I wrote this article before the State of the Union address, so I don’t know what President Barack Obama said. My best bet is that he bragged about how well his policies have rebuilt the economy. It’s a lie. Obama and his lapdog, the Federal Reserve Board, have barely held the country together. And they have done so at a terrible cost over the past six years. But time is running out — not just for Obama but for the stock market and for all of us. The depression that Washington has borrowed trillions of dollars to stop is coming to collect.
Through policies of the Federal Reserve and the Treasury Department, the U.S. federal government has left our children on the hook for trillions of dollars in debt that America has borrowed since 2008 as Obama has doubled down on the massive spending spree begun by his predecessor, President George W. Bush. Very soon we will face the consequences of too much debt and no new real wealth creation.
Of course, it is high times for the hogs of Wall Street, who have pocketed profits by the billions of dollars since the late 2008 bailouts. They have either invested in offshore places like China or tucked the money away for themselves in Switzerland. I suspect Obama has his own nest safely socked away from the collapse his presidency only delayed — a collapse he knows is coming and a collapse he wants to postpone until the next president takes office.
We are sitting on an economic time bomb that is ticking down. Obama and his economic advisers must understand the creation of fiat money by the Fed’s quantitative easing has done nothing to rebuild the foundations of a once-robust American economy.
The chart below shows the incredible growth in money zero maturity (MZM) supply. MZM is the super money that the Fed lends out to banks and that the banks are supposed, in turn, to lend to businesses and consumers. You can see that when Obama was first elected, MZM stood at $6.3 trillion. This year, with Obama in office for only six years, it is more than $13 trillion. Such doubling of MZM happened during the inflationary 70s. But in that case, the rise from less than $500 billion to $1 trillion took 11 years, from 1971 to 1982.
Crude oil and chickens roosting
Two weeks ago, I wrote “Obama’s, Saudi Arabia’s beheading of U.S. oil will exact a heavy toll.” It was well read but heavily criticized by some readers. Many of the readers commented that they could not understand how falling oil prices are anything but a positive.
I take responsibility for not providing a more detailed explanation, although in the column I did point out that plummeting oil prices from $115 per barrel last summer to its current level of $50 would eradicate $1 trillion in future conventional crude projects. I also pointed out that this would be particularly hard on oil-producing states like North Dakota where new expenditures in oil investments were not included in that $1 trillion estimate. Some of those $1 trillion would have created good-paying American jobs and would help build America’s energy independence from Middle East suppliers like Saudi Arabia.
New oil exploration and production in the United States require a base price of $65 per barrel. With crude at about $50 per barrel and the real possibility that it could fall another $10 or $20 per barrel, companies are already laying off thousands of workers. Last week, Schlumberger Ltd., the world’s biggest oilfield-services company, announced it would slash 9,000 jobs. The company said that because of the “uncertain environment” after the collapse in oil prices, such job cuts are essential.
This is just a drop in the barrel, as evidenced in this 2013 report about the American Petroleum Institute (API):
More than 500 members — including large integrated companies, exploration and production, refining, marketing, pipeline, marine businesses, and service and supply firms — provide most of the nation’s energy. The industry also supports 9.2 million U.S. jobs and 7.3 percent of the U.S. economy, delivers $86 million a day in revenue to our government, and, since 2000, has invested over $2 trillion in U.S. capital projects to advance all forms of energy, including alternatives.
The API also stated in its report that the petroleum industry is expected to invest more than $5.1 trillion in cumulative capital expenditures by 2035, adding 1.3 million new jobs by 2020 to support a total of 3 million jobs. Of course, such plans have all gone out the window.
But there is more to it than just collapsing oil prices. Across the board from apples to zinc, commodity prices have been falling.
Another bellwether commodity is copper. And the price of it, too, has crashed. Last week, the price of copper was as low as it had been since the bottom of the 2008 commodity crash. The Guardian reported:
Like oil, copper has a deep effect on the world economy because it is key for phone lines, cables and other infrastructure. It is also important to several world economies; the world’s largest copper producers, in order, are Chile, China, Peru, the U.S. and Australia.
Oil is suffering for two reasons, the flooding of world markets by Saudi Arabia and the economic slowdown in China. This last factor is knocking down copper prices and commodity values across the board. The last time I saw this kind of bear market was in the early 1980s. That time it was instigated by Federal Reserve Chairman Paul Volcker who wanted to squeeze the excess money from the economy created during the 1970s.
Today this option is not available. The Fed has pumped so many dollars and kept interest rates so low — Treasury bills have a negative return accounting for inflation — that financial markets have reached a bubble not seen since 1929. If the Fed were to raise interest rates to adequate levels, it would kill both the U.S. bond market and world equity markets. Rather than inflation we would have a crushing global deflation, the kind that began in 2008 and that Obama managed only to postpone.
The Fed can take no such action; it isn’t in the Fed’s hands anymore. The demand for U.S. Treasury bills, notes and bonds are what will determine U.S. interest rates. If foreign central banks refuse to keep bidding at weekly auctions for these debt instruments, interest rates will soar. That will wipe out investors who believed their money was safe with Uncle Sam.
Higher interest rates will also mean higher borrowing costs for companies, resulting in huge layoffs. In turn, that will devastate U.S. stock prices. Four trillion dollars in U.S. stock equity values could evaporate in a matter of months or even weeks, causing panic in the streets.
The deflationary time bomb is already counting down. If you are really quiet, you can hear it even now: tick, tick, tick.
Yours in good times and bad,