I believe our fiscal situation is much worse than most people realize. True, the situation might be resolvable with a hard-nosed turnaround specialist in charge [Romney?] but, even here, the emphasis is on “might”! In a political context, where citizens have been conditioned to believe they are entitled to live at the expense of government (i.e other citizens because, after all, government has nothing that it first does not take from someone else), the situation is beyond hopeless. Let me address the true economic situation of the U.S. by way of an email I received from a regular reader recently. Words: 615

So says Monty Pelerin’s World (www.economicnoise.com) in edited excerpts from the original article* which Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com (A site for sore eyes and inquisitive minds) and www.munKNEE.com (Your Key to Making Money!) has edited ([ ]), abridged (…) and reformatted (some sub-titles and bold/italics emphases) below for the sake of clarity and brevity to ensure a fast and easy read. The article’s views and conclusions are unaltered and no personal comments have been included to maintain the integrity of the original article. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement.Below is the email which reads, in part:

Our government has grown too big, promised too much and waited too long to restructure. Our fiscal clock is ticking and time is not working in our favor. The Moment of Truth is rapidly approaching. We’ll soon know whether Washington policymakers are up to the challenge and whether they will start focusing more of doing their job rather than just keeping their job and on focusing first on their country rather than their party. [To accomplished what is needed] the President and Congressional leaders from both political parties need to be at the table and everything must be on the table in order to achieve sustainable success.  [Here's an outline of our country's predicament and how it might  be resolved.] Words: 3110

So says David M. Walker (http://tcaii.org) in an article* which Lorimer Wilson, editor of www.munKNEE.com,  has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Walker goes on to say: 

Our nation’s founders understood the difference between opportunity and entitlement. They believed in certain key values including the prudence of thrift, savings and limited debt. They took seriously their stewardship obligation to the country and future generations of Americans but the truth is, we have strayed from these key, time-tested principles and values in recent decades. We must return to them if we want to keep America great and help to ensure that our future is better than our past.

The Federal Debt is 95% of GDP and Growing Rapidly

The total federal debt alone is almost 100 percent of the economy and growing rapidly. Add in state and local debt, and the total number is about three times as much as the total debt we held at the beginning of our Republic – and it is headed up rapidly. As the below graphic shows, our total federal debt has more than doubled in just the past ten and a half years.

Fiscal Fitness Index Ranks America 28th

In March 2011 the Comeback America Initiative (CAI) and Stanford University released a new Sovereign Fiscal Responsibility Index (SFRI) – a Fiscal Fitness Index. We calculated each country’s SFRI based on three factors:

1. fiscal space (the amount of additional debt a country could theoretically issue before a fiscal crisis is imminent), 
2. fiscal path (the number of years before a country will hit its theoretical maximum debt capacity),
3. fiscal governance (a value based on the strength of a government’s institutions, as well as its transparency and accountability to its citizens).

The overall SFRI index shows that the U.S. ranks 28 out of 34 nations in the area of fiscal responsibility and sustainability. On average the U.S. ranks far below all three of the above mentioned categories and, in particular, the fiscal governance category – and will hit its theoretical maximum debt capacity within16 years, and will enter a “fiscal danger zone” within 2-3 years . When you see which countries rank around us, it’s clear that we’re in a bad neighborhood. We’re only a few notches above countries like Greece, Ireland, and Portugal, all of which have recently suffered severe debt crises.  Below is the full list of rankings.

On the positive side, the CAI and Stanford report showed that if Congress and the President were able to work together to pass fiscal reforms that were the “bottom line” fiscal equivalent of those recommended by the National Fiscal Responsibility and Reform Commission last year, our nation’s ranking would improve dramatically, to number 8 out of 34 nations. In addition, we would achieve fiscal sustainability for over 40 years!

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So what are our elected officials waiting for? If they do not want a debt crisis to force them to make very sudden and possibly draconian changes they need to wake up and work together to make tough choices. That’s what New Zealand did in the early 1990s when that country faced a currency crisis. Due to tough choices then and persistence over time, New Zealand now ranks number 2 in the SFRI – second only to Australia. If New Zealand can do it, America can too!

The Recent Budget Policy Proposals Don’t Go Far Enough

In order for us to begin to restore fiscal sanity to this country [recent budget policy proposals as mentioned  below need to be implemented]. President Obama has…

• largely embraced the work of his National Fiscal Responsibility and Reform Commission, although with a longer timeframe for implementation and less specifics on entitlement reforms;
• endorsed the debt/GDP trigger and automatic enforcement concept that CAI had been advocating under [which] Congress could agree on a set of statutory budget controls that would come into effect in fiscal 2013…

House Budget Committee Chairman Paul Ryan recently demonstrated the political courage to lead in connection with our nation’s huge deficit and debt challenges. His budget proposal recognizes that restoring fiscal sustainability will require tough transformational changes in many areas, including spending programs and tax policies. Chairman Ryan’s proposal includes several major reform proposals, especially in the area of health care. For example, he proposes:

• to convert Medicare to a premium support model that will provide more individual choice, limit the government’s long-term financial commitment and focus government support more on those who truly need it
• to employ a block grant approach to Medicaid in order to provide more flexibility to the states and limit the governments’ financial exposure.

[Ryan's proposals] have varying degrees of merit, however, how they are designed and implemented involve key questions of social equity that need to be carefully explored. [Furthermore,] contrary to Chairman Ryan’s proposal, the following concepts also need to be on the table in order to help ensure bipartisan support for any comprehensive fiscal reform proposal:

• additional defense and other security cuts that do not compromise national security and
• comprehensive tax reform that raises more revenue as compared to historical levels of GDP.

Unfunded Liabilities Could Sink our “Ship of State”

Washington policymakers took about 88 percent of federal spending, along with much-needed federal tax reforms, “off the table” during the recent debate over the 2011 budget. In essence, they have been arguing over the bar tab on the Titanic when we can see the huge iceberg that lies ahead. The ice that is below the surface is comprised of tens of trillions of dollars in unfunded Medicare, Social Security and other off-balance sheet obligations along with other commitments and contingencies that could sink our “Ship of State”. It is, therefore, critically important that we change course before we experience a collision that could have catastrophic consequences. As you can see in the series of pie charts below, mandatory programs like Social Security and Medicare already take up the largest share of the federal budget and, absent a change in course, will continue to do so in increasing amounts in the next several decades.

Reaching Federal Debt Ceiling Limit Would Result in Draconian Actions

Now that the level of federal funding for the 2011 fiscal year has been resolved, there has been an increasing amount of attention on Congress’ upcoming vote to increase the federal debt ceiling limit. As is evident by the chart below detailing the debt ceiling limit per capita adjusted for inflation since 1940, the U.S. started losing its way in the early 1980s. Fiscal responsibility was temporarily restored during the 1990s, when statutory budget controls were in place, but things went out of control again in 2003, the year after those budget controls expired.

In essence, raising the debt ceiling is simply recognizing the federal government’s past fiscally irresponsible practices. While federal law provides for the continuation of essential government operations even if the government has not decided on a budget or funding levels for a fiscal year, such a provision does not exist in connection with the debt ceiling. Therefore, if the federal government hits the debt ceiling during a time of large deficits, which is the case today, dramatic and draconian actions will have to be taken to ensure that additional debt is not incurred. This would likely include a suspension of payments to government contractors, delays in tax refunds, and massive furloughs of government employees. In addition, since Social Security is now paying out more in benefits than it receives in taxes, the monthly payments may not go out on time if we hit the debt ceiling limit. That would clearly get the attention of tens of millions of Americans, including elected officials.

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[Since] failure to raise the debt ceiling is not a viable option given our current fiscal state, we must take concrete steps to address the government’s lack of fiscal responsibility. We must also do so in a manner that avoids triggering a massive disruption and a possible loss of confidence by investors in the ability of the federal government to manage its own finances. Such a loss of confidence could spur a dramatic rise in interest rates that would further increase our nation’s fiscal, economic, unemployment and other challenges.

In order to begin to restore fiscal sanity, Congress could increase the debt ceiling limit in exchange for one or more specific steps designed to send a signal to the markets, and the American people, that a new day in federal finance is dawning. To be credible, any such action must go beyond short-term spending cuts for the 2012 fiscal year. The debt/GDP trigger and automatic enforcement concepts I advocate above are one specific step Congress could take.

Sovereign Debt Rating Suggests U. S. on Unsustainable Fiscal Path

The S&P’s revised outlook on the long-term rating for U.S. sovereign debt should be yet another wake-up call for elected officials and other policymakers in Washington. S&P’s action serves as a market-based signal that independent ratings agencies believe the U.S. is on an imprudent and unsustainable fiscal path and that action is needed in order to maintain investor confidence. In my view, this action should have been taken place some time ago; however, it is now likely that other rating agencies will reconsider their ratings positions on U.S. Sovereign debt.

We Must Move Past Partisan Politics

The American people need to understand that doing nothing to address our deteriorating financial condition and huge structural deficits is simply not an option. Failure to act will serve to threaten America’s future position in the world and our standard of living at home. Therefore, both major political parties must come to the table and put aside their sacred cows and unrealistic expectations. As John F. Kennedy said,

“The great enemy of the truth is very often not the lie — deliberate, contrived and dishonest — but the myth — persistent, persuasive, and unrealistic.”

Liberals need to acknowledge that we need to renegotiate the current social insurance contract. For example, contrary to assertions by some, Social Security is now adding to the federal deficit and is underfunded by about $8 trillion. As you can see below, it will face escalating annual deficits beginning in 2015.

There is no debate that last year’s health care reform legislation will result in higher federal health care costs as a percentage of the economy. (See the chart below). In addition, according to Medicare’s independent Chief Actuary, based on reasonable and sustainable assumptions, last year’s health care reform legislation will end up exacerbating our deficit and debt challenges rather than helping to lessen them. He estimated that the cost of the health care law to the Medicare program could be over $12 trillion in current dollars more than advertised.

Conservatives need to acknowledge that we can’t just grow our way out of our fiscal hole. They need to admit that all tax cuts are not equal and there is plenty of room to cut defense and other security spending without compromising our national security. While conservatives are correct to say that our nation’s fiscal challenge is primarily a spending problem, they must recognize that some additional revenues will be needed to restore fiscal sanity. The math just doesn’t work otherwise.

All parties must acknowledge that we can’t inflate our way out of our problem and that we must take steps to improve our nation’s competitive posture. This means that some properly targeted and effectively implemented critical infrastructure and other investments may be both needed and appropriate even if they exacerbate our short-term fiscal challenge.

Washington policymakers need to understand that the same four factors that caused the recent financial crisis exist for the federal government’s own finances, [namely:]

1. a disconnect between those who benefit from prevailing policies and practices and those who will pay the price and bear the burden if and when the bubble bursts.
2. a lack of adequate transparency and accountability in connection with the true financial risks that we face.
3. too much debt, not enough focus on cash flow, and an over-reliance on narrow and myopic credit ratings.
4. a failure of responsible parties to act until a crisis was at the doorstep.

There is growing agreement that the greatest threat to our nation’s future is our own fiscal irresponsibility. In fact, as I noted in 2007 and Joint Chiefs Chairman Admiral Mullin stated last year, our fiscal irresponsibility and resulting debt is a national security issue. After all, if you don’t keep your economy strong for both today and tomorrow, America’s standing in the world and standard of living at home will both suffer over time – and waiting for a crisis before we act could also undermine our domestic tranquility.

What Should be Done to Remedy the Current Fiscal Insanity?

Congress and the President should:

1. reach a compromise agreement on an appropriate level of spending cuts in 2012 while also providing for some additional properly designed and effectively implemented critical infrastructure investments.
2. agree to re-impose tough statutory budget controls that will force much tougher choices on both the spending and tax side of the ledger beginning no later than 2013.
3. authorize and fund a national citizen education and engagement effort to help prepare the American people for the needed actions and to facilitate elected officials taking them without losing their jobs.
4. create a credible and independent process that will provide for a baseline review of major federal organizational structures, operational practices, policies and programs in order to make a range a transformational recommendations that will make the federal government more future focused, results oriented, successful and sustainable.
5. cut spending levels. Base levels of federal discretionary spending increased by over 30 percent between 2007 and 2010 during a time of low inflation.
6. all parties must be realistic regarding how much should be cut and how quickly it can be achieved. In my view, we should be targeting cuts of $125-$150 billion over several years. If we did so, the related savings would be significant and would compound over time.

As the National Fiscal Responsibility and Reform Commission,  the CAI, The No Labels political movement (of which I am a co-founder), and others have noted, everything must be on the table – and all political leaders need to be at the table – in order to put our nation on a more prudent and sustainable fiscal path. This includes a range of social insurance program reforms, defense and other spending cuts, and comprehensive tax reform that generates additional revenues, including both individual and corporate tax reform. We must keep in mind that the private sector is the engine of innovation, growth, and jobs. In addition, many businesses are taxed at the individual, rather than the corporate, level.

Realistically, it will take us a number of years to get back into fiscal shape [and, as such,]what is a reasonable order of battle to win the war for our fiscal future?

• First and foremost we need to enact budget process reforms, re-impose the type of budget controls and engage in the fact-based citizen education and engagement effort referred to previously.
• The next order of battle items should be corporate tax reform and Social Security reform.

Why corporate tax reform? Because it can help to improve our competitiveness, enhance economic growth and generate jobs. Why Social Security reform? Because we have a chance to make this important social insurance program solvent, sustainable and secure for both current and future generations. We can also exceed the expectations of all generations and demonstrate to both the markets and the American people that Washington can act before a crisis forces it too.

The above efforts should be followed by:

• broader tax reform and Medicare/Medicaid reforms.
• rationalize our health care promises and focus more on reducing health care costs in another round of health care legislation.
• begin a multi-year effort to re-baseline the federal government’s organizations, operations, programs and policies to make them more future focused, results oriented, affordable and sustainable.

Conclusion

In summary, the truth is that the government has grown too big, promised too much and waited too long to restructure. Our fiscal clock is ticking and time is not working in our favor. The Moment of Truth is rapidly approaching. As it does, let us hope that our elected officials keep the words of Theodore Roosevelt in mind:

“In any moment of decision the best thing you can do is the right thing, the next best thing is the wrong thing, and the worst thing you can do is nothing.”

“We the People” must do our part by:

• insisting on action and by making the price of doing nothing greater than the price of doing something.
• insisting that our legislators offer specific solutions to defuse our ticking debt bomb in a manner that is economically sensible, socially equitable, culturally acceptable, and politically feasible.
• recognizing that improving our fiscal health, just like our physical health, will require some short-term pain for greater long-term gain…

We’ll soon know whether Washington policymakers are up to the challenge and whether they will start focusing more of doing their job rather than just keeping their job. They need to focus first on their country rather than their party.

The President and Congressional leaders from both political parties need to be at the table and everything must be on the table in order to achieve sustainable success. Let’s hope they make the right choice this time!

*http://beforeitsnews.com/story/610/219/Restoring_Fiscal_Sanity_in_the_United_States:_A_Way_Forward.html (Hon. David M. Walker, Founder and CEO of the Comeback America Initiative and Former Comptroller General of the United States (1998-2008)

Editor’s Note:

• The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
• Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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Fiscal

There are so many headwinds and cross currents in the market today, it is all but impossible to predict what will happen in the short term. There is too much volatility and noise. So, it pays to keep your eyes on the horizon, focused on the long term and the biggest trends – and the biggest of all possible financial trends is the eventual bankruptcy of the United States government – or should I say the existing bankruptcy of the U.S. government? Words: 945

So says Jon Herring (www.InvestorsDailyEdge.com) in an article* which Lorimer Wilson, editor of www.munKNEE.com, has reformatted below for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Herring goes on to say:

The United States government is facing an impending fiscal crisis. Former Comptroller General David Walker calls it a “cancer growing from within.” The wheels for this were already set in motion well before the financial crisis. With ongoing wars in Iraq and Afghanistan, a costly stimulus package and falling tax receipts, the U.S. was already neck deep in debt.

Even before the bailouts, the Office of Management and Budget (OMB) projected that the 2009 federal deficit would be nearly $482 billion. Since then however, our government has jacked up spending by the trillions… but, believe it or not, this is just a drop in the bucket compared to the big picture.

The True Scope of America’s Fiscal Problem
Richard Fisher is the CEO of the Dallas Federal Reserve Bank and a member of the Federal Open Market Committee (FOMC), which sets interest rate policy has stated that the total U.S. debt – including Medicare and Social Security – is more than $99 TRILLION! Along the same lines, Laurence Kotlikoff, a Boston University economist, suggests that the “fiscal gap” – which is the difference between the number above and what we could reasonably expect to collect – is $66 trillion.

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That is the definition of bankruptcy. It is just a matter of time. The scope and impact of our liabilities are stunning. Let’s play devil’s advocate here and consider where this kind of money might come from. How can we possibly meet our obligations to retirees… as well as service our debt to foreign governments… and still operate our own government?

It Won’t Come from Cuts in Spending
Let’s listen in on Fisher’s speech and consider what kind of spending cuts we would have to make to close the gap on what we owe:

“To fully fund our nation’s entitlement programs would be to cut discretionary spending by 97 percent. Hold on! That discretionary spending includes defense and national security, education, the environment and many other areas, not just those controversial earmarks that make the evening news. All of them would have to be cut—almost eliminated—to tackle this problem through discretionary spending.”

Just to meet our current and future obligations, we would have to virtually clear out Washington, D.C. and these changes would have to be made to perpetuity. Now, Ron Paul might have cut government back to its constitutionally mandated functions, but don’t expect anyone else in Washington to even consider the notion. Congress has shown that it has NO moral regard for the long term economic viability of our country.

It Won’t Come from Tax Increases
Even if we did cut the government back to the bare minimum (which we won’t), that still wouldn’t solve the problem. We would also have to raise taxes. By how much? Back to Richard Fisher:

“Similarly on the taxation side, income tax revenue would have to rise 68 percent and remain that high forever. Remember, though, I said tax revenue, not tax rates. Who knows how much individual and corporate tax rates would have to change to increase revenue by 68 percent?”

We already don’t collect enough tax revenues to pay the government’s budget and with a recession taking hold and a depression on the horizon, where are the tax revenues going to come from? Taxation is simply not an option for this kind of money.

We Can’t Borrow it from Ourselves
During World War II, we borrowed the money we needed from ourselves but Americans had a high savings rate then. This is no longer true. Most Americans are upside down, with credit cards, mortgages, cars and other loans… not to mention very high unemployment.

It Won’t Come from Foreigners
For many, many years, the U.S. government has been able to pay for anything and everything we wanted to by borrowing the funds from other countries but other countries are beginning to balk, and for a variety of reasons. For one thing, the countries that do have reserves to lend us are turning their attention inward.

Increases in spending and liabilities along with decreases in foreign lending equals a recipe for disaster. So, where will the money come from? This is a job for the printing press. While we are certainly facing deflation in the near term and a very choppy market, the groundwork has been laid for hyperinflation, soaring interest rates and exploding gold and silver prices.

*http://inflationdata.com/inflation/Inflation_Articles/Is_the_United_States_Bankrupt.asp (This investment news is brought to you by Investor’s Daily Edge, a free daily investment newsletter in which you’ll receive practical strategies for protecting your portfolio and multiplying your money. To view archives or subscribe, visit www.InvestorsDailyEdge.com)

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It would appear that the U.S. is in an untenable position – between a rock and a hard place – in an inescapable debt trap – where the options are, at best, dire – hyperinflation or a deflationary depression! It would seem that all we can do is ride out the storm in a boat laden with gold. Words: 2283

Lorimer Wilson, editor of www.FinancialArticleSummariesToday.com, provides below edited excerpts from Jeff Nielson’s (www.BullionBullsCanada.com) original 7000 word speech* at the “World Money Show” in Vancouver for the sake of clarity and brevity to ensure a fast and easy read. (Please note that this paragraph must be included in any article reposting to avoid copyright infringement.) Nielson goes on to say:

The U.S.’s severe debt problems which are exacerbated by its $70 trillion in unfunded liabilities to fund the social ‘entitlements’ of the mass of baby boomers who will be retiring by the tens of millions in the next few decades and there is NO likelihood of the U.S. government ever reducing those entitlements. Any attempt to do so would cause severe economic disruptions and civil unrest. In fact, there are numerous practical reasons why this will never happen:

1. The looming pension crisis
It is estimated that U.S. pension plans were underfunded by about $3 trillion as of the end of 2008 and even after the recent “rally” in U.S. equity markets that pension deficit still amounts to roughly $2 trillion. Thus, even if the U.S. government could somehow make full pay-outs on the entitlement programs which U.S. seniors will be relying upon, they would still have to raise an additional $2 trillion just to maintain their standard of living not to mention the consumption-level which this consumer economy relies upon for its survival. Why? Because, with over 40% of Americans having less than $10,000 in savings, Americans are more dependent today on these entitlement programs than any other generation of Americans in history.

2. The second coming of another housing bubble
With 75% of the “assets” held by retired and soon-to-be retired Americans consisting of real estate, they will need to dump roughly $2 trillion of real estate onto the U.S. market – the most over-supplied real estate market in history – in order to maintain their standard of living. To preclude such an event, the U.S. government has been desperate to ‘re-inflate’ the U.S. housing bubble – at any cost – to buoy up American ‘real estate’ accounts and bail out the banks holding the mortgages on houses in foreclosure.

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Nevertheless, I believe the U.S.will see a second housing bubble because:
1. the U.S. Federal Reserve has taken the interest rate all the way down to zero – and left it there
2. millions of U.S. properties have either been held off the market by U.S. banks, or are tied-up in U.S. foreclosure proceedings. Both actions have artificially reduced “inventories” of unsold homes by at least 50% putting in place a very temporary “bottom” in prices
3. the U.S. government agencies, which are responsible for all 90% of all new mortgages, have once again lowered their lending standards. In fact, when the government buyers’ “credit” is factored-in, more than half of all U.S. homes purchased in 2009 had zero down-payments.
4. the Federal Reserve has been buying up every U.S. mortgage bond in sight given the record default rates which currently exist in the U.S. In fact, more than 25% of all U.S. mortgage holders have “underwater’ mortgages and 15% of all U.S. mortgages are currently in default and/or foreclosure: an all-time record
5. buying all these “bonds” (with newly-printed dollars) has temporarily kept U.S. mortgage rates several percent lower than they would have been without this hidden and very expensive taxpayer subsidy. This has resulted in the Federal Reserve absorbing more than $2 trillion of “bonds” and securities which – to be polite – are of extremely dubious value and the moment the Fed stops buying-up all these debt-instruments, U.S. mortgage rates will shoot higher.

With all of the aforementioned occurring at a time when millions of “option ARM” mortgages are about to reset and more than 40% of the millions of Americans holding these mortgages have been making minimum payments
it follows that when these mortgages reset, borrowers could see their monthly payments not merely increasing by 40% or 50% per month, but by up to several times their current payments.

These millions of mortgage resets are occurring at the same time that long term unemployment in the U.S. is at its highest level in at least 70 years, and U.S. housing “real” inventories are at their highest levels ever. As such, once this second collapse begins, there will be no means of stabilizing this market because:

1. With interest rates already at 0%, interest rates can literally only go higher
2. U.S. homeowners have less equity in their homes than at any time in history
3. Retiring baby boomers will have to dump $1 to $2 trillion of real estate onto this market just to partially fund their under-funded retirements and much more than that, if entitlement programs should have their benefits slashed.

This will not only undermine the U.S. housing market for many years to come, but any reductions in U.S. entitlement programs will directly make the next collapse of the U.S. housing sector that much more severe – because it would force the sale of much more real estate.

3. The future cost of interest payments and “unfunded liabilities”
The Obama government has already admitted that over the course of this decade more than 50% of every new dollar of debt will be consumed in interest payments on old debt. Those interest payments, alone, will exceed $1 trillion/per year before the end of this decade. Added to this will be roughly $2 trillion per year of “unfunded liabilities”, which will now have to be funded. This means that over the course of this decade, the U.S. government will have to come up with an additional $3 trillion/year – above and beyond all current spending programs. This will roughly double U.S. government spending, and roughly quadruple current deficits.

Even the largest tax increases in history could only fund, at most, about 10% of this spending-gap. This means either cutting trillions per year in government spending, which would be totally impossible, or simply printing-up trillions and trillions of new dollars to pretend to “pay” those bills. This, in turn, guarantees hyperinflation.

4. The on-going political paralysis
The budgetary constraints which I have discussed above have all been of the “economic” variety. However, arguably it is U.S. political constraints which are an even bigger obstacle in beginning to address the massive, triple-problem of U.S. insolvency: debts, deficits, and liabilities.

Decades of “gerrymandering” have transformed roughly 80% of U.S. electoral districts into the permanent holdings of one or the other of the two, U.S. political parties. As such, the candidates of the favored party are essentially guaranteed a seat for life and this eliminates any incentive to produce positive results for their own constituents – other than bringing home the “pork”. As a result, partisan politics has taken precedence over any, and all, other considerations and, regretfully, the #1 rule of partisan politics is to never allow the party in power to accomplish anything (good) of significance.

The one exception to this scenario of total indifference is with respect to the American Association for Retired Persons (AARP) which is not only the largest voting bloc in the U.S., but it is comprised of the only segment of the U.S. electorate which has a constently high “turn-out” in every election. Not surprisingly, their two most important issues are Social Security and Medicare: the two social programs which are 100% certain to bankrupt the U.S. economy. Barring a complete “metamorphosis” of the entire U.S. political system, these “unfunded liabilities” are essentially carved in stone, since they are the only issues where doing something unpopular could threaten the security of the sitting politician and this leaves current and future U.S. government with nothing but terrible options. The questions they must ask themselves are:

1. Do they fully “fund” all these entitlement programs by printing up countless trillions of new dollars (the only possible way to cover those entitlements 100%)?
2. Do they slash entitlements – and lose their own, cushy positions – sucking trillions of dollars out of the economy and result in a debt-implosion which would make the death of the former Soviet Union look like a “picnic”.

If the U.S. does not commit to one course of action or the other, however, the U.S. will likely suffer the worst of both worlds: a “hyperinflationary depression”.

5. The preference for hyperinflation
Hyperinflation is more than just “soaring prices” – it also reflects a crisis of confidence with respect to the currency in question, and the beginning of a death-spiral for that currency.

When a currency starts to rapidly lose value the government is forced to print up vast quantities of new currency to subsidize the depleted wealth of its citizens – so they literally do not starve to death. Then, that excessive money printing leads to an even more rapid rate of devaluation for the currency, and this vicious circle gets more and more severe. In virtually every example in history, such currencies effectively go to zero.

For the reasons previously mentioned, many people will argue that hyperinflation is the inevitable course on which the U.S. is headed. Not only is the Federal Reserve under extreme pressure to continue to print countless trillions of new dollars, but hyperinflation “solves” the twin problems of massive, current debts and completely unpayable entitlement programs. The debts would get “paid”, and the entitlements would be “funded”. That being said, the paper used to do this would have only a minute fraction of its former value because, since hyperinflation causes a currency to move toward zero, all debts and liabilities expressed in that currency also become effectively worthless. Thus, a very strong argument can be made that the U.S. will choose the informal “default” of a hyperinflation, rather than suffer a formal default – and a resultant debt-implosion.

History is clear: the devastation of hyperinflation will destroy the wealth of average Americans to an even greater degree than through suffering the ravages of a deflationary implosion – although the former would preserve the “paper empire” of the Wall Street banks who have been dictating U.S. economic policy. As such, is there really any doubt as to what direction the government, unduly influenced by the country’s financial oligarchy, is going to take?

6. The current deflationary environment
In order to delay inflation from ravaging the U.S. economy, however, the U.S. government is currently playing a very dangerous game. It is essentially starving the entire U.S. economy of capital. Bank-lending is falling at the fastest rate in U.S. history because the banks refuse to lend money to U.S. businesses, despite their promises to do the exact opposite. They prefer to keep most of the bail-out money “on deposit” at the Federal Reserve in what is literally nothing more than a “savings account”. That’s where the Federal Reserve has been “borrowing” the money to buy-up trillions of dollars of worthless U.S. mortgage bonds. The rest of the bankers’ money is then used to “play the markets” with their “proprietary trading”.

7. The lack of a vibrant economy
Those who insist that the “mighty” U.S. economy will “bounce back” as it always has in the past – that the U.S. will “grow” its way out of its huge debt/deficit crisis – Don’t seem to realize, with more than 50% of every new dollar of U.S. debt simply being interest payments on the old debt, that the U.S. economy will not be able to grow much, if at all – let alone at the above-average rate which is required just to produce enough revenues to service all that debt.

The U.S. economy is supposedly growing at more than a 5% rate, which is equivalent to an “economic boom” for any economy other than China’s. However, to borrow an old line: “where’s the beef?” U.S. government revenues (for all three levels of government) are plummeting downward at an accelerating rate, so how can the economy be “booming” if no one is generating any tax receipts for the government? The fact is that, with the U.S. carrying the heaviest debt-load in its history, and an every-larger portion of every dollar consumed just paying interest, the overall U.S. economy would have to be operating at a higher rate of activity than is normal in the past, just to achieve average growth. Can anyone really suggest that the U.S. economy is currently stronger than normal?

A Debt Trap in the Making
With the U.S. economy currently carrying over $60 trillion in total public/private debt just raising U.S. interest rates even 1% would drain an extra $600 billion per year out of the U.S. economy in additional interest payments – an equivalent drop of 5% drop in U.S. GDP – and that would be the case even before factoring in the “multiplier effect” of sucking that much money out of the economy – and every 1% hike would inflict a similar, but compounded, amount of damage on the U.S. economy. Frankly, it is very likely that even a 1% increase in current U.S. interest rates would be enough to send the U.S. economy into an immediate deflationary spiral.

Talk about being between a rock and a hard place – in an inescapable debt trap – where the options are, at best, either a hyperinflation or a deflationary depression! Yes, it would seem that all we can do is ride out the storm in a boat laden with gold.

*http://www.bullionbullscanada.com/index.php?option=com_content&view=article&id=11900:debt-denial-and-default&catid=64:presentations&Itemid=141

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above.
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When people find themselves in a situation where they feel they don’t have a decent grip on the risks they face, or where a great deal of critical information is hidden from view, emotions can easily overwhelm rational decision-making. Is it so farfetched to think that a sudden loss of confidence in the United States’ ability to manage its finances could evoke similar fears about just how large and widespread the fallout might be? Words: 1026

So says Michael Panzer* (www.financialarmageddon.com) regarding the edited excerpts of an article** written by Jeanne Sahadi of www.money.cnn.com/) as follows:

Debt That’s Accounted For
When anyone talks about U.S. debt, they typically refer to a) the debt held by the public (i.e. money owed to those who have bought U.S. Treasurys, most notably big bond mutual funds and foreign governments) and b) the money the federal government owes to government trust funds, such as those for Medicare and Social Security. in addition to that public debt are the trillions in unforseen and underplayed obligations that could make the debt outlook much much worse.

Here is just a sampling of the debt obligations not on the books that the deficit hawks are so worried about:

Debt That’s Not on the Books

1. Losses from Fannie Mae and Freddie Mac are Unmeasured, Unrecognized in the Budget and Unmanaged
Mortgage giants Fannie Mae and Freddie Mac are private companies that for years had the implicit backing of the federal government. That backing assured investors that if anything went seriously south for the companies Uncle Sam likely — although not absolutely — would step in. Well, things did go south, and now both are run by the federal government.

While the implicit guarantee has become explicit for Fannie and Freddie, its treatment in the budget is up in the air. “Our budget doesn’t have Fannie Mae and Freddie Mac on it, even though it’s owned lock, stock and barrel by the American taxpayer,” said Rudolph Penner, a former director of the Congressional Budget Office (CBO) during a conference held by the Peterson-Pew Commission on Budget Reform.

Last year, the CBO did start to account for both companies as if they were federal agencies on the budget but the White House Budget Office only includes some potential costs because the future of the two companies is still under consideration.

It’s estimated that the total loss on the mortgages backed by the companies could reach $448 billion, with a portion of that covered by reserves or assumed by outside parties. The CBO estimated the net costs to the government could top $370 billion by 2020. These are just estimates but what’s clear is that Fannie and Freddie are not cheap dependents and that’s why some argue that lawmakers should assess the potential costs of implicit government guarantees well before things go to pot.

“Their costs are largely unmeasured, unrecognized in the budget and unmanaged,” federal budget expert Marvin Phaup wrote in a recent paper. “A troubling aspect of current policy aimed at restarting the financial markets is the likely expansion of implied guarantees to include the obligations of additional private financial institutions.”

2. Social Security and Medicare Expenses are Unfunded
The governments’ accrued debt to the Social Security and Medicare trust funds is known but making those payments — which which will happen by 2037 for Social Security and within the next decade for Medicare –won’t be easy given the drop in federal revenue and the surge in government spending.

At that point, the programs will only be collecting enough in taxes to pay a portion of the benefits currently promised. There will be enormous pressure on the government to make up the difference, and Uncle Sam would have to borrow a lot of money to do so. Right now, money allocated to both entitlement programs is considered “mandatory” spending and therefore the spending increases for the programs are on autopilot and the financial commitment is uncapped in future years.

Some budget experts like Stuart Butler, vice president for domestic and economic policy at the conservative Heritage Foundation, would like to see the long-term obligations to Medicare and Social Security included in lawmakers’ annual consideration of the federal budget.

3. The True Cost of Tax Breaks
Everybody loves tax breaks and there’s more than a trillion dollars of them to love. That’s the amount of money the Treasury foregoes in annual revenue as a result of the many breaks in the tax code which effectively increases the government’s need to borrow.

This trillion-plus in tax breaks isn’t really up for consideration during annual budget discussions yet, while no one advocates abolishing tax breaks altogether many believe that tax breaks should be treated as discretionary spending. The idea is to bring them into the open so lawmakers can make a conscious decision annually about what they spend on tax breaks and recognize the costs associated with that decision.

4. Long-term Costs of New Roth IRA Rules
This year is the first year in which high-income investors with traditional IRAs or 401(k)s — both of which let savings grow tax-deferred until withdrawn — will have a chance to convert their accounts into Roth IRAs, where investments grow tax-free.

The new conversion rule is scored as a revenue raiser on the federal budget over the next decade because those who convert must pay the tax owed on their traditional IRA savings the year they convert but long-term it’s a different story. Since investments in the converted accounts will grow tax-free, Uncle Sam will collect considerably less revenue than he otherwise might have had the investors kept their ever-larger savings in a traditional IRA and paid taxes on them in retirement.

*http://www.financialarmageddon.com/2010/03/is-it-so-farfetched.html?
**http://money.cnn.com/2010/03/01/news/economy/budget_debt/index.htm

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
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Hank Paulson, the Goldman Sachs bankster/US Treasury Secretary, who deregulated the financial system, caused a world crisis that wrecked the world financial system is writing in the New York Times urging that the mess he caused be fixed by taking away from working Americans the Social Security and Medicare for which they have paid in earmarked taxes all their working lives. Wall Street’s approach to the poor has always been to drive them deeper into the ground. Words: 777

In further edited excerpts from the original article* Michael Myers (www.retirementcrisisinvesting.com) goes on to say:

As there is no money to be made from the poor, Wall Street fleeces them by yanking away their entitlements. It has always been thus. During the Reagan administration, Wall Street decided to boost the values of its bond and stock portfolios by using Social Security revenues to lower budget deficits. Wall Street figured that lower deficits would mean lower interest rates and higher bond and stock prices.

Two Wall Street henchmen, Alan Greenspan and David Stockman, set up the Social Security raid in this way: the Carter administration had put Social Security in the black for the foreseeable future by establishing a schedule for future Social Security payroll tax increases. Greenspan and Stockman conspired to phase in the payroll tax increases earlier than was needed in order to gain surplus Social Security revenues that could be used to finance other government spending, thus reducing the budget deficit. They sold it to President Reagan as “putting Social Security on a sound basis.”

Along the way Americans were told that the surplus revenues were going into a special Social Security trust fund at the U.S. Treasury but what is in the fund is Treasury IOUs for the spent revenues. When the “trust funds” are needed to pay Social Security benefits, the Treasury will have to sell more debt in order to redeem the IOUs.

Social Security was mugged again during the Clinton administration when the Boskin Commission jimmied the Consumer Price Index in order to reduce the inflation adjustments that Social Security recipients receive, thus diverting money from Social Security retirees to other uses.

We constantly hear from Wall Street gangsters and from Republicans and an occasional Democrat that Social Security and Medicare are an “unfunded liability” – a form of welfare that we can’t afford. This is a lie. Social Security is funded with an earmarked tax. People pay for Social Security and Medicare all their working lives. It is a pay-as-you-go system in which the taxes paid by those working fund those who are retired.

Currently these systems are not in deficit. The problem is that government is using earmarked revenues for other purposes. Indeed, since the 1980s Social Security revenues have been used to fund general government. Today Social Security revenues are being used to fund trillion dollar bailouts for Wall Street and to fund the Bush/Obama wars.

Having diverted Social Security revenues to war and Wall Street, Paulson says there is no alternative but to take the promised benefits away from those who have paid for them.

Years ago with stagflation defeated and a rising stock market, I favored privatizing Social Security as a way of creating a funded retirement system and producing greater savings and larger incomes for retirees. At that time Wall Street was interested, not for my reasons, but in order to collect the fees from managing the funds.

Had Social Security been privatized, I doubt that Wall Street would have been permitted to deregulate the financial system. Too much would have been at stake.

After the latest crisis brought on by Wall Street’s dishonesty and greed, trusting Wall Street to manage anyone’s old age pension requires a leap of faith that no intelligent person can make.

Wall Street has got away with its raid on the public treasury. Now, pockets full, it wants to pay for the heist by curtailing Social Security and Medicare. Having deprived the working population of homes, jobs, and health care, Wall Street is now after the elderly’s old age security.

Social Security, formerly an untouchable “third rail of politics,” is now “unsustainable,” while the real unsustainables–a pre-1929 unregulated financial system and open-ended multi-trillion dollar global war against terror are the new untouchables.

This transformation signals the complete capture of American democracy by an oligarchy of special interests.

*http://retirementcrisisinvesting.com/financial-crisis/is-your-retirement-money-safe#more-353

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.

Bank of Canada Governor John Carney and US Federal Reserve Chairman Ben Bernanke are proudly predicting that GDP will turn positive in 2010, but much of that growth will be the result of trillions of dollars of government spending. There is only one politically acceptable way to pay for those trillions, and that is to expand the money supply at an explosive rate. That is exactly what the US Federal Reserve has been doing for the past year. History and economics tell us, unfortunately, that rapid increases in the money supply spell big trouble for investors because they set the stage for spiralling inflation. Words: 2808

In further edited excerpts from the original article* Nick Barisheff (www.bmginc.ca) goes on to say:

Below are four big reasons to worry about inflation:

1: TRILLIONS OF DOLLARS ARE BEING PRINTED OUT OF THIN AIR
The global response to this crisis has been chaotic and ad hoc. The key policy plank seems to be to throw money at the problem until it goes away. Because it is determined to ward off a deflationary spiral at any cost, the Federal Reserve is pumping trillions of dollars into the US and global economies by purchasing massive amounts of treasury bonds and mortgage-backed securities. In order to do so, the Fed has had to balloon its balance sheet to over $3 trillion in assets (from a normal level of under $1 trillion). Much of this has come from printing money out of thin air.

The inflationary implications of this action are obvious, but what is not so obvious is why they need to do it. The US economy has not been healthy for many years. A series of Fed-induced asset bubbles have masked a sobering reality: the lack of real economic growth. The toxicity in the system as a result of years of fiscal and monetary irresponsibility has not been washed away by this crisis, and if anything it has increased. The US economy’s structural imbalances remain, and misplaced monetary policy is allowing them to fester and multiply.

So why hasn’t inflation already happened? Because in order to shore up their cash reserves, the banks are hoarding most of the money being sent their way by the US Federal Reserve. Hoarding reduces the “velocity” of the money in circulation, and this lower velocity has offset increased supply. But this is a temporary phenomenon. Fed Chairman Ben Bernanke is committed to pouring as much money into the system as it takes because, as he famously stated, “under a paper-money system, a determined government can always generate higher spending and hence positive inflation.”

Once the banks start lending the money that they’re now keeping as reserves, money velocity will reverse course and accelerate rapidly, prompting economists such as Lawrence Kotlikoff to warn that US money supply will likely triple in size by the end of this year. It will be very hard for the Fed to put the lid on inflation if that happens.

Virtually every government in the world has taken the easy way out. In a recent issue of Atlantic Monthly, former IMF economist Simon Johnson expressed concern that the bankers and financiers who played the central role in creating the crisis are now using their influence “to prevent precisely the sorts of reforms that are needed.” What’s worse, the government seems helpless, or unwilling, to act against them.

2: GOVERNMENT DEBT IS AT RECORD LEVELS
Let’s examine for a moment the sorry state of US indebtedness. Due to ongoing bailouts and stimulus packages, the US will experience a record $1.75 trillion deficit in 2009. US debt (accumulated deficits), as tracked by the famous US National Debt Clock in Manhattan, stands at a staggering $11.8 trillion and counting. In 2008 alone, the government paid a staggering $451 billion in interest, according to the government’s own website, TreasuryDirect.gov. And that number is expected to rise substantially in 2009.

That figure – $11.8 trillion – is a mindboggling amount of money but it represents only a part of America’s total liabilities. If Social Security and Medicare obligations are included (which they should be), obligations rise to over $106 trillion dollars, according to the US Treasury. None of this money has been set aside, but has instead been borrowed by the government for its own use. When combined with the debt of nearly $11.8 trillion, total debt soars to an astonishing $118.6 trillion, or nearly ten times total GDP, or $300,000 per person.

Former US Treasury Secretary Henry Paulson warned about this problem just last year, noting that it “will drive government spending to unprecedented levels, consume nearly all projected federal revenues and threaten America’s future prosperity.”

Financial analyst Jim Puplava says that while the US government is funding Medicare with Medicare Trust bills tthere is nothing actually backing those bonds. Since the government will shy away from raising taxes, the answer will be to print yet more money out of thin air.

America’s massive debt and unfunded liabilities make inflation the only viable option for today’s policymakers because when the value of future dollars is diminished, future obligations in those depreciated dollars are diminished.

Investors are not just facing a future of uncomfortably high inflation; they may be facing hyperinflation if the US dollar loses its reserve currency status. Raising taxes to pay for the bailouts is political suicide, but printing money is not.

Monetary authorities have done a good job of keeping investors in the dark, and they have had help from a surprising source: the media. The overprinting of money is never discussed by the US financial mainstream press and therefore goes undetected by the majority of people. Money printing may be the ultimate stealth monetary policy tool, but it has lethal consequences.

Even famed stock investor Warren Buffett has become concerned about inflation. In March of this year, Buffett expressed concern that stimulus efforts may lead to an inflation exceeding that of the 1970s. These are not idle remarks; they emanate from one of Obama’s own (unofficial) economic advisors. Buffett knows that when massive money printing is combined with bloated government debt, it makes it exceedingly difficult for any central bank to raise interest rates. And yet, as the early 1980s so painfully taught us, that is the only policy measure that can contain inflation.

The US government and Federal Reserve are caught in a fiscal and monetary bind of their own creation. 1) Zero percent interest rates are having minimal impact on growth, yet 2) with the exception of one or two quarters, prices of goods and services are still rising. 3) Rates must rise to contain inflation when it heats up, but 4) massive and growing US debt will make it nearly impossible for policymakers to raise rates.

3: THE CPI INFLATION INDEX DOES NOT REFLECT TRUE INFLATION
In both Canada and the US, inflation is hurting our pocketbooks, but you wouldn’t know it from the Consumer Price Index (CPI). That’s because the CPI is understated by as much as 7 percent per year according to economist John Williams, who has been tracking US CPI for many years. In addition, North American investors and consumers seldom hear the “headline” inflation number. Instead, the financial media usually report only the “core” inflation number, which excludes food and energy. This was done, ostensibly, to remove volatility from the CPI but food and energy account for about 23 percent of consumer spending, so how can they be ignored? Governments have a major incentive to understate CPI because trillions of dollars’ worth of pension funds, health benefits and wage increases for public sector employees are indexed to it.

Today’s CPI is substantially understated because it is calculated using a complex re-weighting formula that is riddled with substitutions, exclusions, hedonic adjustments and geometric weighting. If we were to recreate the CPI using the original 1983 formula, we would discover that even though we have experienced asset depreciation following the credit crisis, price inflation for goods and services has not gone away. And if the monetary authorities had decided to factor home prices into the CPI, the bubble would have been far more obvious from the beginning.

CPI distortion is consistent with most investors’ first-hand experience of prices of goods and services at the ‘street view’ level. What parent has not experienced tuition shock when their children enter college? Who isn’t paying more for basics like milk, even this year?

Intelligent investment decisions can’t be made without knowing the true rate of inflation. In a world where savings rates currently average 1 percent, an inflation rate of just 2 percent is a guaranteed loss. There is nothing that governments are better at than debasing their own currency. The Canadian and US dollar have lost more than 80 percent of their value since 1970. Again, this is reflective of a concerted monetary policy that continuously drives excessive growth in the money supply. When a country’s money supply is increased faster than its rate of economic growth, the purchasing power of that country’s currency declines and prices rise.

4: OIL PRODUCTION HAS ALREADY PEAKED
The world’s central banks are printing money and running deficits. As for America, the world’s largest economy is massively in debt, its unfunded liabilities are approaching $106 trillion, its spending is out of control, there is explosive growth in its money supply, and its official CPI is blatantly distorted. All this would be more than enough to spark dramatic inflation, but there is also another inflationary factor we must deal with: Peak Oil.

Peak Oil is not someone’s pet theory. It is not a rumour spread by left-leaning conservationists. Peak Oil is supported by hard production data. Peak Oil is a field-by-field extrapolation of what has already happened to existing oil fields. As most investors know, the US has had to import ever-increasing amounts of oil as their own supplies have decreased but now the exact same thing is happening in Britain’s North Sea and in Mexico.

Oil is a finite resource, and many of the world’s largest oil fields are being rapidly depleted. The maximum rate of global petroleum extraction has peaked, and now the rate of production is entering terminal decline. The reason for the decline is, to a large extent, the lack of new discoveries. Most of the major discoveries were made in the 1950s and 1960s. Since then, the annual discoveries of oil have kept dropping to the point where, when we take oil out, we do not replace the reserves.

While it is true that as more wells are drilled and newer and better technology is installed, production initially increases, eventually a peak output is reached and oil production not only begins to decline but also becomes less cost effective. At some point in this decline, the energy it takes to extract, transport and refine a barrel of oil exceeds the energy contained in that barrel of oil. This is happening now. Simply put, the world is quickly running out of cheap oil.

Years ago, Nobel-Prize winning economist Milton Friedman explained that global inflation was a monetary phenomenon that was subject to external shocks and to unpredictable time lags. Soaring oil prices are an external shock just waiting to happen to the monetary system. Because oil is such a vital component of so many products and services we consume, higher oil prices mean higher prices for nearly everything, not just now but over the long term.

Oil is unique, more like a currency than a commodity. The price of oil directly affects the price of the Canadian and Australian dollars. It is the lifeblood of business productivity and essential to our everyday life. It is the reason America’s foreign policy designates certain areas of the world as strategic, but not others. Although Canada is a net exporter of oil, it is not energy independent. Canada imports significant quantities of energy from the US and Europe. At the same time, the Canadian and US markets for petroleum products are deeply integrated, so supply problems in the US affect not only American consumers but Canadian consumers as well.
High oil prices were forgotten when oil prices declined from $147 per barrel to a low of $30 per barrel. However, prices have rapidly risen back up to $70+ per barrel, and are poised to rise much higher. US oil production peaked in 1986, Alaskan production in 1990 and North Sea production in 2000. Global oil production is believed to have peaked in 2008.

The US is the world’s biggest oil importer, but global demand is growing rapidly, particularly in India and China. Between 2003 and 2007 China’s oil demand grew at nine times the US rate. Meanwhile, in India, less than 1 percent now own cars but sales are growing at a rate of 20 percent per year. At the same time, many countries that were exporters are retaining a greater and greater percentage of their oil for their own burgeoning consumption needs, so they have far less to export.

The International Energy Agency (IEA) estimates that three more Saudi Arabias will have to be found and brought on stream just to meet the needs of China and India.

The clearest example of collapsing oil production is Mexico’s Cantarell field, the largest oil field in the Western World. From over two million barrels per day in 2004-2005, Cantarell now produces only 700,000 barrels per day. Soon Mexico will itself become an oil importer – no longer the third-largest exporter to the US.

It is projected that in the next few years Mexico will become a net importer rather than an exporter of oil. As a result, the US will lose its third-largest supplier.

Jeff Rubin, for more than 20 years the chief economist at CIBC World Markets, makes a compelling case for oil to soon rise to $225. “It’s not that the world is running out of oil in an absolute geological sense,” he says, “but it is running out of the type of oil you and I can afford to fill your tank with.” In his recently published book, Why Your World Is About to Get a Whole Lot Smaller, he writes that a world that was built on cheap oil is about to go through a radical transformation because of high oil prices. The debate is no longer about whether costs will rise. The debate is about how society will react and cope, because the economic, social and political costs of Peak Oil will be unprecedented.

The Fed Can’t Simply Shut Off the Money Spigot at Will
Pouring money into everything that moves may end one crisis but it will surely jumpstart another far more damaging one for investors. Despite Ben Bernanke’s protestations, the money supply spigot cannot simply be turned off when inflation starts to heat up because there is a 12- to 18-month time lag between monetary policy implementation and its effect.

Investors who believe we are living in a deflationary period should ask themselves a simple question: why are grocery prices and gas prices and hairdressing prices and insurance costs continuing to rise? What investors fail to understand is that price deflation is very different from asset depreciation. Asset depreciation (stock and real estate prices falling) has a negative wealth effect, but no effect on purchasing power. Price deflation, on the other hand, has a positive purchasing power effect. None of us can say our purchasing power is increasing, despite the recent negative CPI numbers. Price deflation is nowhere to be seen at this point. Since 1971, when the world went to a pure fiat monetary system controlled by central banks, currency in all countries has lost purchasing power. In Canada and the US it is down over 80 percent.

Today’s massive and still rising unemployment will do little to dampen the inflation fires, because inflation is never caused by too much demand but rather by too much money in the system. To paraphrase the late, great economist Milton Friedman, inflation is always and everywhere a loose monetary policy phenomenon. As the stagflation era of the 1970s clearly demonstrated, if slow growth could tame inflation, we would not have suffered through years of high inflation and low growth.

Inflation hurts stock prices because inflation increases volatility and uncertainty and risk, which makes businesses more risk averse, which reduces profits, which reduces price/earnings multiples. And lower P/Es always lead to lower stock prices.

It is difficult to determine exactly where we are in the recovery process. That’s why the money spigot can’t be easily shut off. Too little money and a nascent recovery could be choked off. Too much money and inflation will be impossible to control.

If virtually all of the world’s brightest financial minds missed the telltale warning signs of a bursting credit bubble in 2008, why should we believe they have any more insight into a recovery now?

For investors, it is not a question of if but when inflation will arrive.

*http://www.financialsense.com/fsu/editorials/bms/2009/1125.html (Nick Barisheff is President and CEO of Bullion Management Group Inc., a bullion investment company that provides investors with a cost-effective, convenient way to purchase and store physical bullion. Visit www.bmginc.ca for details.)

Editor’s Note:
- The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
- Permission to reprint in whole or in part is gladly granted, provided full credit is given.
- Sign up to receive every article posted via Twitter, Facebook, RSS feed or our Weekly Newsletter.
- Submit a comment. Share your views on the subject with all our readers.
- Buy the book below from Amazon. It’s pertinent to this article and inexpensive too.