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

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

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

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

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

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

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

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

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

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

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

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

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

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

However, that estimate now seems highly questionable.

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

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

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

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

The Debt Burden: Unsustainable State Deficits Outpacing Economic Growth

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

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

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

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

Here are just a few examples:

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

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

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

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

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

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

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

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

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

• Louisiana is struggling with a $1.6 billion shortfall.

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

• Kansas has a $400 million budget gap.

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

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

Just how bad is debt burden in all 50 states?

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

It is already unfolding.

Deflation a Growing Threat

Right now, there is a growing concern about deflation around the world.

The price of oil has crashed (along with most other commodities), which has pushed down transportation costs. That, in turn, has driven down the cost of virtually all goods.

The Federal Reserve has a publicly stated goal of maintaining an annual inflation rate of 2 percent.

However, the latest inflation rate for the United States is just 0.2 percent through the 12 months ended in August.

For perspective, the inflation rate in the United States averaged 3.32 percent from 1914 until 2015.

Most worrisome, perhaps, over past year wholesale prices have fallen 0.8 percent.

Recessions are by definition deflationary, and many of the world’s major economies are now in recession -- including Japan, Russia, Canada and Brazil, for example.

Even China, the world's second biggest economy (after the U.S.), is slowing.

The Asian giant is the top user of almost all commodities, including coal, iron ore and most metals. But as its economy slows, its demand for commodities is slowing too.

China overtook the United States as the world's top importer of crude oil for the first time in April.

Though it is not in recession, China's falling demand has put downward pressure on all commodities, which is having a global impact -- especially on commodities exporters, such as Australia, Russia, Brazil, Indonesia, and the big oil producers of the Middle East.

This is adding to disinflationary pressures around the globe.

Despite their best efforts, central bankers around the world have seen inflation rates fall far short of their targets in recent years, to the point that deflation is now a genuine concern.

Central banks fear deflation above all else. When it takes hold it can be very difficult to halt, and it can be crippling.

Deflation is worrisome because falling prices make it difficult for the government and companies to repay debts. Whatever you borrow money for is soon worth less than you paid.

Delation is marked by continually declining asset prices, and is often associated with a reduction in the money supply, or credit. It leads to falling wages and layoffs, and can be the prelude to a very bad recession.

Obviously, falling wages make debt repayments more difficult (or impossible) for consumers.

While deflation is characterized by falling prices, it is ultimately a continual increase in the purchasing power of money.

While that may seem wonderful, it is a particularly troubling outcome because it de-incentivizes investment. All investments simply lose value over time, even on an annual basis. The purchase of houses, cars, commercial buildings, factories and the like quickly become bad investments.

But without these investments, the economy will spiral downward in horrifying fashion. The last time the US experienced deflation was during the Great Depression.

The specter of Japan's struggle with deflation is what worries many. The Asian nation has battled slowly falling prices for the last two decades. Despite nominal interest rates of zero, Japan is still fighting deflation.

When confronting deflation (or even low inflation), central banks will typically cut interest rates.

However, with near-zero interest rates in the US for the past seven years, there is little room left to maneuver without going into negative territory.

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

Low interest rates generally stimulate demand, which will lift the economy. Yet, historically low rates have not stimulated demand in recent years.

Consumers remain cautious, and are wary of spending and/or borrowing at pre-recession levels.

Even though the Fed has made money very cheap and readily available, it cannot force Americans to borrow. People with huge debts, low and/or falling wages, no jobs, or the fear of becoming unemployed, will not be persuaded to borrow.

And therein lies the problem: Our entire economy is predicated on borrowing and lending for economic growth to occur.

Money is created through borrowing. Without borrowing, there is less money and no growth. Absent growth, there are no jobs. And without jobs, there is a shrunken tax base and, ultimately, recession.

The Fed is now confronting the fact that three rounds of quantitative easing (QE) and seven years of its zero-interest-rate policy (ZIRP) have failed. The Vice President of the St. Louis Federal Reserve recently admitted as much.

That’s the scary part.

When you’ve given it your best shot and it still isn’t enough, then what?

Deflation is a bitch. Just ask the Japanese.

US Economy Trapped In Long Term Decline

Call it a non-recovery.

Since the alleged economic recovery began in mid-2009, annual economic growth has hovered around 2%, well short of the nation’s historical average of 3.3%. In fact, the US economy has not surpassed 3% annual growth since 2005.

So, for a decade, the US economy has lagged its long term norm.

Yet, this slowdown is just part of a longer term decline.

From 1947 through to 2015, the United States economy grew by an average of 3.25% per year.

However, since 1973, the economy has experienced slower growth, averaging just 2.7% annually.

The best year for the US economy since 1948 came in 1950, when it expanded by 8.7%.

Here are the top five years of GDP growth since 1948:

1950: 8.7%
1951: 7.7%
1955: 7.2%
1959: 7.2%
1984: 7.2%

As you can see, four of the five best years came in the 1950s, and the other occurred 31 years ago.

Though the economy had already been in long term decline for over three decades, the growth rate has slowed quite considerably in the years since the 2008 financial crisis and subsequent Great Recession.

In response to the crisis, which nearly sank the US economy, the Federal Reserve took some rather drastic actions.

First, it lowered the Federal Funds Rate (essentially an overnight lending rate for banks) to a range of 0% to 0.25%. This has allowed banks and large corporations to borrow very cheaply for the past seven years. In fact, for the Big Banks, money has been essentially free at times.

Then the Fed started its quantitative easing (QE) program, under which it printed money to buy mortgage bonds and Treasuries. In fact, the Fed ultimately unleashed three rounds of quantitative easing (QE1, QE2, QE3), plus Operation Twist.

In the process, the Fed’s balance sheet has increased rather significantly, rising from $869 billion in August, 2007 to $4.5 trillion today. That's a 450% increase in just eight years.

Yet, all of these absolutely massive Federal Reserve stimulus programs, which were intended to re-inflate the economy, have barely made a difference.

Here’s a look at the last eight years of US economic growth, according to the World Bank:

2007: 1.8%
2008: -0.03%
2009: -2.8%
2010: 2.5%
2011: 1.6%
2012: 2.3%
2013: 2.2%
2014: 2.4%

This continued weakness, coupled with stagnant wages and incomes, has lowered the standards of living for millions of Americans.

The US economy is driven by consumer spending, which accounts for roughly 70% of GDP. Yet, consumers are in no position to be the engine that brings this economy roaring back to life.

Household incomes are the same now as they were in 1995, after you adjust for inflation. That means that the typical American family isn’t any better off now than 20 years ago.

Consequently, Americans have substituted debt for income growth in recent decades.

Average household debt, though below pre-Great Recession levels, is much higher than it was three decades ago.

According to the Federal Reserve’s Survey of Consumer Finances, after adjusting for inflation, the amount of debt held by the average family nearly doubled from $47,356 in 1989 to $91,114 in 2013.

Additionally, household debt as a share of GDP has increased by roughly 20 percentage points over that same time period, from around 60 percent in 1989 to just above 80 percent in 2013.

The economy needs continually increasing demand and consumption to keep growing. When consumers can’t create enough demand to spur sufficient growth, the government typically steps in.

But, with a national debt in excess of $18 trillion, further deficit spending is no longer a reasonable option (and it wasn’t many trillions ago either).

As it stands, debt growth is outpacing economic growth. That’s a terrible, and unsustainable, situation.

The federal budget deficit for fiscal 2015 (which ends Sept. 30) is expected to drop to roughly $425 billion, according to a report released last month by the nonpartisan Congressional Budget Office (CBO).

If so, it would be a seven-year low for the government’s annual budget shortfalls.

Last year’s deficit was $483 billion, 2.1 percent of gross domestic product, the lowest level since 2008.

If this year's lower deficit sounds like good news to you, ask yourself why $425 billion in deficit-spending in a single year can be considered good news.

Yet, if it wasn’t for that $425 billion in deficit spending this year, and the nearly half-trillion in deficit spending last year, our economy would most certainly be in recession.

Our economy is entirely reliant on debt to keep functioning.

Since all money is loaned into existence, money equals debt. The economy cannot grow without an expansion of debt, meaning that debts can never be fully retired. If debt isn’t accumulating, then money isn't being created and the whole system locks up and shuts down.

And therein lies the problem: Ours is a debt-based economy, and without continually expanding debt at all levels — consumer, corporate and government — there can be no return to what was once viewed as "normal."

In short, there can be no economic growth without debt.

It’s quite likely that without all of the government’s continual deficit spending, we’d be in the midst of a long term depression.

Advanced economies are mature economies, and are therefore harder to grow. The hard reality is that the low growth rates of last eight years are likely just the beginning of a longer-term period of lower, perhaps even zero, growth.

The Federal Reserve has undertaken massive, extraordinary, and rather drastic measures to get the economy out of recession and resume vigorous growth.

Yet, their nearly seven-year efforts have largely failed, and that is a troubling reality.

We are witnessing the limits of monetary policy. This is the best that it can do.

Why the Fed's Desired Interest Rate Hike Matters So Much

In December 2008, the Federal Reserve set its benchmark interest rate close to zero as a way to bolster the economy. The rate has remained there ever since.

Leaving the rate that low, for this long, is unprecedented. In fact, the last time the Fed raised interest rates was in June 2006.

Now the Fed wants to raise its key interest rate — the federal funds rate — which has been set between 0.00% and 0.25% for nearly seven years. That has led to increased volatility and instability in the stock markets.

Why?

When interest rates are this low, even small increases make a big difference.

Very small absolute changes in interest rates are proportionately large when the primary interest rate is so low.

That’s why the market has been thrown into such turmoil in recent months over the prospect that the Fed will soon rise its key interest rate — likely by no more than a mere quarter point.

The federal funds rate is the amount banks charge each other for overnight loans. It is set by the Federal Reserve through its purchases and sales of short-term Treasuries in trades with commercial banks.

The Fed typically raises or lowers the funds rate in quarter point increments.

If the funds rate increases from 0.25% to 0.50%, the rate effectively doubles. That’s why the markets are freaking out. A quarter point is typically a small movement, but when the funds rate is as low as it is now, a quarter-point hike is relatively huge.

If, for example, the 10-year Treasury moves from 2% to 2.25%, that quarter-point increase actually represents a proportional increase of 12.5%, which is substantial.

However, when the 10-year is at 5%, a quarter-point increase isn’t nearly as impactful.

By setting the funds rate near zero, the Fed went as far as it could with its main tool for guiding the economy. Since the Fed could no longer use interest rates to stimulate the economy, it was effectively out of ammunition.

When rock bottom interest rates didn’t have the intended effect, the Fed then used a strategy known as “quantitative easing” (QE) to try to stimulate the economy.

Employing QE, the Fed created money to buy Treasuries and mortgage securities in an effort to bring down long-term rates even further. Ultimately, the Fed utilized QE three times — QE1, QE2 and QE3, as well as “Operation Twist.”

The strategy led to a stock market bubble, pumped up the housing market (perhaps another bubble), and led to lots of mortgage refinancing.

Yet, the economy continues to muddle along, with an annual growth rate of roughly 2%.

When the next financial crisis or economic downturn occurs (and we all know it’s coming), the Fed will have one less tool to employ with its benchmark rate near zero. That’s why it desperately wants to raise the funds rate as soon as possible.

The problem is that outside forces are stymying the Fed’s plans.

The global commodities crash is creating deflationary forces, which makes raising rates a bad idea (central banks generally cut rates to fight deflation).

Additionally, the global stock market rout has everyone worried right now. The entire global economy is slowing (for example, Japan, Brazil and Canada are all in recession), which will likely affect the US at some point.

When that moment arrives, the Fed wants to be ready to act by cutting interest rates again.

But it can’t do that until it raises them first.

Kind of a nutty situation, huh?

With the funds rate so remarkably low, the Fed is performing a high wire act at present, and desperately hoping to avoid global cross winds.

That's an unlikely prospect right now.

Japan's Awful Demographics are Leading to Its Steady Decline

Japan has a major demographics problem.

The country has the oldest population, and the highest proportion of age 65+ adults, in the world. In fact, the size of Japan’s senior population is unprecedented in world history.

Seniors make up a significant portion of Japan's population. According to the latest estimates from Statistics Japan, over a quarter of the population is over the age of 65 and nearly 13 percent are over 75.

By 2030, one in every three people will be 65+ years, and one in five people will be 75+ years.

Think about that for a moment. Japan is the world’s first mass-geriatric society.

In 1963, Japan had only 153 centenarians. Today, there are more than 58,000.

However, a UN projection estimates that by 2050, Japan will have around 1 million centenarians. That is a population bomb of very old people.

Yet, the overall population is shrinking.

Young Japanese couples have lost interest in having children, to the degree that it is bringing down the population. It's not a new phenomena; it's been going on for decades.

The country’s population peaked in 2004 at 128 million, and is projected to shrink to 75 percent of its peak size by 2050.

So, the population is simultaneously getting smaller and significantly older.

This is already affecting pensions, health care, and long-term care, all of which have enormous costs. That’s bad news for an economy that has been struggling for decades.

Japan has the highest life expectancy for women in the world, at 87, and falls in the top 10 for men, at 80.

With the second lowest birthrate in the world (behind Germany), how will Japan care for this tsunami of seniors?

In 2030, one person aged 65+ years will be supported by two working-age persons, compared with 11.2 persons in 1960.

Japan’s birthrate of 1.42 is far below the 2.07 deemed necessary to maintain the population — a level that has not been recorded in Japan since 1973.

Last year, the nation suffered the largest natural decline in its population as the number of newborns hit a record low and the number of deaths rose to a postwar high — a reflection of the rapid aging of the population.

Even if the fertility rate picks up, the pool of women of child-bearing age itself is shrinking so there will still be fewer babies born.

The social implications of this concurrent collapse in the birthrate, and the huge rise in the number of seniors (even centenarians), come with major economic implications.

The number of young working adults isn’t nearly large enough to support the huge number of older, non-working adults. The nation’s social security system could collapse under the weight of this.

The basic math simply does not add up. It's clear that most of Japan’s seniors will have to find a way to keep working.

The large number of deaths in Japan is having other consequences as well.

As its population dwindles, more and more residences are being abandoned and left in disrepair. There are now eight million vacant homes in Japan, the New York Times reports. That’s significant for a nation of 127 million people.

Japan’s upside-down demographic pyramid is creating enormous economic challenges.

Japan’s debt is already at about 245 percent of its annual gross domestic product, and the International Monetary Fund has warned that its debt will be three times the size of its economy by 2030, unless the government acts now to control spending.

However, the country has been battling deflation for two decades, and the government has used fiscal and monetary policy to help raise the country out of its economic doldrums. But it hasn’t done much except to raise the nation’s debt to unsustainable levels.

Japan’s economy contracted at an annualized rate of 1.6 percent in the second quarter (April-June) as exports slumped and consumers cut back on spending.

Living standards have steadily eroded and per capita incomes today are 10 percent below the level of 1990, which is likely why Japanese couples stopped having kids.

The economic decline has surely created a depressing environment for the Japanese people, particularly for younger workers who will not have the same economic freedoms as their parents.

That’s aside from the fact that China overtook Japan to become the world’s second biggest economy in 2010. Japan had held the number two spot, behind the US, since 1968, when it overtook West Germany.

That was surely a huge psychological blow to the society, which witnessed its standing in the world decline in a measurable way.

Japan’s tax base is shrinking along with its population, which makes its debt all the more cumbersome. How much longer before the country faces a full blown debt crisis is hard to tell, but it seems like just a matter of time.

The only good news for Japan is that most of its debt is owed internally, rather than externally.

No matter, debts are always expected to be repaid. That's a troubling assumption for such an indebted nation, especially one with such awful demographic problems.

How Will Falling Treasury Yields Affect Potential Fed Rate Hike?

On Friday, the Dow Jones Industrial Average suffered its biggest two-day point drop since the 2008 financial crisis. The Dow plummeted over 1,000 points last week -- the worst week since 2011.

Volatile equities markets and worries about the global economic slowdown are driving investors into safe havens.

Treasury yields dropped Friday for a third straight day, with the 10-year yield posting its largest weekly decline in five months and finishing at a nearly four-month low.

The yield on the 10-year Treasury declined 3.1 basis point to 2.052% on Friday, its lowest point since April 30.

Demand for Treasuries drives down yields. The US doesn’t need to induce desperate investors to buy when fear does that all by itself.

So, how might this affect the Fed's long-held plan to raise its key interest rate, which has been stuck at or below 0.25 percent since December 2008?

If Treasury yields are falling on their own, would the Fed essentially be in the position of trying to hold back the tide with a rate hike?

Or, would the Fed feel empowered to raise the funds rate since the downward pressure on yields would give them some cover, and room to maneuver?

The combination of lower international yields and higher Treasury yields has already increased investor demand, both foreign and domestic. Higher demand pushes yields lower.

Another consideration for the Fed is the continuing strength of the dollar, which makes dollar-denominated fixed-income assets additionally attractive.

A rate hike would draw in even more foreign money from around the world. The yield sharks are everywhere. And though Treasuries may be falling, they are still higher than yields in much of Europe and Japan, the other perceived “safe” zones.

For example, the German 10-year bund was yielding just 0.565% last week.

Raising the federal funds rate would surely create a flood of hot money into the US, searching for the combination of higher yield and safety.

That would crush already suffering emerging markets, which have been experiencing an exodus of investor money.

Moreover, the strong dollar is already punishing US exporters. American-made goods are less competitive against cheaper foreign goods.

A move higher in rates would only exacerbate the problem, raising the trade deficit even further.

An interest rate hike would also add to deflationary forces. In simple terms, a stronger dollar increases the risk of deflation.

Oil, which is priced in dollars, is already falling due to excess global supplies and weaker global demand. A stronger dollar would make oil even cheaper in the US.

That would be great for American drivers, but awful for US oil companies. The US is the No. 3 crude producer in the world. A lot of jobs and tax revenue are derived from the domestic oil industry.

The Fed has been expected to raise interest rates all year, something it hasn’t done in over nine years. But a combination of deflationary forces and a stumbling economy have kept policy makers from acting.

The Fed surely wants a higher funds rate in order to confront the next financial/economic crisis. We all know it’s coming.

With rates currently just above zero, the only place to go in the event of such a crisis would be zero, or even negative.

That’s a nightmarish scenario.

So, while the Fed is desperate to raise rates, outside forces are tying its hands, and are in fact driving rates down instead.

After Defying Rationality, Stock Market Poised to Crash

If this stock market seems to defy both gravity and rationality, you’re not crazy.

Corporate profits are barely growing, yet the stock market has continued its uprward march this year.

However, largely because of oil-ravaged energy companies and the strength of the dollar, second-quarter earnings from S&P 500 companies are largely flat.

About 44 percent of the revenues from S&P 500 companies come from outside the United States, and the global slump is starting to hurt US markets.

Fully one-third of the companies in the Russell 2000 stock index do not earn any profits, the highest percentage in a non-recessionary period, notes Francis Gannon, co-chief investment officer at Royce Funds. And through the second quarter, a majority of the performance in the Russell 2000 index came from companies that lost money before interest, taxes, depreciation and amortization.

Corporate buybacks are artificially raising share prices, which has created a false sense of health. But cracks are finally showing.

The S&P 500 is now down 1.1 percent this year.

Meanwhile, the Dow is down 2 percent year-to-date, while the Nasdaq is up just 6 percent.

Despite this weak performance, stocks aren’t cheap. The US equity market is trading at a richer valuation than most others.

Professor Robert Shiller’s cyclically adjusted price earnings ratio (CAPE) for the S&P 500 stands at 27.2, some 64 percent above its historic average of 16.6. On only three occasions since 1882 has it been higher – in 1929, 2000 and 2007.

Market crashes followed each time.

In a normal world, stocks would be challenged to move higher in the absence of real earnings growth.

Yet, reality may finally be setting in. We may be witnessing the beginning of a long overdue decline in this six-year bull run.

Absent profits and earnings, how long will investors continue to play this game of roulette?

Historically low interest rates have provided few alternatives for investors. Up until now, there’s been little sense in buying government bonds, or putting your money in a bank CD (which seems positively old fashioned at this point) when the stock market has continued an upward ascent.

However, those ultra-low rates have driven a lot of people into stocks who would not normally be there. That money could exit the markets quickly once rates start to normalize, or if the markets continue to tumble.

The perceived safety of Treasuries and other safe havens, such as gold, could see huge inflows of money.

Another concern is the level of borrowing to fund stock investments. The use of 'leverage' to buy stocks is very near its peak.

According to the New York Stock Exchange, margin debt stood at $505 billion in June, the most recent figure available. That’s down just a bit from the April peak of $507 billion, but up 9 percent from the same period last year.

That's a recipe for disaster.

This is the third-longest bull market in 80 years. There is bound to be a significant correction (likely an outright crash) sooner than later, and it may have already begun.

Economies around the world are slowing, from the biggest to the smallest. That’s putting downward pressure on global markets and, worst of all, creating fear.

Markets don’t like fear; it creates a mad rush to the exits.

As the Romans once implored, "caveat emptor."

Or, in today’s parlance, "buyer beware."

Global Economic Slowdown Raises Fears of Broad Recession

The signs of a global economic slowdown are everywhere, and they are numerous.

Economies around the world -- both big and small, developed and emerging -- are hurting.

Japan’s economy contracted in the second quarter (April-June) as exports slumped and consumers cut back on spending.

The world’s third-largest economy shrank at an annualized rate of 1.6 percent in the second quarter, after expanding 3.9 percent in the first quarter.

This is despite the fact that the Bank of Japan is engaged in a massive monetary stimulus plan intended to end two decades of deflation and economic decay.

Living standards have steadily eroded and per capita incomes today are 10 percent below the level of 1990.

It is a positively nightmarish scenario for Japan if its monetary stimulus policy is failing.

Then there's China, the world's second largest economy.

Though China reported that its economy expanded at a 7 percent annualized clip in the second quarter, no one believed them. And it was for good reason.

Chinese exports fell 8.3 percent in July, its stock markets have been crashing, and it is confronting the collapse of its real estate market.

Meanwhile, China’s index of producer prices declined 5.4 percent from a year earlier in July, the most since 2009 and and the 40th straight month of price decline, raising fears of deflation.

China responded by devaluing its currency this week. It was a rather blatant sign of desperation, indicating that its economy is much worse than officials are admitting. If that’s the case, it’s a very bad omen for the global economy.

Chinese authorities don’t just look desperate; they look clueless. Free markets aren’t manipulated markets.

In the same way that Wall St. is manipulated by bankers, China's markets are manipulated by government officials.

China has a decades-long history of dictating top-down, state-planned, authoritarian policies. The leadership simply implements policy by force of will. However, markets don’t work like that.

The Asian giant is trying a first-of-its-kind attempt at a communism / capitalism hybrid. The notion of such a thing seems schizophrenic, and perhaps it is finally proving to be so.

The decline of China’s economy is bad news for Brazil’s economy, which is heavily dependent on commodities exports (as are Australia, South Africa and other emerging markets).

Brazil is already in recession, and its economy will shrink 2.3 percent by the end of the year, says Bank of America Merrill Lynch. The bank also predicts a recession in 2016.

Brazil's currency is plummeting, having fallen 34 percent against the dollar this year to its lowest point since 2003.

Russia has been driven into recession by a combination of plunging oil prices and Western sanctions. Its economy contracted 4.6 percent in the second quarter, its weakest performance since 2009.

In short, without oil and natural gas, Russia wouldn’t have an economy.

Inflation plagues Russia; the annual pace of price growth has remained above 15 percent for several months, far above the central bank’s 4 percent target.

Eurozone growth has also slowed. The 19-nation economic bloc expanded just 0.3 percent in the second quarter, which followed a meager 0.4 percent gain in the first quarter.

Analysts at Capital Economics said the eurozone would likely continue slow growth.

Even our northern neighbor, Canada, is in recession as a result of collapsing oil prices.

Around the globe, the warning signals are flashing.

Commodities prices are collapsing. Many have fallen to bear market levels last seen in 2008. We all remember what happened then.

From Bloomberg:

"Eighteen of the 22 components in the Bloomberg Commodity Index have dropped at least 20 percent from recent closing highs, meeting the common definition of a bear market. That’s the same number as at the end of October 2008, when deepening financial turmoil sent global markets into a swoon."

The US has the world’s biggest, most powerful economy. Yet, it is not immune to the ailments of the rest of the world. The gravitational pull of a global recession would suck the US right into its own downward spiral.

As I’ve noted many times, the US economy is not what it used to be.

Our economy remains stuck at around 2 percent annual growth, well below our long term average of 3.3 percent annually. In fact, the US hasn’t topped the 3 percent mark in a decade — the longest such stretch in modern times.

In the minds of many Americans, things seem tenuous. Consumer confidence surveys continually show this.

Just 41 percent of Americans said the economy is good, and 57 percent said it is poor in a July AP-GfK poll.

Confidence is everything for an economy that relies so heavily on consumer spending; 70 percent of US GDP is derived from it.

When Americans hear about the economic woes, financial turmoil and outright recessions in other parts of the world, perhaps they’re asking, “What if we’re next?"

It’s a reasonable question.

The American Economic Decline Was Quite Predictable

Most Americans can feel it; even though the Great Recession has officially ended, things just aren’t getting better.

Household incomes are the same now as they were in 1995, after you adjust for inflation. That means that the typical American family isn’t any better off now than 20 years ago. This is likely why there’s so much interest in the minimum wage and income inequality issues right now.

Average hourly wages have been growing no faster than 2.2% a year — two-thirds as fast as usual. That’s hurting consumer demand, which drives 70% of our economy. Without adequate wages, people can’t spend enough to drive the economy to new heights.

Even falling gas prices haven’t encouraged more consumer spending, as had been predicted.

While unemployment may have fallen to 5.3%, over 6.5 million people work part-time jobs but want full-time jobs. That’s much higher than the roughly 4.5 million part-timers before the Great Recession began.

The official unemployment rate excludes 16.5 million people who are either too discouraged to look for work, or who can only find part-time jobs. The so-called U-6 unemployment rate, which does recognize these people, stands at 10.4%. That’s nearly twice the 5.3% U-3 rate the government and media typically reference.

Companies in the service sector (such as retail, health care and hospitality) account for about 80% of all US jobs. Unfortunately, most of them are low paying. That’s no way to build a thriving, middle-class economy. In fact, it’s why the middle class has been eviscerated.

Stagnant incomes have led to our economic decline.

The obliteration of the middle class has resulted in an economy that now just limps along, despite historically low interest rates and three rounds of quantitative easing by the Federal Reserve.

In other words, desperate measures don't really work anymore.

The US economy remains stuck at around 2% annual growth, well below our long term average of 3.3% annually. In fact, the US hasn’t topped the 3% mark in a decade — the longest such stretch in modern times.

America is not an export economy; we’ve long imported more than we export and have maintained a trade deficit since 1976, which is an albatross to our economy.

Instead, the US relies on domestic demand. Consumers must consume for the economy to grow at a healthy pace. But if consumers are squeezed financially (as US consumers have been for decades), consumption will weaken (as it has).

This is especially troubling for a nation with an $18 trillion national debt, that will not go away. Our debt is growing at a faster rate than the economy, meaning we cannot, and will not, grow our way out of debt.

That’s aside from the fact that economic growth is predicated on debt. No debt means no growth. It’s a nightmarish economic system.

Americans have grown quite pessimistic about our economic decline and about the future, particularly for their kids.

Most Americans say their kids will be worse off economically than they are.

The pessimism stems from high levels of student debt, the high cost of housing and the scarcity of well-paying jobs.

Sadly, social mobility has declined for the first time in generations.

In other words, the parents are right: their kids are worse off, except for the children of the wealthiest American families.

While corporate profits have reached all-time highs, wages have stagnated. This is greed of the highest magnitude, and it has only served the elite 1% who control our economy, and our politics.

There isn’t likely a happy ending to all of this until there is a very unhappy, turbulent ending to the current system.

Once there is a major crash — bigger than the last one, perhaps — then there will be an essential need to realign and begin again, with an economy that favors and builds the middle class, and one that provides ladders for the lower classes to join it.

US Economic Growth Remains Weak as Global Stresses Grow

Historically, from 1947 through 2015, the annual GDP growth rate in the US has averaged 3.26 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 aftermath of the Great Recession has been harsh, and the economy has been unable to realize the robust growth rates that typically follow recessions.

Since the economic recovery began in mid-2009, annual growth has hovered around 2 percent, well short of the nation’s historical average of 3.3 percent.

This has occurred despite the fact that the Federal Reserve has held short term interest rates at a remarkably low level of between 0 percent and 0.25 percent since December 2008. That’s seven years, if you weren't counting.

Incredibly, the Fed last raised interest rates more than nine years ago, in June of 2006. From a historical perspective, that’s nothing short of stunning.

However, the utilization of near-zero interest rates isn't the only extraordinary tactic employed by the Fed to prop up the stock market since the 2008 financial crisis.

The central bank also utilized another exceptional monetary stimulus measure: buying up government bonds and other assets (better known as quantitative easing, or QE), which has fueled one of the longest bull markets in history.

In other words, the Fed has created a massive stock market bubble, along with concurrent bond and housing bubbles. We’re right back to 2007 pre-crisis levels, with all the associated risks.

The problem with reflating the bubble is that all bubbles eventually burst.

In the process of blowing these bubbles, the Fed has expanded its balance sheet to a whopping $4.5 trillion. Unwinding that could create problems in the bond markets for years to come.

Despite the Fed’s historic and Herculean measures, the US economy continues to muddle along, still incapable of reaching its longterm average growth rate.

Gross domestic product rose at a 2.3 percent annualized rate in the second quarter, after growing just 0.6 percent in the first quarter.

Yet, according to leaked documents, the Fed projects the US economy will steadily decline through at least the year 2020, eventually falling to a mere 1.74 percent annual growth rate.



That’s very troubling.

After all the Fed has done, this is as good as it gets? We can’t even reach our longterm historical average growth rate of 3.3 percent? After previous recessions, the economy was generally booming, following the predictable pattern in boom and bust cycles.

The current economic expansion, which began following the end of the Great Recession in June 2009, has been the weakest of the post–World War II era. GDP has risen about half as much as in the average post–World War II era recovery.

One has to wonder how bad things would have been if the Fed hadn’t lowered interest rates to near zero, and expanded its balance sheet to $4.5 trillion buying Treasuries and mortgage bonds?

That’s why this is all so worrisome. The results have been so lackluster, yet the risks have been raised to frightening levels.

When there is another shock to the economic and/or financial systems, where does the Fed go from here? Negative interest rates?

Is QE4 merely a matter of time?

Our continual economic weakness, and the crashing of commodities prices, lead me to doubt the Fed’s ability to raise rates this year, as projected.

Many commodities have fallen to bear market levels last seen in 2008. We all know what happened next.

From Bloomberg:

"Eighteen of the 22 components in the Bloomberg Commodity Index have dropped at least 20 percent from recent closing highs, meeting the common definition of a bear market. That’s the same number as at the end of October 2008, when deepening financial turmoil sent global markets into a swoon."

That’s a flashing warning signal that shouldn't be ignored.

There’s no concern about inflation at present. As I noted previously, the real concern is deflation. Given that reality, how can the Fed possibly raise rates? In my estimation, it can’t.

The entire global economy is slowing, and the US won’t remain immune to it.

China’s economy is slowing, and it is grappling with the bursting of its real estate and stock market bubbles. The Latin American economies are a mess. Canada is in recession. Additionally, Europe remains mired with problems, not the least of which is the Greek debt crisis.

In fact, Standard & Poor’s just downgraded its outlook for the European Union to “negative” from “stable.” That’s an ominous warning sign.

The EU is in the midst of its own massive QE program, and that has S&P concerned.

The signs of a potential global recession are clear, and they are growing.

That’s why I don’t believe the Fed will be in any position to raise interest rates this year. Events are rapidly spiraling far beyond its control.

Most troubling, the Fed appears to be out of artillery, and won’t have the necessary tools when the next shock inevitably strikes.

That’s what is most worrisome, because it is only a matter of time.

Growing Global Demand for Lithium Batteries May Soon Outstrip Supply

Lithium — which has long been used to power cell phones, laptops and tablets (as well as in applications for other industrial uses) — is on the verge a global demand boom.

The reason?

The emergence of electric vehicles and home batteries charged by solar panels. Additionally, lithium batteries are beginning to be used as backup power sources for businesses and utilities.

However, the supply of lithium cannot be taken for granted.

As batteries become a more prominent and emerging global energy source, demand for lithium is soaring — and we are only at the beginning of the demand curve.

Tesla is planning to produce more lithium-ion batteries in its planned $5 billion Nevada gigafactory than in the entire global marketplace combined.

In fact, that one factory alone will need 15,000 tons of lithium carbonate in just its first year.

Tesla founder Elon Musk says the demand for lithium storage batteries has skyrocketed to the point that an expansion of his gigafactory may have to be considered before it is even built.

According to Credit Suisse, demand for lithium “will actually outstrip supply as we approach the later part of the decade, with demand potentially as high as 125% of total capacity.”

Clearly, that is problematic.

Even before Tesla announced its gigafactory, global lithium consumption had already doubled in the decade before 2012, driven largely by the use of lithium-ion batteries for cell phones and power tools.

Yet, the growing production of electric cars has created even further demand for lithium.

Tesla’s gigafactory is expected to use as much as 17 percent of the existing lithium supply, according to Fortune magazine.

In 2009, total demand for lithium was almost 92,000 metric tons, of which batteries consumed 26 percent, the largest share.

Demand has continually increased in the ensuing years, and it is still growing.

The demand for all lithium chemicals used in batteries is projected to increase by as much as 50% in the near future.

Elon Musk has said he believes that more than 50% of all vehicles sold by 2030 will be fully electric. If his prediction is correct, this will equate to 75 million vehicles requiring nearly 3,000,000 tons of lithium per year.

However, the worldwide production of lithium in 2013 was only around 160,000 tons. Reaching Musk's demand projection would require a nearly 19-fold increase in production.

In other words, we're a long way from meeting that projection.

The problem is that lithium is difficult to find and excavate. The car manufacturer Mitsubishi predicts a worldwide supply crisis as soon as this year if new reserves are not discovered.

Most of the known supply of lithium is in Bolivia, Argentina, Chile, Australia and China. But since China is the largest consumer of lithium, it’s almost certain that all of its supply will be reserved for its own use.

In fact, China controls about 95 percent of the global market for rare earth metals, and it is expected to use most of those resources for its own production.

But lithium is absolutely vital to modern, rechargeable battery technology.

“There are no other materials that could replace lithium, nor are battery systems in development that offer the same or better performance as lithium-ion at a comparable price,” reports Battery University.

About 70 percent of the world’s lithium comes from brine (salt lakes); the remainder is derived from hard rock.

It takes 750 tons of brine, the base of lithium, and 24 months of preparation to get one ton of lithium in Latin America.

However, research institutes are developing technology to draw lithium from seawater. That's encouraging, and it would be game changer if it proves to be feasible.

Yet, it's important to remember that creating energy generally requires enormous amounts of energy. That's always been a conundrum, and a difficult reality.

One of the most promising aspects of lithium is its low cost. A $10,000 battery for a plug-in hybrid contains less than $100 worth of lithium.

The conclusion?

The demand for lithium is quickly outpacing supplies, and a shortage could ensue as soon as this year.

Given the math and the timeline behind the creation of lithium (750 tons of brine produces just one ton of lithium after 24 months), a shortage problem could escalate rather quickly.

But lithium is rather cheap, while the cost of crude oil is not. Moreover, crude is a finite resource and is therefore guaranteed to increase in cost over time.

Any hope of meeting the absolutely massive global demand for lithium in the years ahead (again, Elon Musk projects a demand of nearly 3 million tons per year by 2030), is wholly dependent on the development of technology allowing for its extraction from seawater.

In short, such a technology is a sort of scientific holy grail.

The Madness of Wall St.

Wall St. often seems to operate in a parallel universe, in which it makes rules that only it can comprehend. The valuation of listed public companies is one great example.

Even if a company has rising profits and revenues, it can be punished with a stock downgrade by Wall St. analysts.

Here are a couple of recent examples of just how insane Wall St. is, as are the markets it controls:

Apple’s profit surged 38%, and its cash reserves rose to a record $203 billion in the fiscal third quarter. The company sold 47.5 million iPhones, or 35% more compared with a year earlier.

Apple’s profit in the quarter rose to $10.7 billion from $7.74 billion in the year-ago period. Revenue also jumped 33% to $49.61 billion.

Yet, because its sales and revenues missed some analysts’ estimates, Apple’s shares fell as much as 7% in after-hours trading, quickly erasing about $60 billion in market value.

In essence, Apple did really, really well in the most recent quarter ⎯ remarkably well ⎯ yet it was still punished. Despite Apple’s excellent performance, it just wasn’t excellent enough for Wall St.

Another example:

Facebook is now more valuable than General Electric.

With a market capitalization of $275 billion, Facebook is now bigger than GE, which has a $273 billion market cap.

GE, a company that makes tangible products - including jet engines, power and energy grid equipment, major medical equipment and devices, and the home appliances that are utilized in tens of millions of homes - has been surpassed in value by a company that makes nothing tangible.

In fact, Facebook is a free service that merely allows people to share “status updates,” such as selfies, cat videos, and pictures of their food.

GE racked up $149 billion in sales last year and employed more than 300,000 people. Meanwhile, Facebook reported $12.5 billion in sales and employed roughly 9,200.

Despite this, Facebook trades at 49 times expected 2015 operating earnings and at 37 times expected 2016 operating earnings.

GE, on the other hand, trades at close to 17 times expected 2016 operating earnings.

It's fair to say that Facebook is wildly overvalued. Yes, the Tech Bubble is alive and well, folks.

In the words of investment guru Jeremy Grantham, "Facebook is not the new steam engine." In other words, it will not radically alter economic growth or productivity.

GE is the only component of the Dow Jones Industrial Average today that was part of the original Dow in 1896.

Facebook was created in a Harvard dorm room a little over ten years ago.

In the rational part of the universe, it’s difficult to reconcile Facebook being valued above GE. But it doesn’t end there.

Facebook’s market cap is now $40 billion larger than that of Wal-Mart, America’s largest retailer and employer.

The fact that Facebook is valued higher than GE and Wal-Mart is totally detached from reality. It speaks to the absurdity of Wall St. and its analysts.

They all live in an echo chamber of madness.

These examples serve as just the latest reminders: Never trust Wall St.

'Too Big to Fail' Banks are Bigger Than Ever, Creating Even More Risk

In 2008, the U.S. government threw enormous sums of money at big banks and insurance companies, with the hope of propping them up and preventing a systemic failure. A domino effect of collapsing big banks was feared.

The term “too big to fail” became a part of our national lexicon. Many economists and politicians feared that if the financial sector were to go under, the broader economy would collapse along with it.

Fast forward to today, and the biggest banks in the U.S. are bigger than ever, creating even greater systemic risk to the financial sector and our economy.

That's probably not the outcome most people expected.

During — or in the aftermath of — the 2008 financial crisis, there were a host of Big Bank mergers.

Bank of America bought Merrill Lynch and Countrywide Financial.

JPMorgan Chase absorbed Bear Stearns and Washington Mutual.

Wells Fargo took over Wachovia.

There were also hundreds of community and regional banks that went bankrupt, and those were consolidated with other community or regional banks.

At the end of 2007, there were 8,534 banks in the U.S. However, as of July 9, 2015, there were only 6,369 insured banking institutions, according to the FDIC.

That means there are 2,165 fewer banks than just eight years ago, a massive 25 percent decline.

However, the focus here is on the scale and magnitude of the biggest U.S. banks.

The Big Bank mergers were merely representative of years of consolidation, which culminated with the repeal of Glass-Steagall in 1999. That allowed the merger of commercial and investment banks, which had been illegal since the 1933.

As a consequence, the five biggest U.S. banks now control nearly half of the industry's $15 trillion in assets.

Those banks — JPMorgan Chase, Bank of America, Wells Fargo, Citigroup and US Bancorp — collectively held $6.8 trillion in assets as of Sept. 30, 2014.

JPMorgan holds just over $2 trillion in assets, or 13.1% of the industry’s total, followed by BofA at $1.5 trillion (9.9%), Wells Fargo just under $1.5 trillion (9.7%) and Citi at $1.4 trillion (9%), before a substantial dropoff to US Bank at $387 billion (2.5%).

Such concentration of banking assets is dangerous for our economy and raises the systemic threat to our banking sector during the next, and inevitable, crisis.

In 1990, the five biggest U.S. banks held less than 10% of industry assets.

Clearly, there has been a long, orchestrated march toward ever fewer and ever larger banks, with enormous financial and political power.

So much power and clout in the hands of so few is plainly dangerous, anti-competitve, and against the best interests of our nation.

Taxpayers are always on the hook for the failures of private banks. Profits are privatized, while losses are socialized.

If you're looking for some good news, there's this: The Federal Reserve established rules, which took effect this year, that will allegedly prohibit bank mergers that result in a combined company’s liabilities exceeding 10% of the industry’s total.

The rule was mandated by the 2010 Dodd-Frank financial law.

JPMorgan Chase is presently the only U.S. bank with assets in excess of 10%. Ostensibly, the banking giant will be prohibited from merging with another large financial firm, except in certain circumstances, such as another financial crisis.

However, that means we can expect JPMorgan Chase to continue its growth through additional mergers during the next, inevitable crisis.

BofA, Wells Fargo and Citi are all approaching the 10% threshold as well.

The Big Banks are very calculated. They understand how critical they are to the U.S. financial system, and the broader economy. They are betting — as they did in the lead up to the 2008 financial crisis — that the government won't let them fail, but will instead bail them out with taxpayer money, no matter how grotesque their misdeeds or how ill-advised their bets.

Big Banks are dangerous to our democracy. They have drowned out the voices of 99% of Americans, turned government into a feeding trough for the financial elite, and turned economic growth into debt.

The Big Banks are able to undermine our democracy because they have co-opted our government. Former Wall St. executives fill the ranks of the government's regulating agencies, which means those agencies are largely neutered.

We've all heard about the revolving door between Wall St. and Washington.

The power of the Big Banks comes from what else? Money.

The nation's top commercial banks (i.e., Wall St. banks) spent $61 million on lobbying in each of the last four years.

As a whole, the securities and investment sector has spent a whopping $1.24 billion on lobbying since 1998. They've gotten a lot for their money.

A 2013 research paper, “Corporate Lobbying, Political Connections, and the Bailout of Banks,” by Creighton Associate Professor of Economics Diana Thomas, found the following:

• Campaign contributions and lobbying influence the voting behavior of politicians.
• Campaign contributions and lobbying have a positive effect on wealth for the shareholders of the companies that spend.
• Businesses that pay lobbyists before committing fraud are 38% less likely to get caught; even when they get caught they are able to evade detection almost 4 months longer than those that do not pay for lobbying.
• Firms with political connections are more likely to receive government bailouts in times of economic distress.

Our government is bought, and our alleged representatives don't really represent us; they represent Wall St. and the other Big Banks.

Such is the sad state of our republic. Our financial system and our economy are imperiled by the power, wealth and influence of the Big Banks, and that affects every single one of us.

The steady pattern of banking consolidation, and the huge increase in concentrated assets, has made the banking system less stable, which has made the U.S. more vulnerable to the next shock.

That event is just a matter of time.

Just like the last time — and every other time — the taxpayers will once again be forced to bail out the banks, which puts all of us at risk. Our whole economy is at risk.

That's not how a free market is supposed to operate.

Even Greece's Creditors Know It Can't Be Saved

A mere seven days after the Greek people resoundingly rejected the demands of Greece's creditors, 61% to 39%, Prime Minister Alexis Tsipras defied the will of his citizens and capitulated to the Troika — The IMF, EU and ECB.

Tsipras was elected earlier this year on a platform of defiance of the Troika and the austerity measures that have crippled the Greek economy. His party and the electorate may now revolt against him. Tsipras could face a snap election and be quickly booted from office.

His decision is a blatant affront to democracy — the will of the Greek people — and for that he may pay the ultimate political price.

Why the Greek government did not ready and relaunch their former currency, the drachma, is inconceivable. It is their only hope to return to some semblance of normalcy.

Greece needs to leave the euro and devalue its currency to gain some competitiveness in global trade.

Greece is stuck in a nightmarish scenario in which it must borrow from its creditors in order to repay those very same creditors. How insane is that?

The sad reality is that Greece is absolutely, fundamentally incapable of ever paying off its debts, and even its creditors know this.

Secret documents published by The Guardian reveal this:

"Greece would face an unsustainable level of debt by 2030 even if it signs up to the full package of tax and spending reforms demanded of it, according to unpublished documents compiled by its three main creditors.

"The documents, drawn up by the so-called troika of lenders, support Greece’s argument that it needs substantial debt relief for a lasting economic recovery. They show that, even after 15 years of sustained strong growth, the country would face a level of debt that the International Monetary Fund deems unsustainable.

"The documents show that the IMF’s baseline estimate – the most likely outcome – is that Greece’s debt would still be 118% of GDP in 2030, even if it signs up to the package of tax and spending reforms demanded. That is well above the 110% the IMF regards as sustainable given Greece’s debt profile, a level set in 2012. The country’s debt level is currently 175% and likely to go higher because of its recent slide back into recession."

So there you have it; the medicine will only help to kill the patient. It is madness!

The IMF knows the demands made by it and the other two members of the Troika will not help Greece. They will only prolong and deepen its misery. Yet, they are making these demands anyway.

It is perverse.

Back to The Guardian:

"Even under the best case scenario, which includes growth of 4% a year for the next five years, Greece’s debt levels will drop to only 124%, by 2022."

Consequently, Greece has no chance of meeting the target of reducing its debt to “well below 110% of GDP by 2022” set by the Eurogroup of finance ministers in November 2012.

If there is no chance, even under the best case scenario, why the charade? Why all the handwringing, public proclamations and outlandish demands by the Troika?

Greece is an economic basket case, and everyone who has followed this story closely for the past five years or so knows this. Back in 2012, I said that the eurozone debt deal would leave Greece permanently indebted.

One way or another, Greece will remain in a depression for quite some time. It's only hope for a better future is to default and return to the drachma.

It won't be easy, and it won't be painless. But at least it offers Greece a ray of hope — a light at the end of a very long, dark tunnel.

Chinese Market Meltdown Bigger Story Than Greece, With Widespread Implications

I've been writing about China's bubble economy since 2010. Now reality is finally setting in.

China's economic growth over the past three decades has been nothing short of stunning, but that trajectory has become increasingly dubious. Many among us have been waiting for China's bubble to burst.

That time may now be at hand.

Despite massive government interventions, China's stock market is in free fall.

In just three weeks, stocks listed on the Shanghai Composite index, mainland China’s most prominent exchange, have tumbled 30% from their seven-year highs. A whopping $3 trillion has evaporated from the Chinese stock market in the last month.

Yet, the plunge isn't over by any means. There's still a long way still to go.

Novice Chinese investors have opened 30 million new trading accounts this year — many on margin. Now they are facing margin calls on their highly leveraged positions, which has ignited a selling frenzy.

Newbie investors are by definition inexperienced, and they are prone to following momentum and the herd. Quite predictably, panic has set in.

Shanghai shares had risen 150% over the previous 12 months, meaning Beijing should have seen this correction coming. The government is attempting to hold back the tide, but it is discovering that it is not so mighty after all.

So far, the free fall has largely affected only Chinese investors; foreigners own just 1.5% of Chinese shares.

However, Chinese stocks represent more than 20% of some emerging-market ETFs, so the pain will be felt far and wide, well beyond China.

China's stock market collapse may lead to a long overdue real estate collapse (which has also started. but still has a long way to go), the opposite of what happened to the US in 2008.

This is a much bigger story than the Greek debt crisis. The Greek economy is miniscule. China's is the world's second largest.

A stock market meltdown could become a full blown real estate meltdown. Stunningly, Chinese regulators are now allowing people to use their homes as collateral to buy stocks! Seriously.

A real estate meltdown would become a full blown economic crisis.

The ripples from a Chinese economic crisis would be felt around the world.

This is a story to watch closely in the coming days and weeks.

Greek Voters Choose Lesser of Two Miseries

By a vote of 61 percent to 39 percent, Greek citizens chose in a referendum not remain permanently indebted to their government's creditors, with no hope of economic recovery.

The Greek economy has been shattered, gripped by spiralling unemployment and poverty. The nation is suffering through a full blown depression.

Yet, the crisis in Greece is growing worse. Even limited amounts of cash are drying up, with no prospect of an immediate infusion from its former creditors. The government imposed restrictions to stem a bank run after the referendum vote was called and its bailout program expired.

Banks remain closed and ATMs have little cash. Without more liquidity assistance from the ECB to Greek banks, Greek citizens might not be able to withdraw even the meager 60 euros ($67) allocated per day.

While banks are scheduled to re-open Tuesday, that remains in doubt. Without assistance, there will be no cash for clerks to handover to bank customers.

Greece is so starved for cash that it could be forced to start issuing its own currency and become the first country to leave the 19-member eurozone, established in 1999.

There is no EU treaty for leaving the currency, but there is one for leaving the EU. Now the monetary union is threatened.

The harsh, unrelenting austerity dictated by the “Troika” – the International Monetary Fund, the European Union and the European Central Bank – pushed the Greek economy into a death spiral, with no chance for recovery.

Huge cuts in government spending helped to create an economic catastrophe in Greece, reducing the economy by one-fourth. Unemployment is at 25 percent, and a stunning one in two young workers are without jobs.

In short, there is no hope for huge numbers of Greeks.

With unemployment so widespread, the tax base has been crushed. With no tax base, it is impossible for Greece to repay its creditors.

The Troiks is now being reminded of an old adage: You can't get blood from a stone.

You're Not As Free As You Think You Are, America

More than any other day, Americans take pride in celebrating our freedoms on Independence Day. It is a day of national honor.

However, observed objectively, Americans aren't nearly as free as they'd like to believe. While Americans are renowned for believing "we're number one!" in any and all manner of worthy rankings, when it comes to freedom — undoubtedly the most important ranking of them all — we're far from number one.

The United States ranks 21st worldwide in personal freedom.

The Legatum Institute in London finds that 20 other nations rank ahead of America in regard to personal freedom, which is calculated based on protections of civil rights and civil liberties. The U.S. ranking has dropped significantly in recent years; in 2010 it was in ninth place.

The researchers at the Legatum Institute measure a nation's prosperity on a number of factors including health, safety, education, economy, opportunity, social capital, governance and personal freedoms.

The research shows that citizens of countries including France, Uruguay, and Costa Rica now feel that they enjoy more personal freedom than Americans.

Yes, France, the country that so many Americans love to hate because it is "socialist," ranks ahead of the U.S.

This is not some liberal screed either.

Even the Heritage Foundation, the famed conservative research think tank, ranks the U.S. 12th in the world in its 2015 Index of Economic Freedom.

Freedom of the press was so critical to our nation's founders that they enshrined it as the very first amendment to the U.S. Constitution.

They would be horrified by our lack of press freedom today.

Reporters Without Borders issues an annual worldwide ranking of press freedom. This year, the United States is ranked 49th.

That is the lowest ranking ever during the Obama presidency, and the second-lowest ranking for the U.S. since the rankings began in 2002 (in 2006, under George W. Bush, the U.S. was ranked 53rd).

Frankly, no nation should rank ahead of the U.S. Period. If there is one area we should be able to proudly brag about being No. 1, it is press freedom.

Sadly, that is far from the truth.

There is a long, unfortunate history of American jingoism and chauvinism. There is an enormously misplaced sense of national pride that America is the greatest in every way. Most of that is rooted in the notion that we are the most free people in the history of the world, and that all other nations seek (or at least should seek) to be just like us.

The reality is quite different.

Of the 167 countries in the world (165 of which are members of the United Nations), 76 are democratic. While the democratic nations account for less than half of the nations in the world, the U.S. is far from unique.

Most critically, we are not a model of freedom or democracy.

So while the U.S. has a litany of things to be proud of (the list of things invented by Americans is stunning), including aviation, the telephone, the internet, rock & roll, jazz, blues, blue jeans, baseball, putting men on the moon, and on and on, we did not invent freedom. That honor goes to the ancient Greeks, the world's first democratic society.

Ultimately, we don't hold some exclusive claim to freedom. In fact, we have lots of room for improvement.

We have a nation of stunning beauty, filled with kind, giving people who are always willing to lend a hand in a natural disaster or any other national tragedy.

But we shouldn't fool ourselves about how free we are, especially on a day such as today.

What we should do, instead, is look at all the countries ranked ahead of us in various measures of freedom, and aspire to be more like them.

We should demand better, because we deserve better.

Criminality Endemic at Big Banks

Since the 2008 financial crisis, at least, many Americans have come to view bankers in a negative light. It is not an uncommon view that the Big Banksters are seedy, unethical, crooked and even criminal.

Wall St. (and other) banks were handing out mortgages to anyone with a pulse. People with no reasonable expectation of servicing a home loan were extended credit, sometimes in absurd amounts. The massive debt expansion that ensued eventually caused a historic residential and commercial real estate bust that nearly torpedoed the US and global economies.

The banks that made these reckless loans quickly sold them off to other lenders as if they were handing over grenades without their pins. Get away quick! Millions of dubious loans were bundled and sold as Wall St. securities to countless investors. It was like selling well-masked time bombs.

But that story — as famous and historic as it is — was just the surface, the most public aspect of outright criminality by the Big Banks.

Just this week it was reported that the Justice Department is looking into possible fraudulent manipulation of the $12.5 trillion Treasurys market. The focus of the probe is on Treasury auctions, a secretive process when interest rates are set for the offerings.

Treasury rates affect a whole range of borrowing costs — including home mortgages, auto loans, credit cards and corporate bonds.

If criminal wrong doing is eventually discovered, it will not be the least bit unique or surprising. And it will merely result in a paltry fine (by banking standards) that will change nothing. For banks, fines are merely a marginal operating cost in a very lucrative business.

Traders from Citigroup, J.P. Morgan, UBS, RBS and Barclays are known to have rigged the currency market. In fact, the traders referred to themselves as "the cartel."

As a result, regulators around the globe fined these banks nearly $6 billion in May.

Yet, $6 billion in fines is merely the cost of doing business for the Big Banks. Breaking the law is incentivized if a penalty of $6 billion is the consequence of earning hundreds of billions of dollars.

Such a fine is not a penalty; it is an inducement and an enticement. It encourages and guarantees the status quo: more rigging, more corruption and more law-breaking.

Criminality and fraud are endemic in modern banking.

Bloomberg reported the following in 2010:

"Wachovia, it turns out, had made a habit of helping move money for Mexican drug smugglers. Wells Fargo & Co., which bought Wachovia in 2008, has admitted in court that its unit failed to monitor and report suspected money laundering by narcotics traffickers -- including the cash used to buy four planes that shipped a total of 22 tons of cocaine.

"Wachovia admitted it didn’t do enough to spot illicit funds in handling $378.4 billion for Mexican-currency-exchange houses from 2004 to 2007. That’s the largest violation of the Bank Secrecy Act, an anti-money-laundering law, in U.S. history -- a sum equal to one-third of Mexico’s current gross domestic product."

There are many more cases of blatant criminality by the Big Banks.

"Bank of America, Western Union, and JP Morgan, are among the institutions allegedly involved in the drug trade. Meanwhile, HSBC has admitted its laundering role, and evaded criminal prosecution by paying a fine of almost $2 billion," reported the Huffington Post in January, 2014.

If laundering money for drug cartels wasn't bad enough, HSBC was found to have laundered money for terrorist groups and the Iranian government, which is listed as a state sponsor of terrorism by the US.

HSBC actively circumvented rules designed to “block transactions involving terrorists, drug lords, and rogue regimes.”

In other words, this behavior was not inadvertent or unintentional. To the contrary, it was willful and purposeful.

The bank’s regulator, the Office of the Comptroller of the Currency (OCC) failed to monitor $60 trillion in wire transfer and account activity, and didn't take a single enforcement action against HSBC despite numerous violations by the bank.

The global economy is roughly $77 trillion, so that gives you a sense of proportion here.

The US government, which has been co-opted by the Big Banks, turns a blind eye to nefarious and illegal activities. So, what's the point of having a regulator? The foxes are guarding the henhouse.

Major global banks were also found to have manipulated the Libor (London Interbank Offered Rate), which is the interbank lending rate. Banks were falsely inflating or deflating their rates to profit from trades.

Libor underpins approximately $350 trillion in derivatives, so this is a really big deal.

Mortgages, student loans, financial derivatives, and other financial products often rely on Libor as a reference rate. So, the manipulation of Libor can have significant negative effects on consumers and financial markets worldwide.

Federal Housing Finance Agency Inspector General and auditor Steve A. Linick said that Fannie Mae and Freddie Mac may have lost more than $3 billion because of the manipulation.

Additionally, it is estimated that the manipulation of Libor cost US municipalities at least $6 billion.

The Big Banks involved in the Libor scandal, such as Barclays ($360 million) and UBS $1.2 billion), were merely fined. These fines are chump change relative to the billions that were collected through fraud and rigging. Critically, no one involved went to prison.

Fraud and rigging are rampant at the Big Banks. Criminality is endemic. It is their method of operation.

The fact that no one from these banks is serving time for these assorted crimes is, itself, criminal. This miscarriage of justice simply reinforces criminality. The profits of criminal banking are so grand, and the penalties so weak, that the Big Banks are incentivized to break the law. And our government (via the Justice Department) tolerates it. In fact, it implicitly condones it.

There is no morality, ethics, scruples or decency to be found at the Big Banks. There is only the quest for profit and power.

There is no justice in the corridors of power, or for those who run the Big Banks.

The Banksters make the rules, and when they can't, they simply break them with impunity.