Will U.S. Follow Europe Back Into Recession?

While the news that Europe is back in recession is not surprising, it is still troubling.

This week, Britain's Office for National Statistics reported that in the first quarter of this year Britain's economy shrank 0.2 percent, after having contracted 0.3 percent in the fourth quarter of 2011. That makes this Britain's first double-dip recession since the 1970s.

Officially, two consecutive quarters of shrinking GDP indicates a nation is in recession.

It's been four years since Britain's real GDP peaked in the first quarter of 2008. At the end of the first quarter of 2012, its GDP was still 4.3 percent below its pre-recession high. That's telling. It indicates that Britain never truly recovered at all.

On Monday Spain officially fell into recession, for the second time in three years. This means the Iberian nation is now grappling with a rather rapid double-dip recession. The Spanish economy is projected to contract 1.8% this year, according to the International Monetary Fund. Bad news.

Naturally, the credit ratings agencies have taken notice.

Standard & Poors downgraded Spain by two notches on Thursday, from "A" to "BBB+", saying the country's budget problems are likely to worsen due to economic weakness. The contracting economy will ultimately expand the nation's debt. S&P also assigned a negative outlook, meaning it may downgrade Spain again in the near future. The lower rating will likely raise Spain's borrowing costs, which is the last thing it needs right now. Moody's had previously cut Spain's credit rating by two notches back in February.

The pain in Spain is widespread. The Spanish unemployment rate is a whopping 23.6%, with youth unemployment at a stunning 49%. That's akin to a full-on depression. Spanish home prices dropped more than 11% in the fourth quarter, year-over-year. And in December, mortgages collapsed 39%. That's also akin to a depression.

Amidst all of this gloom, the Spanish government is following other European nations in trying to reduce its deficit through painful austerity measures. Many doubt that this will do anything but shrink the country's GDP, making it even harder to repay its debts.

"Austerity itself will almost surely be disastrous," said Nobel Prize-winning economist Joseph Stiglitz. "It is leading to a double-dip recession that could be quite serious. It will probably make the Euro crisis worse. The short-term consequences are going to be very bad for Europe."

The fear is that Spain may eventually follow in the footsteps of its smaller euro-zone partners — Greece, Ireland and Portugal — and need its own financial rescue. The problem is that there is no mechanism in place to bail out Spain. It's simply too big to save and there isn't enough money to rescue it.

Like Spain, Italy is another economic zombie, shouldering a Greek-like debt-to-GDP ratio of 121 percent. And, like Spain, it is also too big to save.

Data released earlier this month showed no growth in France's economy in the first quarter. It seems highly likely that France is now contracting as well. Europe is so interconnected that these things have a tendency to spread. If Germany — the continent's economic powerhouse — follows, it would be a most ominous outcome.

These are huge economies we're talking about here. A European recession will have global consequences. Germany has the world's sixth biggest economy; the UK is ninth biggest; France is 10th; Italy is 11th and Spain is 14th.

As a whole, the European Union has the world's biggest economy. When Europe gets sick, the rest of the world can get sick along with it. Recessions can be contagious and are often global.

Even China's massive economy is slowing from its torrid double-digit growth rate. The global demand for goods is declining and this will affect all exporters, including the U.S. That could result in higher unemployment here and elsewhere.

Yes, this could get ugly.

Due to widespread deficit and debt problems, European governments have been making large budget cuts. But the private sectors in most of these economies have been struggling for years. The only thing keeping most of them afloat has been government spending. That's where all the debt came from.

So, cutting spending, while seemingly necessary, will have the unintended consequence of cutting into GDP as well. That will hurt the European economies and cut tax receipts, which will only make the debt problems worse. It's a downward spiral in which the medicine only makes the patient sicker.

While the ratio of a nation's debt relative to the size of its economy is often viewed as critical, what is more important is the size of a nation's revenues. That's what allows a country to pay its debts.

Which brings us to the U.S.

Absent the government's deficit spending, real GDP has been flat for 15 years. Without the growth in government debt, the U.S. would be in a depression. Perhaps the deficit spending was the lesser of two evils, but now the government has an absolutely massive debt problem on its hands.

After the November elections, Congress will have nine weeks to make a whopping $5 trillion in tax and budget decisions. Even if it weren't for all of the ugly partisan politics the process will surely involve, it would still pose an incredibly difficult challenge and be very unpopular with voters. There is a whole lot less money to fund the government these days, yet there are even greater needs.

The U.S. is still dealing with the hangover from the Great Recession. During any recession, GDP and revenue invariably decline, while safety net payments increase.

In 2010 the federal government brought in $2.16 trillion in revenue — down from $2.56 trillion in 2007 — putting revenue at a 60-year low.

According to the Congressional Budget Office (CBO), automatic stabilizer payments (such as unemployment and food stamps) are adding significantly to the budget deficit. And with 22% of the workforce either unemployed or underemployed, GDP cannot reach its full potential.

The CBO estimates that automatic stabilizers added the equivalent of 2.4 percent of potential GDP to the deficit in 2010, an amount somewhat greater than the 2.1 percent added in 2009.

Millions of Americans remain in dire straights and this is adding to the deficit. These people are not contributing to government revenues, but are instead relying on them. This is not about to change any time soon. In fact, if the U.S. drifts back into recession, the ranks of the needy are certain to grow.

Since the financial crisis, only about 15 percent of the total debt increase was due to the 2008 bank bailout (Bush) and the 2009 stimulus (Obama), according to the CBO. The rest was the result of a huge drop in federal revenues. Absent a rather immediate and significant reduction in unemployment, revenues will not improve.

As it stands, revenues haven't rebounded much and that's a bad sign for the government, the annual deficit and the total debt — now $15.6 trillion, and climbing.

Though the U.S. has added nearly two million jobs over the past two years, the economy is still down about five million jobs since the recession. The unemployment rate has been falling because so many people have dropped out of the work force. That tends to lower the total percentage of those officially defined as unemployed.

The labor participation rate fell steadily after the recession began in 2007, yet it has continued to fall ever since the economy started its 'recovery' in 2009.

An alternate measure of the jobless rate is the employment-to-population ratio, which paints a more sobering picture of the employment outlook.

After peaking at the end of 2006 at 63.4 percent, the portion of the 16-and-over population holding a job (excluding those in prison, the military, or long-term care) fell to 58.2 percent by the end of 2009. Since then, the ratio has barely budged — rising by less than half a percentage point.

That's not good for the revenue side of the equation.

While a solid argument can be made that the U.S. government needs to reduce spending, such action will result in some very heavy consequences. What the government really needs, above all else, is more revenue. Without it, the U.S. will be attempting to bail out a sinking ship.

I'm not arguing that the U.S. doesn't have to reduce its deficits, and eventually its debt. It clearly needs to do both. The country's debt burden is massive and potentially crippling. What I am saying is that the U.S. is caught between a rock and a hard place, with no good choices any more. We're damed if we do, and damned if we don't.

The U.S. will surely follow Europe's lead and initiate its own round of austerity measures in 2013. The budget cuts will shrink GDP, thereby shrinking revenues. Even if those cuts result in a lower deficit (they will by no means eliminate it), they will not reduce the underlying debt. Consequently, the smaller GDP and lower revenues will only raise the debt-to-GDP ratio.

The ratings agencies won't like that one bit. You can expect the U.S. to be downgraded yet again, probably next year.

Congress should have cut the government's budget when unemployment was low and wages were stronger. But cutting spending during this time of high unemployment and stagnant (or declining) wages will only cause unemployment to rise even further, which will reduce revenues even further.

Cutting the safety net payments that millions of Americans rely on will also increase the chances of social unrest. Desperate people do desperate things. It could ultimately result in the kind of social upheaval not seen in the U.S. since the 1960s.

Such unrest has already begun in Europe. Will the U.S. follow Europe down that road?

Healthcare Costs Could Overwhelm U.S. Economy

The U.S. Supreme Court is expected to rule in June on the Constitutionality of the Affordable Care Act, also know as 'Obamacare'. The latter name is either used pejoratively by the President's adversaries or in complimentary fashion by his supporters.

For better or for worse (and since the law won't fully go into effect until 2014, it may be too soon to tell), crediting or discrediting the President for the law is misleading. After all, the 2,700-page law was crafted by Congress, in conjunction with the healthcare, insurance and pharmaceutical industries.

However, the final bill was passed with no Republican votes, which made it immediately controversial.

A reasonable argument can be made that the law is too long, too complex and had far too much input from the private industries that stand to benefit from the law's existence.

The one thing that most Americans — conservatives and progressives alike — seem to dislike about the law is the mandate requiring every American to carry health insurance coverage. Conservatives see it as a direct assault on their freedom and progressives see it as a generous gift to the private health insurance industry.

No matter how one views the law, there is no denying the litany of problems with the current U.S. health care system.

Health care spending now accounts for 18% of the US economy — the highest proportion ever, according to the government. As recently as 1980, health care expenditures were just 4.2% of gross domestic product.

By comparison, in 2009, industrialized nations spent an average of 8.9% of GDP for healthcare expenditures, according to the OECD. If the U.S. spent 9% instead of 18%, the annual savings to the nation would be roughly $1 trillion annually. That's stirring when your consider that Americans spent $2.6 trillion on health care in 2010.

The saddest thing is how little Americans get for their health care dollars.

The United States spends more on health care than any other country. But, at 78.2 years, American life expectancy is just 27th in the world. On the other hand, Japan spends $2,878 per person — about $5,000 less than the U.S. — and has the highest life expectancy among developed nations.

In most of the OECD countries, health care expenses come to more than $2,000 per person each year. In the 10 countries with the highest costs, expenses are roughly twice that.

However, in the U.S., spending on health care per capita comes to nearly $8,000 per person, approximately $2,600 more per person annually than Norway, the second-highest spender.

In four of the countries with the most expensive health care, pharmaceutical expenses come to at least $600 per person per year. In the U.S., those costs are more than $950 per capita, the highest in the world.

Even if the health care system ultimately saves lives, attempting to pay off all its associated debt is destroying many others.

From 1999-2009, health insurance premiums for families rose 131%, while the general rate of inflation increased 28% over that period. The increases in health insurance costs are not relative to anything else in the economy. They exist in a world of their own, driven by profit, high executive pay, advertising and marketing.

A recent study by the American Journal of Medicine found that 62 percent of all bankruptcies filed in 2007 were tied to medical expenses. The more striking thing is that three-quarters of those who filed for bankruptcies in 2007 had health insurance. This is further evidence of a truly broken system.

However, last year, roughly 50 million Americans were without health insurance, according to Census Bureau data. This amounted to 17% of the population in 2011. A report by the Kaiser Family Foundation found that three-quarters of the 50 million uninsured in the US are actually employed. Again, more evidence of just how broken the existing system is.

Sadly, things are moving in the wrong direction. Due to the struggling economy, more Americans lack healthcare today than just four years ago. In 2010, the total number of Americans with health insurance fell for the first time in decades.

Yet, the nature of many accidents and illnesses is that they are unpredictable and often unpreventable. Invariably, the uninsured end up in the emergency room with no means to pay the bill. Hospitals still treat them, but the ensuing costs are passed along to the Americans who are insured in the form of higher prices.

For this and other reasons, the unfortunate reality is that the U.S. has an exceptionally expensive healthcare system that doesn't deliver much value for all of its massive costs. As previously noted, this is largely attributable to the fact that the system is profit-driven and bloated by expensive marketing and advertising costs. The system is also inflated by generous executive compensation packages and the need to satisfy Wall St expectations.

For example, the U.S accounts for almost half of the global pharmaceutical market, with $289 billion in annual sales, followed by the EU and Japan. For years, the pharmaceutical industry has been the most profitable of all businesses in the U.S. In the annual Fortune 500 survey, the pharmaceutical industry topped the list of the most profitable industries, with a return of 17% on revenue.

The profit motive is clearly one of the primary drivers of costs. But perhaps the most worrisome issue is how little we get in return for what we spend.

According to a 2007 report issued by the Commonwealth Fund (a non-profit group that studies healthcare issues), America has the most expensive, least efficient healthcare system compared to five other industrialized nations.

The report found that — in order — Germany, Britain, Australia, New Zealand and Canada all provide better care for less money.

The reports’ issuers said, “The U.S. healthcare system ranks last compared with five other nations on measures of quality, access, efficiency, equity and outcomes.”

The report also studied convenience, such as waiting more than four months for elective, non-emergency surgery. The U.S. didn’t fare as well as Germany, but was better than the other countries.

The Commonwealth Fund has consistently found that the U.S. — the only one of the six nations surveyed that does not provide universal healthcare — is inferior to the other nations in many measures of healthcare.

Though the Affordable Health Care Act has yet to be fully implemented, things haven't improved in recent years.

If the U.S. wants to continue thinking of itself as a world leader, then it has to be able to do better than other industrialized nations. Like education, the health of the nation's citizens is not just critical, but fundamental.

Unquestionably, the U.S. has a highly advanced, highly technological healthcare system. If you are in crisis and in need of intensive care, or some form of life-saving surgery, the U.S. is among the very best. The problem is that the U.S. system focuses very little on prevention and health maintenance, both of which mitigate future costs.

As of 2008, 80% of all healthcare dollars were spent on chronic conditions. As the old saying goes, an ounce of prevention is worth a pound of cure — and it could also be worth billions in savings. Quite simply, prevention is a lot cheaper than treatment.

However, cost will not be part of the equation in the Supreme Court's decision-making. The Justices will simply determine whether or not it is Constitutional for the government to mandate that the American people purchase health insurance.

If the Court rules that it is not Constitutional, it could call into question the government's ability to mandate many things. After all, laws are supposed to be compulsory, not optional.

Would the overturning of the mandate invalidate the Massachusetts healthcare law signed by Mitt Romney in 2006?

While conservatives now vehemently oppose the Affordable Care Act, the concept of an individual health insurance mandate originated at the Heritage Foundation, a conservative think tank, in 1989. Republicans also introduced health care bills that contained an individual health insurance mandate twice in 1993. And of course Republican Mitt Romney championed and signed such a mandate into law as Massachusetts' governor.

The conservative approach has been to create a truly national health insurance market, allowing people to purchase insurance from any of the 50 states. This seems logical. The larger and more competitive a market is, the lower prices tend to be.

However, the U.S. problem is a matter of high costs, which ultimately drive end-prices for consumers.

The other long-time conservative solution to soaring costs is tort reform. However, the 15 leading insurance companies had a 5.7% increase in malpractice payouts from 2000 to 2004, while increasing premiums by 120% during that period. Since malpractice lawsuits don't appear to be the problem, tort reform is not the solution.

That said, a solution must be arrived at soon because health care spending will eventually strangle the economy.

The U.S. healthcare system encourages hospitals and doctors to perform unnecessary medical procedures on people who don't need them, while denying procedures to those who do.

According to a 2005 report by researchers at the Boston University School of Public Health, about 10% of the U.S. population is responsible for 70% of its health care costs. That group consists primarily of the elderly and the chronically sick.

While we can’t stop the aging process, we can do more to avoid lifestyle diseases such as heart disease, hypertension and diabetes. We can also stop spending so much on end-of-life care, which simply prolongs the inevitability of death.

The health care costs related to our aging population are poised to worsen. The health care system is on a collision course with reality.

The U.S. is on the threshold of becoming the first-ever mass-geriatric society. For the first time in history, people 85 and older are the fastest growing segment of the population. Over the next 20 years, the number of people over the age of 65 will double to more than 70 million, or 20% of the population.

Ultimately, America needs to spend more money preventing disease than treating it. In order to regain control of spiraling costs, the focus must shift to prevention. It's the chronic conditions that people ignore for so long — usually because they don't have insurance — that are so expensive to treat.

However, the government, doctors, hospitals, and insurance companies can only do so much. Ultimately, we need to do a better job of taking care of ourselves.

Two-thirds of Americans are overweight or obese, and that is the public health issue of this generation. The CDC has reported that obesity is now overtaking smoking as the leading cause of preventable deaths.

Additionally, diabetes is now viewed as an American epidemic and is projected to become this nation's most costly disease. Incredibly, 90% of diabetes cases are Type II, meaning they are almost entirely preventable.

Yet, Americans refuse to change their behaviors and their lifestyles.

Our physical well being is largely in our own hands. Until we start taking better care of ourselves, the personal and economic costs will become increasingly burdensome to our nation as a whole.

U.S. Corporate Tax Rate Quite Deceiving

Much has been made of the fact that, at 35 percent, the U.S. has the highest marginal corporate tax rate in the developed world.

However, to fully understand this story you have to read between the lines and look past the political posturing.

Few U.S. corporations actually pay the 35 percent rate because the loophole-riddled tax code gives them a lower "effective" rate.

The effective corporate income-tax rate — what corporations actually pay after all deductions, credits, and loopholes — is 27.7%.

The tax code has not been thoroughly overhauled in 25 years, and it is in desperate need of fixing. Corporate lobbyists worked hard at putting all those loopholes in place, and they are determined to keep them there.

However, due to a shrunken tax base, a signifiant revision may be on the way.

In February, President Obama proposed a corporate tax reform blueprint that included a 28 percent top rate. Such an idea seems like one that Republicans would love, and it provides an opportunity for genuine consensus and true bipartisanship.

The problems with the tax code are egregious, and they are robbing the Treasury of much needed revenue.

In 2010 the federal government brought in $2.16 trillion in revenue — down from $2.56 trillion in 2007 — putting revenue at a 60-year low.

Much of that is due to the effects of the Great Recession. But corporations are also taking advantage of the tax code and paying lower rates than most individual taxpayers, or avoiding taxes altogether.

Of the 30 companies in the Dow Jones industrial average, 19 told shareholders their effective rate for their 2011 fiscal years (most of which ended on December 31) was below Obama's proposed new tax rate, according to a Reuters analysis of securities filings.

Verizon, for example, paid an effective rate of just 2.7 percent. Even more remarkable, AT&T, Bank of America and Travelers Insurance actually posted a tax gain.

From 2007 to 2009, accounting tricks helped lower Pfizer's average tax rate to 17 percent; Merck to 12.5 percent, and GE to just 3.6 percent.

Those relaxed rates are well below the rates paid in other industrialized nations.

The average 2012 corporate tax rate for the 34 developed countries is 25.4 percent, according to the Organization for Economic Co-operation and Development. The Obama plan would put the U.S. just above that average.

The key to reform is to fully eliminate all deductions, exemptions and loopholes. The code must create a level playing field that is fair, straightforward and incorruptible. Presently, U.S. corporations are making a mockery of the tax code.

A 2008 report by the Government Accountability Office (GAO) found that approximately two-thirds of all corporations paid no federal income tax in 2005. However, it was part of a longer trend.

The GAO — the investigative arm of Congress — also found that two out of three US corporations paid no federal income taxes from 1998 through 2005. The study covered 1.3 million corporations of all sizes, with a collective $2.5 trillion in sales. It also included foreign corporations that do business in the U.S.

The Wall Street Journal reported that 69 percent of U.S. corporations were organized as nontaxable businesses in 2008, up from 24 percent in 1986.

Last year, 30 of the biggest corporations spent more on lobbying than taxes. How crazy is that?

Corporations have gamed the system in their favor. So assertions about how punitive and restrictive the corporate tax code is are plainly absurd.

A government report shows that last year total corporate federal taxes paid fell to 12.1 percent of profits — a level not seen since 1972.

Things weren't always this way. In the 1950s, US corporations contributed a 30 percent share to the federal tax base. Today it's down to 6.6 percent.

Corporations paid a higher share of revenues in the past and the economy was a whole lot healthier.

Revenue from corporate income taxes was between 5 percent and 6 percent of gross domestic product back in the early 1950s.

However, federal corporate tax collections made up only 1.3 percent of U.S. GDP in 2010, down from 2.7 percent in 2006.

The lobbyists did what they were paid to do, and they did a really good job. Congress, ever the loyal servants to their corporate masters and benefactors, did what was asked of them and rigged the tax code.

The consumer group Citizens for Tax Justice said it surveyed major U.S. companies and found that 26 on average paid no net federal income taxes between 2008 and 2011, among them General Electric and Duke Energy.

This nation is essentially broke. In Fiscal 2011, the U.S. government borrowed roughly 36 cents for every dollar spent. Fiscally, the country is teetering on the edge of a cliff. The government simply cannot allow huge, profitable corporations to continue paying zero taxes or, worse, post tax gains.

It's also time for corporations and their Congressional cronies to drop the act; they are not burdened by high or punitive taxes. Quite the contrary. Further, U.S. corporations are fortunate to be subject to the rule of law and all of the protections that this allows.

If the tax code is rewritten, it would benefit the corporations that don't get the special sanctions and the generous tax benefits. Ultimately, the playing field should be leveled and made equal for all.

Moreover, the tax code doesn't need to be rewritten for the benefit of corporations; it needs to be rewritten for the benefit of the rest of the nation. More revenue is desperately needed by the Treasury, which is presently being swindled by corporations.

U.S. Debt Crisis, Straight Ahead!

Within the next five years, $5.9 trillion — or 71 percent — of the U.S. government's privately held marketable debt will come due.

This means the government will somehow have to roll over nearly three-quarters of its debt by 2017 — almost certainly at higher interest rates than at present.

Simply put, an enormous amount of debt — perhaps too much — will come due in a very narrow time frame.

The U.S. has become overly reliant on short-term funding; only 10 percent of the public debt matures beyond ten years. This creates constant pressure to issue new debt and get debt holders to roll over existing debt with the promise of even more interest payments down the road.

The U.S. paid $454 billion in interest on its publicly held debt in fiscal 2011, which ended September 30. For perspective, the entire U.S. budget deficit in 2007 was $161 billion. The current interest payments, alone, now exceed that figure.

The scary thing is that even if Congress manages to balance spending with revenues, it would still have roughly half-a-trillion dollars in interest payments to make this fiscal year. And the situation can get even worse.

As interest rates rise — and they surely will — the interest payments will become even more cumbersome. Based on the current structure, a one percentage-point increase in the average interest rate will add $88 billion to the Treasury’s interest payments this year alone, according to Lawrence Goodman, president of the Center for Financial Stability. Goodman is an expert in such matters; he previously served at the U.S. Treasury.

When rates return to historic norms, the interest payments will become unmanageable.

In 1970 the yield on a 10-year Treasury averaged 7.35 percent; in 1980 it was 11.43 percent; in 1990 it was 8.55 percent; in 2000 it was 6.03 percent; and in 2010 it was 3.22 percent. You can see the long term downward trend. But rates can just as easily trend upward instead.

It is reasonable to ask how the government will convince foreign governments and sovereign wealth funds to roll over their existing debt, rather than taking their money and going home.

After all, the U.S. private sector — namely banks, mutual funds, corporations and individuals — reduced its purchases of U.S. government debt to a meager 0.9 percent of GDP in 2011, from a peak of more than 6 percent in 2009. That's because they're all chasing higher yields in riskier markets.

Buyers of U.S. debt have become scarce enough that last year the Federal Reserve purchased a stunning 61 percent of the total net Treasury issuance. That is simply insane. It is also patently unsustainable.

The Fed is effectively subsidizing U.S. government spending and borrowing. This masks the reduced demand for U.S. debt by sovereign entities and the U.S. private sector.

Simply put, the U.S. government would cease to function without the absolutely massive intervention of the central bank. But there are limits to all of the Fed's money-printing schemes.

At present, the U.S. government's demand on the credit markets for its annual interest and principal payments is equivalent to 25 percent of GDP, according to Goodman, which is 10 percentage points higher than the norm.

This level of indebtedness cannot continue. Interest payments on the debt steal from more productive uses, whether its infrastructure, research & development or education.

More importantly, at some point large interest payments can force some rather unfortunate social choices and even the potential of default. Never in the history of the Republic has that happened. But there is a first time for everything.

The likely outcomes are a debt crisis, spiking interest rates, and spiraling inflation due to all of the Fed's monetization of the debt (meaning, printing money backed by nothing so that the government can maintain its deficit spending).

One needs only to look at the European sovereign-debt crisis to see how this all ends. Things can seem just fine for many years, until there is a sudden shock to the system.

In other words, everything can seem just fine until, quite suddenly, it isn't.

Strategic Petroleum Reserve for Supply Crisis, Not High Prices

Attempting to offset rising oil prices by tapping the Strategic Petroleum Reserve would be both shortsighted and ineffectual.

The price of oil seems to be front-page news nearly every day now, and it's clearly a hot topic among American drivers filling their cars with gasoline each week.

The price of West Texas Intermediate (WTI) crude reached $100 per barrel in November and has experienced highs of at least that level for five consecutive months.

WTI is domestically produced oil and it is the benchmark for oil pricing on the Chicago Mercantile Exchange.

In January, the U.S. Department of Energy predicted that, for the first time ever, the price of crude oil would average more than $100 a barrel this year.

The elevated price of oil is raising food costs, as well as the costs of all other transported goods. Shippers, such as UPS, have raised their rates and airlines are also raising ticket prices to compensate for rising fuel costs.

The current state of affairs is spurring some people, including assorted politicians and news pundits, to call on the President to release oil from the U.S. Strategic Petroleum Reserve (SPR).

However, such a move would be unwise and ineffective.

According to the U.S. Department of Energy, with a capacity of 727 million barrels, the SPR is the largest stockpile of government-owned emergency crude oil in the world. It is stored in four locations; two in Louisiana and two in Texas.

"Established in the aftermath of the 1973-74 oil embargo, the SPR provides the President with a powerful response option should a disruption in commercial oil supplies threaten the U.S. economy," reads the DOE's Website.

The purpose of the Reserve is to to maintain a backup oil supply in case of national emergency, such as another oil embargo that could cripple the U.S. The SPR also provides a reserve for the national defense.

The President can order the release of oil from the Reserve in the event that the United States faces an economically threatening disruption in oil supplies. This has occurred just three times since the creation of the Reserve in 1975.

The first was in 1991, at the beginning of Operation Desert Storm.

The second was in September 2005, after Hurricane Katrina struck the Gulf Coast and devastated the vital oil production, distribution and refining industries in the region.

The third Presidentially-directed release came on June 23 of 2011 and was used to offset the disruption in global oil supplies caused by unrest in Libya and other countries.

Though the Reserve has a capacity of 727 million barrels, the current inventory is 696 million barrels. At the current usage level of 19 million barrels per day, the reserve would supply oil to the U.S. for just 36 days.

Apparently, those calling for the release of oil from the SPR are unaware of this fact. Attempting to offset rising prices in this way would be both shortsighted and ineffectual.

Moreover, the maximum total withdrawal capability from the Reserve is just 4.4 million barrels per day, less than a quarter of current daily usage. At that draw-down rate, it would take 160-plus days to exhaust the supply.

So even a full emergency release wouldn't offset a foreign oil embargo, the results of which would devastate the U.S. economy.

Critically, the price paid for the oil in the SPR is $20.1 billion (an average of $28.42 per barrel). If the U.S. were to run through the Reserve supply and then have to replenish it, the cost would be nearly four times the previous expense. This makes tapping the Reserve a last ditch effort.

The Strategic Reserve was designed as an insurance policy in case of significant supply disruptions; not rising prices due to rising global demand or the behavior of unscrupulous Wall St. speculators.

At this point, the U.S. is not facing a genuine oil shortage or energy emergency. Drawing down the SPR would leave the U.S. defenseless in the event that a genuine global crisis should erupt.

Federal Reserve & National Debt Have Set Stage For Soaring Inflation

In 2011, the U.S. inflation rate averaged 3.2 percent. So far in 2012, the rate is still averaging roughly 3 percent. Yet, Americans are seeing even more significant increases whenever they buy food or gasoline.

The concern among many economists and analysts is that the U.S. could be headed for a much higher inflation rate in the not too distant future.

From 1914 until 2010, the average inflation rate in United States was 3.38 percent. It's reasonable to ask, What's behind this?

Most people associate inflation with rising prices. However, rising prices are merely a symptom of inflation, not the cause.

In reality, rising prices are the result of money losing its value — its buying power. Money is driven by the same laws of supply and demand that affect almost everything else. The more rare something is, the more valuable it is. Conversely, the more readily available something is, the less valuable it is.

Money is constantly being created by the world's central banks, including the Federal Reserve Bank. When the supply of money exceeds the supply of goods and services in an economy, it devalues the currency — meaning the currency loses buying power.

The Fed is allowed to create money out of nothing. Yes, as incredible as it seems, the Federal Reserve is legally entitled to create something of value out of absolutely nothing. All of the world's central banks do this. All paper money is fiat money, meaning it is simply assigned a value by government decree. Yet, paper money has no intrinsic value. It's just paper with ink, backed by nothing of value.

However, only about three percent of the world's money is in the form of bills and coins. The other 97 percent is just numbers typed into bank databases and shown on computer screens.

Most troublingly, all money is loaned into existence. But the interest portion of all loaned money is never created; only the principle is created. So, the system is always out of balance, right from the start. The only way for the interest on debts to be paid off is by creating even more money. In essence, money is created as debt.

So, by design, our monetary system must constantly create new money, or new debt. And price inflation is the end result every time a central bank creates new money. It's the money supply that is being inflated, and all of this new money continually devalues the existing supply of money.

What is really worrisome is that the creation of money has been happening at an alarming rate.

The U.S. monetary base (the supply of money) nearly doubled between 1994 and 2006. Then it doubled twice more, increasing by an additional 221% from 2006 to 2011. That's simply staggering. In fact, it's alarming.

The result has been a devalued dollar, manifested in the form of rising prices, which is affecting all Americans. This process will continue to play out in the coming years, but the consequences are likely to become considerably worse over time. If you don't understand this, just think supply and demand.

The U.S. government has created so much debt for decades that the Federal Reserve would have to manufacture about five times more dollars than exist today merely for the Treasury to meet its obligations. The U.S. government's unfunded liabilities currently amount to $70 trillion.

Yes, you read that correctly. The U.S. government has $70 trillion in future obligations and it doesn't have the funds to pay them.

Due to its fears of deflation and persistently high unemployment, the Federal Reserve has bought trillions in mortgage-backed securities and Treasury bonds over the past couple of years, all with freshly created money. The funds from those purchases have flooded the economy with inflation-fueling liquidity, pumping up the stock market in the process.

Much of the excess liquidity has also ended up in commodities markets, which has sent crude oil and food prices into an upward trajectory.

All of that liquidity flowing through the economy has enabled the government to continue producing annual trillion dollar deficits. Whatever funding the Treasury cannot raise in the bond market, the Fed simply prints.

But the Fed isn't acting alone. The European Central Bank, the Bank of England, the Bank of Japan and the Chinese Central Bank have all been printing like mad, pumping absolutely massive amounts of liquidity into global markets.

The end result will be skyrocketing inflation.

There are limits to everything. This level of debt creation cannot go on indefinitely.

As Dr. Chris Martenson has astutely observed, beginning in January 1970, total credit market debt doubled five times by 2010. This includes all debt — financial sector debt, government debt (federal, state, local), household debt, and corporate debt.

In order for the 2010 decade to mirror, match, or in any way resemble the prior four decades, credit market debt will need to double again from $52 trillion to $104 trillion.

Does this seem reasonable or even possible to you? How can the current amount of debt ever be repaid, much less another doubling?

What is clear is that no matter how this all ends, it will not end well.

The dollar has already lost over 95 percent of its buying power since the creation of the Federal Reserve in 1913. And there is no let up in sight to all of this unrestrained money printing. Once foreign governments and sovereign wealth funds stop buying Treasuries — out of fear that the U.S. already has too much debt to ever be repaid — the only option will be for the Fed to super charge its already rampant money creation.

As it stands, the national debt already exceeds the gross domestic product. That's troubling because when public debt reaches 90 percent of the GDP, research suggests that economic growth slows by about 2%. And slow growth can pile on even more debt.

In their book, "This Time It's Different: Eight Centuries of Financial Folly," Carmen Reinhart, a University of Maryland economist, and Harvard professor Kenneth Rogoff find that a 90 percent ratio of government debt to GDP is a tipping point in economic growth. Beyond that, developed economies have growth rates two percentage points lower, on average, than economies that have not yet crossed the line.

History indicates that the U.S. will not be able to grow its way out of debt. And the long term trends for the debt and dollar are frightening.

Under the CBO’s rosiest estimates, total Federal Debt is projected to rise to at least $21.7 trillion by 2022. However, the debt could also be as high as $29.2 trillion by that time.

The end result will be an even more devalued dollar with even less buying power.

The inflation of our currency is already leading to inflated prices throughout the economy, Yet, the current inflation rate is merely a hint of the explosion that is yet to come.

The inflation rate hit a historical high of 23.70 percent in June of 1920 and got as high as 13.5 percent as recently as 1980. It shouldn't be a surprise to anyone when inflation rises to a level somewhere between those two points in the coming years.

Then we'll all sound like our grandparents, reminiscing about how cheap things used to be back in 2012.

John Maynard Keynes Was Right (and not for the reason you think)

For more than eight decades, famed economist John Maynard Keynes has been the subject of much discussion and debate.

Many observers attribute his scholarly positions on monetary policy with ending the Great Depression, while others have negatively viewed him as a champion of big government and unsustainable deficit spending. The latter has made him a scourge to conservatives ever since.

However, what is often overlooked is that Keynes advocated both tax cuts and budget surpluses. Deficits, he believed, were to be begrudgingly accepted as a necessary evil only in some circumstances.

Like all economists, Keynes theories on economics boiled down to the basic laws of supply and demand.

However, unlike others before him, Keynes believed that demand drives supply. In Keynes view, insufficient demand leads to unsold goods, which leads to layoffs. Ultimately, insufficient demand leads to a downward spiral of unemployment, poverty and even depression.

Keynes' remedy in these instances was to artificially stimulate demand by increasing government spending or cutting taxes, which ultimately encourages the public to increase its spending instead. The idea was to cause either the government or the public to increase spending to stimulate the economy.

These goals were to be achieved through fiscal policy; spending measures or tax cuts. Yes, Keynes actually advocated cutting taxes.

Keynes favored deficit spending only to combat depressions, not to fight low levels of unemployment. He also advocated creating surplus budgets to eliminate government debt in times of prosperity.

Yet, that approach has been largely ignored for decades. The overall debt has increased under every president since the 1940s, regardless of which party has controlled Congress. Even during times of extraordinary economic expansion, debt has continued to pile up.

The primary concern about large government debt is that it can fuel inflation.

Notably, Keynes believed that inflation could be cured with the help of budget surpluses and/or restrictive monetary policy. If demand (or spending) are reduced, then prices start falling.

Though Keynes argued for budget deficits to stimulate demand, he also advocated for subsequent budget surpluses to eradicate debt. That part of the equation seems to have been forgotten by many.

The public debt has increased by over $500 billion each year since fiscal year (FY) 2003, with increases of $1 trillion in each FY since 2008. The fiscal year begins on October 1 and ends on September 30 the following year.

The national debt is now in excess of $15.5 trillion and there is no end to the deficits in sight. Interest payments are consuming an ever-larger portion of the budget each year as the debt grows. And, though currently at historically low levels, interest rates are poised to increase — perhaps significantly — in coming years. That could make debt management impossible.

Budget surpluses now seem like a pipe dream. They are a distant memory from the 1990s. Keynes would surely be disappointed, if not appalled.

And though consumer demand remains constrained by a variety of factors (high unemployment, stagnant wages, the bursting of the housing bubble, etc.), with such an enormous debt the government is hamstrung to engage in further deficit spending to stimulate demand.

The nation's infrastructure is crumbling and received a cumulative grade of D from the American Society of Civil Engineers. And the nation desperately needs to invest in scientific research to remain competitive in the 21st Century.

Yet, in both instances, the government is handcuffed by its enormous debt. With trillion dollar deficits adding to the mammoth debt each year, how can anyone reasonably argue for piling on yet more debt, no matter how worthy the cause?

When Vice President Dick Cheney famously stated, "Reagan proved that deficits don't matter," he was wrong. Very wrong. They do matter. A lot.

Keynes knew this all along.

Tar Sands Too Inefficient & Energy Intensive, Not Worth Cost

Perhaps you've heard of the Keystone XL pipeline. It's been in the news a lot lately. The pipeline was intended to carry tar sands oil across the Canadian border to the U.S.

There was a big hullabaloo in Congress over the pipeline, which was finally voted down by the Senate this week. Notably, 45 Republicans voted in favor, while the other two abstained.

The obvious question is, what is the value of tar sands?

The story currently being promoted by some suggests that Canadian tar sands (also known as oil sands) are the solution to America's energy needs and a way to relieve us of our reliance on Middle Eastern oil.

Somehow, this story ignores the fact that tar sands are still a form of imported oil, and that most of America's imported oil already comes from Canada and Mexico, not the Middle East.

But that's not the heart of the matter.

Here's the key question: What is the net energy returned after utilizing oil or natural gas to obtain more oil? In the oil business, this is referred to as Energy Return On Energy Investment (EROEI).

EROEI is defined in the following way: Energy Produced / Energy Used = EROEI

For example, if oil is selling for $100 per barrel and it costs $10 in energy to produce a barrel, the EROEI is 10. Traditional oil development is currently estimated to have an EROEI of about 15. Obviously, the higher the number (i.e., the higher the EROEI), the better.

If it requires a barrel of oil to retrieve a barrel of oil, then what's the point? Energy producers have to take into account the market price of oil or natural gas, versus how much it will cost to extract and refine them.

The light, sweet crude is the good stuff that sits at the top, where it's relatively easy to extract. The lower quality oil — like tar sands — just happens to be the most expensive oil because it is the most difficult to extract.

With tar sands, the cost to produce a unit of energy is much higher than with traditional oil. Simply put, tar sands do not come cheaply.

Just how energy-intensive are tar sands? Professor Kjell Aleklett of Uppsala University in Sweden, a recognized expert on tar sands, puts it this way: "The supply of natural gas in North America is not adequate to support a future Canadian oil sands industry with today's dependence on natural gas."

The problems begin right at the start of the operation. Tar sands are typically mined, which means a large amount of energy is required just to get the process started.

Tar sands are a mixture of roughly 90 percent sand, clay and water, plus 10 percent bitumen, a thick hydrocarbon liquid. After extracting that 10 percent of bitumen from the tar sand mixture, the bitumen can be purified and refined into synthetic crude oil.

Bitumen is one of the world's most expensive and heaviest hydrocarbons. And it is very energy intensive. In fact, bitumen production requires so much natural gas for processing and enrichment that it now accounts for one-fifth of Canada's natural gas demand.

That's the problem Professor Aleklett was referring to above.

Since bitumen is a highly viscous “heavy” oil that doesn’t flow as easily as lighter crude, it requires more processing to facilitate its flow through oil pipelines.

In fact, bitumen is so heavy and viscous that it will not flow unless it is heated or diluted with lighter hydrocarbons, such as natural gas. Typically, tar sands are produced using natural gas to heat the steam that drives the oil out of the sands. And it takes a lot of gas to do this.

Finally, bitumen has to be upgraded so that it can be refined. This can be done by adding methane or hydrogen — from even more natural gas — to the bitumen to create lighter oil.

Even if electricity is used to extract the tar sands and natural gas, this ultimately comes from a coal-fired power plant. It doesn't change the equation; you're still exchanging one form of energy for another.

Perhaps you now get a sense of just how inefficient tar sands really are. In fact, tar sands are so inefficient that just 75% of the bitumen can be recovered from sand.

At the turn of the 20th Century, it took just one barrel of oil to find and liquidate 100 barrels. That amounted to an extraordinary Energy Return on Energy Investment.

However, according to Peter Tertzakian, the chief energy economist at ARC Financial Corporation, the EROEI for tar sands amounts to 7:1 for extraction and drops to 3:1 after it has been upgraded and refined into something useful, such as gasoline.

The process of making liquid fuels from oil sands requires abundant energy from beginning to end, extraction to refining. The entire process generates two to four times the amount of greenhouse gases per barrel of final product as the production of conventional oil.

Ultimately, squeezing oil out of tar sand is an extremely wasteful process, requiring between two and four tons of tar sand and two to four barrels of water to produce a single barrel of oil. The current level of water consumption is enough to sustain a city of two million people every year, according to an analysis by Energy & Capital. And after the water has gone through the entire process, it is so toxic with contaminants that it cannot be released into the environment.

When you look at the big picture, tar sands clearly aren't the answer to our energy needs. They're not even part of the answer. They are too energy intensive, release far too much carbon into the atmosphere and are far too dirty, polluting precious water supplies.

Until some renewable, synthetic fuel is developed that can reduce our reliance on fossil fuels, conservation will be our best bet. Oil prices are in a long term upward trend, and tar sands present more problems than solutions.

Homes Prices Reach Nine-Year Low

Home prices have tumbled more than a third from their bubble-induced peak. The last time that happened was during the Great Depression, and it took two decades to recover.

In any market there are buyers and sellers, winners and losers.

With that in mind, there's some bad news for homeowners, but good news for potential buyers.

U.S. home prices fell again in December, reaching their lowest level since the housing crisis began.

The S&P/Case-Shiller 20-city composite fell 1.1% in December, ending 2011 with a 4% downturn. The index hasn’t been this low since February 2003 and has dropped 33.8% from its peak.

If history is a guide, it could be two decades before prices return to their previous highs.

The latest news is a tough way for the beleaguered housing market to begin the new year.

While the data does show increasing housing starts, what does that really tell us? After all, there is already a surplus of existing homes, many of which are in some stage of foreclosure. Are builders just overconfident? Sales of new homes are moving at an annual rate of 321,000 — some 75% below the peak.

The housing market is being held down, in part, by the so-called shadow inventory — unsold homes that big banks, Fannie Mae and Freddie Mac own but haven’t yet put on the market, plus soon-to-be foreclosed houses.

As it stands, distressed sales (short sales and foreclosures) account for a third of existing home sales. That pushes prices down almost across the board.

According to some estimates, the current shadow inventory may include as many as 10 million properties.

That shadow inventory is virtually certain to grow.

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

And roughly 22 percent of residential properties with mortgages were underwater at the end of the third quarter, according to CoreLogic. This could lead to even more strategic defaults and yet more unwanted inventory falling into the hands of lenders. That would be a nightmare for already stressed banks.

Though home prices continue to fall and mortgage rates are at historic lows, demand — though somewhat improved — remains historically low.

The pace of existing him sales is about 4.5 million a year; still much less than the 6 million rate that’s considered “healthy.”

Home prices have a long way to go before recovering their 2005 peak. The last time home prices fell 33% was in the 1930s, when the full cycle from peak to trough to peak took 19 years.

If that pattern were to repeat, home prices would not recover until the year 2031 — assuming that we've finally seen the bottom. Give that a moment to sink in.

Yet, even potential buyers who feel persuaded by the historically low rates and fallen prices are finding that it is now quite difficult to qualify for a home loan.

Lending standards are much tighter now than during the bubble era. Today, nearly 90% of mortgage applications require full documentation, which is much higher than the pre-bubble level, when it got as low as 60 percent.

And these days, a much higher credit score is also required. Last year, the average FICO score was 730. During the boom, borrowers with scores in the high 500s were routinely steered to high-cost subprime loans.

The National Association of Realtors says 33% of contracts were canceled in January, “caused largely by declined mortgage applications and failures in loan underwriting from appraisals coming in below the negotiated price.”

There’s also less money available for lending. During the housing boom, investors quickly bought up the mortgage-backed bonds issued by Wall Street bankers. That market has all but vanished; 90 percent of new mortgages written today are backed by the government.

Analyst Barry Ritholtz, of the Big Picture blog, is not optimistic about the housing market. He thinks home prices still have a long way to go before rebounding.

"If this is the bottom then this will be the first time that a major boom and bust hasn't careened past fair value," says Ritholtz.

Historically, when a bubble bursts it tends to overshoot on the downside just as it does on the upside. The big question, the one everyone wants an answer to is, Where's the bottom?

As Patrick Newport, an economist at IHS Global Insight, sees it, “Our view is that foreclosures, excess supply, and weak demand will drive prices down another 5 to 10 percent.”

The current state of employment (13 million unemployed and nearly nine million underemployed) is a recipe for further price declines

A housing recovery is being held up by the fact that too many Americans are still unemployed and those who do have jobs have experienced stagnant or declining wages.

John Williams of Shadowstats notes that the January 2012 payroll employment level remains below the level that preceded the 2001 recession, more than a decade ago. That's simply stunning.

Housing and employment are inextricably linked. Until the employment picture improves considerably, until the massive shadow inventory is liquidated, and until we have full and true price discovery (i.e. housing hits a true bottom), the housing sector and overall economy will not — cannot — begin to fully heal and recover.

But with housing, what's bad for sellers is good for buyers. However, unlike previous buyers, new homeowners will not be able to view their homes as investments; they will merely be places to live.

That should be good enough.

U.S. Economy Still Facing Many Obstacles to Recovery

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Debt Deal Will Leave Greece Permanently Indebted

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

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

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

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

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

Does that sound like a solution to you?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

But all of this may be for naught.

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

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

However, that is highly unlikely.

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

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

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

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

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

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

Reducing National Debt Will Be A Long, Painful Process

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

That's about to change.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

Additionally, lending standards are now tighter and are keeping many people out of the market. In 2010, one-third of American consumers were considered sub-prime and couldn't even qualify for a home loan. When a third of your market is disqualified, that's obviously a very bad sign.

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

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

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

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

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

U.S. Wealth & Income Disparity Reach Alarming Proportions

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

The current statistics are simply stunning.

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

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

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

The middle class has disappeared before our eyes.

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

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

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

Yes, that's decades.

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

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

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

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

According to the Washington Post, since the 1970s, median pay for executives at the nation’s largest companies more than quadrupled even after adjusting for inflation. Yet, during the same period, pay for non-supervisory workers has dropped more than 10 percent.

In 2010, the average American earned $26,487 — down over $2,000 in real terms from 2006. This figure includes females and part-time workers who may be looking for full-time positions.

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

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

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

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

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

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

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

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

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

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

This stark divide worries most Americans.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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