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Jun 24, 2011

Know Your Enemy - pt 2


Let's state a couple of facts:

  • The United States of America is financially insolvent.  
  • The European Union is bankrupt.  

Are you shocked to hear it?  If not, congratulations.  You have a leg up on this discussion.  Please skip down to the second half where we'll discuss how this mess is the product of peak oil.  All you doubters, sit up straight and pay attention.

Please Don't Shut Off My Cable!

  • Bankruptcy or insolvency is the legal status of a person or an organization that cannot repay the debts it owes to its creditors.

Why do I say the US and Europe are bankrupt?  They haven't defaulted yet.  They borrow and spend, but they always repay.  There's a man who is $500,000 in debt who earns $60,000 a year and he hasn't defaulted yet either.  He has multiple credit cards and he uses one card to pay the interest on another each month in order to free up his income to cover the mortgages on his McMansion and luxury SUV.  He's making all his minimum payments on time.  He has the best of intentions to pay off the debt he owes.  And most importantly he's a hard-working fella and all-around-nice-guy.  
What do you think will happen to this man - sooner or later?


When you add up our real-world situation, between outright government debt in the form of US Treasuries and unfunded liabilities in the forms of Social Security, Medicare and Medicaid, the mind-blowing total is over $120 trillion...that's not a typo...$120,000,000,000,000!  Our GDP is about $14.7 trillion.  So the analogy with my hypothetical debt-slave above is pretty accurate.  Of course the man can't print his own money to pay his debts like the government.  But that's not a long-term solution, it's called hyperinflation (it's also what Chairman Bernanke was fantasizing about when the photo above was taken).


I'm not intimately familiar with the details of European debt, and I don't really need to be.  Take a look at the world debt clock.  Can you guess what all the countries (excluding the US) with External Debt to GDP totals greater than 100% have in common?  Why they're all in Europe or on that island across the channel!  Hey, where's Greece?  I guess the makers of this site couldn't get the clock to update fast enough to keep up with their debt...


What can we do to fix this pathetic state of affairs?  I'll focus on the US, but the analysis applies to Europe as well.  We can either raise taxes substantially, cut spending to the bone, or give up and default.  Our political leaders may experiment timidly with the first two options in the near future, in order to show that they're trying something.  The Elephant will cut spending, the Donkey will raise taxes.  However, they won't implement either one in a big way because it would be political suicide and they know that.  Heck, right now we've got low taxes and enormous government spending together and the economy is barely breathing - it's on life-support.  You take those away and it's the 1930s all over again, I guarantee it.  So forget the difficult, painful choices.  What's behind door #3?  


Why it's our two old friends, Extend and Pretend!  Mark my words, these two jerks will be around past the point when creditor nations stop showing up for Treasury auctions and the Federal Reserve or the IMF is "forced" to purchase every penny of new national debt.  Past the point when 50, 60 then 70 million Americans are on food stamps because inflation and unemployment are rampant.  Will another earthquake/tsunami be the final straw that brings our termite-ridden house to the ground?  Or perhaps an overthrow of the House of Saud will do it?  Dissolution of the European Union?  How about ______ and Israel going toe-to-toe?  All viable candidates at this point.  Whatever form the triggering event assumes, the endgame of debt collapse is almost a given now.  We need a miracle.  We need God Himself to intervene and save our sorry butts, because otherwise the future that we've created will be neither unicorns nor rainbows.


Oil and the Non-Linear Function


The connection between peak oil and unsustainable debt is very simple at its core, but also easy to overlook because we've grown so accustomed to cheap oil that we take it for granted.  Modern economies are based on a paradigm of perpetual growth.  GDP must grow at a certain rate each year to keep up with two factors: inflation and rising debts.  We all know what debt is, but what is inflation on a national level?  Quite simply, it's a sneaky way of reducing the impact of debts by printing more of the currency used to pay them.  Westerners have grown up accepting this as normal.  Your money never buys as much as it used to.  I bet you've chuckled at the quaintness of earlier generations for spending a nickel on a loaf of bread or $10,000 for a house.  How adorable!  But don't forget that while inflation helps us pay off the debts of last year, it makes the debts of next year always more expensive.  Hmmm, well as long as we keep inflation at the 2% "healthy" rate sanctioned by the Federal Reserve things will be fine...right?


Yes.  The master plan is to keep GDP always growing faster than debt plus inflation.  To ensure that GDP grows each year, we need responsible government policies that encourage businesses to expand and produce more goods.  As businesses grow, we must root out evil speculators looking to drive up the price of oil and other commodities that our patriotic industries depend on.  The best way to foil the market manipulators is to increase supply constantly and flood the market year after year with cheap resources.  We need to drill, baby, DRILL and get more oil faster!  We need the Earth to continue creating oil each year through abiotic processes, and at an ever increasing rate!!  We need to...  Earth?  Why are you laughing, Earth...?  We need you to step up and start making us more oil please so we can slurp it up even quicker tomorrow.  You've got a really important part to play in all this, Planet Earth, I'd think you would take your responsibility to the human race a bit more seriously.  No, I don't particularly care about your "limits", I've got bills to pay.  Damn, the Earth doesn't seem to be listening...what's our plan B?


OK, thanks for indulging me in a little role playing.  But just what I'm I trying to subtly imply here?  That we can't keep this flea circus running forever?  Bingoooooo.  On one side of the equation we have limits.  Limited supplies of oil.  Hard limits to how far businesses can expand and how big our economy can get.  On the other side we have no such caps.  Debt can grow forever, especially when it's refinanced at higher rates with penalties and interest is compounded over time.  Yes almost forever - it can grow until it's unpayable, then it must collapse in on itself in The Great Unwinding.  When does that happen?  Just as soon as we reach the peak of oil production and the growth in world economies starts to seize up like a car's engine without enough...well, oil.  In other words:  Right.  About.  Now.


Reading Video List


MANDATORY - The Crash Course

The Most Important Video (Series) You'll Ever See


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