America has Adopted the Sclerotic European / Japanese Model

Jul
08

America has Adopted the Sclerotic European / Japanese Model;

Nationalized Risk, Low Growth, and an ever Larger Safety Net!

But Why?

By Chris Hamilton

 

The road to hell is paved with good intentions and since the turn of the century, there’s been a whole lot of proverbial paving taking place.  Nationalizing risk (the costs of failure borne by the masses, the benefits accrued by a few) and gargantuan debt creation to maintain the appearance of economic growth.  Without sufficient growth (domestically or globally), it is not plausible to service large debt loads (in any honest fashion) or deal with future unfunded liabilities.  Rather than acknowledge the fallacies in their thinking, the central bankers and politicians are expending all future demand in the form of non-income producing debt here and now.  The fallacy they won’t face?  There is an underlying and increasing drag on growth they can’t resolve and thus they feel necessitates ever more of their failed policies and an ever greater Statism.

 

Our society’s problem is that key players and their models still believe (or purport to believe) that 3%-5% economic growth (and the attendant cheap energy growth) is just around the corner.  But the structural changes as demonstrated by the debt growth, the dole growth, the energy price spikes say that our growth rate will be as sclerotic as Italy’s or Japan’s.  Central bank emperors are naked yet the world lacks a cohesive alternative belief system to replace the failing Keynesian model.  But I’ll show central bankers aren’t just Keynesian zealots but that they are running scared from the one thing they can’t conjure from thin air…the fuel for growth; a growing supply of cheap exportable oil.

 

First, in Lieu of Wage Growth, Government Benefits and Debt for Everyone

American households who were recipients of one or multiple means-tested government benefits in 2011 outnumbered year-round full-time workers, according to data from the Census Bureau. There were 108.6 million people in the fourth quarter of 2011 who were recipients of one or more means-tested government benefit programs, the Census Bureau said.  These consist of Medicaid (82.5 m), Food Stamps (49 m), Supplemental Security Income (20 m), WIC (Women, Infants, Children program) (23 m), Public or subsidized rentals (13.5 m), and Temporary Needy Family Program (6 m).  These #’s of recipients do not include non means-tested programs such as Social Security (57 m), Medicare (50 m), unemployment (4 m on a weekly basis), disability (11 m), and non means tested VA benefits (3.2 m).

 

Meanwhile, according to the Census Bureau, there were 101.7 million people who worked full-time year round in 2011 (including both private-sector and government workers).  When considering the US population is 318 million, this means likely half of all households are receiving a majority of their income from government benefits.

 

Check the data below to see the myriad means our government is utilizing to camouflage the missing economic recovery while the monetarily manufactured record valuations are “celebrated” in the financial media daily…and then we’ll move onto the real root of our problem.

 

2007 vs. 2014 – Self-Sustaining Recovery?  Escape velocity?  Green Shoots?

 

Total Jobs

+.00001%              146.22 million jobs (+ 10k jobs)

US Job Increase/Decrease by Age Groups (’07-‘12)

                +2%                        Age 55+

                -6%                         Age 24-55 (-6.3 million jobs)

Total Population

+5%                        316.5 total population

Employment Participation Rate

<-2.8%>                 63.3%

Median Household Income

+1.5%                    $51,017/yr.

Inflation Adjusted Median Real Household Income

<-9%>                    $51,017/yr.

Gross Federal Debt

+87%                      +7.8 trillion

Gross Domestic Product

+19.5%                 +$2.78 trillion

Fed Balance sheet

+1,000%                $4.5 T

Fed Funds Rate

<-5.3%>                 0%

Cost of Energy (Crude oil) in $’s

+90%                      $112 Barrel

Social Security (totals)

+16%                      56.8 million beneficiaries

+42%                      $775 billion payments

Veterans’ Benefits

+30%                      3.89 million recipients, Veterans with disability compensation or pension

Supplemental Security Income

+26%                      $49 billion Federal SSI payments

Food Stamps

+81%                      47 million recipients

+143%                   $80 billion

Medicaid

+31%                      $339 billion, Expenditures (2010)

+20%                      65.5 million, Un-duplicated recipients, (2010)

Unemployment Insurance

+37%                      $46.6 billion/yr., Total payments, (2011)

<-3.5%>                 127.5 million covered employees, <-5 >million covered by UE insurance!?!

Medicare

+41%                      $566 billion Total benefits

+18%                      51 million enrollees

Student Loans 2013

+110%                   $1.223 trillion outstanding debt (+$640 B)

 

I don’t believe this is simply socialization gone awry…I believe it’s a failed economic model complete with bad assumptions that are now proven patently false.  This model can no longer supply the necessary growth due to a finite, falling supply of cheap exportable oil and no readily available replacement…and leaders with no re-electable answers…so politicians in conjunction with the Federal Reserve and Treasury do what they can…not what they should.  They conjure credit and debt.

 

INFINITE OIL FOR INFINITE GROWTH?

 

Credit and debt premised on the failed model that borrowing today will be more easily repaid in the future.  To have the necessary global growth to pay the interest plus principal on debt (plus ideally a profit), a cheap growing supply of exportable energy has been the key.  However, as you can see in these excellent charts from a spectacular blog (http://ourfiniteworld.com/), since the beginning of the ‘00’s, energy is no longer cheap, is growing agonizingly slowly (despite a six-fold increase in price), and is running even shorter in exportable supply due to producers using ever greater amounts of their own production…leaving less available for importers.

 

First, 10 of 11 recessions since WWII have coincided with oil price spikes.

1

 

While there is great excitement regarding the US production gains since ’09 to 8.5/mbpd (million barrel ped day) from a low of 4.5/mbpd in early ‘00’s…but keep this in perspective production is still well off from the peak of 10/mbpd in the ‘70’s.  And sustainability of the shale (tight) production gains is likely to be a hot topic in the next 2-3 years.  Typical “tight” production of Baaken, Three Forks, and Eagle Ford show first year depletion of up to 65% and there are not likely adequate wells currently available or “sweet spots” left to drill to replace those in decline.

 2

 

 

Second, higher prices nor US production increases have not translated into significant increases in global production.

 3

 

http://ourfiniteworld.com/2013/10/02/our-oil-problems-are-not-over/

 4

 

 

http://ourfiniteworld.com/2013/10/02/our-oil-problems-are-not-over/

 

5 

 

Growth in world oil supply, with fitted trend lines, based on BP 2013 Statistical Review of World Energy. http://ourfiniteworld.com/2013/10/02/our-oil-problems-are-not-over/

 

Third, consumption growth is being driven by the developing nations of the world.

 6

 

 http://ourfiniteworld.com/2013/10/02/our-oil-problems-are-not-over/

 

Global Oil Exports

 

HERE IS THE KEY – Notice global oil available for export (below) is falling and the “extrapolators” who assumed energy would naturally meet demand and provide infinite growth…well, that isn’t working out so well in this finite world.  This isn’t a doomsday crash in production, it’s simply an ever increasing global demand, a flattening production base, and a shrinking net exportable supply.  But higher prices that are necessary for potential increased oil production necessarily slow economic growth…but lack of increasing exportable energy slows economic growth…catch 22!

7

http://peak-oil.org/2013/09/the-export-capacity-index/

 

New Discovery’s to Replace Depleting Production?

 

Global discoveries of new oil reserves, despite vastly improved technology, continue to fall off.  Existing fields continue to be depleted absent adequate identified replacements.  And new discoveries continue to be in far more remote and difficult to extract locations (deep sea, arctic, etc.)…and generally are of lower quality and requiring greater refining. (*Disregard peak production arrow in slide…not quite there yet thanks to a combination of higher prices and new technology).

 8

 

http://www.testadepibou.com/pagesEN/Evolutions_ressources.html

 

Plus, consider the capex spending of the largest global oil producers and their return on that spending.  

 9

 

 

http://ourfiniteworld.com/2014/02/25/beginning-of-the-end-oil-companies-cut-back-on-spending/

 10

 

 

 

 

http://ourfiniteworld.com/2014/02/25/beginning-of-the-end-oil-companies-cut-back-on-spending/

 11

 

 

http://ourfiniteworld.com/2014/02/25/beginning-of-the-end-oil-companies-cut-back-on-spending/

 

 

Oil’s Impact on, well, Everything

 

And notice (below) the peak of “financialization” coinciding with the peak of oil prices in July ‘08…and credit…and deficit spending…and slowing incomes.

 12

 

Figure 3. US home mortgage debt, based on Federal Reserve Z.1 data

http://ourfiniteworld.com/2014/05/21/the-connection-between-oil-prices-debt-levels-and-interest-rates/

 13

 

http://ourfiniteworld.com/2014/05/21/the-connection-between-oil-prices-debt-levels-and-interest-rates/

 14

 

Figure 5. U S publicly held federal government debt, based on Federal Reserve data.

2008 and subsequent years. http://ourfiniteworld.com/2014/05/21/the-connection-between-oil-prices-debt-levels-and-interest-rates/

 15

 

http://ourfiniteworld.com/2014/05/21/the-connection-between-oil-prices-debt-levels-and-interest-rates/

 

During periods of high oil prices, wages suffer as business owners reduce the primary cost to business, labor.  This is done via multiple streams; outsourcing, automating, etc. and general innovation to stream line process’ removing redundancies and fat…aka, corporate profits at record highs with workers share of profits (wages) falling.

 16

 

http://ourfiniteworld.com/2014/05/21/the-connection-between-oil-prices-debt-levels-and-interest-rates/

 

 

Conclusion:

 

Absent a growing supply of cheap exportable energy, the massive debt loads can’t be repaid via growth.  They are only being serviced via monetization and a Ponzi of central bank purchasing of debt without a plan to ever repay it.  Many question what could bring this system of infinite fiat creation to a head but the growing shortage of exportable oil will likely be the finite undoing of infinite money creation.  Rising oil costs have coincided with 10 or the last 11 recessions.  Perhaps before the next inevitable oil induced recession occurs we should engage in an honest evaluation of where we are, why, and what options exist for a more sustainable, equitable economy and society! 

 

Appendix of supporting data:

 

Social Security (totals)

Number of beneficiaries, December 2012 vs. 2007

  • Old-Age, Survivors, and Disability Insurance 56.8 million                (’07 49 million, +16%)
    • Old-Age Insurance, Total 39.6 million             (’07 34, +16%)
    • Survivors Insurance, Total 6.3 million             (’07 6.6, +5%)
    • Disability Insurance, Total 10.9 million           (’07 8.6, +27%)
      • Disabled workers 8.8 million         (’07 6.8, +30%)
      • Spouses, Children 2.1 million        (’07 1.8, +17%)

 

Benefit payments, 2012

  • Old-Age, Survivors, and Disability Insurance $775 billion (’07 $546 b +42%)
    • Old-Age and Survivors Insurance $637.9 billion (’07 $455 b +40%)
    • Disability Insurance $136.9 billion                  (’07 $92 b +49%)

 

Veterans’ Benefits

  • Number of veterans with disability compensation or pension, 2012
    • Service-connected disability 3.54 million (’07 2.73 m, +30%)
    • Non-service-connected disability 315k   (’07 330k, <-5%>)
  • Monthly payment in 2013 for—
    • Service-connected disability
      • 10 percent disability $129     (’07 $115)
      • Total disability $2,816          (’07 $2,471)

 

Supplemental Security Income

  • Federal SSI payments
    • Benefits paid in 2012, $49 billion                   (’07 $39 b, +26%)
    • Number of recipients, December 2012, 8.0 million (’07 7.2 million, +11%)
    • Average benefit, December 2012,  $500         (’07 $455)

 

http://www.ssa.gov/policy/docs/statcomps/supplement/2013/supplement13.pdf

 

Welfare

A patchwork of up to 185 means tested Federal benefit programs w/ myriad of Federal, state, local and pass through funding…

 

2013

  • From $536 B Fed + State, Local w/ some transfer from Fed’s…potentially as much as $1 Trillion

2007

  • $360 B Fed…likely $600 B

 

http://www.usgovernmentspending.com/spending_chart_2003_2019USr_15s2li111mcn_40t

 

Food Stamps

2013

  • 47 million recipients                                     (’07 26 million recipients, +81%)
  • Average $133 per person                             (’07 Average $96 per person, +39%)
  • $80 Billion year                                            (’07 $33 Billion year, +143%)

 

http://www.fns.usda.gov/sites/default/files/pd/SNAPsummary.pdf

 

Medicaid

  • Medical service expenditures in fiscal year 2010, $339 billion          (’07 $258 b, +31%)
  • Number of unduplicated recipients, fiscal year 2010, 65.6 million   (’07 55 million, +20%)

 

Unemployment Insurance

  • Total payments, 2011 $46.6 billion/yr.                                                 (’07 $34 b/yr., +37%)
  • Average—
    • Weekly benefit amount (regular programs) $296                             (’07 $277)
    • Weekly insured unemployment 3.7 million                                        (’07 2.5 million)
    • Covered employment 127.5 million                                                                              (’07 132.2 million, <-3.5%> covered employee’s)

http://www.ssa.gov/policy/docs/statcomps/supplement/2013/supplement13.pdf

http://www.ssa.gov/policy/docs/statcomps/supplement/2007/highlights.pdf

 

Medicare

  • Total benefits paid in calendar year 2012 ($566 billion)                                         (’07 $402 b, 41% increase)
    • Hospital Insurance (Part A) $263 billion                                               (’07 $189 b, 39% increase)
    • Supplementary Medical Ins. (Part B) $303 billion                              (’07 $213 billion, 42% increase)
    •  # enrollees, July 2012 (one or both of Parts A and B) 51 million                         (’07 43.3 million, 18% increase)

http://www.ssa.gov/policy/docs/statcomps/supplement/2013/supplement13.pdf

http://www.ssa.gov/policy/docs/statcomps/supplement/2007/highlights.pdf

Student Loans 2013

  • $1.223 Trillion outstanding debt                                                                                   (’07 $583 B …+$640 B, 110% increase)
    • 37 million outstanding student loans
    • 20 million students attend college yearly – approx. 14 million (70%) take on debt to pay for it…up from 65% in ‘07
      • 2/3rds of 2014 graduate will have debt @ an average of $33k in school loans…’07 average was $23k per graduate
        • Average ’14 graduate owes $380/mo for 10yrs @ 6.8% ($4560 / yr) vs. average salary w/ “real job” $27,500 / yr or $2290 / mo pre-tax or After tax $1374… $380/mo is 28% of after tax income to service student loans

http://www.zerohedge.com/news/2014-05-18/net-worth-college-grads-student-debt-20-less-high-school-grads-no-debt#new

Median / Inflation adjusted Real Household Income

’07 – $50,233 (real, $55,627)

’13 – $51,017 +1.5% (real, <-9%>same)

= + $130 / yr. (+$784) or Real inflation adjusted <-$768> /yr. <-$4610>…the loss in income is likely double this figure based on the under counting of inflation

http://research.stlouisfed.org/fred2/graph/?g=EyO

Gross Federal Debt

’07 – $8.95 T

’13 – $16.72 T

= +7.77 T or +87% in debt from ‘07

http://research.stlouisfed.org/fred2/graph/?g=Crp

Gross Domestic Product (sum of the entire US economy)

’07 – $14.235 T

’13 – $17.016 T

= +$2.78 T or +19.5% in GDP

http://research.stlouisfed.org/fred2/graph/?g=EyP

Participation Rate / Total Jobs / Total Population

’07 66.1%, 146.21 million jobs, 302 total population

’13 62.8% (<-3.3%>), 146.22 million jobs (+.00001%), 318 total population (+5%)

Civilian non-institutional population = 247,814,000 (+14.7 million)

Civilian labor force = 155,421 million (+1.8 million)

Employment = 146,221,000 (+10k JOBS…)

Not in labor force = 92,120,000 (+12.9 million)

= +10 k jobs for 16 million population gain (1 job created per 1,600 increase in population)

http://www.bls.gov/news.release/archives/empsit_01042008.pdf

http://www.bls.gov/news.release/pdf/empsit.pdf

All Job gains from ’09 recovery came in the 55+ demographic, Decline in 20-54 demographic…Jobless younger generations are intended to pay for the 55+ benefits?

65+ in the United States: 2010

http://globaleconomicanalysis.blogspot.com/2013/01/startling-look-at-employment.html

Federal Reserve Balance Sheet (Notes/Bonds)

’07 $400 B

’14 $4.5 Trillion

= 1,000% increase

Fed Funds Rate/Fed Balance Sheet vs. Cost of Energy (oil) in $’s

‘99 – 4.6% – $12 barrel

’07 – 5.3% – $59 Barrel

’14 – 0% (<-5.3%>) – $112 Barrel (+90%)

Notice despite huge increases in energy, housing that Fed’s CPI remains unchanged from it’s

http://research.stlouisfed.org/fred2/graph/?g=ECj

6 Responses to America has Adopted the Sclerotic European / Japanese Model

  1. PAUL SMITH on July 8, 2014 at 6:20 pm

    WOW….what a case for fusion energy as the next big boost needed for growth in the world. Well presented and documented. Thanks for a comprehensive view of the current situation and how this will impact our future. Using the word “conjure” with reference to credit and debt tells the whole story of our official (financial and political) responses to the predicament.

  2. fedwatcher on July 9, 2014 at 5:50 am

    “Peak Oil” was never about running out of oil, only running out of cheap oil. We saw what happened to the U.S. economy during the Arab Oil Embargo. During much of the U.S.’s real economic growth, the U.S. was a net oil exporter. It then required more and more imported oil which was O.K. as long as it was cheap.

    The U.S. is becoming less dependent on imported oil because the price is high enough to access oil that previously cost too much to lift and natural gas is being used as an oil replacement.

    Meanwhile many oil exporters are in trouble as their use of oil increases faster than their production. Many will become net importers of crude.

    We now are seeing many of the majors (Exxon, Chevron, Total, Eni, BP, Conoco, Royal Dutch, etc.) pulling out of leases that hold little promise. Their costs are rising and the value of the oil they already have found is rising. They all wish to take on LESS risk.

    Until we transition to a new energy model (like Thorium) we are in a low growth environment. A rate of 1% real growth could become the long term norm.

  3. EARL CARROLL on July 11, 2014 at 7:18 am

    I propose a debt jubilee for every citizen who earns less than 30,000 per year and who have a negative net worth….the government would pay off all their debt and the lenders would all benefit and the ones receiving the relief can start borrowing all over again spend that new money.
    I also propose legalizing ALL drugs in all states. it would cut crime rate and prison population by 90 percent.

    I also propose the government give everyone a job, pay them 10 dollars an hour and allow small businesses to bid on these workers,[say 2 dollars per hour and the government pay the difference. I believe these 3 would put this country back on a REAL POSITVE PATH

  4. black dog on July 14, 2014 at 8:45 pm

    some nice work there, chris

    re the decline in capex forecast for major oils … yikes.

    “mining” (including oil production) subset of industrial production has been rocking (so far) … by FAR IP’s best looking number (IP one of 4 major numbers NBER looks at for recession calls).

    “Mining output advanced 1.3 percent in May following gains of more than 1 1/2 percent in each of the previous two months. Increases were widespread within mining, including oil and gas extraction, coal mining, and drilling and related activities. The index for mining was 9.7 percent above its year-earlier level.

    http://www.federalreserve.gov/releases/g17/Current/default.htm

    • Chris Hamilton on July 15, 2014 at 5:53 pm

      Here is some food for thought regarding oil/nat gas Capex spending and the ROI…

      “The cumulative blitz on exploration and production over the past six years has been $5.4 trillion, yet little has come of it. Output from conventional fields peaked in 2005. Not a single large project has come on stream at a break-even cost below $80 a barrel for almost three years.”

      http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/10957292/Fossil-industry-is-the-subprime-danger-of-this-cycle.html

      Yesterday, BP came out with their annual report on global oil/energy reserves and estimates on oil longevity…what a hoot.

      http://www.bp.com/en/global/corporate/about-bp/energy-economics/statistical-review-of-world-energy/review-by-energy-type/oil/oil-reserves.html

      Before we should consider BP’s view for the next 10yrs, let’s look @ the last 9yrs…

      Brent crude saw a 300% increase in price ($38 to $109) from ’04 til ’13 which produced a 5% increase in global production and despite the higher prices still saw a 9% global increase in demand (consumption). And available net exports (ANE) are flat to falling. Amazingly (sarcasm) there is no discussion of ANE’s on which the price of all oil is established…like everything, oil is priced on the margin and in this case based on what can be exported after net exporters have their fill…importers are paying a kings ransom and will continue to pay more and more slowing their growth so long as there isn’t adequate ANE.

      When the last 10yrs show that the price of something triples but net global supply barely changes while total demand continues rising faster than supply…and Cap-ex spending for the largest oil producers (XO, BP, CVX, BG, COP, ENI, OXY, PBR, RDS, STO, TOT, XOM) collectively goes up 320% from $80 B to $262 B but shows a net loss of production for these companies…that may indicate there is a problem.

      So, BP’s assertion that there is adequate oil for 53.3yrs is an interesting claim full of interesting assumptions and assertions.

      And no cheap energy –> no “trend” growth –> no way to service debt…

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