The New Great Depression

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

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

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

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

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

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

There are numerous reasons for this economic breakdown.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That's not pessimism; it's realism.

Plastic-to-Oil Converter Exemplifies Energy Ingenuity

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Domo arigato, Mr. Ito.

Unemployment Remains Bleak; Challenges Are Daunting

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

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

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

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

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

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

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

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

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

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

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

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

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

22,063 divided by 161,299 equals 0.13678

This means the current U3 unemployment rate according to the BLS metric should be 13.7%, not 9.1%. Note that this is higher than the "unemployment rates" reported in the first two years of the Great Depresion, 1930 (8.9%) and 1931 (13.0%). Please also note that the two historical "unemployment rates" are estimates made well after the fact as the BLS didn't track unemployment statistics until 1948. Finally, one also must take into account that the current rate would be considerably higher were it not for the 2,868,000 more people that are now employed by the federal government than were employed in 1940, much less before the New Deal of 1933. Including these extra 2.8 million government workers in the unemployed list, as one must do in order to make a reasonable comparison between 2011 and 1930-31, indicates a comparable "unemployment rate" of at least 15.5%.

It's important to remember that even if the economy simply kept up with population growth by adding 125,000 jobs each month (for a total of 1.5 million new jobs this year), it still wouldn't help the roughly 24 million Americans who are already unemployed or under-employed, meaning they can only find part-time work.

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

Obviously, that isn't happening.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Food Stamp Use Rising With Poverty

The times are tough now, just getting tougher
This old world is rough, it's just getting rougher
— Bruce Springsteen, 'Cover Me'

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

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

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

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

Food retailers have taken notice.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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.