Fracking and Tar Sands Will Not Resolve Peak Oil

All of the oil in the world was created from carbon-based fossils over a period of millions of years, and all of it sits in the upper regions of the earth's crust. Like cream that rises to the top of milk, all of the best, purest oil — known as light-sweet crude — also sits at the top. That makes it the easiest, and cheapest, crude to extract.

Due to its higher quality, light-sweet crude is the most sought after grade of oil in the world. It is used to make gasoline because it contains a minute percentage of sulfur.

Petroleum containing higher levels of sulfur is known as sour crude. The impurities need to be removed before this lower quality crude can be refined into petrol, thereby increasing the cost of processing. This results in a higher-priced gasoline than that made from sweet crude oil. As a result, sour crude is typically processed into heavy crude oil, such as diesel and fuel oil, rather than gasoline to reduce processing cost.

A major problem faced by the oil markets today is that there is very little refining capacity available to process these heavy sour grades. Additionally, light-sweet crude is being depleted at a much faster rate than its heavier, sour cousin. The increase in the spread between light sweet and heavy sour crudes indicates that there is a serious supply problem for light-sweet crude.

Simply put, the planet is not creating any more pre-historic animals and, as such, it is not creating any more light-sweet crude. This is a challenge for a world that is so utterly dependent on crude oil, particularly the light-sweet variety.

Despite the wishful thinking of the masses, oil is a finite commodity — though this is a most unfortunate and difficult reality.

As the U.S. Geological Survey bluntly stated, "The simple inescapable fact is that the world's supply of petroleum is finite and nonrenewable."

Consequently, oil continues to trade at $90-$100 per barrel. This is a primary reason that our economic recovery is, and will continue to be, so sluggish. Why is the high cost of oil a problem?

High oil prices also raise the cost of food. Oil is used in numerous ways throughout the processes of growing and transporting food. But it's not just food that's affected; the shipping cost of all goods is higher, as are the costs of all materials made from oil, such as asphalt and chemical products.

So the high cost of oil is being felt throughout the economy. Simply put, oil affects everything.

Though we have seen significant swings in the price of oil over the past decade, the overarching trend has been toward higher prices.

Inflation-adjusted oil prices reached an all-time low in 1998, even lower than the price in 1946. Then, just ten years later, oil prices were at an all time high — above the 1979-1980 prices — in real, inflation-adjusted terms (although not quite on an annual basis).

By 2012, annual oil prices were higher than at any other time except 1980, during the second oil crisis.

This is having a huge impact on the U.S. economy.

Despite doubling their worldwide investment in oil production from $300 billion to $600 billion, oil companies have been pumping nearly the same amount of oil out of the ground since 2005, according to economic analyst Chris Martenson.

“If you want to have economic growth you’re going to need growth in oil consumption,” says Martenson. “Oil is the lifeblood of any economy.”

Fast-growing economies, like China, Brazil and India, now demand more oil than the U.S., Japan and Europe combined.

Let's look at this problem a little more closely.

The combined crude oil production of the five main international oil companies (Exxon, BP, Shell, Chevron and Total) hit a historic high in 2004. Since then, it has fallen by 25.8%, despite large increases in investments. That can rightly be described as stunning.

In 2005, global crude oil production reached 73 million barrels per day. To increase production beyond that, the world had to double spending on oil production. By 2012, spending had reached $600 billion, yet the price of oil has tripled. For all that additional expenditure, the oil industry has only raised production 3 percent since 2005, to 75 million barrels per day.

That's a horrible return on investment.

The world can no longer increase its production of “easy” oil; many of the older fields are stagnant or declining.

Of the world’s four super-giant oil fields, three are officially in decline: Mexico’s Cantarell, Russia’s Samotlor, and Kuwait’s Burgan. The fourth is also in decline. Though Saudi Arabia officially denies these claims, we know through Wiki-Leaks that this is indeed the case.

In fact, the pace of decline in mature oil fields is accelerating. Mature OPEC fields are now declining at 5 to 6 percent per year, and non-OPEC fields are declining at 8 to 9 percent per year.

As a result, the world is spending a lot of money to eke out additional production from hard, expensive sources like Alberta’s tar sands or tight oil in North Dakota. However, unconventional oil can’t compensate for that decline rate for very long. Even all the growth in U.S. tight oil from fracking, which has produced about 1 million barrels per day, hasn’t been enough to overcome declines elsewhere outside of OPEC.

We’re relying on low-quality oil resources to compensate for the decline in cheap, high-quality oil. One of the implications of Peak Oil is that as production starts to falter, we need much higher prices in order to sustain production. And that’s exactly what’s happened since 2005.

Despite optimistic media reports, fracking for shale oil is highly energy-intensive and is a net energy loser. Net energy is what's left over after new energy resources are found and extracted. The inescapable fact is that conventional oil is used to extract shale oil.

Though North American shale oil is said to be abundant and is expected to lower prices, petroleum costs reached a new annual record in 2012. The reality of shale oil doesn't live up to all the hype.

This is how ShaleBubble.org describes the hype surrounding fracking:

"We’re being told that — thanks to technological advances like hydraulic fracturing and horizontal drilling — the US is undergoing an energy revolution, leading us in a few short years to become once again the world’s biggest oil producer and an exporter of natural gas.

The reality is that the so-called shale revolution is nothing more than a bubble, driven by record levels of drilling, speculative lease & flip practices on the part of shale energy companies, fee-driven promotion by the same investment banks that fomented the housing bubble, and by unsustainably low natural gas prices. Geological and economic constraints — not to mention the very serious environmental and health impacts of drilling — mean that shale gas and shale oil (tight oil) are far from the solution to our energy woes.

Shale plays suffer from the law of diminishing returns. Wells experience severe rates of depletion, belying industry claims that wells will be in operation for 30-40 years. For example, the average depletion rate of wells in the Bakken Formation (the largest tight oil play in the US) is 69% in the first year and 94% over the first five years.

This steep rate of depletion requires a frenetic pace of drilling, just to offset declines. Roughly 7,200 new shale gas wells need to be drilled each year at a cost of over $42 billion simply to maintain current levels of production. And as the most productive well locations are drilled first, it’s likely that drilling rates and costs will only increase as time goes on.

William Engdahl, an award-winning geopolitical analyst and strategic risk consultant, provides an equally sobering perspective on the shale energy mania:

Some say America’s shale energy revolution will provide gas for a century and create millions of new jobs. The only problem with this picture? It’s built on myths, lies and Wall Street hype.

The costs and economics of shale gas in the US are actually negative.

Shale Gas, unlike conventional gas, depletes dramatically faster owing to its specific geological location.

The Wall Street bankers backing the shale boom have grossly inflated the volumes of recoverable shale gas reserves and hence its expected duration. Independent conservative estimates are that recoverable shale gas is about half what the industry claims on its financial statements.

Real well extraction data are now available that show shale gas wells decline at an exponential rate, and will run out far faster than being hyped.

The problem with tar sands is much the same. The cost to produce a unit of energy from tar sands is much higher than traditional oil. The net energy returned from tar sands is terrible. It is the most expensive oil because it is the lowest quality oil and is the most difficult to extract and refine.

If any of this is surprising, even shocking, to you, it's likely because the mainstream media has been hyping fracking, shale oil and tar sands as the panaceas to our nation's insatiable energy demand. Yet, these "remedies" are not actual solutions; they are merely empty promises.

Middle East oil producers and exporters are acutely aware of the problem that is Peak Oil, and they are no longer publicly denying it.

Dr. Robert L. Hirsch, a Senior Energy Advisor at MISI, recently attended a Peak Oil conference in the Middle East and had this to say about the experience:

The fact that a major Middle East oil exporter would hold such a conference on what has long been a verboten subject was quite remarkable and a dramatic change from decades of Peak Oil denial.

The going-in assumption was that “peak oil” will occur in the near future. The timing of the impending onset of world oil decline was not an issue at the conference, rather the main focus was what the GCC countries should do soon to ensure a prosperous, long-term future.

Among the findings at the conference:

• Shale oil in the U.S. is so much foolishness and does not invalidate Peak Oil. We definitely must worry about peak oil.

• High oil prices will impact the world even before the onset of Peak Oil.

Chris Nelder, SmartPlanet's energy columnist, describes the issue this way:

Peak oil was never about “running out.” That’s a strawman argument. The word “peak” in peak oil simply refers to the maximum production rate of oil. While oil producers constantly trumpet new discoveries and rising reserves, they tend to avoid talking about production rates.

Reserves are meaningless if they don’t amount to an increasing rate of production. If you had a billion dollars to your name, but could only withdraw $1,000 a year, would you be worried about running out of money or paying your bills?

The benchmark price of Brent crude shot from $31 a barrel at the beginning of 2004 to $111 a barrel at the end of 2012. It was a very powerful indicator.

This tripling of oil prices resulted in a mere 5.4 percent increase in supply; world production in November 2012 was just 3.9 million barrels per day over the January 2004 level, according to the Energy Information Administration.

A total of $2.4 trillion in capital expenditures from 1995 to 2004 produced 12.3 million barrels per day of additional oil production. However, from 2005 to 2010, the same amount of spending produced a decline of 0.2 million barrels per day. Why?

Because “each marginal barrel will be more expensive and will require more equipment and services to extract,” said John Westwood, the chairman of energy consulting firm Douglas-Westwood.

According to a March 4, 2013 article in the Oil & Gas Journal, the supermajors have been spending about $100 billion dollars a year, collectively, on exploration and production since 2008. That spending resulted in a 25.8 percent decline in oil production since 2004. Leaving out the Russian oil assets of Tymen Oil Company (TNK), which BP acquired in 2003 and subsequently sold to pay for the damages of the Deepwater Horizon disaster, the supermajors’ production actually has been declining since 1999.

Chris Nelder went on to say the following:

The underlying problem, of course, is that production from the world’s old (and cheap) oil fields is continuously declining at over 5 percent per year — another dirty little fact that the oil majors studiously avoid discussing. Thus, global oil production is a treadmill, where you have to run just to stay in place.

The industry plans to respond to this stubborn reality by drilling like there's no tomorrow.

In a leaked powerpoint document from the Society of Petroleum Engineers, the SPE says the gas and oil industry will drill more wells in the next decade than they have in the last 100 years. That is a telling indicator about both supply and demand. It could also be fairly described as frightening.

With a clear memory of oil reaching a high of $145 per barrel in July of 2008, some people may view current prices as a relative bargain. Yet, prices are still historically high.

"A person might think from looking at news reports that our oil problems are gone, but oil prices are still high," writes Gail Tverberg on OurFiniteWorld.com, citing Ten Reasons Why High Oil Prices are a Problem.

"In fact, the new 'tight oil' sources of oil which are supposed to grow in supply are still expensive to extract. If we expect to have more tight oil and more oil from other unconventional sources, we need to expect to continue to have high oil prices. The new oil may help supply somewhat, but the high cost of extraction is not likely to go away."

Her piece is an excellent read and is highly recommended.

The "drill baby drill" crowd mistakenly believes that the solution to our nation's oil problem lies far to the north, in Alaska's frozen Arctic tundra.

It is estimated that 10.5 billion barrels of oil lie beneath the coastal tundra of northeastern Alaska, the Arctic National Wildlife Refuge (ANWR).

At present, the U.S. uses about 7.3 billion barrels of oil a year. Do the math: that's less than a year and half's supply.

Yet, not all of the oil under the earth is recoverable.

In 2010, the U.S. Geological survey estimated that there are 896 million barrels of technically recoverable crude oil in ANWR. However, these are classified as prospective resources, not proved. In comparison, the estimated volume of undiscovered, technically recoverable oil in the rest of the United States is about 120 billion barrels.

The total production from ANWR would be between 0.4 and 1.2 percent of total world oil consumption in 2030. Consequently, ANWR oil production is not projected to have a meaningful impact on world oil prices.

No matter how hard anyone tries to spin it, the problem will always be that oil is a finite, non-renewable resource. As such, supply will increasingly lag demand and prices will continue to rise, affecting every aspect of the U.S. and global economies.

The U.S., a nation that got used to the notion of unlimited abundance throughout the 20th Century, will have to resign itself to higher prices for everything. It's all tied to oil. The best solutions are conservation, efficiency and renewable energy. Smaller, lighter cars will help, as will electric vehicles.

But higher oil prices are here to stay and oil will become increasingly more expensive in the coming years. There are no magic bullets and no universal cures.

It's a matter of realigning our priorities, conserving what oil we have at present, and continually adapting to a new, more challenging, normal.

The Federal Reserve: Making Money From Nothing

At its core, money is a medium of exchange, a unit of account and a store of value. A currency with a commonly recognized value can be used to buy the goods and services we want and need. Like all other things, the value of money is determined by its quantity and availability.

For centuries, people used gold as money. In order to buy something, they had to carry around pieces of the heavy, yellow metal. But that was impractical, especially if someone needed to make a large purchase requiring a significant amount of gold. So people decided to leave their gold in a bank and instead use pieces of paper that would represent their gold. That paper could then be taken to a bank and exchanged for gold.

Gold is a form of commodity money, a currency thats value is based on the value of an underlying commodity. Gold is durable, portable, easily stored, highly recognizable and difficult to counterfeit, which made it an ideal commodity money throughout the world over many centuries.

But, beginning in 1933, the U.S. government decided that we could no longer exchange our dollar bills for gold. From that point forward, dollar bills have merely represented the concept of money.

However, until 1971, U.S. currency was still backed by gold. Foreign governments were able to take their U.S. currency and exchange it for gold with the U.S. Federal Reserve. That changed when President Nixon effectively took the U.S. off the gold standard by ending the convertibility of the dollar to gold in August of 1971.

Since that time, our money has been fiat money, meaning its value has been declared by the government to be legal tender. In essence, it must be accepted as a form of payment within the boundaries of this country, for "all debts, public and private."

Fiat money has value because the government says it does.

Not only is there no longer any gold backing our money, there aren't even bills for most of the money that exists. Most money is simply an idea. Banks don't even have all the money that's allegedly in the accounts of their depositors.

Most money isn't physical; it is merely created electronically. Think about what happens when you pay your mortgage, rent, utility bills, car payment or monthly insurance. No cash — no physical money — ever changes hands.

M2, the broadest measure of our money supply, had increased to $9.61 trillion in October 2011, the latest month for which data is available. However, as of December 2010, only $915.7 billion (about 10%) consisted of physical coins and paper money.

The other 90% is just numbers in bank databases, on computer screens.

The truth is, our money is created out of nothing. It is merely loaned into existence.

Every six weeks, the Federal Reserve's Open Market Committee convenes in Washington D.C. to discuss the health and performance of the economy. By controlling the amount of money in our economy, the Fed can influence interest rates. More money usually results in lower rates, while less money typically has the opposite effect.

More money (or lower rates) generally makes it easier for businesses and individuals to get loans. This allows businesses to expand or new businesses to start up. That ultimately translates into more jobs and a stronger economy.

But, more money can also result in inflation. For example, if there's a hundred dollars in an economy and you create a hundred more, every dollar is suddenly worth half as much. That's inflation.

Money must correlate to the amount goods and services produced in an economy, particularly the things that people want. If there is too much money chasing too few goods and services, money loses value. It's not so much that prices are going up. Rather, the purchasing power of money is going down.

That is why simply printing new money will not create wealth for a country. Money must be in balance with the supply of goods and services in the economy for it to maintain its value, or purchasing power. If the Fed issues too much money, its value will go down, as is the case with anything that has a higher supply than demand.

Over the thirty-year period from 1981 to 2009, the U.S. dollar lost over half its value. This is because the Federal Reserve has intentionally targeted a low, stable rate of inflation.

On January 25th, 2012, Fed Chairman Ben Bernanke announced a 2 percent target inflation rate. Bernanke had previously stated that central banks seek an inflation rate between 1 and 3 percent per year.

Between 1987 and 1997, the rate of inflation was approximately 3.5 percent and between 1997 and 2007 it was approximately 2 percent.

Yet, even at an annual inflation rate of 2 percent per year, the dollar would lose 20 percent of its value in just one decade.

But that doesn't deter the Federal Reserve.

The Fed injects billion of dollars into the economy via the banking system. It does this by purchasing government bonds from the banks. Big banks typically have billions of dollars in Treasury bonds just sitting around on their books because these bonds have long been viewed as the safest, surest investment.

But having billions of dollars just sitting around on their books doesn't suit the banks. At least the bonds they sell to the Fed earn interest. So, the banks are inclined to loan out this new money to make even more money. After all, that's what banks do. And that's how all of this new money enters the economy.

But a large supply of new money doesn't create demand. To create demand, the banks need to lower their lending rate to encourage businesses and individuals to borrow. The hope is that an increased level of borrowing will create an economic expansion. But, as we've recently seen, that doesn't always work as planned.

When the financial crisis was in full swing in the fall of 2008 and the economy appeared poised to crater, the Fed ramped up its money printing to unprecedented levels.

Since that time, the Fed has done things it had never done before. And it's done them on a scale that has dwarfed anything ever attempted before in its history.

NPR's Planet Money put it this way:

The sheer amount of new money that the Fed created was unprecedented. From the time we went off the gold standard of 1933 until 2008, the Fed had created a net total of $800 billion. In the months after the financial crisis, that number nearly tripled to almost $2.4 trillion.

[The Fed was] spending more newly created money in just 15 months than [it] had created in its entire history up until 2008.

However, getting all these trillions of dollars into the economy required more than just buying Treasuries. The Fed decided to buy home mortgages as well, in the form of mortgage backed securities. The intention was to prop us the plummeting housing market.

The danger of this extraordinary and historic Fed intervention is that it will result in debilitating inflation, resulting in the dollar losing significantly more of its purchasing power.

At some point, the Fed will have to find a way to get all those trillions of dollars out of the economy before serious inflation takes hold. Instead of buying bonds, the Fed will begin selling them, which it will attempt to do in an orderly fashion without flooding the market and driving down their value. Again, think supply and demand.

The Fed is able to create trillions of dollars out of thin air on its own authority. Congress doesn't debate it or vote on it. The president doesn't approve it. There's no public input. The Fed is independent and is able to act of its own accord.

Though the Federal Reserve is subject to Congressional oversight, its chairman is appointed by the president, and its name includes the word "federal," it is not actually part the federal government.

It's important to understand that the Federal Reserve isn't federal at all. It is an independent institution comprised by 12 regional banks, all owned by big private banks. Yes, the Fed is privately owned and actually has stockholders.

As the long-time Chairman of the House Banking and Currency Committee Charles McFadden said on June 10, 1932: “Some people think that the Federal Reserve Banks are United States Government institutions. They are private monopolies.”

Consider that when you're evaluating or scrutinizing any decision made by the Fed.

We should never forget that the Fed started the financial crisis that tanked the economy. By keeping interest rates too low for too long, the Fed inflated the housing bubble. And it now appears that it has initiated a bond bubble and a stock market bubble as well, which is an odd occurrence.

Money usually shifts between bonds and equities, typically favoring one or the other, given the particular economic circumstances or appetite for risk. But, right now, there is so much money flooding into the financial system that it is flowing freely to both the bond and equities markets.

At this point, it's pretty clear that the Fed is again blowing yet more massive bubbles that could once again tank the U.S. economy — except that next time will likely be even worse since the economy is still on such weak legs.

The Fed cannot print this economy back to health. At this point, that should be clear. To the contrary, this massive monetary expansion could have some horrible consequences.

As history repeatedly shows, printing money is the road to ruin. It devalues money and causes a loss of confidence. If everyone stops believing in their currency, it has disastrous results. The whole monetary system is built on trust. Once that trust is gone, the value of money goes away with it.

The Fed is Blowing Yet Another Stock Market Bubble

If the stock market's record run-up in the face of our continued economic weakness has left you bewildered, you're not crazy. Though the economy continues to struggle, Wall St. is thriving.

Since the second quarter of 2006, there have been only two quarters in which GDP was at least 4%. And over the last ten years, the average U.S. economic growth rate has been below 2 percent.

Inflation-adjusted wages fell 0.4% in 2012, following a 0.5% decline in 2011. Simply put, wages aren't keeping up with inflation. This is hurting demand and, ultimately, the greater economy.

Yet, despite all of this, the stock market is booming.

In the strange world of Wall St., the stock market thrives even as the economy remains anemic. Go figure.

The Dow Jones recently soared above 14,000, setting an all time high in the process. Yet, the Dow is simply an average of thirty large, publicly traded companies. Thirty companies in a sea of thousands do not accurately represent the vast U.S. economy.

The S&P 500 index recently began trading above 1,500 for the first time since December 12, 2007, just months before the implosion of big Wall St. banks sent the major averages crashing to decade lows.

Despite continual weakness in the economy and consumer spending (which accounts for about 70 percent of GDP), the stock market is booming. How can this be?

You can thank the Federal Reserve, which is pumping $85 billion per month of thin-air money into the markets. Quite simply, this bull market is being fueled by all the funny money being spun out of the Fed's printing press. Hundreds of billions in new money has been flowing into the stock market, which is pushing the averages to new highs.

This stock market run-up is nothing more than an illusion of economic well-being created by the Fed. It is entirely lacking in fundamentals.

The Fed is engaged in an aggressive bond-buying policy, in which it has been purchasing $85 billion in Treasuries and mortgage bonds each month in an attempt to lower long-term interest rates and spur the economy.

Before this year even began, the Fed had already expanded its balance sheet by nearly $3 trillion buying these assets in recent years.

Yet, the central bank is not finished. There are still hundreds of billions of these purchases to come and that money will continue to flow into equities, likely pushing the markets even higher.

At the current pace of $85 billion per month, the Fed's bond purchases will result in another trillion-plus dollars of freshly created money flowing into the financial and equities markets over the course of 2013. Such massive injections of liquidity into the economy have been, and will continue to be, quite favorable for equities.

This is why the market has been steadily increasing, despite the numerous factors arrayed against it — weak earnings, political tensions in Washington and a European recession. While this may seem incomprehensible, it is the result of massive sums of money flowing into the financial markets from quantitative easing. Wall St. has to send that money somewhere, and Treasury yields are at record lows.

Considering the historically low rates of return for Treasuries — which don't even keep up with inflation — it's easy to understand why all that money is instead flowing into the equities markets.

The biggest banks are getting enormous sums of money through the Federal Reserve as virtually zero interest. They are then able to invest hundreds of billions of essentially free money in the stock market and collect massive returns. This results in pure profit, which is one hell of a business model.

Though it's been widely reported that U.S. corporations are sitting on a record $2 trillion in cash, it may actually be as much as $5 trillion. Companies have been using some of that cash to buy up and reduce the total number of shares outstanding. Coupled with the roughly $2.8 billion in Fed money flowing into the financial markets every single day, there is an extraordinary amount of money chasing fewer shares.

So, the current stock market averages are quite misleading. They are simply a reflection of our continually irrational, bubble economics. Most critically, the vast majority of Americans are not benefiting from this stock market boom, which has seen the Dow jump 119 percent since bottoming in March 2009.

Unfortunately, the gains from this surging stock market have been flowing mainly to richer Americans. Roughly 80 percent of stocks are held by the richest 10 percent of households.

Quite predictably, middle-class Americans, having lost faith in the markets, sold their stocks over the past few years and have not benefitted from the rebound. During 2012, Americans dumped $204 billion in stocks, according to a report from the Federal Reserve.

Retail investors have been leaving the stock markets in droves for the past few years. In each of the last three years, individual investors have withdrawn more than $150 billion from U.S. stock mutual funds and ETFs. This means that millions of individual investors have missed the current market boom.

The truth is, the stock market is not an accurate measure of the health and strength of the economy. In reality, Wall St. is a pretty poor measure of the economy’s condition since it is simply a bet on the future performances of a select group of companies listed on a few stock exchanges.

Furthermore, as previously noted, the majority of Americans don’t have any direct investments in the stock market.

According to the June 2012 Fed survey, just 15.1% of American families had any stock holdings in 2010, down from a peak of 21.3% in the 2001 survey. And just 8.7% of families had direct ownership of pooled investment funds (mostly mutual funds) in 2010.

Clearly, the ballooning stock market is not a reflection of the financial well-being of the vast majority of Americans. Most of them aren't even investors. The markets are simply Wall Street's betting games.

Undoubtedly, the 2008 financial crash scared million of individual (or retail) investors out of the markets. However, even six years prior to the crash, more than four out of five U.S. households had no individual stock holdings.

In its 2002 study, the Mutual Fund Industry group, Investment Company Institute, found that only 21 million households (less than 20%) owned individual stocks outside an employee sponsored retirement plan. Employees in such plans are typically invested in mutual funds that give them no voting control.

So, Wall St. is not a true reflection of how the average American worker, or the average family, is faring.

Many U.S. corporations have been making money by cutting costs and laying off workers, not by increasing revenues. This increase in efficiency and productivity has resulted in corporate profits reaching all-time highs (as it turns out, workers who fear losing their jobs work longer and harder). And that's been putting even more downward pressure on jobs and wages, resulting in weaker economic growth and lingering recessionary effects.

So what's been good for U.S. corporations hasn't been good for American workers or their families.

And then there's the whole issue of Wall Street's manipulation and control of the equities markets.

By some estimates, "high frequency trading" is responsible for close to 70% of all volume in US markets. Computers can track hot stocks and immediately buy up all available shares. Since volume moves markets, massive purchases of millions of shares push prices higher, allowing computer algorithms to quickly sell those shares at higher prices. Millions of shares can also be dumped in just milli-seconds. That pushes share prices lower, allowing the computers to quickly swoop in and repurchase the shares at a lower price.

The radical, erratic movements of the stock market over many years can accurately be described as schizophrenic.

The markets are totally manipulated and, unfortunately, there will be a lot of losers because of this.

At the first sign that the Fed plans to withdraw its monumental levels of liquidity from the markets, they will go into free fall. Just the mere rumors or grumblings of the Fed's intention to change course could trigger panic selling.

Ultimately, this will not end well. It never does. We've seen the markets implode numerous times. The Fed's bond-buying program will conclude at some point. While individual investors, pension funds, mutual funds and the overall economy stand to lose big time, Wall St. traders will be the first ones to the exits, with their profits intact.

In fact, there is evidence that this exodus is already underway.

All bubbles eventually burst, and this one will be a whopper.

When Will China's Bubble Burst?

China's rise to the status of economic powerhouse has been nothing short of breathtaking. For most of the past century, China was still an impoverished Third World nation.

However, the Asian giant has averaged a 10 percent growth rate over the past 30 years and it is now the world's fastest-growing major economy. In 2010, that spectacular growth culminated in China vaulting past Japan to become the world's second largest economy (by nominal GDP), behind the U.S.

In the process, China also became the world's biggest car market, which is remarkable considering that almost everyone there rode bicycles just 20 years ago. Car ownership rocketed from just 1 million in 1977 to 75 million in 2011.

China's emergence as the world's second biggest economy was a historic shift, one that can rightly be described as a sea change. From out of nowhere, China became a major player on the world stage. It's arrival was bold, rapid and pronounced.

To provide a sense of the magnitude of China's growth, consider this: In 2007, China's gross domestic product stood at $3.38 trillion. By 2010, it had reached $5.87 trillion. That's just amazing.

In 2010, China surpassed the US as the world's biggest energy consumer and, in the process, it also became the world's second biggest greenhouse gas polluter (also following the US). The UN reported that Chinese emissions nearly doubled from 1994 to 2002.

China's energy demand has increased exceptionally fast; just 10 years earlier, its energy consumption was half that of the US.

All of these developments were astonishing in their own right. But they were small in comparison to what is projected to soon occur.

The IMF dropped a major bombshell in 2011 when it forecast that China’s economy will surpass that of America in real terms in 2016.

Such an outcome would be a positively stunning development. But as amazing as China's emergence has been, it has not come without serious challenges.

China has considerable problems that it needs to confront. With a population of 1.3 billion people, the country outnumbers the US by a billion citizens. The need to provide energy for all of those people is transforming world energy markets and increasing the global demand for fossil fuels, including oil and coal. With 20 percent of the global population, China's enormous demand will continue to drive energy costs well into the future.

According to Fatih Birol, the chief economist at the IEA, China's surging appetite for energy will require a massive and rapid infrastructure build out. China will need to construct some 1,000 gigawatts of new power-generation capacity over the next 15 years — about equal to the current total electricity-generation capacity in the US.

That is simply amazing. The US achieved its current energy capacity over a period of many decades. Yet, China's growth has occurred at hyper-speed. This is already having enormous impacts on the planet, ecologically and environmentally.

Though the US has just five percent of the global population, it uses 25 percent of the world's oil. But America now has a huge competitor for vital energy resources, and one with very deep pockets. The irony is that America's robust appetite for Chinese exports helps to pay for China's massive purchases of foreign oil.

Yet, China's problems go far beyond its demand for energy resources, much of which come from foreign sources.

China needs to generate 15 million jobs needed annually—roughly the population of Ecuador or Cambodia—to employ new entrants into the national job market. That is a spectacular challenge.

China's incredibly rapid growth was built on manufacturing and exporting. But with the global economy slowing, the demand for Chinese goods has also slowed. In order to maintain its growth, China will eventually have to boost domestic demand and switch from its export-driven model to a consumption economy. That will be a challenge for a thrifty nation more inclined toward saving.

Moreover, one billion of China's citizens are still peasants. It has one-fifth of the world's population and it has to feed that mass of humanity. Yet, much of its landscape is an ecological wasteland and an environmental disaster area. That poses an enormous challenge.

Dust storms have been steadily worsening in China over recent decades due to heavy tree-cutting. The environmental damage in China is extensive. More than a quarter of the country's landmass has been turned into desert as a result of erosion and logging, and acid rain has damaged a quarter of Chinese soil.

According to the World Bank, China is home to 16 of the world's 20 most polluted cities. Three hundred thousand Chinese citizens die prematurely each year due to respiratory illness, and the life expectancy of a traffic cop in Beijing is approximately 40 years due to the horrid air quality.

These problems are poised to worsen as China attempts to provide energy to its continually developing economy and absolutely massive population.

So, while some are heralding the 21st Century as the 'Chinese Century', and predicting that China will supplant the US as the world's dominant power, I, for one, remain unconvinced.

Yes, the US has its own enormous challenges and finally appears to be bumping up against the limits to growth. While the US is the world's biggest debtor nation, China is the world's largest creditor nation and owns approximately 20.8% of all foreign-owned US Treasury securities.

Nonetheless, China will eventually face even greater environmental and agricultural challenges, which could derail all of those exuberant projections of its rise to global supremacy.

Yet, long before China is forced to fully confront its horrendous environmental degradation, which will make feeding 1.3 billion humans even harder than it would otherwise be, it will likely be derailed by the largest housing bubble in human history.

China has built entire cities with no one in them. Seriously.

According to Gillem Tulloch, a Hong Kong based financial analyst, China is building somewhere between 12 and 24 new cities every single year. We're not talking about developments, communities or neighborhoods — but entire cities. This means that 1-2 new cities are being constructed each and every month in China.

Think about that for a moment. It's hard to comprehend.

These are known as "ghost cities" and their skylines are adorned with massive apartment buildings that sit empty. The emerging Chinese middle class is buying up multiple properties — in addition to their primary residences — with the belief that real estate is the best investment. Banks offer paltry interest rates and the stock market is too volatile. Property prices, on the other hand, have always gone up and they've always beaten inflation.

Sound familiar?

Real estate has been an enormous driver of growth in recent years, accounting for as much as 20 or 30 percent of the entire economy, according to some estimates. And it's not just apartments and houses; it's shopping malls and towering office buildings. But far too many of them sit empty.

The idea seems to be, "If you build it, they will come."

But there's a big problem with that assumption: Though China has a rapidly growing middle class, one billion of its citizens still live as peasants.

The typical new Chinese condo is 1,100 square feet and costs between $100,000-$150,000. However, the typical two-income Chinese couple in their 30s makes approximately $7,000 or $8,000 a year. That just doesn't add up.

In some places, it's even worse. A typical apartment in Shanghai costs about 45 times the average resident's annual salary.

China is building the wrong kind of housing. It isn't creating affordable dwellings for its massive population of impoverished citizens. And desperately poor people don't shop at malls either. Most people in China live on about $2 a day.

When this enormous real estate bubble bursts, it will have massive reverberations throughout the world — not just in China.

About 50 million Chinese workers are employed as construction workers. When the bubble bursts, they'll all suddenly be out of work. That would pose a staggering social problem for the government.

Already, numerous construction projects throughout China have been abandoned. Many developers have run out of money and abruptly pulled out of existing ventures in midstream. That, in turn, is slowing the Chinese economy. Lots of loans are going sour. If this builds up a head of steam, it could cripple the economy.

How might this affect the US?

The Chinese government has spent some $2 trillion to build these 'ghost cities' as a means of maintaining its economic growth.

Imagine if the Chinese government has to use its US currency reserves to solve its own financial and economic crises. Imagine if it has to sell off its US Treasuries to fill the void?

If the Chinese bubble bursts, it would affect all US companies that sell commodities to China — particularly the variety that go into construction, such as steel, most of which goes to China at present.

I first wrote about the Chinese real estate bubble three years ago, when I questioned whether China's growth is an illusion. At that time, millionaire hedge fund manager James Chanos said the following about China: “Bubbles are best identified by credit excesses, not valuation excesses. And there’s no bigger credit excess than in China.”

Chanos, the founder and President of Kynikos Associates, has spent significant time evaluating and analyzing the Chinese economy and its property bubble. Back in 2010, Chanos warned that the bubble will likely burst and run its course in late 2010 or in 2011.

Because that hasn't occurred yet doesn't mean Chanos was wrong. He was just early. The pressures in the system have only grown considerably over the last two years, meaning that when this bubble does finally burst, it will be felt all around the world.

There's an awful lot of foreign investment money tied up in China. At the first outward signs of distress, everyone will want to escape intact. But with everyone simultaneously heading to the exits, not everyone will fit through the door.

The losses would be catastrophic.

Why the Official Unemployment Rate is so Deceiving

The government wants you to disbelieve your lying eyes and accept that our nation's unemployment problem (or, crisis) is actually improving. The jobs problem has been so awful over the past five years that the government desperately needs the illusion of good economic news, and none could be better than promoting the notion that more people are working now than last month or last year.

The problem with this story is that it's all nonsense.

It's not that the government is lying outright; it's that it is cherry-picking the data. It's telling the story in a way that makes things seem much better than they are in reality. By looking at one set of numbers while ignoring other critical ones, you end up with a very different, and more upbeat, picture.

But to do so is highly misleading.

The Federal government counts a person who is self-employed and earns $100 a year as "employed" and it also counts a person who works one hour a week as "employed."

As a result, the only meaningful metric is full-time employment.

To be counted as officially unemployed, a person must have actively looked for work some time in the past month. If you have not looked for work in the past month, for whatever reason, you are not counted as unemployed.

The government uses two different numbers to express unemployment. These are known as the U-3 and U-6 unemployment figures.

U-3 is the 'official' unemployment rate. It measures people without jobs who have actively looked for work within the past four weeks.

However, U-3 does not include so-called "discouraged workers", or those who have stopped looking for work because current economic conditions make them believe that no work is available for them. It also excludes so-called "marginally attached workers", or those who "would like" and are able to work, but have not looked for work recently.

On the other hand, U-6 includes all of the above, plus part-time workers who want full-time work, but cannot find such employment due to economic circumstances.

Under the U-3 definition, the official unemployment rate was 7.7% in February. By this definition, there were 12 million people who said they had looked for a job without success.

But there were also 6.8 million people who said they wanted a job but weren’t even looking, perhaps because they were so discouraged. This may be due to a lack of transportation, a lack of childcare, illness, or some other reason.

Additionally, 8 million people said they could only find part-time work, even though they preferred full-time work. In some cases, their hours have been cut back involuntarily.

If you count those discouraged workers and the involuntary part-timers as unemployed — the U-6 figure — the unemployment rate jumps to 14.3%. That's nearly twice the official figure. Big difference.

A more accurate measure of our unemployment problem is the size of the labor force. This looks at the number of people, ages 16 and older, who are either working or are actively looking for work, while excluding the disabled and those in the military, prison, or hospital.

Using that measure changes the picture considerably.

In February, the labor force shrank by 130,000, which is why the U-3 rate fell to 7.7%. Yes, if you exclude huge numbers of people, the unemployment figure looks considerably better.

The labor force participation rate actually decreased slightly to 63.5 percent in February, from 63.6 percent in January. That's a return to the low of last summer and matches the woeful rate seen back in 1981.

So, while some are celebrating the unemployment rate's drop to a four-year low, the reality is not nearly so encouraging. It's obvious that unemployment is "improving" only if you pretend that millions of American workers no longer want jobs.

If the participation rate were 66.2% — where it was when the economy fell into recession in December 2007 — the jobless rate would be 10.7%. Again, when you exclude millions of people, the unemployment rate looks a whole lot better than it really is.

The number of people reported as not in the labor force rose to 89.304 million in February from 89.008 million in January, which is a new record. It means that 28 percent of the adult population is no longer contributing to the wealth of the nation through their labor.

That's a stunning statistic.

Because more than 3 million people turn 65 each year, the number of retired people is increasing steadily. That obviously has an impact on the decreasing labor force participation rate. But it is not the sole reason for this alarming tumble. Young workers continue to enter the labor force each and every month.

The critical numbers are all heading in the wrong direction. To make pretend this isn't so is highly deceptive and unhelpful.

By ignoring all of this, the government can celebrate a falling unemployment rate while millions of Americans continue to suffer. Undoubtedly, job creation is largely a function of the private sector. Most Americans aren't pining for more government jobs just to improve the unemployment rate.

However, if the government was held accountable for the true unemployment rate and the declining labor force participation rate, perhaps it would have to work more closely with the business community to improve conditions for job creation — most especially for the small business community.

When Stimulus Doesn't Stimulate

Since 2009, the U.S. has run an average annual deficit of $1.2 trillion. At the same time, the Federal Reserve has expanded its balance sheet by more than $3 trillion. Yet, the economy has only managed to grow at a subpar rate during that period.

Historically, from 1948 until 2012, the annual GDP growth rate in the U.S. averaged 3.22 percent. However, GDP growth has slowed considerably in the last decade. In fact, the average growth rate has been below 2 percent over the last ten years.

The Fed has even held short term rates at a remarkably low level of between 0% and 0.25% since December 2008 and made the unprecedented promise to keep them that low “at least through late 2014.”

What have we got to show for all of these historic interventions? Not much. The economy continues to limp along like a wounded animal. Though you can't prove a negative, perhaps all of these monumental actions averted a full blown depression.

However, the headwinds acting against the U.S. economy have been gathering strength for many years and our share of the global economy has been continually shrinking.

According to the World Bank, U.S. GDP accounted for 31.8 percent of all global economic activity in 2001. That number dropped to 21.6 percent in 2011. That's not just a decline — it's a freefall.

Despite all of the Fed's extraordinary efforts with monetary policy, and despite Congress' aggressive deficit spending, the U.S. economy still surrendered a huge share of global GDP over the past decade.

It's rather amazing that our economic system has held together so well, particularly over the past five years, in the face of all this thin-air money printing and repeated trillion-dollar deficits.

However, these actions are merely acting like duct tape keeping things together. Money-printing and massive deficit spending only offer a temporary respite; they are not long term solutions. They will just create greater long term crises.

Moreover, by forcing near-zero interest rates upon us, the Fed has forced millions of Americans — including retirees — to make big gambles with their life savings. Low rates have driven many people to buy risky assets in the quest for returns high enough to beat inflation.

After lowering short-term rates to near-zero levels, the Fed has lost one of its primary tools for monetary policy. All it has left is its ability to increase the quantity of money.

At present, the Federal Reserve's quantitative easing program (QE) is the lifeblood of the U.S. economy. Yet, despite all of this unbridled money-printing, the economy still contracted in the fourth quarter. Without QE, the economy would seize up. The Fed's funny money — trillions of dollars created out of thin air — is the only lubricant greasing the wheels this economy right now.

The central bank has been purchasing $85 billion in Treasurys and mortgage bonds each month, and says that it will continue doing so for an indefinite period.

Though the Fed has already expanded its balance sheet by nearly $3 trillion buying Treasurys and mortgage bonds (in an effort to lower long-term interest rates and stimulate the economy), this additional $85 billion per month in bond purchases will result in another trillion-plus dollars of freshly created money flowing into the financial system and equities markets over the course of 2013.

The Fed isn't worried, at this moment, about the trillions of dollars is has been printing because the U.S. economy remains gripped by sluggish growth. Many observers predict that the economy will continue to grow at lackluster 2%, or so. Slow growth usually equals low inflation, which keeps interest rates low.

However, as history shows, all of this unbridled monetary easing eventually leads to a sharp increase in inflation and bond yields. It's just a matter of time.

The Fed is conducting a rather dramatic and desperate experiment right now, hoping it won't backfire and unleash a punishing wave of inflation on the American people. Yet, this unprecedented experiment is already having side effects. Though inflation averaged "just" 2.1% in 2012, which many economists consider mild, at that rate the dollar would lose 21% of its buying power by the end of the decade.

The Fed continues to create oodles of money out of thin air, backed by nothing, without regard to the amount of goods and services in the economy. As history shows, this sort of money/currency inflation ultimately leads to price inflation.

The U.S. monetary base (the supply of money) nearly doubled between 1994 and 2006. But then things got really crazy. It doubled twice more, increasing by an additional 221%, from 2006 to 2011. That can only be described as stunning.

None of this even takes into account the amount of debt the federal government has been incurring as it tries to stimulate demand and fill the void created by a hobbled private sector. The national debt now exceeds $16.6 trillion and will surpass $17 trillion before the year is over.

According to the Bureau of Economic Analysis, U.S. gross domestic product totaled $15.8 trillion in 2012, meaning that our debt is now 105% of our GDP.

The 'Debt Held by the Public', which is all federal debt held by individuals, corporations, state or local governments, foreign governments and other entities outside the United States Government, equals $11.7 trillion at present. That amounts to 74 percent of GDP.

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% 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.

For 800 years "you increase it over and beyond a high threshold, and boom!" write Reinhart and Rogoff.

As their work shows, debt ratios that high cause GDP growth rates to fall. That creates a downward spiral. Slowing growth — or worse, a shrinking economy — only causes debt ratios to increase even further.

Unfortunately, the U.S. has now reached that point of no return.

"Highly leveraged economies, particularly those in which continual rollover of short-term debt is sustained only by confidence in relatively illiquid underlying assets, seldom survive forever, particularly if leverage continues to grow unchecked," write Reinhart and Rogoff.

"Sovereign powers saddled with debt loads as large as those of the U.S., Europe, and Japan today are jeopardizing their long-term economic wellbeing."

Since the 2008 financial crash and subsequent Great Recession, the U.S. has added more than $4 trillion in new debt and the Federal Reserve has blown out its balance sheet by more than $3 trillion. Despite these historic and dramatic interventions, the U.S. economy has just muddled along and barely grown.

After contracting in 2009, the U.S. economy expanded 2.8% in 2010, 1.7% in 2011 and 2.2% in 2012. The Congressional Budget Office projects GDP to increase 1.4% this year.

Those weak results are not what one would expect, given all that has been done to bring the economy back to life.



Perhaps the U.S. would still be in the midst of the second Great Depression if not for the massive deficits and money-printing that have ensued. But after all of this spending by Congress, and these stunning monetary interventions by the Fed, it's reasonable to ask:

Is this as good as it gets?

Low Incomes and a Dearth of Good Jobs Have Led to Unsustainable Dependence

During the last election cycle, the American public was subjected to a contentious debate about 'makers' versus 'takers.' Posited on one side of the argument were the industrious, entrepreneurial Americans who produce things (including jobs) and on the other side were the Americans who allegedly mooch off the government.

Republican vice presidential candidate Paul Ryan initiated the dispute when he had previously argued that 60 percent of Americans receive more financial benefits from the government than they pay in taxes.

Quite obviously, the framework for this debate was bound to be controversial. It implied that the majority of Americans are idly sitting around, just waiting for a check from the government so they don't actually have to work. Under this argument, an enormous segment of the American public is deemed as lazy, unmotivated and lacking ambition.

The proper context would be to question why the middle class has been entirely shredded and why so many millions of Americans cannot find work, leaving them to simply exit the labor force as a result. Chronic unemployment has become the new normal.

The U.S. labor market started 2012 with fewer jobs than it had 11 years earlier, in January 2001. The only reason the unemployment rate continues to drop is because people keep dropping out of the labor force.

The percentage of the civilian labor force that is employed fell every single year from 2006 to 2011, according to the Bureau of Labor Statistics. In other words, this ugly trend was already underway a full two years before the financial crisis even began.

Yet, those fortunate enough to have jobs are confronted by the fact that, adjusted for inflation, wages have been stagnant since the 1970s. And the prevalence of low-wage jobs is further hampering the U.S. economy.

The U.S. had the highest share of employees toiling away at low-wage work among all developed/industrialized countries in 2009, according to OECD data. One in four U.S. employees were low-wage workers that year. That is 20 percent higher than in the number-two country, the United Kingdom.

Low-wage work is defined as earning less than two-thirds of the country's median hourly wage.

The number of employees working in low-wage jobs has been rising since 1979, according to to John Schmitt, senior economist at the Center for Economic and Policy Research.

Given these troubling developments, it should come as no surprise that government dependence has reached an all-time high.

Charles Hugh Smith spells out the stark reality quite clearly:

There are roughly 127 million people who receive government transfers or benefits. Sixty-one million recipients of Social Security and Medicare and 66 million people receiving welfare (SNAP food stamps, housing credits, Medicaid, etc.) Since there are about 115 million full-time jobs in the U.S., this means there are 1.1 government dependents for every full-time worker in the U.S. (For context, there are 315 million Americans and roughly 142 million jobs. About 38 million of these jobs are part-time that pay less than $10,000 annually. Fifty million wage earners earn less than $15,000 a year, and 61 million earn less than $20,000 annually.)

The Federal government counts a person who is self-employed and earns $100 a year as "employed" and a person who works one hour a week as "employed." As a result, the only meaningful metric is full-time employment.

A new research paper by Patrick Tyrrell and William W. Beach says the number of Americans receiving money directly from the federal government each month has grown from 94 million in the year 2000 to more than 128 million today.

Whether the number of Americans receiving government benefits each month is 127 million or 128 million amounts to quibbling. It is a serious problem when there are just 115 million full-time workers subsidizing that many of their fellow citizens.

It's not even a matter of morality, or charity, or fairness; it's a matter of practicality and sustainability.

It's reasonable to ask how long the federal government can afford to support 128 million Americans every month. There will always be poor people in any society, including ours. But how can the U.S. maintain first world status with such a rapidly growing portion of poor and low-income citizens?

I wrote about the shocking upswell of low-come Americans in a recent article, Stagnant Incomes Leading to Economic Decline.

According to Census Bureau data, a record number of Americans – nearly 1 in 2 – are now classified as either poor or low income. About 97.3 million Americans fall into a low-income category, and 49.1 million fall below the poverty line and are counted as poor. This means that 146.4 million, or 48 percent of the U.S. population, is now considered to be either poor or low-income.

This is why so many millions of our fellow citizens rely on government transfer payments.

According to the U.S. Census Bureau, 49 percent of all Americans live in a home that receives direct monetary benefits from the federal government. Back in 1983, less than a third of all Americans lived in a home that received direct monetary benefits from the federal government.

Here's the breakdown of the households receiving government benefits: Social Security - 31.6 percent; Medicare - 29 percent (obviously there is a lot of overlap between the two, since those programs mainly benefit retirees); Medicaid - 19.5 percent; food stamps - 12.7 percent; subsidized lunches - 11.2 percent; public housing - 5 percent (again, there is some overlap here); unemployment - 4 percent; and veterans’ compensation - 2.6 percent.

The growth in these various programs has resulted in significant increase in the amount of income that Americans now derive from the associated government payments.

In 1980, government transfer payments accounted for just 11.7 percent of all income. Today, government transfer payments account for more than 18 percent of all income.

Low and stagnant wages, plus an insufficient number of well-paying jobs, have left far too many Americans dependent on government benefits. This is plainly unsustainable. Low wages and chronic unemployment are crippling the economy and leaving the U.S. continually vulnerable to recession. That, in turn, will increase the number of Americans in need the government safety net and continual transfer payments.

Without an abundance of middle-class jobs — millions of new ones each and every year — the U.S. economy will continue to decline. Our economic health relies on quality jobs that allow millions of low-income Americans to participate in the middle class. This would also increase the tax base and lessen the dependance on government.

At the end of 2012, just 58.6 percent of all working age Americans had a job. According to the Bureau of Labor Statistics, the percentage of the U.S. labor force that is employed has been steadily falling since 2006.

Take a look at the percentage of the civilian labor force that has been employed over the past several years. These numbers come directly from the Bureau of Labor Statistics:

2006: 63.1

2007: 63.0

2008: 62.2

2009: 59.3

2010: 58.5

2011: 58.4

2012: 58.6

As you can see, the percentage of the civilian labor force that is employed fell every single year from 2006 to 2011.

In January, only 57.9 percent of the civilian labor force was employed. So the number is trending downward once again.

As a result, the number of Americans "not in the labor force" has absolutely skyrocketed in recent years. There has been an alarming and steady rise every year since 2006:

2006: 77,387,000

2007: 78,743,000

2008: 79,501,000

2009: 81,659,000

2010: 83,941,000

2011: 86,001,000

2012: 88,310,000

In January, there were reportedly 89,868,000 Americans at least 16 years of age not in the labor force.

Despite mainstream media reports, it's obvious that unemployment is "improving" only if you pretend that millions of American workers no longer want jobs.

As long as the percentage of the civilian labor force with a job remains this low — much less continues to increase — the reliance on government benefits will persist and even grow. As it stands, the 75 million Baby Boomers will progressively become eligible for Social Security and Medicare benefits each and every year for the next two decades. That will pose a tremendous burden to this nation.

By 2033, there will be almost twice as many older Americans as today — from 43.4 million at present to 75.7 million — according to the Social Security Administration. Meanwhile, the number of workers for each Social Security beneficiary will decline from 2.8 to 2.1.

The vast number of seniors, alone, will create a tremendous fiscal burden. The additional weight of so many poor and low-income Americans also in need of support could strangle the economy. The current state of affairs cannot continue indefinitely. At some point, it will collapse.

There is certainly enough money in the U.S. economy. The problem is that it is too restricted at the top.

According to a recent study by University of California economist Emmanuel Saez, based on an analysis of American tax returns, in 2010, 93 percent of all new income growth went to the top 1 percent of American households. Everyone else, the bottom 99 percent, divided up the remaining 7 percent.

As long as that persists, the current level of government dependance will also persist — until it can be sustained no longer. At that point, it's game over. Our days as a first-world nation will be nothing more than a memory and a tale for the history books.

Stagnant Incomes Leading to Economic Decline

If you're wondering why attempts to reinvigorate the American economy have been so ineffective, you can blame it on the evisceration of the middle class. The emergence of a vibrant middle class had previously allowed the U.S. to become the dominant economic power in the world. The rapid collapse of our middle class is leading to a historic economic decline.

The facts are striking.

According to Census Bureau data, a record number of Americans – nearly 1 in 2 – have fallen into poverty or have earnings so low that they are classified as low income.

Pause for a moment and let that sink in.

About 97.3 million Americans fall into a low-income category, commonly defined as those earning between 100 and 199 percent of the poverty level, based on a new supplemental measure by the Census Bureau that is designed to provide a fuller picture of poverty. Together with the 49.1 million who fall below the poverty line and are counted as poor, they number 146.4 million, or 48 percent of the U.S. population.

When nearly half of your population is defined as low income, you are merely clinging to 'first world' status. Yet, the whittling down of the middle class has been underway for decades.

Since 1980, the typical hourly wage for a worker has increased just $1.23 cents, after accounting for inflation. The effects of this have been felt most broadly by those on the bottom of the income scale.

The inflation-adjusted average earnings for the bottom 20 percent of families have fallen from $16,788 in 1979 to just under $15,000, and earnings for the next 20 percent have remained flat at $37,000.

Though the problem of falling incomes has been decades in the making, it accelerated during the financial crisis and worsened in the alleged recovery.

Despite record-high corporate profits, the inflation-adjusted median wage continues to drop. And the share of the economy going to wages rather than to profits is the smallest on record.

Median household income in America has fallen for four consecutive years, according to the Census Bureau. Overall, it has declined by over $4000 during that time span.

Remarkably, approximately one out of every four American workers makes 10 dollars an hour or less. That makes growing the economy very difficult because it is choking off demand.

Though salaries and wages have essentially been stagnant, the cost of living has been continually rising. For example, inflation was 27 percent from 2000 to 2010. That's a hidden tax on all Americans, young and old, rich and poor. However, it disproportionately affects the poor and middle class, who can least afford it.

Historically, from 1914 until 2012, the United States inflation rate averaged 3.36 percent. This means that your money has been losing roughly a third of its buying power each decade. This is having punishing affects since incomes have not kept up with inflation.

The Federal Reserve's aggressive monetary policy (money printing), in which it has expanded its balance sheet by $3 trillion (on its way to $4 trillion by year's end), has set the stage for a massive devaluation of the dollar.

When you hear your parents or grandparents talk about how cheap things like bread and milk or cars and houses used to be when they were young, you can blame this on the dollar's continual loss of buying power due to the Federal Reserve's well-orchestrated inflation objectives.

The Fed intentionally creates inflation by printing more money, which devalues all of the money already in circulation. This is not hidden or secretive. In fact, the Fed is quite open about this.

On January 25th, 2012, Fed Chairman Ben Bernanke announced a 2 percent target inflation rate. Simple math reveals that over the course of a decade, this would add up to 20 percent, meaning your money would lose one-fifth of its buying power.

Since wages and salaries for most Americans have not kept up with inflation for many years, this has punished the poor and the middle class (or, what's left of it), while hindering the economy.

Safety-net programs (such as food stamps and unemployment benefits) and tax credits have kept millions of out of poverty, masking the true magnitude of the problem.

Many middle-class Americans continue dropping below the low-income threshold – roughly $45,000 for a family of four – due to the loss of a job, pay cuts and/or a forced reduction of work hours.

A continually growing segment of Americans can be described as 'low income' and the affects of this a can be seen throughout the economy.

Since consumer spending drives 70 percent of U.S. economic activity, lower incomes and falling demand are obviously impacting the broader economy. By and large, Americans have less disposable and discretionary income to direct back into the economy, which is why it no longer operates smoothly.

We are learning about the limits of growth.

Decades of massive debt accumulation masked stagnant and falling incomes. Americans were forced to live on credit just to pay for essentials, such as food, gas, medicine and doctor's bills.

But people have learned that the accumulating interest makes paying off this debt difficult to impossible. As a result, Americans have been defaulting at record rates over the past five years. This has made credit issuers more cautious and made credit more difficult to obtain.

The point is, we can no longer count on debt to propel the economy — nor should we. Despite decades of debt accumulation (total U.S. household debt reached a whopping $13.8 trillion by 2008), it still wasn't enough to stop the long term decline of the U.S. economy.

Historically, from 1948 until 2012, the annual GDP growth rate in the U.S. averaged 3.22 percent. However, since 1973, the U.S. economy has experienced slower growth, averaging 2.7 percent annually. And this slowdown has accelerated in recent years.

In the 1950s and 1960s the average growth rate was above 4 percent. In the 1970s and '80s it dropped to around 3 percent. Yet, in the last ten years, the average rate has been below 2 percent.

After contracting in 2009, the U.S. economy expanded 2.8% in 2010, 1.7% in 2011 and 2.2% in 2012. The Congressional Budget Office projects GDP to increase 1.4% this year.

As GDP growth rates have tumbled, personal disposable income growth has fallen even more precipitously.

In the 1970s and '80s personal disposable income for the average American was rising 10 percent a year. From 1990 to 2008, income growth rate had dropped to an average of 5.8 percent. And since the recession in 2009, when it actually declined, income has been growing an average rate of 3.6 percent.

As incomes have declined, the middle class has declined. Quite predictably, the U.S. economy has declined as well.

That's where we find ourselves in 2013, on a long road to continual economic decline.

Despite its Debt, the US Can't Afford to Ignore its Antiquated Infrastructure

In 2009, the American Society of Civil Engineers (ASCE) gave America’s infrastructure a “D-“ grade and called for $2.2 trillion in investment over the coming five years. However, the necessary investment has not since been made. This has jeopardized our economy and even our safety. Basic upgrades and critical modernization have been ignored.

In his State of the Union Address, President Obama acknowledged this, admitting that we have an "aging infrastructure badly in need of repair," while also noting that there are “nearly 70,000 structurally deficient bridges across the country.”

Roads, bridges, ports, and rail systems allow businesses to move goods, reach global markets, grow their market share and create new jobs. Investing in these critical elements of our nation's infrastructure, as well as our water systems, is the only way to build and maintain a 21st Century economy.

Greg E. DiLoreto, President of the ASCE, put it this way:

For the U.S. economy to be the most competitive country in the world we need a first class infrastructure system—transport systems that move people and goods efficiently and at reasonable cost by land, water and air; transmission systems that deliver reliable, low-cost power from a wide range of energy sources, and water systems that drive industrial processes as well as the daily functions in our homes. Infrastructure is the foundation that connects the nation’s businesses, communities and people, driving our economy and improving our quality of life.

On March 19th, the ASCE will release its 2013 Report Card for America’s Infrastructure. It will be interesting to see if anything has improved in the intervening four years, or if our overall infrastructure has predictably regressed.

The 2009 report highlighted a continual pattern of disrepair and neglect. The ASCE had previously given US infrastructure a "D" grade in 2005 as well. Getting the same grade again in 2009 clearly indicated a total lack of national commitment to correcting these critical problems.

In an economic report on the failure to invest in infrastructure, ASCE has found that "infrastructure investment is inherently linked to our nation’s economic success. The Failure to Act report found that if we fill our infrastructure funding gap by 2020, the U.S. can eliminate potential drags on economic growth, protect 3.5 million jobs, and protect $3,100 in annual personal disposable income."

If these problems are ignored, the ASCE warns, "Your commute will become less reliable, your shipments will take longer. You may experience more electrical outages and water issues."



Those problems will come at a great expense.

The ASCE study finds that the overall cost to households and businesses of deficient infrastructure grows to $1.2 trillion for businesses by 2020 and $611 billion for households, under current investment trends.

The ASCE asserts the following:

Thus, the investment gaps will total $1.1 trillion by 2020, and will grow to $4.7 trillion by 2040.

If we don’t address this funding shortfall of $157 billion a year for our nation’s infrastructure, we will be faced with the following by 2020:

• A projected loss of $3.1 trillion in GDP, almost the equivalent of the 2011 GDP of France

• A $1.1 trillion decline in U.S. trade value, equivalent to Mexico’s GDP

• A loss of 3.5 million jobs in the year 2020 alone, more than the jobs created in the U.S. over the previous 22 months

• A $2.4 trillion decline in consumer spending, comparable to Brazil’s GDP

• A drop of $3,100 in disposable income per year, per household

Obviously, the cost of performing these vital infrastructure repairs and improvements will be great. Yet, the ASCS says, "the real story of this report is that we can’t afford not to."

Whatever the cost, the price of not investing will be even higher.

Repairing, rebuilding and modernizing our national infrastructure would also create jobs, increase demand, circulate money back into the U.S. economy and revive the tax base.

It will be impossible for the U.S. to maintain it's status as a super power and a world leader in the 21st Century with a failing and crumbling infrastructure. Quite disturbingly, the current state of affairs reveals a nation in decay and decline.

The problem is that the U.S. is already running massive annual budget deficits and is burdened by a cumbersome national debt exceeding $16 trillion. Our politicians have squandered our national wealth, as well as opportunities to address these problems, for many years. This decay didn't just happen overnight.

The repairs to our nation's infrastructure are long overdue. Yet, for a nation with such a staggering debt burden, they will prove cumbersome.

Economic growth this year will average only 1.4 percent, according to the Congressional Budget Office’s latest forecast. In other words, growth will be too paltry to pay for these vital repairs.

Yet, they cannot be ignored, and that's the conundrum for the U.S.

The U.S. can't afford $2.2 trillion in infrastructure repairs and improvements, and yet it can't afford not to fund them either.

When the Obama administration unveiled its fiscal stimulus package in early 2009, the federal government’s debt to the public amounted to only 35 percent of our gross domestic product. Today, it amounts to about 75 percent. That's a whole lot of new debt in a very short time frame.

However, according to CBO calculations, the 2009 fiscal stimulus produced about $1 of economic output for every $1 in stimulus, on average. In other words, spending on infrastructure paid for itself.

But there is still reason for caution.

Earlier this month, the CBO produced an analysis of the impact that further deficits would have on the economy. A $2 trillion fiscal stimulus would increase growth for the next three or four years. But as the economy recovered, the deficit would crowd out private investment, reducing growth over the decade. By 2023, government debt would amount to 87 percent of GDP.

Congress needs to weigh the potential return on public investment over the long term. Improving the nation’s infrastructure could ultimately yield much more than a dollar in economic output for each dollar spent.

The reality is that we can't ignore our infrastructure. Even absent the goals of modernizing and improving our infrastructure, old bridges, roads, dams, dikes and levees will continue to crumble.

It is a problem that cannot, and will not, be ignored.

Treasury Using Fed to Create Illusion of US Bond Market

The Treasury Department, in conjunction with the Federal Reserve, has created its own bond market.

The government's monthly borrowing needs are so great that it can't find enough corporate, institutional and sovereign buyers on the open market to purchase the copious amounts of available U.S. debt.

Consequently, the Federal Reserve's printing press has become the alternative.

The U.S. private sector — namely banks, mutual funds, corporations and individuals — reduced 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 everyone is chasing higher yields in riskier markets.

This has put the U.S. in desperate situation where it has sought a buyer of last resort. Enter the Fed.

The U.S. is heavily 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 to get our creditors to roll over their existing debt, with the promise of even more interest payments down the road.

This is an important concept: the federal government — already so deeply in debt — must continue issuing Treasuries just to pay back its current debt holders, in addition to maintaining its deficit spending.

This means the U.S. is on a never-ending carousel of debt. The government has to continue issuing new debts just to support its old debts.

Like any pyramid or Ponzi scheme, the system needs continuous inflows of new money to refinance its debts and keep itself afloat.

The U.S. economy has become so reliant on these Fed purchases, that it's reasonable to wonder if — not when — they will end. Simply put, the U.S. government would cease to function without the absolutely massive interventions of its central bank.

This month, the Fed will buy 75% of new 30-year Treasuries. While that sounds utterly astonishing, such an outsized share is reflective of the increasing surge that has been taking place over the last few years.

In 2011, the Federal Reserve purchased a stunning 61 percent of the total net Treasury issuance. And the Fed has purchased 41% of all the 30-year Treasury bonds issued since 2009.

The Fed is effectively subsidizing the U.S. government's borrowing and spending. It allows the government to repay older, maturing debt that is not rolled over and reinvested by legitimate creditors.

Given that the U.S. is piling ever more debt onto its current $16.4 trillion burden, it's understandable that foreign governments and sovereign wealth funds may feel reluctant — or even refuse — to roll over their existing debts.

In essence, the Fed is monetizing U.S. debt, meaning that it is printing money — backed by nothing — so that the government can maintain its deficit spending and debt payments.

Monetizing the debt will devalue the dollar and eventually spike inflation. That would create a self-perpetuating cycle in which inflation then decreases the buying power of the dollar.

When interest rates eventually rise (and they will), there will be a variety of consequences. Rising interest rates automatically devalue older bonds issued at lower fixed rates. That will be punishing to holders of current Treasuries.

Right now, yields are barely keeping up with inflation and are, in fact, usually losing bets. Last year, inflation ran at 2.1 percent. Meanwhile, the yield on 10-year notes was 1.78 percent at the end of 2012, while the yield on the 5-year note was 0.72 percent.

Famed investor Jim Rogers says he is short long-term government bonds. A short position is a bet that the value of an asset will decline.

With the U.S. dollar used as the world's reserve currency and U.S. Treasuries historically viewed as the safest of all investments, the Fed has long been able to control interest rates.

But if investors demand higher rates due to reckless U.S. fiscal and monetary polices, the general consensus is that the Fed will then lose its control over rates, which would subsequently begin to rise.

However, if the Treasury can continue using the Fed to create an artificial debt market, then it should be able to keep interest rates at paltry levels — at least as long as it is able to maintain this charade.

How long will that be? Who knows?

Everything can seem to be going along just fine, until suddenly it isn't.