“By a continuing process of inflation, government can confiscate, secretly and unobserved, an important part of the wealth of their citizens.”

With those words, John Maynard Keynes–the inventor of the “prime the pump,” economic stimulus theory employed by both FDR and Obama–tells you everything you need to know about current U.S. monetary and fiscal policy.  And while he said this as an attack on inflation, it is ironic that his policies have–in some people’s minds–led to high levels of inflation right here in the United States.

American Endgame has already touched upon inflation in fleeting terms.  We have discussed the idea that inflation is the rate at which a particular currency loses its value.  For example, a 2% rate of inflation will leave a dollar with 25% of its buying power after about 75 years.  A 6% rate of inflation will accomplish the same in just over 20.  But one thing we have not discussed is how inflation may be purposely being employed by the U.S. Government–and governments around the world–to both buy this economy more time and to establish a solution to America’s “there’s no way we can pay off our debt” problem.

The mechanics of inflation are fairly straightforward.  Assuming a fixed supply of currency, businesses will accept the fact that there is a finite amount of money to be “earned,” and prices will stabilize around a strategy to maximize a business’ ability to get the largest chunk of that pot as possible.  By way of example, if there were $1,000,000 in the U.S. economy, an intelligent businessman would recognize that there are $1,000,000 in circulation and “up for grabs” among the workers.  Some of these dollars would be given to the workers through paychecks, while others would be made available through bank loans, credit card borrowing, etc.  This intelligent businessman would also recognize that, on average, each American has access to $1,000,000/x, with x being the number of workers in the country (this is dramatically simplified, but bear with me).  After factoring how much of that money must go to basics needed to survive, a businessman makes a calculation of how much they will charge for their good or service to entice workers to spend a portion of their $1,000,000/x dollars on their product to maximize their profit.  Conversely, as a worker with only $1,000,000/x dollars available to spend, one must carefully determine how much they must spend to survive, buying food and clothing, paying rent and utilities, before going out to buy other goods.  Every purchase results from a calculation that goes approximately like this: “I have $1,000,000/x, so I can still afford to buy…”

Now, what would happen if the U.S. Government made arrangements to introduce an extra $1,000,000 into the economy?  This could be done through various methods, including physically creating more currency or by lowering the amount of money banks must hold in reserve, thus allowing them to fractionally lend greater amounts of their deposits.  Either way, let us say that now the U.S. economy consists of $2,000,000, and the amount of money available to workers is $2,000,000/x, on average.  Of course, this increase will come almost entirely from bank lending and credit card borrowing, since no one is going to advocate doubling a worker’s pay in America–not even in our hypothetical scenarios is that anywhere near realistic.  So, now the intelligent businessman recognizes that there are two times as many dollars out there to get his hands on.  In this way, prices would rise in all sectors because people are now “twice as able” to buy the products they’ve been buying all along.  And while the original intent of the government introducing more currency would have been to get people to buy “extra” stuff with their “extra” money, the effect is almost always different: people will end up buying the same stuff at an “extra” cost.  The effect is highly detrimental, and not stimulative at all.

One doesn’t have to be a prize-winning economist to see that this set of circumstances is not only happening today, but very dangerous indeed.  After all, if I make a fixed amount of money, and prices continually rise because more money is available to use, this is highly problematic.  My purchasing power drops continually as my slice of the overall pie continues to dwindle as I sit helpless.  If, in order to keep up, I do what so many Americans do and borrow money from banks or use credit cards to fill the gap, I am doubly in trouble.  How will I ever pay it back on a fixed, finite amount of pay? (I say “fixed” and “finite,” and I use those terms in a relative sense.  A 3% payraise–unimaginable for most of us–is not “fixed,” but might as well be for the purposes of taking on inflation, since the numbers we see suggest inflation is somewhere near 9 or 10%.)  So why does the U.S. Congress and the Federal Reserve continue to make more money available?  Consider the alternative.  Should the Federal Reserve end its policy of introducing more currency into the system on a fairly constant basis–this introduction is easy because U.S. Dollars, as we’ve learned, are fiat and have no real value–people will be forced, finally for the first time in probably 30 years, to live within their means.  “Living within their means” scares the Hell out of Congress.  Without more money always being introduced into the system, the United States would experience a highly deflationary event.  Americans would quickly begin to conserve and spend far more preciously the currency they possess in order to survive.  Without additional availability of credit, we would see money spent on food, utilities, gasoline to get to and from work, clothing, and other basics.  Goodbye, Channels 2-300…  Goodbye, trips to the movies for a family of four…  Goodbye new cars that can’t be paid for from savings…  You get the picture.  While the uber-rich would probably be fine, the 99% would vastly reduce their spending, and this would cause a massive collapse of the United States’ economy for want of customers.  Layoffs would ensue, and a deflationary spiral–where prices would fall to keep up with spending habits, which would lead to layoffs, which would lead to businesses shuttering, which would lead to catastrophe–would be almost certain.

There are some who dare suggest that this type of event is inevitable and necessary to fix the problem we’ve created by allowing too much debt to accumulate in the system.  After all, $55 trillion is a lot of debt, and like any massive debt, it will save a lot of money in the long-term were it paid down or paid off.  The devil is in the interim.  The contraction of such an overinflated economy would most likely feel like something between the Great Depression and the Dark Ages.  And as we’ve seen this year in Greece, when the government reduces its spending–ending favored social programs, reducing benefits, lowering minimum wages, and potentially increasing taxes–ain’t nobody gonna be happy.  The problem then becomes not only an economic problem, but a major social problem and a political problem.  And Congress and the White House don’t have the stomach for an American Spring, which is what they would be looking at if they make the necessary changes.

I am of the mind that we are definitely going to experience this “something between the Great Depression and the Dark Ages” event–you could probably tell by the title of this blog.  The question is not whether a major credit crisis will occur.  The questions are “when will it occur,” “how do we mitigate the impact on our society,” and “what do we owe to our progeny?”  If our generation could shoot for the Great Depression–an event which we survived–and take that on, it would be a great contribution to our nation’s future.  This would be far better than the Dark Ages scenario.  However, we grew up in a society so focused on material gain, selfish behavior, and instant gratification, that we may not have the mental fortitude to take this on.  The alternatives are dire.

One way or another, this event is unavoidable unless we make changes to our spending now.  The selfish path leads to our annihilation.  The selfless path–where Medicare, Social Security, low taxes, and military omnipresence are sacrificed–may get us out of this mess in the next 50 or 60 years.  I am simply not yet convinced we as a people have the foresight and strength to recognize the need for these changes and make them.  Even if our Congress sees the need and tries to save us from ourselves, we will probably “unelect” them or riot in the streets.  Either way, the outcomes will most likely be the same and we’ll have an interesting lifetime to look forward to.

~ DS

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 “Every time the workers come out in the only way they know to protest against conditions which are unbearable the strong hand of the law is allowed to press down heavily upon us.” ~ Rose Schneiderman

One of the more predictable reactions of the Federal and state governments in this period of change–a period when we begin to slowly realize in this country that expansion is not infinite, regardless of how Congress and the Fed try to keep it that way–is the desire to curb protest and demonstration.  Two key events in 2011–the public workers’ occupation of the Wisconsin State House and the general public’s occupation of Zuccotti Park outside the New York Stock Exchange–convinced The Powers That Be that Americans are still far too free to speak up and speak out in the event that the government begin to impose austerity on its population a la Greece.  After all, as George Carlin once said, “even in a fake democracy, the People ought to get what they want once in a while…”  Even as it pretended to support democratic demonstrations in Egypt last year, the U.S. Government was understanding the power of the people to create a mass movement that could overthrow a political system.
And how did this predictable reaction manifest itself?  In three key ways.  First, we’ve seen the unconstitutional National Defense Authorization Act signed into law by Barack Obama.  This Act does nothing less than eliminate Habeas Corpus.  That is, it allows American citizens who have not been charged with a crime to be held indefinitely and without hearing or access to counsel if the President deems that they are supporting terrorism.  This of course flies in the face of what it means to be American, but is not without precedent.  These tactics were used by other Presidents, namely Lincoln and FDR, both men held up by their parties as shining examples of righteousness and justice, during periods of national crisis.  Why, suddenly in 2011/2012, do we need to lock up Americans without hearing or counsel?  Are we suddenly more in danger from American would-be terrorists than we were 10 years ago?
Next, we experienced the flash fury that surrounded Congress’ attempts to control the Internet through the Stop Online Piracy Act and the Protect IP Act, both of which intended to outlaw “piracy” on the Internet.  These laws would have essentially given the U.S. Government carte blanche to regulate Web content.  A post should be dedicated some day to how quickly Congress abandoned these bills when millions of Americans contacted Congress to demand SOPA and PIPA be rejected.  While we will probably never be sure how many people contacted their legislators on this issue, it must have been a fantastic amount.  Congress was scared to proceed, and probably decided the American people were not ready to be ram-rodded in this fashion.
But this week, a little-known story that even this author would not be aware of except by random chance comes to us from news source rt.com, an English-language news site from Russia.  You can find the article linked here.  Below I present a selection:
The US House of Representatives voted 388-to-3 in favor of H.R. 347 late Monday, a bill which is being dubbed the Federal Restricted Buildings and Grounds Improvement Act of 2011. In the bill, Congress officially makes it illegal to trespass on the grounds of the White House, which, on the surface, seems not just harmless and necessary, but somewhat shocking that such a rule isn’t already on the books. The wording in the bill, however, extends to allow the government to go after much more than tourists that transverse the wrought iron White House fence.
Under the act, the government is also given the power to bring charges against Americans engaged in political protest anywhere in the country.
Under current law, White House trespassers are prosecuted under a local ordinance, a Washington, DC legislation that can bring misdemeanor charges for anyone trying to get close to the president without authorization. Under H.R. 347, a federal law will formally be applied to such instances, but will also allow the government to bring charges to protesters, demonstrators and activists at political events and other outings across America.
The new legislation allows prosecutors to charge anyone who enters a building without permission or with the intent to disrupt a government function with a federal offense if Secret Service is on the scene, but the law stretches to include not just the president’s palatial Pennsylvania Avenue home. Under the law, any building or grounds where the president is visiting — even temporarily — is covered, as is any building or grounds “restricted in conjunction with an event designated as a special event of national significance.”
The article alarmed me, to say the least, and I honestly thought it was a joke.  Is this from the Onion?  So, to help me relax, I went to thomas.loc.gov, a Library of Congress website that allows you to search bills before Congress.  This is the official Congressional source for pending legislation.  Sure enough, there it sat:
Amazingly, I noticed under “Latest Action” the phrase, “On motion that the house suspend the rules and agree to the Senate amendment Agreed to by the Yeas and Nays: 388 – 3.”  This is Cspan nerdspeak for the fact that the Senate has already passed a similar version of this bill, and that the House was agreeing to the Senate’s proposed changes in order to create an identical bill that could be passed by both chambers and sent to the President for his signature.  It is now essentially waiting to be signed.
Now, before we go off half-cocked, one has to ascertain the context of this bill.  On its face, it sounds insidious, but it could also be a simple update of current law related to Secret Service protection for principals of the U.S. Government and presidential candidates.  So, is this a massive change designed to suppress American resistance to government control, or a minor security update?  Its hard to say without knowing how the law currently reads, but thanks to American Endgame,you can at least judge the text of the bill here:
    `(a) Whoever–
      `(1) knowingly enters or remains in any restricted building or grounds without lawful authority to do so;
      `(2) knowingly, and with intent to impede or disrupt the orderly conduct of Government business or official functions, engages in disorderly or disruptive conduct in, or within such proximity to, any restricted building or grounds when, or so that, such conduct, in fact, impedes or disrupts the orderly conduct of Government business or official functions;
      `(3) knowingly, and with the intent to impede or disrupt the orderly conduct of Government business or official functions, obstructs or impedes ingress or egress to or from any restricted building or grounds; or
      `(4) knowingly engages in any act of physical violence against any person or property in any restricted building or grounds;
    or attempts or conspires to do so, shall be punished as provided in subsection (b).
    `(b) The punishment for a violation of subsection (a) is–
      `(1) a fine under this title or imprisonment for not more than 10 years, or both, if–
        `(A) the person, during and in relation to the offense, uses or carries a deadly or dangerous weapon or firearm; or
        `(B) the offense results in significant bodily injury as defined by section 2118(e)(3); and
      `(2) a fine under this title or imprisonment for not more than one year, or both, in any other case.
    `(c) In this section–
      `(1) the term `restricted buildings or grounds’ means any posted, cordoned off, or otherwise restricted area–
        `(A) of the White House or its grounds, or the Vice President’s official residence or its grounds;
        `(B) of a building or grounds where the President or other person protected by the Secret Service is or will be temporarily visiting; or
        `(C) of a building or grounds so restricted in conjunction with an event designated as a special event of national significance; and
        `(2) the term `other person protected by the Secret Service’ means any person whom the United States Secret Service is authorized to protect under section 3056 of this title or by Presidential memorandum, when such person has not declined such protection.’.
            So, are we entering an Orwellian state where public protest is being controlled by the Federal government?  We’ll see as things progress.  The average citizen sees what he wants to see, I suppose.  Does the thoughtful citizen have reason to be concerned?  Judge for yourself…
                ~DS

          “If enough bondholders do not accept the bond swap offer, Greece would be deemed to be in outright payment default”

          ~ Standard & Poor’s Rating Agency

          Anyone out there shocked to find that no Greek bailout has taken place yet?  Anyone flabbergasted that zero dollars have flowed into Greek coffers?  Well, if you are, you haven’t done your homework.  After all, several sources, including our friends at ZeroHedge and The Slog, as well as this very site, have stated in recent weeks that no “deal” is done until money flows from the ECB to Greece.  Thus far, nothing of the sort has taken place.  And while several people were laughing at us last week when the European leadership notified the world that a deal had been agreed to, and yesterday when the Bundestag agreed to send German tax dollars to Greece, this morning we wake up to read that Greece is on the verge of default as noted by the Standard & Poor’s rating agency, one of the three organizations who are paid by the issuers of bonds to rate a debtor’s creditworthiness.  In other words, people paid by Greece to rate Greece’s credit say they are incredibly close to defaulting on their debt.  Enjoy this statement, as reported by Tyler at ZeroHedge this morning:

          Greece Ratings Lowered To ‘SD’ (Selective Default)

          Rating Action

          On Feb. 27, 2012, Standard & Poor’s Ratings Services lowered its ‘CC’  long-term and ‘C’ short-term sovereign credit ratings on the Hellenic Republic  (Greece) to ‘SD’ (selective default).

          Our recovery rating of ‘4’ on Greece’s foreign-currency issue ratings is  unchanged. Our country transfer and convertibility (T&C) assessment for  Greece, as for all other eurozone members, remains ‘AAA’.

          Rationale

          We lowered our sovereign credit ratings on Greece to ‘SD’ following the Greek government’s retroactive insertion of collective action clauses (CACs) in the documentation of certain series of its sovereign debt on Feb. 23, 2012. The effect of a CAC is to bind all bondholders of a particular series to amended bond payment terms in the event that a predefined quorum of creditors has agreed to do so. In our opinion, Greece’s retroactive insertion of CACs materially changes the original terms of the affected debt and constitutes the launch of what we consider to be a distressed debt restructuring. Under our criteria, either condition is grounds for us to lower our sovereign credit rating on Greece to ‘SD’ and our ratings on the affected debt issues to ‘D’.

          What does all this jargon mean?  Simple.  Because Greece has retroactively and unilaterally created new conditions for when and how they will pay back their creditors to their own advantage, making it easier for Greece to force a larger “haircut” onto its lenders, (ZeroHedge and others have done a good job of covering this, and perhaps we can revisit this topic in another post) S&P is stating that it is within its right by its own definition to find Greece is in a state of default.  After all, what is a default but a failure to repay a loan based on the original conditions of said loan?  In essence, S&P is stating that Greece is already in default.  The term “selective” seems to be applied here to indicate that the default is of Greece’s own making, which may be used as a way to avoid triggering Credit Default Swaps.  This is absolutely another conversation for another time.

          Let it suffice to say today that we are in uncharted territory here.  The Slog has treated this topic today with the article “When Will Enough Be Enough for the Credit Agencies?” and ZeroHedge has their article here.  As it turns out, March 23 is closer now than it was last time we covered Greece, no money has made its way to the Bailout Fund, and with news like this being circulated in the U.S., what are the odds that Europeans (read Germans) are going to want to chase a nation already in technical default with their own taxes?

          He who laughs last laughs best, but will any of us be laughing when Greece goes under?  Three more weeks until we find out…

          ~ DS

          Today is a busy day at the Smith homestead, so this might be a brief piece, but will cover an important topic we will definitely be hearing more about in the weeks and months ahead.  We can’t go too far down this rabbit hole without touching on precious metals, primarily gold and silver.  Some of you probably know a ton about this–even more than me.  Others may have no idea about the wealth-preserving nature of these metals.  It is this second group that I’m hoping to reach with this post.  Enjoy…

          One of the things we learned in a previous post discussing the nature of money creation (please see “How The Federal Reserve Creates $$ Out of Thin Air”), and one thing we know from Chris Martenson and his Crash Course video series, is that the process by which any government or central bank can create money is relatively simple.  In fact, it doesn’t even take an act of Congress any more…  Through a process the Federal Reserve likes to call “Quantitative Easing,” or QE, the Fed essentially creates more Dollars electronically (they don’t physically print more money these days–that’s so Weimar Republic!) by buying financial assets from banks on paper and paying the banks in Dollars as part of this quid pro quo.  Usually, the swap involves the Fed buying long-term maturity paper of some kind in exchange for cash.  This only makes sense when the Fed’s interest rate (the price it charges for banks to borrow money) is near zero, which it is right now.  In any event, the Federal Reserve has already employed this technique multiple times, and with predictable outcomes.  For a time the economy is stimulated, but eventually prices rise and inflation ensues.  The Fed knows this happens, and understands that really all they’re doing is making things worse in the long run, but they almost certainly see themselves as having no choice.  Its a choice, using a poor medical analogy, between taking years off the end of the patient’s life or having them die right there on the operating table at that moment.  Hence, Quantitative Easing.

          The only problem with QE is that it leads to your Dollars being worth less.  The simplest way to explain this is to say that if there were twice as many Dollars in the world, each Dollar would be half as scarce, or half as precious.  People, therefore, have to work half as hard to get ahold of one Dollar, making every Dollar half as valuable.  This is a major oversimplification, but it will do for now.  In any event, therein lies the major issue with fiat currency, as we discussed in previous posts: when your money has no actual intrinsic value–when your money is linen and fiber–its value is subject to an increase in the supply, which, as we stated above, is very simple to achieve.  That is precisely why the Federal Reserve and the U.S. Government use such currency as their tender.  It is easily manipulated.

          Where do the precious metals come in?  Gold and silver are the two main precious metals that people deal in, although platinum is also somewhat common.  These metals are also a form of currency.  They, in fact, better meet the traditional definition of a currency than the USD: a true currency must have intrinsic value, must be scarce enough to maintain its value, and must be easily transferable as part of a currency transaction.  So, depending on what form you hold your precious metals in, the “easily transferable” part might be difficult.  I’d personally feel awkward trying to buy a mansion with a 100 kilo brick of gold bullion.  Of course, these metals come in all sizes and denominations.  In any event, the first two criteria are met by PMs head on.  There is almost always more demand for gold and silver than there is production, and this kind of production can’t happen at a printing press or a bank of computers.  The intrinsic value of gold or silver is really a discussion for a philosophy class, but silver itself has significant industrial uses and is, I would argue, intrinsically valuable for its uses as a part of manufacturing.

          These metals are Kryptonite to the Fed’s QE plans.  Think about it this way:  If you buy an ounce of gold today for $1700, and tomorrow the Federal Reserve created–out of thin air–another $1 trillion in currency, and massive inflation ensued as it usually does, and the price of gold rose as a result of this inflation to $2000 an ounce, you just made money.  Of course, you must be careful (DON’T MAKE ANY PURCHASES OF ANY PRECIOUS METALS ON MY ADVICE–I AM FAR FROM AN EXPERT ON PRECIOUS METALS–I SPEAK FROM MY HEART AND SPEAK THE TRUTH AS BEST AS I CAN, BUT I AM NOT A FINANCIAL ADVISOR) because today there are paper precious metal exchange mechanisms called ETFs, which trade the “paper” value of gold or silver like stocks or mutual funds, and the price is subject to wild fluctuations in the short term.  To be clear, the wealth-preserving properties I am discussing relative to precious metals only apply to actual physical gold and silver, not gold or silver funds that you buy on E-Trade.  So, your $1700 today might become $1400 tomorrow.  But, over time, as more Dollars are printed, the physical asset you bought in the past is worth more and more Dollars, in theory. Its something that most people use, not as a way to get rich–although some people who figured this out 30 years ago are swimming in it now–but as a way to preserve your wealth in an era when savings accounts yield something like 0.25% and stocks against inflation often lose money.  Hell, governments are now charging investors to loan them money in some countries.  With PMs, you have a means of protecting and preserving your assets if and when (hyper)inflation ramps up.

          That’s enough for today.  We’ll get WAY more into this topic in future posts, but for now, knock yourselves out doing research on this stuff.  There are dozens and dozens of websites out there that talk PMs, but I would start at TF Metals Report or Silver Doctors.  In the meantime, enjoy your Monday.  Silver and gold are already doing battle this morning, and if this is the first week you ever get into following this stuff, you picked a wild one–should be fun.

          Peace out girl scout.

          ~ DS

          “America is now the only global superpower, and Eurasia is the globe’s central arena. Hence, what happens to the distribution of power on the Eurasian continent will be of decisive importance to America’s global primacy and to America’s historical legacy.” ~ Zbigniew Brzezinski, The Grand Chessboard

          Dr. Brzezinski, probably best known today for being the father of Mika Brzezinski of MSNBC’s Morning Joe, is also considered the father or American grand imperial strategy in Central Asia.  In his text, The Grand Chessboard, the good doctor explains the advantages of a post-Cold War, post-Soviet Union Central Asian landmass dominated by the world’s last hegemonic power, the United States of America.

          The rationale behind this need to dominate Central Asia is clear.  It was clear in 1998 (when the work was published) that with the Balkanization of Europe and Asia through the disintegration of the Soviet Union, the continued consolidation of power in Europe under the auspices of the European Union, and the continued development of China’s economic and military power, that the 21st Century was not going to be dominated by a bipolar arrangement, where two super powers aligned against each other and all the minor actors in the world chose a side.  The 21st Century was shaping up to be a multi-polar demonstration, where the United States would be competing with multiple centers of power for the only thing that really matters: resources.  Yes, power matters, money matters, military strength matters, but only to the extent that those things increase your ability to access and harvest resources.  Brzezinski explains how, geostrategically, Central Asia is important because it was sort of the crux of two of the world’s three largest power centers, and was axial to the world’s primary resources, including oil.  North America, for example, was already dominated by the United States.  Ditto for South America.  No one’s sweating Antarctica or Australia.  Europe, Asia, and Africa were where the game would play out.  According to Dr. Brzezinski’s thinking, not only would controlling Central Asia give a nation access to the resources they would need to maintain power, but would also position that nation strategically to prevent the rise of any rival (he labeled these nations “Eurasian challengers”) that could compete for the same resources on any kind of global scale.

          Where does that leave us today?  I think its safe to say that our interventions in the Middle East and Central Asia have increased since Dr. Brzezinski penned his book.  And I think the title of his work–The Grand Chessboard–helps us understand that there is far more going on in U.S. foreign policy than the public in this country realizes, certainly more than the government or mainstream media care to explain.  After all, Dr. Brzezinski is playing chess in his tale.  He is not playing checkers.  Chess is a game of immense strategy, where victory is plotted dozens of moves ahead and players often make short-term decisions that don’t seem advantageous, only to reveal much later how their sacrifices put them in a position to win.  Its a game, incidentally, from which this blog–American Endgametakes its name.  And if we make the mistake of believing that the United States government–or any of the other actors around the world–is playing checkers, we will miss the point of what is happening.

          Consider the two wars we’ve fought in Iraq.  Both conflicts were different in cause.  We can see how the invasion of a foreign state is different than the application of a preemptive doctrine.  However, the two wars worked together in a fascinating way.  The ultimate accomplishment of the first Gulf War was the containment of a former ally nation (Saddam Hussein’s Iraq) which no longer served U.S. interests and a legitimate excuse to inject U.S. troops in the Middle East.  Recall that the United States stayed in the region after the war, complete with air bases and everything.  The second war was clearly crafted to finish the coup against Iraq and–when combined with the war in Afghanistan–went a long way toward meeting Dr. Brzezinski’s dual goal of accessing resources and preventing the rise of rival powers.  After all, containing Iran and having access to the oil-based resources of the Caspian Sea are both long-term interests of the United States.  The current escalation of hostilities with Iran represents the U.S.’ metaphorical attempt to capture the opponent’s queen.  Iran represents the most powerful non-aligned nation in the region, and therefore the only real threat in the Middle East to U.S. hegemony in the area.

          There is a problem, though.  The United States isn’t playing chess against Iran.  The United States is playing against China and our old friends, the Russians. AE plans to delve into this topic more deeply in the coming days and weeks, but for today, understand this one thing: the United States, when it comes to resources, is in a fight for its life.  As I said before, don’t miss the point of what’s going on here.  The United States isn’t trying to control the world’s oil supply just so secret cabals of oil execs can get rich.  We’re doing it so our nation can survive the 21st Century.  We’re doing it because Russia and China have decided that this period of American dominance needs to come to an end.  Currently these two nations are actively engaged in undermining American hegemony in the most effective way possible: by attacking the U.S. Dollar.

          I’ll give you a preview of where we go from here with this topic: How are we able to maintain a $1.3 trillion deficit year after year?  Yes, we borrow money.  Which nations have a large enough economy to support our spending habit?  Yes, China comes to mind.  Wouldn’t we be in trouble if China stopped buying our debt?  People have been saying that forever.  Well, is it happening?  Yes, it finally is.  Those who research the topic will find China is slowly positioning itself to divulge itself of U.S. Treasury bonds.  The fact that Russia and China are signing bilateral currency agreements–through which the use of the USD as a reserve currency is abandoned–should be particularly concerning to all of us.  Ultimately, we will find that there is more going on here than meets the eye, and those who believe we are sitting in the catbird seat might not see the checkmate coming until the game is already over.

          Cheery Sunday.

          ~ DS

          “There are few problems which have greater potential to quickly unsettle the North American public and strain essential services than suddenly being denied access to fuel.” ~ Rick Munroe

          Imagine, if you can, that there is a resource everyone likes to use.  They like to use it for convenience: it lets them go places, have neat things, eat the foods they want no matter what time of year it is…  And imagine this item was in total abundance, as if the world might never run out of it.  Imagine how fast people would use this resource…  Probably as fast as they possibly could, right?  And imagine it was really easy to access it, and that in certain parts of the world you could simply drill a hole in the ground and this resource would flow right to you.  Life would be fantastic!

          Now imagine, if you can, that this resource begins to become scarce.  Imagine that the world could not discover any new supplies of this resource, nor could they produce it any faster.  Imagine this was because the “easy” supplies had already been used, and now the more difficult to reach supplies were economically disadvantageous to access…  What would happen to the supply of this resource?  It would dwindle.  And what would happen to all the items that were made from it?  They would rise in price.  And what would happen if the resource became so scarce that not everyone could have it?  How would people react?  Would they adapt and move on with their lives?  Would they go to war to protect their resource?  Would there be civil unrest when people couldn’t afford the resource or have the things they wanted?

          While those questions may seem difficult to answer in the abstract, we are currently being treated to a real-life experiment along these very lines.  That is because such a resource exists today in the form of oil, and we are watching the world decide what to do about the reality that less oil is available for more of us every day.  The concept of “peak oil”–that the world is now beyond the peak of oil discovery and production–is one that few of us have been treated to, but is probably the most important economic and geopolitical problem facing us in 2012.

          Once again, we will turn to Chris Martenson and his Crash Course video series.  This is where the concept was explained to me, and if you want to get it, no one explains it better.  This is Chapter 17a (yes, there a lot of chapters) on Peak Oil:

          If you weren’t able to watch the whole 18 minutes at once, I understand.  Please come back to it–this is a really powerful concept.

          For those of you who want the down-and-dirty version, here goes:

          1.  Global oil discoveries peaked about 40 years ago.  Since then, no major new high-energy oil or oil-based sources have been discovered (I know, I know, tar sands–those are in the low-energy-return category).
          2. Global oil production peaked within the last few years.  We now produce less oil every year than the year before for the first time since oil was discovered in the 1850s.
          3. Global oil demand continues to climb every year.  Countries like China and India are witnessing massive oil demand as their middle classes grow and the desire for gasoline powered vehicles and creature comforts like electronics, CDs, etc., increases.  Also, energy demand for electrified homes and heat is continuing to climb.
          4. Nations who were recently exporters of oil are also seeing increased domestic demand for oil, and are quickly becoming net importers of energy.  This concept is REALLY important.  For example, Mexico, the U.S.’ third largest oil supplier, is about to begin importing oil to meet its own energy demands.  When that happens, the United States will lose its third-largest oil supplier and then begin competing with Mexico for the dwindling global oil supply.
          5. The sources of oil and oil-based energy we continue to use (including tar sands) cost more to produce and offer less energy per unit.  In other words, we have already extracted and used the cheap, high-energy stuff.  We are now using the expensive, low-energy stuff.
          6. All this to say that between lower supply, higher demand, more nations competing for less oil, and higher production cost per energy unit produced, the cost of oil-based energy (and every other form of energy when you consider that less oil means greater demand for every other way we make energy, including solar, wind, water, LNG, coal, etc.) is going to continue to climb, probably exponentially.

          So what?  This is problematic on two levels.  The first level is very obvious.  More of my paycheck going to heat my home and get to work, not to mention buy my groceries (which are shipped by truck) and clothes (ditto), is going to push America’s fragile economy to the brink of Depression (in my opinion, we’re already there, but that’s another post).  What good is a payroll tax cut of 2% when energy costs go up 20%?  The second level is far more disturbing.  Consider the massive, exponential growth of every yardstick by which we measure human development: industrial output, standard of living, quality of life, access to technology, access to communication, GDP, etc.  Consider that these rapid advancements have coincided–although it is not coincidental–with the availability of oil.  If you saw a timeline on a chalkboard that covered the last 200 years, and were asked to mark the board with a line signifying when you believed American society was “at its peak,” meaning at its best, its most prosperous, its most balanced and its happiest, where would you mark it?  I would venture to say that many of us, if we are mature and honest enough to handle this exercise appropriately, would look at the period of the late 1950s to early 1960s and say, “oh yeah, those were the good years.”  And I would agree with you.  If you feel that way, consider how little stood in America’s way during that time.  Sure, we were in the midst of a heightening Cold War, but domestically, the world was our oyster, and development and growth were commonplace and rampant.  And it is my assertion that this period of prosperity was due almost entirely to the abundance and availability of inexpensive, high-yield oil-based energy products.  When there is a ton of oil, and you can get it for almost nothing, any country can be great.  It is, as Chris says, the lifeblood of a developed economy.  With it, a nation can take on all comers and grow its industrial, commercial, and technological sectors with abandon.

          However, without a cheap and abundant supply of oil, I am afraid our nation is headed for difficult times.  Could it really get that bad, and how bad would it be?  That is what Peak Oil is all about.  I’ve thrown the term at you, now you get to go learn more, if you choose.

          In another post I hope to explore Zbigniew Brzezinski’s important work, The Grand Chessboard.  This book, written post-Cold War, explained the importance of the United States both a) maintaining control of the Middle East for resource purposes and b) not allowing a “Eurasian challenger” to grow powerful enough to threaten American global hegemony.  I think that is an area where the Peak Oil discussion becomes relevant, and I think combining Brzezinski’s work with a post-peak production would goes a long way to explain why we are about to go to war with Iran.  But that, as I like to say, is for another post.

          ~ DS

          “A man in debt is so far a slave.” ~ Ralph Waldo Emerson

          And with these blunt words, we launch into today’s AE missive on U.S. Debt.  After all, people who live in glass houses should not cast stones, and before we stare at Greece like the guy who just got mauled by the lion at the zoo, or gleefully root for a default like bombs over Baghdad, we might want to recognize that Greece and other nations (Italy, Portugal, Japan, etc.) are the canaries in the coal mine.  Until we have our own financial house in order, no one should find the current financial collapse in other nations around the world fascinating, exciting, or informative.  We should find it scary as Hell!

          So, let’s take a snapshot in time right now, courtesy of the wonderful website usdebtclock.org:

          This website contains fascinating information, and should be viewed regularly if and when you feel the need to vomit in your mouth. We immediately see several things.  Primarily you will tend to view the amount in red under “US NATIONAL DEBT.”  It currently stands at $15.4 trillion and change (I’m rounding today FYI).  This number, for the record, is climbing.  We are spending $3.6 trillion a year and only taking in $2.3 trillion.  As usual, Americans want to have their cake and eat it too.  Typical.  Obviously, as we posted earlier in our discussion on the Federal Reserve and money creation, Congress is more than happy to oblige because its the only way they stay in power.  More on the political implications of our debt later.  For now, let’s stick to the numbers.

          So our public debt stands above $15 trillion, but our “US TOTAL DEBT” clears $56 trillion!  This is insane.  It represents all the debt in the whole country: Federal, state, and local government outstanding debt, as well as personal debt (home loans, auto loans, credit cards, etc.).  I will be honest when I’m unsure of something, and I will be honest here: at publication time, our crack research team has not been able to establish whether or not the $56 trillion includes unfunded liabilities such as Social Security, Medicare, Medicaid, our public and private pensions, etc.  In my opinion, the number is too small to include all of that.  So potentially double the actual TOTAL DEBT number to include those other items.

          Now I want to address the hardest part for people to get their brains around, because I can hear a lot of you know: “we owe all this money, so what?”  After all, its not like we have to pay it all back right now, right?  This is obviously a debt that gets paid back over time (we discussed earlier in the week how the Treasury takes on debt 30 years at a time–a treasury bond sold this year doesn’t come due until 2042).  This is true.  Just like we don’t pay off a 30-year mortgage in one year, this debt will be serviced over time.  The problem is that we owe so much, we will never pay it off without cutting services or raising taxes, and this is where things will get dicey.

          Buried in those numbers above is our GROSS DEBT TO GDP RATIO, which stands at 102%.  This means that we owe more public debt than the value of goods and service our nation produces in a year.  This is equivalent in personal terms to owing more than you make in a year of work.  If you calculate our this ratio using total debt instead of public debt, the number is more like 367%.  This is not good.  Even though we don’t need to service all this debt in one year, the price we pay to borrow money changes with our credit risk.  For some reason, individuals, banks, corporations or countries who would lend the United States money have a hard time mentally lending money to a nation that owes more than it makes?  Would a bank lend you money if you already owned more than you earned?  Well, it might if you were as important to the global economy as the United States is, but this doesn’t make the lending warranted.  Eventually, the price to service our debt will far outreach our own domestic spending priorities, and the amount we’ll need to borrow to stay afloat will outstrip the resources of the nations and entities that lend to us.  And then we’ll get cut off.  And then we’ll be Greece: a nation that has to double or triple its taxes, hack its social safety net in half, lower the minimum wage back to $5.50, and potentially dismantle our army.  Can you imagine what our nation will look like when this happens?

          But, please, don’t worry about any of this.  Go back to believing the mainstream media, who tells us every day that Whitney Houston is more important than 30-year bond yields or the destruction of the cradle of Western Civilization.  After all, we’ll all be gone in 50 years, and our kids can fend for themselves.

          ~ DS