OIL RESERVES

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Aggravated that the price of gasoline is running a below peak price of $2.82 per gallon but still an average fill-up is about $50? The threat of a global recession has brought crude oil down from $100, to about $90 a barrel, temporarily. But we need to realize the problem is much more than price gouging. The United States needs to invest more money in becoming energy independent, and less on trying to establish democracies around the world.
In the 70’s, when our Alaska slope oil was discovered, we had 39 billion barrels of US oil reserve un-pumped, and in 2006, we were down to 21 billion barrels of reserve. In 1970, we produced a total of 3.5 billion barrels; while in 2006, we produced a total of only 1.8 billion barrels. In 30 years, our internal production was down by 50%. At the same time our consumption was up to 7.3 billion barrels annually. The net difference, 5.5 billion barrels, was imported. We seemed to have a policy of trying to sit on our oil, as long as we could buy worldwide. Apparently someone had conjectured that the barrel price would never surpass the $30-$50 range. It costs us something like $10 a barrel to pump oil out of the ground. According to the US Department of Energy, our 2007 oil consumption was predicted to be 20.9 million barrels per day, while production would fall to 5.1 million barrels per day. That means consumption is now 4 times production, and yet we have only about 12 years of domestic crude production left. What then? While protecting the environment, which we can do, it is extremely essential we start to drill in the Alaska Wildlife Refuge, and in all known coastal resources.
But even that is not enough to achieve long time independence. Fortunately, the US has the largest known concentration of oil shale in the world, 2,500 billion potential barrels, enough to meet our current demands internally for 110 years. Unfortunately, oil from shale currently must be produced by mining, not drilling, and is much more expensive. There is current research being done on using carbon dioxide, of which we produce too much, as a catalyst to release the oil more efficiently. Also being studied is a method of freezing a donut ring in the earth, within which steam is pumped under high pressure, helping release the oil with less danger to the environment. It is called In-situ Conversion process, or ICP. If we direct the time, money and talent to this project that we invested in a moon landing, instead of a new moon landing, we could probably succeed within 10 years, as we did before.
Our good neighbor, Canada, which is actually our major single source of petroleum imports, (8.5 million barrels annually) has one of the largest world deposits of oil sand (tarry sand), 265 billion barrels. Canada, our ally, and Venezuela, our antagonist, each control about 1/3 of the world supply of oil sands. Oil sand is much less expensive to convert than oil shale. To put it into perspective, Canada now ranks 3rd in worldwide oil production, and has 174 billion barrels of recoverable oil in oil sands, while Saudi Arabia has only 260 billion barrels of traditional oil reserve.
What is Congress’ solution? In December, they passed legislation mandating that auto manufacturers increase their Corporate Average Fuel Economy (CAFÉ) standards to 35 mpg by 2020. This means that the average mileage of all the cars they offer must be 35 mpg. Don’t you wish you could solve all your own problems by ordering some one else to engineer a quick fix? It is high time that we citizens educate ourselves to our nation’s problems and demand that our Congress address them with a righteous determination to solve them proficiently.

BAILOUT

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Alan Greenspan is going around the nation to promote his new book and to preach to the people that this current recession is not his fault, hoping all the blame will fall on his successor, Bernard Bernanke. I respectfully beg to differ. We have said in this column recently that this entire financial collapse started when Greenspan’s Fed kept interest rates at an unrealistic 1% for over a year during 2003-2004. The boom created by such quixotic actions always leads to an economic downfall within 5-7 years. Today, “We are it.” If you believe at all in the sanctity of the Federal Reserve, Bernard Bernanke is doing “a hell of a job” (excuse me, Pastor Jim) with his tools. He is attempting to get money flowing again in a market which has frozen because of the sub-prime mortgage debacle, and is emasculating the price of houses. As I have said before, however, I do not believe in the sanctity of the Federal Reserve, a pseudo-government consortium of private banks, which has absolute control of the US dollar, now worth 51 cents to the British and 68 cents to Europe.
If you remember the S & L bailout of 1989, Bush #1 pushed through the Resolution Trust Corporation to buy about 1,000 failed Savings and Loan Associations, and sell the their assets at a loss. RTC was funded by selling $157 billion of floating interest 30 year government bonds, which will eventually cost us between $500 billion and $1 trillion with interest. You will recall my saying if you owe $1,000 and can’t pay, you are in trouble. But, you see if you owe $157 billion and can’t pay, you have friends.
Now, back to the sub-prime debacle. We have talked about how these unrealistic mortgages were pooled, then sliced and diced and sold to investors. In order to sell the most odious of these packages, they relied on loss-insurance, or “credit-default swaps.” For a premium, an entity promises to buy defaults from you when they go bad. This industry guaranteed about $2.4 Trillion of bonds. The problem now is that the loss insurers are about to go broke, because of the massive amount of losses approaching. Two of the largest insurers, MBIA and Ambac, are likely to be bailed out by you and me. The reasoning: you and I cannot afford to let them fail! Pardon me? My dollar is worth 51 cents to the British now, and will probably be worth maybe 45 cents after the bailout, where is my profit? The Federal Reserve can print as much money as they like with no backing but their word, and every time they print more, the value of the dollars I hold goes down. My old granddaddy, who hoisted a few toddies before he quit, said: “You cannot drink yourself sober, and you can’t spend yourself rich.” Well said, granddad!
It appears the big mortgage bankers of New York, who originated, sold, and then also got caught holding a bagful of these collateralized debt obligations, may continue without a bailout. Why? Because No 1, they have sold big pieces of their ownership to foreign entities to raise more capital; and No 2, if we bail out MBIA, Ambac and others, their bad loans may eventually be bought at par (with our money, of course).
This is your money, Madison. This is your money, America. How much longer are you going to let your Federal government steal it from you? I repeat: We are the bosses, they are the employees. Our government, in the name of free trade and prosperity, has fostered turning us from a producer nation to a consumer nation, from a creditor nation to a debtor nation, from THE major world power, to a world (?) power. We have extended their employment contracts. We have stood and watched. We should be ashamed.

SUB-PRIME DEBACLE

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Confused about all the fuss over the “sub-prime mortgage slime” and its ramifications? Give me 10 minutes and we will try to make sense of it and see how and why it turned the financial world upside down.
The Federal Reserve, which is really a pseudo-government organization owned by its member banks, controls the interest rates in this country. After the tech stock crash of 2000, and the event of 9/11/2001, they kept the Fed Funds rate as low as 1% for an extended period of time during 2003 and 2004. This was good for all of us who needed to borrow money for sensible purposes. But the people who had big money to lend were going crazy at such low returns. They said to the money brokers of New York, “We don’t care how you do it, just find us a way to make 8-11% on our money, and we will buy it all.” The money brokers, ever anxious to oblige (and make a fee) came up with the answer.
They invented SIV/s (structured investment vehicles) to buy CDO/s (collateralized debt obligations), and CMO/s (collateralized mortgage obligations) and they put together a lot of good and potentially bad mortgages into packages, and sold tranches (slices) to eager, money-hungry investors. You could pick the amount of risk and return you wanted, but it all appeared to be rated AAA. Some SIV/s even borrowed money short term, with asset backed commercial paper (ABCP), to buy long- term 30 year CDO/s. It’s like borrowing on your credit card to purchase someone’s home mortgage.
When word got out as to how bad some of these high interest mortgages were, the ABCP market completely dried up. Without the ability to refinance their short term debts, the SIV/s would have to sell their long term CDO/s, but there was no market and no one could even determine their value. To the rescue comes the Fed. Being the lender of last resort (they print money at will), they offered to lend to banks at their discount window, and even said they would take this bad paper as collateral for a short time, but longer than usually allowed.
Next, the Treasury Secretary encouraged the three largest banks to form an MLEC, (Master Liquidity Enhancement Conduit---or a huge pool of money) to buy securities from those SIV/s who could not sell to anyone else, and did not even know what they were worth. This keeps the SIV problems totally separate from the bankers, who were their creators.
Thus proves the old saw—if you borrow $1,000 and can’t pay, you are in trouble. But if you borrow $100 million and can’t pay, someone is going to help you out. We can’t afford to upset the money world. Someone should have learned a lesson from 1964, and LBJ. He told the Federal Housing Administration, until then one of the government’s only success stories, to quit lending based on credit worthiness, and to make their decisions based on what seemed to be “reasonable risks”. Within a few years, those borrowers who should not have been given loans defaulted, the lenders repossessed; and FHA, who had insured the loans, ended up with the houses; losing thousands of dollars on each one, when they resold them. Who lost? We did, because we are the government. Now, housing prices are going to be depressed for probably several years, and we lose again. Any time a boom is created by unreasonably low interest rates, a bust will follow in about 5-7 years. The Fed seems to enjoy ignoring history.

WHO ARE NEO-CONSERVATIVES?

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True conservatives, arise and be wary. The neo-conservatives (neocons) are not really your friends and your brothers. Yet they are effectively taking control of the National Republican Party; which was revived in the 1960’s, when Barry Goldwater first cracked the wall the Democratic Party had built around the “solid south”.
The neocon’s “self confessed” godfather is Irving Kristol, father of William Kristol, Fox TV contributor and Editor of “The Weekly Standard”. Their origin was in the 1970’s among elite liberal intellectuals who grew disillusioned with the Democratic Party’s growing desire to focus the Federal government on social policies, and reluctance to spend adequately for defense. They decided to infiltrate the GOP.
According to Kristol senior, “their historical task and political purpose is to convert the Republican Party, and American conservatism in general, against their respective wills, into a new kind of conservative politics suitable to governing a modern democracy.” Their heroes include TR, FDR, and Ronald Reagan (the last, without adequate justification, in my opinion). They ignore Hoover, Eisenhower and Goldwater. They assert that the large majority of the present Party knows nothing, and could not care less, about neo-conservatism. Unfortunately, they are probably exactly right.
They agree to cutting tax rates in order to spur economic growth, but their attitude toward burgeoning Federal debt is far less risk adverse than most conservatives. They aver that budgetary deficits are the cost (temporary, they hope) of pursuing economic growth. They feel no alarm at government growth in the past century, seeing it as inevitable. They feel that most people prefer strong central government to weak central government. They espouse sympathy toward restricting social evils, in an attempt to hold the “religious right” in their camp.
But they are most easily defined by their foreign policy. They do not want one world government, but they want the U. S. to be an empire which dominates and controls the world. While calling themselves Patriots, they think it provincial to believe that our national interests begin and end at our borders. We are, rather, to enforce our ideological interests around the world. Unlike most conservatives, they have no reservation against military intervention and nation building. They see our military might as the result of the “bad luck” we had in having to fight wars in Korea, Viet Nam, the Gulf, Kosovo and Afghanistan. “The result,” they believe, “is that our military spending expanded more or less in line with our economic growth.” They believe that if you have such power, you have the responsibility to use it. Either you find opportunities to use it, or the world will discover them for you. They fear no danger in creating enemies around the world in the name of democracy and capitalism. This, in my opinion, is a misguided philosophy.
I have come to believe that you cannot “bestow” democracy upon any nation. Those who are not willing to pledge their own lives, fortunes and sacred honor to achieve such independence, can not hold it if given to them. Iraq, I offer, as my proof.
We should heed the admonition of “Ike” in his farewell address 40 years ago: “In the councils of government, we must guard against the acquisition of unwarranted influence, whether sought or unsought, by the military industrial complex. The potential for the disastrous rise of misplaced power exists and will persist. We must never let the weight of this combination endanger our liberties or democratic processes. We should take nothing for granted. Only an alert and knowledgeable citizenry can compel the proper meshing of the huge industrial and military machinery of defense with our peaceful methods and goals, so that security and liberty may prosper together.” Well said, Ike

INFLATION

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Let’s talk about inflation. It is certainly a perennial problem in America, so it should be of interest to everyone. We are taught that inflation is the result of wages and prices increasing. We are even taught to measure it by a government invention called the Consumer Price Index. The index compares current consumer prices to previous consumer prices to see how many more dollars you now need to buy the same products.
I would submit that we are putting the cart before the horse. The Consumer Price Index is really a measure of the “symptoms” of inflation, not the “disease” itself. I think we all agree that if there is only one horse in town available to buy, and everyone in town holds $2,000 on Tuesday; when suddenly the mayor graciously gives everyone another $2,000 each on Wednesday, the price of the horse just went up. This is called the law of supply and demand.
Thus, we would make the point that the “inflation disease” is properly defined as the artificial over-expansion of the money supply. Since our national currency is no longer backed by a commodity such as gold, it is called “fiat” money, meaning it can be arbitrarily created by decree. The authority to do this in the U. S. belongs to our Federal Reserve System. However, I am not yet one of those who would cry, “crucify them.” They should expand the money supply in amounts “equal to” any increased production, so that there will be enough money to buy every new product which we can physically produce. But since 1970, the U. S. money supply has actually doubled every 10 years, while GDP (production) has less than trebled in the entire 30 years. That works out to 800% money chasing 300% production. Remember the horse? The way the system works now, the act of printing actual greenbacks is not nearly as important as in the past. By controlling bank reserves, the Federal Reserve can create more money to put into checking accounts, without printing greenback dollars. Actually, about 2/3rds of our $100 bills are held by others in foreign countries.
History shows the real crux of the problem arises when our government wants to fight a war, but does not want to raise taxes to pay the new and extra expenses, nor to cut any present expenses. They meet the problem by “monetizing the debt”, or creating extra money. Our worst example is the Viet Nam conflict, and the Iraq conflict is not far behind.
A good example of inflation to the extreme can be found in Germany after World War I. At the outbreak of the war, Germany suspended the redeemability of its German “Mark”.By the end of the war, the money supply had quadrupled. By1920, prices were up 500%.Confidence in the mark weakened. By 1922, prices had increased another 700%, and yet the government still kept printing money. From mid-1922 to November 1923, hyper-inflation raged! By mid 1923, some workers were being paid 3 times a day, and their wives were meeting them each time; and then rushing frantically to buy goods before the shops were empty. People needed a wheelbarrow of money to buy a loaf of bread. It is said one woman burned money in the stove, because it was cheaper than buying wood. Finally, the government stepped up to the plate. They printed 2.4 billion new “Rentenmarks” to replace the old marks at the unbelievable exchange rate of one rentenmark for one TRILLION marks. But, they committed that no more rentenmarks would be printed, and they severely limited borrowing. Drastic new taxes were imposed, and by 1925, the crisis was over.
If you remember our interest rates of the early 80’s, you saw an example of our government stepping up to the plate, in the form of The Federal Reserve. Interest rates reached 21% on home mortgages. This was a direct result of LBJ escalating Viet Nam, while spending domestically on a “great society”; followed by Nixon, who wanted a landslide re-election in 1972. But, when borrowing is reduced, the money supply automatically shrinks. We finally overcame that inflation, but a lot of people lost their shirts. We are nearing another crossroads. Our debt has mushroomed to nearly $9 trillion (That is 9 million x one million). We are monetizing the debt. We must start to pay it off.

U S GOLD RESERVES

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There is more gold in the Federal Reserve Bank of New York vault than there is in Fort Knox, Kentucky. Unfortunately, most of it does not belong to the United States. It is the gold reserves of foreign nations, on deposit there because it is yet considered the safest bank in the safest country in the world. The U. S., arsenal of democracy during World War II, is said to have owned about 20,000 metric tons of gold at war’s end. It is now reported that we own only about 8,000 metric tons, but there has not been a gold audit in nearly 10 years. The bulk of the loss occurred during the Johnson administration, although it started with the Kennedy administration. Finally, in 1971, Nixon was forced to stop redeeming dollars for gold, because of the continuing international rush to redeem. He abrogated the Bretton Woods Accord, an international post war agreement which required us to redeem our dollars for gold to all other nations.
At the market rate of about $660 U. S. per ounce, our U. S. gold should currently be worth about $186 billion. Yet our government owes almost $9 trillion in debt. M1 is the measure of our most liquid forms of money. Thus it includes all greenbacks in circulation, plus all checking accounts, plus all bank money market accounts. In September, 2006, the M1 value was reported to be $1,357 billion. That means every liquid dollar, not every dollar, conceivably was backed by about 7 cents worth of gold. However, it does not really mean that, because dollars cannot be redeemed for anything else of value, they are simply Federal Reserve Notes. Our domestic redemption right has gradually disappeared during the nearly 100 years the Federal Reserve has existed.
Now please understand. I am not an anarchist. I do not advocate overthrow of the U. S. government, but it could sure use some major remodeling. I do not even claim to have all the answers. But, I do assert that most of the problems are the result of ever growing trade deficits with the rest of the world, and continued profligate Federal spending domestically. The U. S., which was a producer nation for the first half of the 20th century, became a consumer nation in the last half. Most of the manufactured and assembled products we purchase and enjoy now come from the far-east, on borrowed money.
The idea of world free trade has backfired on us. Nissan, even in its American plants, pays straight time of $14 to $23 per hour; while GM pays $25 to $29 per hour. But the real killer for GM is that in the 1950’s, they promised to pick up all employee medical costs, 30 year-and-out retirement pensions, and post retirement medical benefits. Ford and Chrysler were doing about the same thing. It did not show up then as costs, allowing for huge profits. Now it is eating them alive. The first car I bought was a brand new 1954 Ford Customline club coupe, which cost me $1,854. What will that buy you now? GM is said to be now spending $1,525 per car just on medical benefits, more than they spend on the steel included in the car. As their production goes down, their cost per car goes up. No wonder both GM and Ford bonds are rated junk status, below BBB.
America must once again become a producing nation! And we as citizens must realize the government cannot give us anything. We are the government. Would you birth a child and then abdicate any responsibility for its raising? If the answer is “No”, then you must not abdicate your responsibility to control your government. Federal, state and local governments all belong to you. You are the lord, not the vassal. But your control is in your vote alone. Never should you vote for anyone running for office without a thorough study of each candidate’s character and the issues involved. In doing this, my suggestion is to use television only as your last resource.

THE GOLD STANDARD

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In 1792, the dollar of this country was pegged to silver and gold, or a bi-metallic standard. Dollars could be exchanged with the government on demand for a set amount of gold or silver. In 1862, because of the Civil War, the government issued paper money without metallic backing for the first time. After the war ended, a financial panic ensued. In 1875, the link to metal was re-established. In 1900, the bi-metallic standard was abandoned, and the dollar was made equal to gold, at $20.67 per ounce. In 1933, Franklin Roosevelt passed a law outlawing Americans owning gold, with the government redeeming all of it. The next year, he re-valued gold to $35 per ounce, thus de-valuing the dollar by 41% overnight. But, still, it took World War II to end the depression.

By the end of World War II, the United States was recognized as the strongest free country in the world, with most of the world’s gold. During 1944, the allied countries all met in Bretton Woods, New Hampshire to devise a way to rebuild the world economy. It was agreed the U. S. dollar would be fixed at $35 per ounce of gold, and all nations would peg their currency to it. The United States would now redeem U. S. dollars in gold for all nations at $35 per ounce. The dollar had now replaced the British pound sterling as the world standard. But the U. S. was soon to become a consumer rather than a producer, running huge trade deficits with other countries.

By 1961, with U. S. gold reserves falling fast, John F. Kennedy led in forming the “London Gold Pool”. The U. S. would match gold contributed by 8 other nations, and deposit it at the Bank of England. The Bank of England would buy and sell gold into the market to keep $35 per ounce stable, within 20 cents. Redemption demand continued to rise! In 1968, under LBJ (guns and butter), there was an international run on U. S. gold. England, at the request of the U. S., actually closed the London gold market for 2 weeks. When it re-opened, there was a 2 tier gold market. Central banks would continue to honor the $35 price to each other, but the private gold market would be allowed to find its own level. Then, in 1971, foreign governments requested redemption of another $3 billion U. S. dollars. Richard Nixon removed the dollar from the Bretton Woods agreement; refusing to redeem other nation’s dollars for gold, and effectively taking the dollar off the gold standard. Before long, U. S. authorities reached an agreement with Saudi Arabia, the world’s largest oil producer, to sell oil for U. S. dollars, exclusively, for all worldwide transactions. This means U. S. dollars are figuratively backed with OPEC oil rather than gold. Thus was born the “petrodollar”. In return, the U.S. promised to protect the OPEC countries from foreign invasion or domestic coup. Remember Kuwait?

But, in 2000, Saddam Hussein of Iraq, announced his oil would be sold only for Euro’s, not U S dollars. Shortly thereafter, he switched his $10 billion UN reserve fund from dollars to Euro’s. Since then, the Euro has re-valued upwards from 82 cents to $1.33 against the US dollar. Iraq has the world’s 4th largest oil reserve. If all 11 OPEC countries switched to the Euro for oil sales, the dollar would probably deflate another 20 to 40%. Could this be seen as a problem warranting an invasion? About 2 months after Saddam’s fall, Iraq oil sales and its UN reserve fund both reverted to the U. S. dollar.

Neighbor Iran has the world’s 3rd largest oil reserve. Historically, oil has been traded on only 2 exchanges. The U. S. NYMEX, and the British IPE. Iran is setting up a new oil exchange that will trade in Euro’s. It is called the Iranian Oil Bourse (French for exchange). What might this do to the value of the U. S. dollar? What would be its effect on U. S. / Iran relations?