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October 4, 2009
Issue 64  -  It's Hard to Argue with Math
 
The state of the United States' books is abysmal.  There is no getting around the fact that we are digging a deeper and deeper hole with a bigger and bigger shovel.  To show this I've got a few charts from GATA: 
 
Total debt issuance as of September 2003:
 
 
 
This chart is in millions so you have to add 6 zeros to all the numbers.  This means that there was a total of $24 trillion in debt issuance at that time.  That's a lot.  Let's fast forward to September 2008:
 
 
 
 
Now the debt issuance is up to $42 trillion. Wow, that is an average increase of $3.5 trillion per year,  Considering that the total tax receipts of the United States is less than that per year, that is probably not a good thing.  This time period starts at the beginning of the war and ends at the tail end of Bush 43, prior to Obama.  Let's see what has happened under Obama as of September 2009: 
 
 
Well, well, well, the "era" of responsible government doesn't look like it's living up to the promises.  The total now stands at $53 trillion.  This a gain of over $11 trillion in debt in ONE year!  That is approaching the total GDP of the whole country.  What's going on here?  Massive government debt issuance and spending.  This is during a time of plummeting tax receipts:
 
 
 
Ok, so the deficit spending is exploding WHILE the inflow is collapsing, but things are getting better because the stock market is rising?????!??  That is nonsensical.  I keep hearing how things are getting better and all is well.  Cramer has proclaimed that the recession is over.  Hooray!  
 
However, being slightly cynical I dig a little deeper before I jump on the band wagon.  Currently there are over 400 banks on the FDIC troubled list.  This is out of about 8000 banks total in the United States.  That seems like a lot (5%) but is the true number higher?  Last week this happened:
 
 
"Banks Have Us Flying Blind on Depth of Losses: Jonathan Weil

Oct. 1 (Bloomberg) -- There was a stunning omission from the government’s latest list of “problem” banks, which ran to 416 lenders, a 15-year high, as of June 30. One outfit not on the list was Georgian Bank, the second-largest Atlanta-based bank, which supposedly had plenty of capital.

It failed last week.

Georgian’s clean-up will be unusually costly. The book value of Georgian’s assets was $2 billion as of July 24, about the same as the bank’s deposit liabilities, according to a Federal Deposit Insurance Corp. press release. The FDIC estimates the collapse will cost its insurance fund $892 million, or 45 percent of the bank’s assets. That percentage was almost double the average for this year’s 95 U.S. bank failures, and it was the highest among the 10 largest ones.

How many other seemingly healthy multibillion-dollar community banks are out there waiting to implode? That’s impossible to know, which is what’s so unsettling about Georgian’s sudden downfall. Just when the conventional wisdom suggests the banking crisis might be under control, along comes a reality check that tells us we’re still flying blind."

 
So a bank that WASN'T on the watch list failed.  How many more are there that are in trouble?  I'm betting a lot.  This story seems to support me:

 
"FDIC Prepayment Likely for Banks

BY DAMIAN PALETTA

WASHINGTON -- The Federal Deposit Insurance Corp. is expected to propose Tuesday that the bulk of the banking industry prepay three years' worth of fees to replenish the fund that insures trillions of dollars of customers' deposits, people familiar with the matter said.

Having banks pay up front for 2010, 2011 and 2012 could bring between $36 billion and $54 billion to the government agency, which insures deposits at more than 8,000 banks, these people said. It couldn't be learned when the assessments would have to be prepaid."

 
 The FDIC wants money UP FRONT to cover banks in the future that fail.  3 years prepaid "insurance".  Isn't this rich, the strong banks pay for the weak banks "insurance".  That is the main problem with the FDIC.  Banks can take crazy chances knowing they will get bailed out.  If there was no FDIC, banks would have to be responsible or people wouldn't deposit their money there.   That's how capitalism works.  This is socialism.  No responsibility, no risk too big, just go for it.  It's like a trust fund kid.  Do whatever you want, because Daddy's money will bail me out.  This is not American.
 
Then the Federal Reserve, seeing that the "Audit the Fed" bill has over 200 votes is taking drastic measures, actually, mob type measures:  threats.  
 
 

"WASHINGTON -- Federal Reserve General Counsel Scott Alvarez said audits of monetary policy by the U.S. Congress could lead to higher interest rates and reduced confidence in central bank policy.

Congressional audits of monetary policy could "cause the markets and the public to lose confidence in the independence of the judgments of the Federal Reserve," Alvarez told the House Financial Services Committee today in response to a question from Rep. Dennis Moore, a Kansas Democrat. Alvarez said in his prepared remarks the audits would probably "chill" the central bank's discussions on interest rates.

Fed Chairman Ben S. Bernanke and his colleagues are trying to persuade lawmakers not to pass legislation sponsored by Rep. Ron Paul of Texas that would repeal the central bank's immunity to audits of monetary policy. Fed officials used emergency powers to protect creditors of Bear Stearns Cos. and American International Group Inc. during the financial crisis, prompting congressional scrutiny.

"We don't want to give the rest of the world or, more important, domestic investors the impression that we are somehow in a formal way injecting Congress into the setting of monetary policy," said Rep. Barney Frank, a Massachusetts Democrat and chairman of the committee. "That could have a very destabilizing effect."

 
In case you forgot Scott Alvarez is this weasel:
 
 
You remember, the lying Federal Reserve lawyer from the video last week where he is interviewed by Rep. Alan Grayson.  While I don't agree with Grayson's liberal tendencies on health care he is spot on in regards to the Federal Reserve.  This Alvarez skunk demonstrates almost every body language "tell" of deception that you could think of so anything he says is HIGHLY questionable.  So when he says that to audit them would cause interest rates to rise, it would seem likely that he is lying.
 
Besides, if it was true that interest rates would rise, then that would mean that the Fed isn't as strong as advertised, or maybe there are things on their books that they want to keep secret.  (Ding, Ding, Ding, we have a winner!)  Perhaps there are things in their books in regards to gold and it's price suppression.  A web site called zerohedge.com has unearthed documents from the 1970s in regards to gold price manipulation:
 
 

"Exclusive Smoking Gun: The Fed On Gold Manipulation

Tyler Durden's picture
Submitted by Tyler Durden on 09/27/2009

Zero Hedge has recently presented several declassified documents from the pre-1971 "Nixon Shock" days, that endorse the case for gold as a major historical factor in US monetary and foreign policy, as demonstrated by State Department and CIA disclosure. Gold's special status in policy and administrative decision-making was a direct factor in Nixon's choice to abolish the gold reserve at a time of an exploding budget deficit.

Yet what about the days after 1971, and specifically, how did that critical "behind the scenes" organization, the Federal Reserve, perceive and manipulate gold in the post Bretton-Woods world? Was gold, freed from its shackles to the dollar, once again merely a symbolic representation for money?

Zero Hedge presents the smoking gun that may provide responses to all the various open questions, courtesy of a declassified memorandum, written by none other than the then Fed Chairman, addressed to the president of the United States.

On June 3, 1975, Fed Chairman Arthur Burns, sent a "Memorandum For The President" to Gerald Ford, which among others CC:ed Secretary of State Henry Kissinger and future Fed Chairman Alan Greenspan, discussing gold, and specifically its fair value, a topic whose prominence, despite former president Nixon's actions, had only managed to grow in the four short years since the abandonment of the gold standard in 1971. In a nutshell Burns' entire argument revolves around the equivalency of gold and money, and furthermore points out that if the Fed does not control this core relationship, it would "easily frustrate our efforts to control world liquidity" but also "dangerously prejudge the shape of the future monetary system." Furthermore, the memo goes on to highlight the extensive level of gold price manipulation by central banks even after the gold standard has been formally abolished. "
 
 
 So the Federal government and the Fed (remember the Federal Reserve is a privately owned entity) have been "helping" the gold price since 1971.  Public pundits who claim this now are made fun of and called "tin foil hat" conspiracy nuts.  But here it is in black and white.  YOU need to have some gold (and silver).  The price is still low because it has been manipulated down for 37 friggin' years!  37 years!  Do you think it's been manipulated up?  This is simple stuff here.  Protect yourself.  Buy some gold this week.  More on gold and silver next week.
 
A couple more things and I'll call it week.  There is a growing tendency to lump global warming (now called "climate change" because temperatures have been falling since 1998) and peak oil together as both bogus.   While there is no way to know if peak oil is real or bogus for sure (at least until it is confirmed empirically), global warming is clearing incorrect as the earth has warmed far more than is being predicted by the worse case scenario when there were NO humans on earth.  Ergo, humans didn't cause it.  Duh!  If the earth was hotter in the past when there were no humans, than call me skeptical when someone, whose salary and grant money rely on said theory being true, tries to convince me that humans are the cause of rising temperature.  Peak oil, however, is much more difficult to prove. 
 
We do know that output of oil peaked several years ago.  This might be due to the world economic slowdown but there is no way to be sure.  If oil production were to start rising again, than that would be an issue for peak oil.  It still wouldn't confirm or disprove peak oil, but it would be a blow to the theory.  What we do know is that drilling and exploration has been curtailed, although you wouldn't know it by this type of story:
 
"Oil Industry Sets a Brisk Pace of New Discoveries
Ken Childress/Transocean


An offshore oil rig, shown here off Brest, France, and now under contract to BP off the coast of Angola. More than 200 oil discoveries have been reported so far in 2009 in dozens of countries.

Article Tools Sponsored By
By JAD MOUAWAD
Published: September 23, 2009

The oil industry has been on a hot streak this year, thanks to a series of major discoveries that have rekindled a sense of excitement across the petroleum sector, despite falling prices and a tough economy.

A blog about energy, the environment and the bottom line.

These discoveries, spanning five continents, are the result of hefty investments that began earlier in the decade when oil prices rose, and of new technologies that allow explorers to drill at greater depths and break tougher rocks.

“That’s the wonderful thing about price signals in a free market — it puts people in a better position to take more exploration risk,” said James T. Hackett, chairman and chief executive of Anadarko Petroleum.

More than 200 discoveries have been reported so far this year in dozens of countries, including northern Iraq’s Kurdish region, Australia, Israel, Iran, Brazil, Norway, Ghana and Russia. They have been made by international giants, like Exxon Mobil, but also by industry minnows, like Tullow Oil.

Just this month, BP said that it found a giant deepwater field that might turn out to be the biggest oil discovery ever in the Gulf of Mexico, while Anadarko announced a large find in an “exciting and highly prospective” region off Sierra Leone.

It is normal for companies to discover billions of barrels of new oil every year, but this year’s pace is unusually brisk. New oil discoveries have totaled about 10 billion barrels in the first half of the year, according to IHS Cambridge Energy Research Associates. If discoveries continue at that pace through year-end, they are likely to reach the highest level since 2000."




 
Wow, 200 discoveries, that sound like a lot.  Is it?  Let's run the math.  10 billion barrels "found".  It's impossible to retrieve all the oil from ANY field and a good rule of thumb is 50% but we'll use 70% to be safe.  That means we found 7 billion barrels of recoverable oil.  That sounds like a lot, doesn't it?  Not so much.
 
The world daily consumption of oil is 85 million barrels a DAY.  Dividing 10 billion by 85 million and we have, are you ready........82 more DAYS of oil.  Doesn't seem like so much now, does it.  To make matters worse, a lot of the found oil is under a couple miles of water and will require BILLIONS of dollars in infrastructure to recover.  This isn't really this much oil.  To really put it into perspective, Ghawar, the largest oil field ever, in Saudi Arabia, has 71 billion barrels of recoverable oil.  That's in ONE field.  It has been producing oil since 1951 and has output over 60 billion barrels of oil.  All the oil discovery companies in the world have only found 7 billion barrels of oil in the past 6 months AND it's spread out over 200 different places.  Oil is VERY likely to be in peak situation. Make that next car/truck more fuel friendly.  I think you'll be glad you did.
 
Lastly, a very fun video that could save your arse someday.  Have a great week!