston College (CRR) estimates that more than half of all American households will not have enough retirement income to maintain the living standards they were accustomed to before retirement, even if the members of the household work until age 65.

Just how big is the problem?

Alicia Munnell, director of the CRR, testified before the US Senate that the nation’s Retirement Income Deficit (RID) is now a whopping $7.7 trillion, and that it had risen $1.1 trillion in just the previous five years.

The Retirement Income Deficit is the gap between what American households have actually saved today and what they should have saved today to maintain their living standards in retirement.

Trillions are really big numbers, and its hard for most people to get the heads around the scope and magnitude of the retirement crisis. But the following number helps to crystallize the issue:

Today in America, over half of households 55 and older have nothing saved for retirement, according to the Government Accountability Office (GAO).

Think about that for a moment. It’s stunning.

More than half of American households are roughly a decade from a normal retirement age, yet it is inconceivable that they will experience anything remotely resembling a normal retirement.

All of this sounds the alarm that tens of millions of Americans will be unable to adequately fund their upcoming retirement years.

We are already seeing many seniors moving in with their adult children because they can’t make ends meet. This is a necessity, rather than a choice.

Another growing trend is seniors living like 20-somethings, with roommates.

PBS described the movement this way:

"According to an AARP analysis of census data, approximately 490,000 people — 132,000 households — live in a Golden Girls situation. And the number is expected to grow, especially given that one in three Baby Boomers is single and a disproportionate number of them are women.”

While it may be too late for the huge number of people age 55 and older who have no retirement savings, younger workers can plan ahead and start preparing for their senior years now.

Many financial planners recommend that you save 10 percent to 15 percent of your income for retirement, starting in your 20s.

But even if you're in your 30s or 40s, it's not too late to start planning for retirement.

As a general rule, you'll need at least $15 to $20 in savings to cover each dollar of the annual shortfall between your income and your expenses.

The key is to have a plan, and to start executing it now.

If you fail to plan for retirement, you might be planning to fail in retirement.

Lots of Americans Don't Pay Federal Income Taxes, but That's not the Real Outrage

Each April 15th, the media inevitably reports that a significant portion of Americans don’t pay any federal incomes taxes. These yearly news stories lead many taxpayers to feel infuriated and outraged.

Most Americans hate paying taxes. This nation was founded on a tax revolt, after all.

Paying taxes is seen as a necessary evil to have a functioning government (albeit a bloated one on many levels), and most people pay their taxes dutifully, though begrudgingly.

Consequently, no taxpayer wants to hear about freeloaders avoiding their patriotic or civic duty to pay their taxes. It’s a reflexive and justifiable anger.

Here’s a perfect example of such a story this week, from MarketWatch:

An estimated 45.3% of American households — roughly 77.5 million — will pay no federal individual income tax, according to data for the 2015 tax year from the Tax Policy Center, a nonpartisan Washington-based research group.

Roughly half pay no federal income tax because they have no taxable income, and the other roughly half get enough tax breaks to erase their tax liability, explains Roberton Williams, a senior fellow at the Tax Policy Center.

It should be noted that the 45.3 percent figure refers to households, not individuals, and there is a big difference. Additionally, the figure includes retirees, who collect Social Security.

Naturally, retirees (and there are tens of millions of them) no longer pay federal income taxes, so this makes the aforementioned figure quite misleading. In fact, retirees are the majority of those not paying federal income taxes.

Additionally, just because some workers don’t pay federal income taxes doesn’t mean they don’t pay any taxes.

Most workers pay state income taxes, and all workers pay payroll taxes (Social Security and Medicare), property taxes (even renters), and sales taxes — which are levied on almost all goods and services, including utilities.

You’ve surely noticed that your water, electric, gas, cable and phone bills, for example, all include hefty taxes. There’s no getting around them.

Unlike federal income taxes, which are progressive — meaning, the more someone makes the higher their tax bracket — payroll taxes are applied at the same rate to all workers, regardless of income. This means they disproportionately impact lower income earners.

And, let’s face it — payroll taxes are indeed taxes on income paid to the federal government.

The combined tax rate for Social Security and Medicare is 15.3 percent, which is split evenly between employer and employee. However, self-employed workers pay the whole 15.3 percent tax.

Yet, the maximum taxable income is $118,500, meaning that any income above that level is not subject to the payroll tax. That favors high earners and the rich (yes, there is a difference).

The fact that 45 percent of households don’t pay federal income taxes speaks to the fact that they earn so little income, which is the really troubling matter.

A recent report by the Social Security Administration has some rather stunning findings:

In 2014:

- 38% of all American workers made less than $20,000
- 51% made less than $30,000
- 63% made less than $40,000
- 72% made less than $50,000

Pause to reflect on that for a moment.

Given that more than half of all workers make less than $30,000 annually, it’s not all that surprising that they don’t pay federal income taxes. They simply don’t earn enough money.

Even a mere 10 percent federal income tax — which would amount to $3,000 — would be punitive to a worker who earns so little.

For perspective, we should consider the federal poverty guidelines for this year.

The poverty threshold for a family of three is $20,160.

The poverty threshold for a family of four is $24,300.

It’s not hard to imagine one parent working, while the other stays home with an infant or toddler(s).

The real outrage is not that so many American workers aren’t paying federal income taxes; it’s that they earn so little.

That means they aren’t helping to create adequate demand and consumption to spur the economy, and move it substantially forward.

Even worse, many of these people are full-time workers who earn so little that they qualify for federal subsidies for things like food, housing and medical. That’s the real scandal and injustice.

There are plenty of large employers (such as Walmart) who pay their workers so little that the rest of us need to subsidize them with our federal income taxes.

That’s the true outrage in this story.

Our Crumbling Infrastructure vs. Our National Debt

In case you hadn't noticed, the U.S. national debt has now eclipsed $19 trillion.

Despite the federal deficit being well within the limits that international economists recommend (3 percent, or less), the size of the underlying debt makes what were customarily viewed as reasonable deficits quite cumbersome.

For example, a 3 percent deficit would result in $570 billion being added to the existing $19 trillion debt. When the underlying debt is so large, even relatively small percentages of it add up to enormous sums. The bigger the debt becomes, the bigger the deficits become.

It’s called exponential growth.

The heart of the issue is that Congress has never reconciled spending with revenues. It either needs to collect more, spend less, or both. But that never happens.

Debt can be productive if it is used for investments that result in positive returns. Unfortunately, the U.S. (like many other countries) is malinvesting, while facing ever increasing debt-to-GDP ratios.

The worst form of debt, which undermines an economy and can be crippling, is that which is used to finance existing debt.

The Congressional Budget Office projects a $534 billion deficit in fiscal year 2016, about $100 billion more than in 2015.

In essence, the federal government must borrow in excess of half-a-trillion dollars this year to keep paying those whom it already owes enormous sums of money. We owe our creditors continually more, year after year, decade after decade.

This money cannot be used to build, or rebuild, our infrastructure — things such as aging roads, bridges, railways, power stations, electrical grids, water lines, sewer systems, etc. These are the things that make the country run smoothly, allowing us to transport people, goods, water, electricity, and more.

Infrastructure is the stuff that ultimately pays for itself, and helps the economy grow.

I’ve long advocated that the US should rebuild its infrastructure for the 21st Century. It would create jobs and make the economy more productive, which would ultimately create more tax revenue.

The specific infrastructure categories that need the most immediate attention and investment are debatable.

Some might argue that more roads are the wrong investment, noting that unless we all shift to all electric cars our fossil fuel addiction will be our demise. More light rail in and around urban centers and their suburbs might be a wiser choice.

Regardless, our roads are crumbling and bridges are collapsing. This is a matter of national safety. Lives are quite literally at risk.

But that’s not the only public safety hazard resulting from our antiquated infrastructure.

“Excessive lead levels have been found in almost 2,000 water systems across all 50 states, affecting 6 million Americans” reports USA Today. “At least 180 of the water systems failed to notify consumers.”

This is why infrastructure matters. America’s is antiquated, crumbling and unfit for the 21st Century.

However, with our existing $19 trillion debt, any further massive deficit burdens would be politically and fiscally risky. But with interest rates historically low, if we’re ever going to make these much-needed investments, the time is now.

It’s just hard stomach our debt having now risen to such extraordinary levels. By next year, it will reach $20 trillion. This massive debt is already hindering economic growth, which leads me to wonder, how much more will growth be constricted by our debt in the coming years?

However, it should be noted that as our debt has grown continually larger through the years, so has the economy. The IMF estimates the U.S. economy will reach $19 trillion this year.

Rebuilding our infrastructure, much of which dates back to the early and mid-20th Century, will put a lot of people to work in well-paying jobs. But those jobs will be temporary, not permanent.

China executed its own massive infrastructure build out in recent years, and now that it’s completed they have millions of idle workers. Such work doesn’t last forever.

But while the employment and economic stimulus will be temporary, the infrastructure could last more than a half century. And ours is in desperate need of repair, upgrade and modernization.

These are really big, thorny, difficult issues, and Congress doesn’t even address them honestly. Instead, it’s all typical, bullshit politics. Yet, the problems cannot be ignored.

The American Society of Civil Engineers issues a report every four years on the state of our national infrastructure. The most recent was conducted three years ago.

In its 2013 Report Card, the ASCE gave America’s Infrastructure an overall grade of D+ across 16 categories, up just slightly from the D given in ASCE’s 2009 Report Card. The ASCE gave the U.S. infrastructure a cumulative grade of D in its 2005 report card.

As you can plainly see, our failing, antiquated infrastructure is an ongoing problem that is not being given the attention, or funding, it desperately needs.

Yet, whenever there is a war that Congress deems important enough, they always find (aka, borrow) the money to fight it.

If protecting the American people is the government’s highest duty or objective, then our infrastructure is a top priority.

But that won’t leave me any less worried about our massive, and continually growing, national debt.

The only consolation is that infrastructure will almost always pay for itself in the end.

Americans Have Big Debts and Little or No Savings

“Financially, I’m set for life… if I’m shot tomorrow." — Mitch Helberg

Though the Great Recession officially ended in 2009, a rather large segment of Americans continues to struggle. Seven years later, large debt loads and absent savings haunt tens of millions of Americans.

According to a recent survey of more than 1,000 adults by Bankrate.com, nearly one in four Americans have credit card debt that exceeds their emergency fund or savings. That’s due, in part, to the fact that many people do not have any emergency savings.

Another Bankrate survey released last year found that 29% of Americans have no emergency savings at all.

Consequently, many Americans are “teetering on the edge of financial disaster,” says Greg McBride, Bankrate.com’s chief financial analyst. “Not only do most of them not have enough savings, they’ve all used up some portion of their available credit — they are running out of options.”

Financial experts recommend that you have no credit card debt and at least six months of savings in an emergency fund, or more if you have dependents.

Yet, just 52% of Americans have more emergency savings than credit card debt, the Bankrate survey revealed.

That’s because debt is so costly. The average household is paying a total of $6,658 in interest per year, according to NerWallet.com.

Credit card debt is particularly costly, carrying higher interest rates than secured forms of debt, such as homes or cars. The average U.S. household with debt carried $15,355 in credit card debt last year.

The problem isn’t due to a lack of responsibility, or to reckless spending.

Household income has grown by 26 percent in the past 12 years, but the cost of living has gone up 29 percent in that time period.

Not only has this driven up household debt levels over time, it has also kept millions of Americans from saving, even though they might like to.

U.S. household borrowing reached its highest level since 2010 in the third quarter of last year. Household debt climbed by $212 billion, reaching $12.07 trillion.

Though that’s down from the all-time high of $13.8 trillion in 2008 when the bubble burst, household debt is once again on the rise.

People are still struggling. Everyone knows the dangers of debt in the aftermath of the financial crisis and subsequent Great Recession. Yet, people must survive, and they are going further into debt to do so.

The end result is that one in four Americans is living on the edge, facing financial disaster.

Chances are, you might be one of them, or perhaps it’s one of your friends or family members.

Sadly, many people are likely suffering in silence, too ashamed to tell anyone of their struggle. That means, you may never know who is on the verge of financial disaster.

If you’re puzzled by this year’s primary season, and by the rise of an ideologue like Donald Trump, or the self-described democratic socialist Bernie Sanders, this awful state of affairs should help to explain it.

Is the New Housing Bubble About to Burst?

The most critical aspect of any housing market is affordability. Even in the wealthiest enclaves, buyers must still be able to afford their properties.

Even in the case of all-cash sales, in which buyers need not seek a mortgage from a bank, the buyer must be able to afford the all-in, up-front cost of the home purchase (all-cash sales were 24 percent of transactions in December, down from 27 percent in November).

The law of supply and demand is always at work. A limited supply of homes will drive up prices if it cannot meet existing demand.

Total housing inventory at the end of December dropped 12.3 percent to 1.79 million existing homes available for sale, and is now 3.8 percent lower than a year ago (1.86 million), reports the National Association of Realtors.

That brings us to the vital issue of cost.

The median sales price of a new home in the US was $288,900 in December 2015, which was down slightly from the all-time high sales price of $307,600 set in September, according to government data.

The average price of a new home in December was even higher: $346,400.

All things being equal, existing homes tend to have a lower cost than new homes, which brings down both median and average prices.

The median home price for all housing types (both new and existing) in December was $224,100, up 7.6 percent from December 2014 ($208,200). That price increase marked the 46th consecutive month of year-over-year gains, according to the National Association of Realtors.

That sort of upward trend seems quite unsustainable, and it’s reasonable to wonder if we’re in the midst of a new housing bubble.

Historically, home prices have appreciated nationally at an average annual rate between 3 and 5 percent, according to Zillow, though different metro areas can appreciate at markedly different rates than the national average.

The San Francisco Bay area, for example, has far exceeded that average, while prices in other regions have been below the average.

This historical average is important to consider as we look for signs of another housing bubble.

What's most worrisome is that the current increase in home prices far exceeds the general rate of inflation, which was just 0.7 percent through the 12 months ended in December 2015, the most recent figure published by the government.

Again, home prices surged 7.6 percent in that same period.

More important than home prices is affordability. Can people pay their mortgages with their current incomes?

In order to consider affordability, we must take into account median household income.

The Census Bureau estimated that real median household income was $53,657 in 2014 (the latest available figure), which was down from $54,462 in 2013, and well below the peak of around $57,000 in 1999.

Consider for a moment that the median price of a new home in December 1999 was $222,600, while median household income was around $57,000.

Fast forward to December 2015, and the median price of a new home had leapt all the way to $288,900, while median household income had slid backward to $53,657.

In short, home prices have surged higher even though incomes have gone in reverse.

New home prices are now 5.4 times household income. Yet, home prices have a long term average of 3.3 times household income, according to the Economist.

If we take all homes into consideration, both new and existing, the median sales price in December was, again, $224,100, which is 4.2 times median household income. That is still well above the long term average.

If this doesn’t make sense to you, it’s because it simply doesn’t make any sense at all.

When you dig deeper into the income numbers, it makes you wonder how most Americans afford houses at all.

A new report by the Social Security Administration has some rather stunning findings.

In 2014, 38% of all American workers made less than $20,000; 51% made less than $30,000; 63% made less than $40,000; and 72% made less than $50,000.

This is likely why there are fewer homeowners now than at any time in the last two decades.

The US homeownership rate fell to 63.8 percent in the fourth quarter of 2015, the lowest level since early 1995. First-time buyers have been kept out of the market by strict lending standards and low wages.

A National Association of Realtors survey released in late 2015 revealed that the annual share of first-time buyers was at its lowest level in nearly three decades, falling to just 32 percent. The long–term historical average is nearly 40 percent.

The trouble is that the US population has grown significantly over the last two decades, rising from 266.3 million people in 1995 to more than 320 million in 2015.

The addition of 54 million new residents should have resulted in a massive increase in the homeownership rate. Yet, the opposite is true. There are just more renters now. Houses are simply unaffordable for millions upon millions of Americans.

All of this leads me to believe that we are indeed in the midst of yet another real estate bubble, and the one truism of bubbles is that all of them eventually burst — every single one of them.

Remember, home prices are much higher now than they were when the last real estate bubble began collapsing in 2007. Yes, the problem is even worse today!

The median home price reached an all-time high of $236,300 last June, and then began falling. It may be the first sign that the next housing collapse has already begun.

This is what the Fed’s zero interest rate policy (ZIRP) has given us. The central bankers wanted to re-inflate the housing bubble, and it worked. But a housing bubble is what caused all of our economic and financial troubles the last time.

The numbers are clear — they don’t lie. Homes are currently overpriced and clearly unaffordable for huge numbers of Americans. It’s a simple matter of prices exceeding incomes once again, and we saw how that story played out less than a decade ago.

My fear is that we are facing the same scenario all over again.

Treasury Yields Keep Falling Despite Fed Rate Hike

The Federal Reserve raised its benchmark interest rate by 0.25 percentage points on December 16. It was a momentous occasion because it was the first rate hike by the US central bank since June 2006 — a 9 1/2-year span.

The US had never before experienced a period anywhere near that long without an interest rate hike.

As of February 11, the Federal Funds Rate, essentially the overnight lending rate between banks, stood at just 0.38 percent. That is still remarkably low by historical standards.

For perspective, the Fed's benchmark rate has averaged 6 percent since 1971, and soared as high as 20 percent in 1980.

Meanwhile, other central banks around the world have been cutting interest rates into negative territory. The Swedish, Swiss, Danish, European and most recently Japanese central banks have all set interest rates below zero.

Since no one wants to pay to keep their money at a bank, these actions have made US Treasuries all the more appealing than usual (Treasuries have long been considered the safest investment in the world).

Yet, with investors flocking in droves to Treasuries, this demand is driving down yields. Think supply and demand. If everyone wants in, you don’t need to entice them with higher rates. Investors are already motivated to invest.

Ten-year yields dropped almost 40 basis points during the past three weeks to 1.66 percent. The record low of 1.38 percent was set in July 2012. That record may be tested in the next couple of months.

Remember, this drop has nothing to do with the actions of the Fed. It’s due to other central banks dropping rates below zero, as well as tumbling stock markets around the world, which haven't benefitted from negative rates. Investors are seeking safety amid all the volatility.

In a normal world, the Fed’s December rate hike would be having the opposite affect — raising Treasury yields. But we no longer like in a normal world.

Last August, I wondered if the Fed might “feel empowered to raise the funds rate since the downward pressure on yields would give them some cover, and room to maneuver?”

Ultimately, the Fed did indeed feel it had the cover just a few months later to raise the funds rate.

Though the Fed would surely like to continue raising its key rate to return to some state of normalcy, the realities of the slumping global economy — and the actions of other central banks — are now dictating both actions and outcomes.

By plunging interest rates below zero, central banks around the world are trying to provoke commercial banks to lend to businesses and consumers, thereby stimulating their economies.

The Fed’s caution about further rate hikes is being driven by the actions of other central banks. Cutting interest rates below zero has created a race to the bottom in global currencies. Negative rates devalue those currencies (with the hope of boosting exports), which in turn makes the dollar stronger and more appealing to global investors.

The strong dollar has already been hurting US exporters and US companies that do business overseas, which have to convert foreign sales back into dollars.

That is making sales much weaker, and revenues are falling across the board. In fact, US companies have suffered two consecutive quarters of falling revenues, which is referred to as an “earnings recession.” It’s the first time that’s happened since the Great Recession.

In short, the Fed doesn’t want to see the dollar continue strengthening. Another rate hike would assure this.

Yet, the Fed seems helpless to control the outcome of events right now, which must be quite frustrating for these Masters of the Universe.

Treasury benchmark yields are on course to set a new all-time low in March if they keep rallying at the current pace, Bloomberg reported this week.

This clearly wasn’t the outcome the Fed had in mind when it raised the funds rate in December.

Higher interest rates have a cooling affect on an economy that is (or may be) overheating, and they consequently slow inflation. However, the US economy shows no signs of overheating, and inflation is virtually non-existent.

The inflation rate was just 0.7% through the 12 months ended in December 2015, the most recent figure published by the government.

This weak inflation has to be freaking out Fed board members. This is not how the textbooks, or history, say things should be. Extraordinarily loose monetary policy (ultra-low rates) should have long ago resulted in significant (if not rampant) inflation.

It’s a sign of how sick the global economy is, and how powerful the forces of global deflation are.

The Fed is desperate to continue raising rates so that when the next crisis inevitably arrives it will then be able to cut rates once again in response, as it always has. It’s the classic tool of central banks, but one that appears to have now been removed from the Fed’s toolkit.

That will be quite problematic when the Fed eventually comes face to face with that crisis, or recession.

Given current global conditions, that moment may not be too far off into the future.

Energy Sector Failures Presage Looming Bank Failures

Free falling oil prices are wreaking havoc in the “oil patch.” Oil simply costs too much to recover at current prices, making drilling (much less exploration) a losing battle.

In North Dakota, the active rig count has fallen from 200 to 49 over the past four years. In Texas, the oil rig count is 271, down from 697 at the same point last year.

Layoffs in the energy sector are mounting, which will lead to home foreclosures and personal bankruptcies.

Employers in the oil and gas extraction sector have cut 17,000 jobs since the October 2014 peak, according to the U.S. Bureau of Labor Statistics.

Many energy companies are already failing, and the number will surely increase throughout the course of 2016 and beyond. The fallout will be widespread.

We can expect significant bank failures to accompany the failing energy companies they loaned to when oil was over $100 per barrel.

With oil now at roughly $30 per barrel, there will be carnage in both the energy and banking sectors. Bank failures will soon be on the rise, which will remind Americans of the fallout from the housing crisis in 2009 and 2010.

Here’s a look at this history of bank failures, going back to the year 2000:

Year - Number of Failures
2000 - 2
2001 - 4
2002 - 11
2003 - 3
2004 - 4
2005 - 0
2006 - 0
2007 - 3
2008 - 25
2009 - 140
2010 - 157
2011 - 92
2012 - 51
2013 - 24
2014 - 18
2015 - 8

(source: FDIC)

As you can see, from 2000-2007, just 32 US banks failed. Then, starting in 2009, there was an explosion of bank failures due to the housing crisis.

From the FDIC’s creation in 1933 through 2008, there were just 10 years in which 100 banks failed in a single year. But that regrettable milestone was reached in consecutive years — 2009 and 2010.

My sense is that we are once again on the precipice of significant bank failures. Lending institutions in oil producing states, and beyond, are on the hook for the huge losses now being experienced by frackers and other high-cost energy producers.

Shale oil is expensive to extract by historical standards, and is only viable at much higher prices. Shale oil costs $50 to $100 a barrel to produce, compared with $10 to $25 a barrel for conventional supplies from the Middle East and North Africa.

At the current price of roughly $30 per barrel, many producers will not be able to survive. The cost to extract shale oil simply exceeds the returns.

This year, we will witness an avalanche of bankruptcies in the oil patch, running from North Dakota to Texas, and on to Pennsylvania. There will be continued job losses, home foreclosures and lots more failing banks.

More than 30 small companies that collectively owe in excess of $13 billion have already filed for bankruptcy protection due to collapsing oil prices.

One-third of U.S. oil companies could face bankruptcy by mid-2017, according to Wolfe Research.

The current downturn in oil is now deeper and longer than each of the five oil price crashes since 1970, according to Morgan Stanley. Yet, Morgan -- as well as Goldman Sachs and Citigroup -- expects the price of oil to plunge into $20 territory.

Wall St. is bracing for a wave of defaults in the oil sector. Standard & Poor's Ratings Service recently warned that a whopping 50% of energy junk bonds are "distressed," meaning they are at risk of default.

Corporate defaults topped 100 last year, the first time that's happened since 2009. Almost one-third of the defaults in 2015 were by oil, gas or energy companies.

The world currently produces a surplus of 2-3 million barrels per day. That surplus isn’t going away anytime soon. And as the global economy flirts with recession, demand will not rebound anytime soon either. This means low oil prices are here to stay for the foreseeable future, and the collapse of energy companies will continue.

Unfortunately, yet quite predictably, a significant number of banks are doomed to collapse right along with those energy companies.

This is a story to follow closely throughout 2016.

National Debt Reaches Point of No Return

Rising government debts are becoming worrisome all over the world. Over the past eight years, governments have added $60 trillion in new debt to the already enormous piles of existing debt.

As a point of reference, the entire output of the global economy in 2014 was estimated at $77.6 trillion by the International Monetary Fund (IMF).

The US has been an active player in this global debt binge.

According to the US Treasury, the national debt now stands at $18.775 trillion.

Without context, numbers can be meaningless, and even misleading. So, let me attempt to provide some context.

The IMF recommends that a developed nation’s debt not exceed 60 percent of its gross domestic product (GDP), or the entire output of its economy. A nation’s debt is the cumulative byproduct of accruing annual budget deficits.

In essence, a deficit results from a government spending more money in any given year than it collects in taxes and other revenues. The deficit adds to a nation’s debt.

The concern is that high debt-to-GDP ratios cause economic instability and hinder economic growth.

Again, the national debt is $18.775 trillion, which is bigger than our projected $18.125 trillion economy in 2015.

In other words, our debt is more than 100 percent of our economic output. That’s a whole lot bigger than the IMF’s 60 percent recommendation.

Yet, it's important to remember that the government doesn't pay its expenditures with the entire US economy; it pays for them with its revenues, which are procured through corporate and personal taxes.

The 2016 federal budget shows $3.525 trillion in revenues, which is about 20 percent of the national debt. That's a more accurate and useful reflection of the government's true debt ratio than is debt-to-GDP. It's also more worrisome.

In essence, if the government dedicated every dollar it collected this year to the national debt, it could only pay down roughly 20 percent, and there would be no money for anything else.

The trouble is that each annual deficit leads to even more debt.

For example, the federal government will run a $474 billion deficit in fiscal 2016, which amounts to 2.5 percent of GDP (by the way, the fiscal year is supposed to begin on October 1, but, due to Congressional dysfunction, the budget wasn’t handed to the president to be signed into law until November 2).

Economists have long recommended that a nation’s deficit should not exceed its annual economic growth. For example, if a country’s economy grows by 3 percent, it can sustain a deficit of 3 percent.

While the US economy used to grow by 3 percent annually, it hasn’t cracked that number since 2005. We’re now stuck with roughly 2 percent annual economic growth, which means our deficits should be smaller as well.

However, it should be noted that if the US were to follow the above deficit formula it would be perpetually indebted. A country needs to have economic growth exceeding its deficit in order to begin paying down its existing debt, rather than adding to it each year.

The current federal deficit of 2.5 percent is certainly better than it had been in recent years.

After the 2008 financial and economic crash, deficits soared as the federal government sought to fill the void left by crippled US companies and households, as can be seem below.

Deficits by Year, as a Percentage of GDP (source: Federal Reserve)

2009 - 9.8 percent
2010 - 8.6 percent
2011 - 8.4 percent
2012 - 6.7 percent
2013 - 4.1 percent
2014 - 2.8 percent

Clearly, the deficits have been moving in the right direction. But this doesn’t diminish the fact that deficits are the norm in the US, and they have been for many decades. There is never an honest attempt by Congress to balance the budget by either spending less or collecting more to avoid continual deficits.

Kiplinger’s and the Conference Board both project US economic growth of 2.5 percent this year. If that proves to be accurate, the 2.5 percent deficit would be a wash.

But here’s the concern:

As the national debt has grown continually larger, deficits that once seemed reasonable (say, 3 percent) result in rather huge dollar amounts. For example, this year's 2.5 percent deficit amounts to a whopping $474 billion.

In fiscal 2015, the US spent more on debt service (interest payments) than on housing & community, transportation, education, and food & agriculture. Debt service buys you nothing.

The debt will reach $20 trillion by 2017. By that time, a deficit of 2.5 percent would equal $500 billion — half-a-trillion dollars!

Deficits of that size were once unimaginable; they are now a matter of fact, and they will continue to be at least that large from this point forward. It's just math.

There’s no reason that the deficit will necessarily be restricted to 2.5 percent annually, but even if it is, the result would be $1 trillion in added debt every two years. Yet, as the debt continues to rise, deficits of 'just' 2.5 percent will result in ever larger dollar amounts.

It’s easy to see how this whole thing spirals out of control and eventually cripples the United States.

It’s not some far out notion. The numbers are rather clear.

Debt service crowds out other spending. It robs from critical national needs, such as science, research & development, infrastructure, education, healthcare, etc.

Our debt is on track to become so cumbersome that it will prevent the government from tending to needs that most Americans take for granted.

The national debt isn’t going away. It will continue growing dangerously larger each and every year, well into the foreseeable future.

Global Commodities Crash Signals Long Term Economic Slowdown

The economic expansion that followed World War II — known as the post-war expansion — was unparalleled in the 20th Century.

Much of Europe, which had been destroyed by years of warfare, needed to be rebuilt. The Marshall Plan — the American initiative to aid in the rebuilding Western Europe after the war — cost approximately $130 billion in today's dollars.

The rebuilding effort put millions of men to work and utilized huge amounts of resources. Roads, bridges, dams, train stations, railways and buildings all needed to be rebuilt or constructed.

The US, absent any competition from Europe or Japan, became the world’s dominant economic superpower in the latter half of the 20th Century.

Once the rebuilding of Europe and Japan was completed, however, a huge source of economic growth came to an end. But Europe and Japan were then able to redirect their energy and resources from the war effort toward other, more useful economic pursuits.

In the process, Europe and Japan became huge sources of industrial output, manufacturing, engineering, research, development and invention. The US suddenly had some competition.

But all developed economies eventually experience a slowing of their growth rates. At some point, most of the potential growth has been ultimately realized and there is less juice to be squeezed from the fruit, so to speak.

Inevitably, the economies of the US, Japan and Europe have all slowed from the from their postwar glory years.

Enter China to pick up the slack.

China’s expansion over the past 30 years — especially the last 20 — rivals the postwar expansion in Europe, Japan and the US.

The Asian giant became the dominant consumer of many — if not most — of the world’s industrial commodities (copper, zinc, iron ore, coal, etc.), creating an economic boom that spread to other countries that are commodities exporters (Brazil, Chile, Australia, New Zealand, Indonesia, etc.).

Between 2000 and 2011, broad indices of commodity prices tripled, easily outpacing global growth, notes The Economist. That was clearly unsustainable, and we are now seeing the fallout.

China’s economy has begun to slow, and like the US, Japan and Europe, it too is overburdened by debt.

From the New York Times:

The so-called supercycle driven by China’s once insatiable appetite for raw materials has been extraordinary by any standard. Edward L. Morse, Citigroup’s global head of commodities research, likens China’s boom to the three decades after World War II when Europe was rebuilt, or the Gilded Age industrialization of the United States in the half-century after the Civil War.

“The last 20 years have been mind-boggling,” Mr. Morse said. “Between 1993 and 2013, China built 200 cities of a million people or more. This was incredibly intensive in terms of steel and copper and other commodities.”

Consider that for a moment. The US, the third most populous country in the world, has just 10 cities with a population of 1 million or more. But China built 200 of them in just 20 years. That is absolutely stunning!

The Chinese boom is tantamount to the massive buildout that occurred in Europe and Japan after WWII. In fact, it was even bigger.

Yet, that massive infrastructure buildout has finally come to an end, and with it so has the commodities super-cycle. Hence, the global crash we are now witnessing.

Commodity prices have fallen to their lowest level since the financial crisis and — by at least one measure — to the lowest this century.

The Bloomberg Commodity Index, which tracks a basket of 22 commodities, has fallen to its lowest level since 1999.

Copper is a key component in manufacturing everything from electronics to cars and other industrial goods. But copper prices are near their worst levels since 2009. Copper has sunk by about 22% so far this year.

Why?

China represents 40% of global demand, says financial blogger Wolf Richter. But China and the rest of the global economy are slowing. Absent demand, supplies have grown, so prices have fallen.

Shanghai steel futures have fallen to a record low, largely due to shrinking demand from its top consumer, China.

China is the biggest buyer of iron ore, but its demand is rapidly dwindling. Construction activity in China has fallen considerably over the last year or so.

A global glut of iron ore has sent prices to below $45 a tonne this year, less than a quarter of record highs seen in 2011.

Think about that: iron ore prices are less than a quarter of what they were just four years ago. That’s an epic crash.

Here’s how the NY Times describes it:

"The fall in prices for a variety of products, including crude oil, iron ore and agricultural crops like corn and soybeans is reminiscent of the collapse of the technology boom in 2000 or the bursting of the housing bubble nearly a decade ago. And behind the pain and anxiety are headwinds blowing from China and other emerging markets, where growth is slowing and demand for the raw materials that drive the global economy has dried up.”

Economists describe trends as either cyclical (repeating in shorter-term ups and downs, aka booms and busts) or as secular, meaning they are long term. There is every reason to believe that commodities are now in a secular down trend.

China is not about to build 200 more cities of at least 1 million people over the next 20 years.

That means the global economy is also likely on a long term downward trend. Growth will not match previous levels.

Slow growth and stagnation are likely the new normal.

The only thing growing at a great clip is global debt.

Slow growth and rapidly rising debt are a really unhealthy combination.

But, again, that’s our new normal.

No one wants to hope for an economic expansion that might follow WWIII.

Wall Street's Plundering of America

There has been a lot of discussion over many years about the decline of the American middle class. That’s because the process has been decades in the making.

But a closer look reveals a broader economic decline, involving almost all Americans, from all classes.

The stagnation of incomes and wages isn’t merely a recent phenomena. When adjusted for inflation, both have suffered a long term decline.

A new report by the Social Security Administration has some rather stunning findings.

In 2014, 38% of all American workers made less than $20,000; 51% made less than $30,000; 63% made less than $40,000; and 72% made less than $50,000.

Put another way, if you make more than $30,000, you earn more than 51% of Americans. And if you make more than $50,000, you earn more than 72% of Americans.

That is simply breath-taking, and it doesn’t square with the notion that America is a prosperous society where anyone can get ahead with some hard work and discipline.

In fact, the U.S. dropped out of the top 10 and into 11th place in the 2015 Legatum Institute Prosperity Index, which measures economy, education, entrepreneurship & opportunity, governance, personal freedom, social capital, health and safety.

If you’re still recovering after digesting those depressing findings from the Social Security Administration, get ready to be shocked again.

In September the US Census Bureau released its report on US household income by quintile. The findings are brutal.

Every quintile (or 20% share), as well as the top 5%, has experienced a decline in real household income since their peaks.

The bottom quintile (the lowest 20 percent) has experienced a 17.1% decline in real income from the 1999 peak (from $14,092 to $11,676). The 4th quintile has had a 10.8% fall in real income since 2000 (from $34,863 to $31,087). The middle quintile has had a 6.9% decline in real income since 2000 (from $58,058 to $54,041). The 2nd quintile has had a 2.8% fall in real income since 2007 (from $90,331 to $87,834). The top quintile has had a decline in real income since 2006 of 1.7% (from $197,466 to $194,053). The top 5% has experienced a 4.8% reduction in real income since 2006 (from $349,215 to $332,347). Only the top One Percent or less (mainly the 0.1%) has experienced growth in income and wealth.

Meanwhile, the US stock markets are still flirting with their all-time highs. Quite a disconnect, huh?

Many American corporations have been actively buying up their own shares with the use of very cheap money — the result of the Fed’s zero-interest-rate policy.

However, stock buy backs are just gimmicks to improve share prices. They don’t actually improve business, and they aren’t a productive use of capital. Stock buy backs may increase earnings per share, but they don't increase earnings. Fewer outstanding shares doesn’t help the bottom line.

Likewise, a company can trim costs (such as personnel) without actually increasing revenues. Ultimately, profits may increase for a while, but there are limits to cost cutting. If revenues aren’t growing, then neither is the company.

The use of stock buybacks and similar gimmicks amount to nothing more than smoke and mirrors.

Corporations engage in such shenanigans as a means of increasing earnings per share, which pleases Wall Street. And, as we all know, what Wall Street wants, Wall Street gets.

Companies will engage in unsustainable practices just to improve their stock price and/or earnings per share in an effort to satisfy the Street.

All focus is on the short term. Live for today, and don’t worry about tomorrow. More precisely, it’s live for this quarter — don’t worry about anything that comes after. There is no concern for the long term.

Wall Street’s takeover of the economy is what is known as “financialization.”

Over the last 35 years, or so, the financial sector has become more important than the industrial and agricultural economies — the sectors that actually produce tangible things. Leverage (debt) has taken precedence over capital, or equity.

Finance is not a productive activity. It is extractive, robbing from the economy. Nothing is created, other than debt.

Joan McCullough, of Longford Associates, sums it up quite nicely in her recent piece, The Financialization of the Economy.

Financialization is characterized by the accrual of profits primarily thru financial channels (allocating or exchanging capital in anticipation of interest, divvies or capital gains) as opposed to accrual of profits thru trade and the production of goods/services.

Economic activity can be “creative” or “distributive.” The former is self- explanatory, i.e., something is produced/created. The latter pretty much simply defines money changing hands… Financialization is viewed as largely distributive.

Business (and government) does the bidding of its financial masters on Wall Street. And Wall Street’s game is pumping out debt, which hangs like a grotesquely outsized albatross around the neck of our economy.

With the Federal Reserve keeping its benchmark at near-zero for the last seven years, companies have loaded up on debt.

“They now owe more in interest than they ever have, while their ability to service what they owe, a metric called interest coverage, is at its lowest since 2009,” notes Bloomberg.

As of the second quarter, high-grade companies tracked by JPMorgan incurred $119 billion in interest expenses over the last year, the most for data going back to 2000, according to the bank’s analysts. Companies have already issued $9.3 trillion in new debt since the financial crisis.

That’s a big hinderance to economic growth.

As the IMF notes, “the marginal effect of financial depth on output growth becomes negative … when credit to the private sector reaches 80-100% of GDP …”

In other words, too much financialization restricts growth.

We’ve long since surpassed that critical threshold. As of 2014, the US ratio of private sector debt to GDP stood at 194.8.

Making money out of money creates nothing.

“By creating nothing, the economy relies on the financialization process to create growth,” writes McCullough. “But the evidence supports the notion that once overdone, financialization stymies growth.”

However, as we all know, debt is not just corporate America’s problem.

The federal government owes over $18.4 trillion in debt (not including trillions more in unfunded liabilities), and the 50 states have a collective debt of over $5 trillion.

Then there’s the debt of ordinary Americans. As of June 30, total household debt was $11.85 trillion — 6.5% below its third quarter 2008 peak of $12.68 trillion, according the the New York Fed. Despite the improvement, Americans are still heavily indebted — or, more accurately, over-indebted.

The point that I’ve made many times through the years is that Americans are tapped out. Despite their shrinking wages and incomes, Americans don’t want to take on further debt. Diminished incomes and large debts have only served to shrink demand and diminish consumption.

Without adequate demand and consumption, business slows, as does investment. In the long run, job creation will be negatively affected as well.

Now the economy just hobbles along, a shadow of its former self. The days of 3,3% annual economic growth (our historic average) are a thing of the past. In fact, the economy hasn’t surpassed 3% annual growth since 2005.

This is our reality. This is what financialization has done to us. It has squeezed and siphoned from the economy. It is leaving a ravaged carcass, as it eats all the meat from our economic bones.

Is the US Inching Closer to Negative Interest Rates?

Of unicorns and interest rates...

The Federal Reserve decided to leave its benchmark interest rate unchanged on Wednesday, maintaining its zero-interest-rate policy (ZIRP) that has been in affect since December 2008.

The decision likely surprised no one. It is an open admission that the Fed doesn’t have much faith in the US economy, or its alleged recovery.

Markets (and the economy) are moved by sentiment (including fear), and this decision signals that economy still isn’t healthy in the eyes of America’s central bank.

For many months, the Fed has led us to believe that would soon raise its key rate; first in June, then in September, and then again in October. Instead, there has been no change in policy.

It's all been much ado about nothing.

The federal funds rate — the benchmark rate for all long term lending in the US — has never been this low, this long.

Inflation is nonexistent (it was literally 0% in the 12 months ending in September), negating the reason to hike. The Fed generally raises rates when it is concerned about inflation, and lowers or maintains them when it is concerned about unemployment and weak economic growth.

After eight years, zero interest rates are no longer shocking — especially in a world of negative interest rates.

Over the last two years, four central banks in Europe moved interest rates into negative territory. The negative interest rate policy (NIRP) was introduced when ZIRP wasn’t working as intended (stimulating the economy through the increased lending of cheap money).

The problem is that, even at these extraordinarily low rates, there aren’t enough borrowers.

The European Central Bank (ECB), along with the central banks of Sweden, Denmark, and Switzerland, all charge large depositors to hold cash.

That’s pretty shocking. It would be even more shocking if it were to be employed here in the US.

But what was once unimaginable in the US is suddenly quite imaginable. After all, the template has been created in Europe. The playbook has been written. There is a precedent taking place right now.

While individuals might be able to close their accounts to avoid the fees — moving to an all-cash payment system where they can — corporations are not able to do this. That would be very costly and disruptive for them.

In a normal world, banks take cash from depositors, pay them interest, and then lend the money at higher rates to borrowers. This helps fuel economic activity and growth.

But this is no longer a normal world.

US rates are significantly higher than the rest of the developed world. The 10-year U.S. Treasury bond yields around 2.0%. Meanwhile, the German 10-year pays a mere 0.5%, and Swiss 10-year bonds are yielding -0.3%.

This is attracting foreign depositors and strengthening the US dollar. That’s making our goods more expensive overseas and hurting trade. In fact, quarterly profits and revenue are set to decline together for the first time since the financial crisis.

Rather than concerning ourselves about when the Fed might finally raise interest rates, maybe we should instead be wondering when they might actually cut them to negative.

No one had ever seen ZIRP before 2008. It was a mythical notion, like a unicorn.

However, now that we’ve seen one unicorn, another may be on the horizon. We might call it NIRP.

Brazil's Recession Brings Suffering to Millions, as Recessions Always Do

I’ve been following the unfolding crisis in Brazil, where economic problems are leading to national misery. This is a really sad and grim time for most Brazilians.

I always try to view these economic crashes through the dimension of human suffering — the suffering of individuals and families. The situation in Brazil is just awful, and terribly painful for millions of its citizens.

And this suffering is going on all around the world right now. It's how political instability begins.

Brazil’s unemployment rate has risen to 7.6 percent from a record-low 4.3 percent at the end of 2014. That’s a 76 percent increase in less than a year, which is enormous.

Latin America’s largest economy is now in recession — already the worst since 1990 — and the situation is expected to worsen.

The spike in unemployment is particularly troubling since the country based its growth model in recent years on a credit-fueled boom in consumer spending. But now millions of Brazilians may be unable to repay their loans for houses and cars.

Over the past decade, Brazil's banks engaged in a massive credit expansion that enabled some 40 million Brazilians to rise out of poverty and into the middle class. Total loans in the banking sector climbed five-fold over that time to 3.1 trillion reais. Family household indebtedness, as a percent of annual income, jumped to 46 percent from 20 percent.

The following is summary of the country's economic malaise:

Brazil officially entered recession four months ago. Its currency, the real, has fallen more than any other major currency in the world this year; annual inflation has soared to almost 10 percent; the budget deficit has swelled to the widest in at least two decades; and the government’s credit rating was cut to junk by Standard & Poor’s.

Last week, analysts at Itau Unibanco Holding predicted the economy will shrink 3 percent this year and unemployment will top 10 percent by 2016.

This means Brazil’s economic woes are expected to worsen over the next year, and with that there will be an increase in human suffering.

Brazil is a major exporter of commodities, and the slowdown in China and the rest of the global economy means that fewer of its commodities are being bought by other nations. This has crushed exports and hurt the overall economy.

Yet, Brazil does not exist in isolation. As the largest economy in Latin America, its pain and suffering will likely be felt more broadly, throughout the Latin world. Economic crashes often have a domino affect.

As I said earlier, this isn’t just about numbers; it’s about human lives. It’s about dashed hopes and dreams. It's about the suffering of millions of people who will lose their jobs and houses, and often wonder where they will find their next meal.

That’s especially difficult for children, who have no idea why any of this is happening.

Brazil is not unique. A number of countries around the world are confronting economic recession right now, including our northern neighbor, Canada, as well as Russia, Japan, and Greece — which is actually in a full blown depression.

Recessions are not merely things that give economists and analysts something to talk about. They are crises that negatively impact the lives of millions of ordinary, everyday working people, whose standard of living usually declines while their suffering typically increases.

That’s the stuff I always keep in mind.

Central Bankers & Governments Lose Control; Monetary & Fiscal Policies Have Failed

One of the primary themes I’ve written about on this page in recent years is how little bang for the buck the Federal Reserve has gotten from its massive -- and unprecedented -- monetary policies.

Near-zero interest rates, three rounds of quantitative easing (QE), Operation Twist, etc., have gotten essentially nothing in return.

Consider that the Fed increased its balance sheet from $869 billion in August, 2007 to $4.5 trillion today. That’s a 450% increase in just eight years.

Yet, the US economy remains stuck at roughly 2 percent annual economic growth -- less than two-thirds of its historic average. That's clearly not the result the Fed was anticipating.

However, the Federal Reserve hasn’t acted alone. Central banks around the world — the Bank of Japan, the Bank of England, the European Central Bank, for example — have initiated their own QE schemes (money printing) and zero-interest-rate policies (ZIRP).

The central banks took these extraordinary measures in the belief that they would stimulate their beleaguered economies in the wake of the 2008 financial and economic crash.

After seven years of easy-monetary policies in developed countries, central bank balance sheets have risen to nearly $8 trillion!

And what do they have to show for it? Roughly 1 percent annual economic growth. Simultaneously, inflation has descended toward zero. In fact, deflation has become a genuine, and growing, threat.

After so much manipulation, so many schemes, and such gargantuan efforts by central banks, investment and growth both remain below pre-crash levels.

Bloomberg described it this way:

"More and more, bond traders are drawing the same conclusion: central bankers globally are coming up short in their attempts to combat the world’s economic woes.

"Even after hundreds of interest-rate cuts and trillions of dollars in quantitative easing, the bond market’s outlook for inflation worldwide is approaching lows last seen during the financial crisis. In the U.S., Europe, U.K., and Japan, those expectations are now weaker than they were before their respective central banks began their last rounds of bond buying.”

The emperor has been revealed to have no clothes. Central bankers, who see themselves as masters of the universe, have been exposed as having little power after all.

One Fed official has even publicly admitted that QE failed.

Stephen D. Williamson, vice president of the St. Louis Fed, says that quantitative easing has, at best, a tenuous link to actual economic improvements.

"There is no work, to my knowledge, that establishes a link from QE to the ultimate goals of the Fed — inflation and real economic activity. Indeed, casual evidence suggests that QE has been ineffective in increasing inflation,” wrote Williamson.

Williamson also said the zero interest rate policy in place since 2008, which was designed to spark "good" inflation, has actually resulted in just the opposite.

Even as monetary policy has failed to meet its goals, government leaders around the world have (through the utilization of fiscal policy) vigorously added to their already enormous piles of debt. They seemed determined to spend their economies out of the doldrums and invigorate them with new debt. But it hasn't worked as planned.

In just eight years, they have added nearly $60 trillion in new debt to the existing mountain — while GDP grew by only $12 trillion over the same time period, notes Chris Martenson, over at Peak Prosperity.

Despite the debt binge, global nominal GDP is projected to be $68.6 trillion in 2015 — virtually unchanged from 2013.

In other words, that massive debt increase got the world very little in return, and essentially nothing over the last two years. The global economy continues to struggle and is, in fact, barely growing at all.

Taken as a whole, developed and emerging countries racked up debt at five times the rate of nominal GDP growth.

This is madness!

Massive debts are not a solution to economic woes if they aren’t accompanied by commensurate economic growth and higher tax collections. Absent those things, debt is an albatross that ultimately weighs down a nation and hinders its government from serving the public interest in areas such as education, health and infrastructure. Servicing the interest on massive debts buys you nothing.

Back in 2010, I wrote that the world’s answer to the debt crisis was to add more debt. In essence, the solution was to treat the disease with more of the same disease.

Five years later, nothing has changed. Somehow, the world still hasn’t learned that you cannot cure a debt crisis with even more debt.

The lack of economic growth presents an epic challenge for global leaders.

They all need economic growth to service their enormous debts. The trouble is, there can be no growth without debt. Growth equals debt. In order to grow, the world's economies will have to incur even more debt. But that’s like adding more disease to an already sick patient.

Central bankers keep doing more of the same, expecting different results. By the way, that’s the definition of insanity.

The IMF recently downgraded its growth outlook for the world, and warned of a rising risk of a global recession.

Meanwhile, the Organization for Economic Cooperation and Development says leading indicators on a wide variety of data show that the world’s three largest economies — the U.S., China and Japan, as well as the U.K. and Canada -- are poised for slowdown.

This has got to be stunning, and depressing, for central bankers and government planners (not to mention the rest of us).

They’ve given it their best shot — utilizing every resource at their disposal, really — yet they’ve failed to re-inflate the bubble. All they’ve done is create absurdly unstable balance sheets, while racking up absolutely massive amounts of debt.

Maybe they’ve so far prevented a global depression. We’ll never know, since you can’t prove a negative.

We’re now in uncharted waters. These are unprecedented times. The world has never seen so much debt. Nor has it seen interest rates this low, never mind for this long.

In a normal world, this should be sparking massive, out of control inflation. But that hasn’t happened. This isn’t how the playbook says things should be. Economic textbooks will have to be re-written.

At this point, the Federal Reserve and other central banks appear to be trying to hold back the tide. Obviously, such an effort is in vain. The forces of global deflation are gaining steam, and world economic growth has reached a standstill.

There is plenty of academic work showing that massive debts -- both government and private -- ultimately hold back economic growth, and we're likely seeing that right now.

Again, global debt has increased at five times the rate of nominal GDP growth over the past eight years.

Clearly, that isn’t a solution. It’s more like a recipe for disaster.

Hold on tight. Things are about to get very bumpy.

Shrinking Labor Force Robbing From Productive Economy

The US economy created 142,000 jobs in September, following a revised 136,000 gain in August, which was lower than previously estimated.

This raises the real concern that the economy may be slowing.

However, the glaring issue is that a record 94,610,000 Americans were not in the American labor force last month — an increase of 579,000 from August, which had been the previous record increase.

The labor force participation rate, which indicates the share of the working-age people in the labor force, decreased to 62.4 percent from 62.6 percent. That was the lowest since October 1977.

When the Great Recession officially began in December 2007, the proportion of adults who either have a job or are looking for one stood at 66 percent. This means that, eight years later, roughly 8 million fewer people are now in the workforce.

The number of Americans in the labor force has continued to fall partly because of retiring Baby Boomers, and because fewer workers are entering the workforce.

The Congressional Budget Office says about half the decline is due to the aging population. Roughly 10,000 baby boomers turn 65 every day, and many of them retire.

Again, the retirement of the Baby Boomers is only half the reason that the labor force participation rate continues to fall.

This raises a thorny issue -- a whopping number of Americans are no longer productive and helping to support the economy.

In September, there were 156,715,000 people (age 16 or older who were not in the military or an institution) participating in the labor force by either holding a job or actively seeking one, according to the Labor Department’s Bureau of Labor Statistics.

Let me put this in a clearer perspective:

There are 156,715,000 people in the labor force.

There are 94,610,000 people not in the labor force.

In essence, there are just 1.66 workers for every non-worker.

There is no good way to spin this. It’s just not healthy for our economy.

Even if you attribute the problem solely to the retiring Baby Boomers (which isn’t entirely so), that means it is a long-term, structural problem without a solution. It is something that just needs to play itself out over many years.

However, 1.9 million people were marginally attached to the labor force in September, meaning they were not in the labor force but wanted and were available for work, and had looked for a job some time in the prior 12 months.

Additionally, there were 6 million people employed part time for economic reasons (involuntary part-time workers) in September. These individuals, who would have preferred full-time employment, were working part time because their hours had been cut back or because they were unable to find a full-time job.

The economy simply cannot fire on all cylinders with nearly 8 million people out of the workforce for involuntary reasons. These folks can’t propel demand, increase consumption, or drive economic output.

Yet, those figures don’t even include the 8 million who are officially listed as unemployed (the unemployment rate remained at 5.1 percent in September).

Taken as a whole, it means that 16 million Americans are either unemployed or under-employed.

Many of these people are reliant on government assistance to get by. That robs from the economy rather than adding to it. Fewer workers result in less economic growth.

The more people who are either too young or too old to work leaves fewer working-age people to support them and contribute to the economy. This is what’s know as the “dependency ratio.” The higher the ratio, the worse it is for the economy.

This is not a political screed. It is not meant as an indictment of the president, or either political party.

These are just stubborn facts, and they point to a significant reason that our annual economic growth has remained stuck at roughly 2 percent since the Great Recession officially ended. The nation’s long-tern, historic average for annual economic growth is 3.3 percent.

So, if you hear anyone (namely a candidate for president) say this is a problem with an easy solution, and that he/she will just “get” our economy back to its historic average, or even up to 4 percent annual growth (as some have suggested), don’t believe it for a minute.

This is a long-term, structural problem with no solution other than the passage of time.

The Baby Boomers are defined as the generation born between 1946 and 1964, and they comprise nearly a quarter of the US population — or more than 75 million people.

While they were once were an unprecedented economic force, that is no longer the case.

With the Social Security retirement age now age 67 for anyone born after 1960, the last of the Baby Boomers won’t retire until 2031 — 16 years from now.

But, again, the retirement of the Baby Boomers is only half the reason for the fall in the labor force rate, according to the Congressional Budget Office.

The other half is due to an education and skills gap, and that won’t be easy to fix either.

Shell Abandons Arctic Oil Project, Casting Doubt on Crude Estimates in Region

Some are calling Monday's announcement by Shell Oil that it will cease drilling in the Arctic a victory for environmentalists.

In truth, it is a victory for economics. In essence, drilling in the region simply did not make financial sense.

Shell had already sunk billions of dollars into exploration, and the results were quite disappointing for the Dutch company.

Shell drilled in the Chukchi Sea this summer, but found only traces of oil and gas. The company got essentially nothing for its $7 billion exploration project.

It will result in an absolutely massive loss considering that Shell's entire net profit in the second quarter this year was $3.4 billion.

Shell’s investors must be none too happy right now. The oil giant’s share price has fallen by around a third over the past year.

When Shell got its license to explore the Chukchi Sea in 2008 and then began drilling, oil prices were more than $100 a barrel. Today, prices have tumbled to less than half that, due to excess global supplies.

The failure to find sufficient oil and gas casts doubt about the viability of future Arctic projects. That should buoy environmentalists.

But make no mistake: Shell’s decision to abandon its drilling project in the Arctic was not due to pressure from environmental groups. It was due to financial pressure.

The numbers simply didn’t add up, and economics (or good sense) prevailed.

Drilling more than a mile beneath the ocean’s surface (Shell drilled to 6,800 feet) has been compared to operating in outer space. The technology and costs involved are enormous. The process is challenging enough in the warm waters of the Gulf of Mexico. But it is another magnitude of difficulty in the frigid Arctic.

If crude prices again reach $100 per barrel, some energy companies may be emboldened to begin exploration in the area once again.

The U.S. Geological Survey estimates that American Arctic waters in the Chukchi and Beaufort seas contain 26 billion barrels or more of recoverable oil.

However, that estimate now seems highly questionable.

Additionally, an Energy Department advisory council said it would take more than a decade for oil in the Arctic to be discovered, developed and brought to market.

For example, Italian energy company Eni SpA and Norwegian producer Statoil ASA are just now moving into production on a giant oil field in the Barents Sea -- 15 years after it was discovered.

Timelines aside, it’s critical to remember that Shell didn’t decide to abandon its efforts simply because the price of oil had fallen too far for drilling to make financial sense.

Shell walked away because there simply wasn’t enough oil or gas to be found in the region, and $100 per barrel oil won’t change that.

The Debt Burden: Unsustainable State Deficits Outpacing Economic Growth

During the Great Recession, states across the country began running large budget deficits. This was to be expected. Tax receipts fell, while safety net expenditures (such as unemployment payments, food assistance and other help for those in need) increased.

While the Great Recession is defined as beginning in December 2007 and ending in June 2009, the state burdens never really went away.

Some governors cut their state’s taxes with the hope that it would increase economic activity, but unfortunately they were proven wrong.

More than six years after the alleged economic recovery began, numerous states are still running budget deficits, ranging from small states like Rhode Island to large states like Illinois.

Here are just a few examples:

• Illinois had a staggering $6 billion budget deficit in the 2014 fiscal year, and a $9 billion budget in the 2015 fiscal year — the largest state budget deficit in the nation.

• Pennsylvania dealt with a $2.3 billion budget deficit for 2015.

• Wisconsin faces a $2.2 billion budget deficit over the 2015 and 2016 fiscal years.

• Maryland grappled with a $750 million budget deficit in the last fiscal year.

• Kansas had a $710 million budget deficit for the 2014 fiscal year.

All but four states (Alabama, Michigan, New York and Texas) begin their fiscal year on July 1, meaning that they are now in fiscal 2016. Yet, the budget problems of recent years have continued unabated.

The New York Times reports the following state budget deficits for fiscal 2016, and this is only a partial list:

• Alaska is facing a deficit that could reach $4 billion in a budget of only about $5 billion — with years of deficits projected after that as well.

• Illinois is grappling with a $3 billion budget shortfall.

• Louisiana is struggling with a $1.6 billion shortfall.

• Alabama has a long-term $702 million shortfall.

• Kansas has a $400 million budget gap.

• Wisconsin has a budget shortfall of more than $280 million.

In short, the fiscal position of many states across the nation is awful, and the problem has been growing continually worse.

Just how bad is debt burden in all 50 states?

State and local governments have sharply increased borrowing over the past three decades. In 1980, they were carrying close to $400 billion in outstanding debt; by 2000, it was $1.2 trillion; and by 2013, it had reached $3 trillion, according to the Board of Governors of the Federal Reserve System.

Yet, according to another analysis, the cumulative state debt has grown much worse in recent years.

State governments faced a combined $5.1 trillion in debt, which amounted to $16,178 per capita in the nation, according to a January 2014 report by the nonprofit organization State Budget Solutions.

This means that state and local debt increased nearly 13-fold in just 33 years. Think about that for a moment; it amounts to a 1,300 percent debt increase in just over three decades. That’s astonishing!

While it’s true that state economies, revenues and budgets are also considerably larger today than in 1980, the massive increase in debt is still striking.

Given that reality, it’s not enough to simply look at the size of each state’s budget deficit; you have to consider the size of its economy, or gross domestic product (GDP), as well.

That's when the problem becomes more complicated: a whopping 47 states had deficits that were larger than their GDP growth in fiscal 2015.

In simple terms, if a state’s debt increases 2% but its economy also grows by 2%, it is effectively a wash.

But almost every state saw its debt increase well beyond its economic growth, which makes servicing those debts much more difficult.

So where is this all leading? Well, the outcomes will be very uncomfortable.

Whether it's public-employee pensions; the building, repair or maintenance of critical infrastructure; education; police; fire departments; or any of the other countless services that taxpayers have come to expect, something has to give.

The means simply do not exist to pay for all of it given the structural economic constraints.

In Here Comes The Next Crisis ’Nobody Saw Coming’, Charles Hugh Smith notes the following:

• Nominal GDP rose about 77% since 2000, while state and local debt rose 150% — double the rate of GDP. Again, debt has increased at double the rate of economic growth.

• State and local taxes have soared 75% since 2000, while earnings have risen just 38%, barely keeping pace with inflation. So, state and local taxes have risen at twice the rate of wages/salaries.

• State and local government expenditures have risen 82% since 2000 — faster than GDP, and twice the rate of inflation.

• Yet, wages and salaries are down 8.5% since 2000.

Taken as a whole, this is a recipe for disaster. All the problems from 2008 were simply papered over, not solved.

Debt is like the monster in every horror film; it’s hard to kill and keeps coming back.

This is a simple math problem, and the numbers do not add up. Debt has significantly outpaced economic growth, while taxes have significantly outpaced wages and salaries. Taxpayers are already squeezed and have little left to give.

As Herb Stein’s law states, “If something cannot go on forever, it will stop."

States cannot carry this much debt while their economies continue to struggle for growth.

This will not have a happy ending, and anyone paying attention knows this. The pending crisis won’t come out of nowhere.

It is already unfolding.