Energy Armageddon

Prologue There is a light at the end of the tunnel, and its a freight train. Its headed right for us, and we can't get off the track.

Today our nation faces the greatest single challenge since its creation. A challenge greater than the deficit. A challenge greater than the sub-prime mortgage meltdown. A challenge greater than the Great Recession. A challenge greater than the collapse of the pension system in America.

This challenge is not only an American challenge, but a global challenge, since modern societies throughout the world will face the same issue.

Bush 43 aptly stated that America is addicted to foreign oil (and promptly did very little about it).

America is also addicted to credit, and America is addicted to conspicuous consumption and consumerism, all of which are tied to the oil based economy. As those addictions spread through China and India, which is already beginning, the next bubble will surely burst.

In the early part of this decade we began to recognize the energy problem, and to focus on solutions. In late 2008, our attention shifted to the problems being created by the Great Recession. With unemployment affecting 15 million Americans, we, once again, began to ignore our oil addiction. Just as we did after the temporary oil crisis in the 1970s, we went back to our oil consumption patterns, and have failed to focus on the problem. Our delay in working toward a solution will make any type of adjustment or recovery much more difficult, and, unfortunately, much more painful for the population. Can we avoid disaster? Maybe.

Human nature is too predictable. Most people, including governments and whole societies, will not focus on an obvious problem until it becomes a full blown crisis. The ability to overcome a crisis is the defining moment for any organization. The size and scope of the crisis will sometimes be so overwhelming that it cannot be solved, and at that point, there is a paradigm shift. The coming crisis will force a paradigm shift.

The sad and painful part of all of this is that we are funding our own demise. As a nation, America spends about one-half of a trillion dollars each year buying foreign oil. Much of that money goes to fund our enemies who want to destroy our way of life. Invested in alternative methods, those funds could have solved this problem by now. It didn't happen, so now we face the consequences.

Study the facts and figures presented here. Come to your own conclusion.

Chapter 1 OIL CONSUMPTION AND THE LIQUID FUEL CRISIS The looming liquid fuel crisis will be the greatest challenge ever faced by modern man.

Thanks to the Great Recession, we have been completely distracted from the greatest challenge that we have faced as a civilization. As you will see from reading this Chapter, our inability to focus on the most disruptive problem in our history has delayed our required response to the issue, and may have delayed our response just long enough to insure our demise. As we appear to be exiting from the Great Recession, we will come face to face with the problem.

Historical Perspective Without rehashing all of the well known discussions about the concept of peak oil, suffice it to say that nearly everyone accepts the conclusions of M. King Hubbert, at least with regard to the United States. A petroleum geologist, Mr. Hubbert observed in the 1950s that once you extract half the oil from a given field, production begins to decline. Based on that very basic original observation, he calculated what he believed to be the point at which the United States would reach its peak with regard to production of oil. He predicted that the United States would reach peak oil in the early 1970s. Needless to say, Mr. Hubberd’s conclusions were not welcome with open arms by the oil industry. As we all know, in 1970, the United States was producing approximately 9 million barrels of oil per day, and thereafter began to decline in production. Mr. Hubbert was right, and the United States reached peak oil in 1971.

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It appears that the only ones who were really paying attention to Mr. Hubbert were members of OPEC. In 1973, OPEC imposed restrictions on oil exports which resulted in a five percent (5%) reduction of oil available to the United States, (and the rest of the world) and a 70% increase in global oil prices. OPEC flexed its muscles and we cringed, and from that day forward they have felt empowered.

I don’t know about you, but if my neighbor who owned the only bakery in town didn’t like me, and charged me higher and higher prices for bread, I would stop eating bread. Our response appears to have been to eat more bread.

“If global warming is a three on a scale of 10, then peak oil is a 12.” Guy McPherson - University of Arizona, Professor of Natural Resources

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Facts about Oil Consumption The United States consumes 21 million barrels of oil per day (bbl/day), and about 66% of our oil comes from foreign sources. Even though our population is only approximately 4% of world population, the United States is responsible for 25% of all oil consumption in the world. Although industry experts say that the U.S. reached its peak oil production in the 1970s, the United States is still the third largest producer of crude oil in the world.

In 1970, America imported 24% of the oil we consumed. Today its over 66%. Don't forget that at the time of the Oil Embargo of 1973, we were importing less than 30% of our oil from foreign sources, and yet a mere 5% of oil availability drove us to the brink of chaos.

Global oil consumption rose 5.6% in 2010, which is the largest annual increase since 1973.

By 2030, the Energy Information Administration projects that overall energy consumption in the U.S. will increase by more than 30 percent, which means that we will consume 27 million barrels of oil per day.

The United States created the Strategic Petroleum Reserve (SPR) to avoid future short term interruptions of the supply of oil. The SPR stores about 700 million barrels of oil in underground storage along the Gulf of Mexico. If all oil supplies were completely cut off, with rationing, this reserve could last up to 60 days. That is a stretch, and we would be lucky if it lasted 30 days, and most of that would go to the U.S. Military, not the citizens.

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Where does the foreign oil come from that we buy?

We get about 18% from our friends in Canada, and then we get about 35% of our oil from a combination of Saudi Arabia, Venezuela and Nigeria, with the balance from a variety of other countries including places like Russia, Libya and Iraq. Although we get about 14% from Mexico, which has been a neighbor and trading partner for many years, Mexico suffers from instability, and has also seen substantial reduction in production in recent years. Industry experts believe that Mexico’s oil fields are becoming rapidly depleted. Mexico faces serious consequences from the depletion of its oil reserves, and indirectly, we face those same consequences.

Of the fourteen major suppliers to the United States, nine of them are members of OPEC, and account for over 65% of the oil that we import every year. What does that mean in terms of dollars and cents? America spent between $400 and $500 billion on foreign oil annually, according to sources at the Pickens Plan, or about a half a trillion dollars.

Oil Consumption by China and India Maybe all of these facts and figures wouldn’t be so important if America were the only oil consuming country, but we are simultaneously faced with growth of the economies of countries such as China and India, which are consuming more oil every year. At the present time, the typical Chinese resident consumes 1/6 of the energy consumed by each American. That will change, and energy consumption in China is growing rapidly. Industry experts expect China’s oil consumption to double over the next ten years, with China increasing its use by 10% per year.

With China’s population of approximately 1.3 billion compared to the population of the United States of approximately 300 million, it is easy to understand how the development of Chinese consumerism will begin to dwarf our use of oil. United States population amounts to 23% of China’s population.

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China's consumption is rising at an alarming rate. For all of 2010, China consumed an average of 8.71 million barrels per day of oil. By December, 2010, China's rate of consumption reached 9.3 barrels of oil per day. An oil industry group, FACTS Global Energy, has estimated that China's oil demand will increase to an average of 9.5 million barrels per day for 2011. Compare that to 2008, when China consumed an estimated 7.8 million barrels per day of oil, moving it into position as the second-largest oil consumer in the world behind the United States. During that same year, China produced an estimated 4.0 million barrels per day of oil, of which 96 percent was crude oil. China’s net oil imports were approximately 3.8 million barrels per day in 2008, making it the third-largest net oil importer in the world behind the U.S. and Japan.

The U.S. Energy Information Administration forecasts that China’s oil consumption will continue to grow. World energy consumption, led by China, (projected in December 2010 by the EIA), will reach 87.78 million barrels a day in 2011. Chinese oil demand reached 8.71 million barrels per day in 2010, and is projected to reach 9.5 million barrels per day in 2011. While a graph of projected US oil usage shows a gradual rise over the years, China’s projected oil usage looks more like a hockey stick, with China projected to consume over 30 million barrels of oil per day by 2020. Where will that oil come from?

According to FACTS Global Energy, of the crude the oil imported by China in 2010, approximately 50% came from the Middle East, and 30% came from Africa. The other 20% percent came from the Asia-Pacific region, and other countries. Like India, China’s two largest suppliers are Saudi Arabia and Iran, in that order, followed by Angola and Russia. China has been developing a Strategic Petroleum Reserve and commercial storage to ensure oil reserves.

The first phase of China’s SPR was completed in early 2009, and has a total storage capacity of 103 million barrels. Capacity will amount to approximately 25 days of net oil imports based on 2008 estimates of Chinese oil demand. The second phase of China’s SPR is expected to increase capacity to almost 270 million barrels by 2011. China’s goal is to complete a third

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phase, to bring total strategic oil reserve capacity in China to 500 million barrels.

India India’s oil consumption has continued to grow in recent years. According to the CIA World Factbook, in 2010, India consumed approximately 2.98 million barrels of oil per day, up from 2.72 million barrels of oil per day in 2009, making it the fifth largest consumer of oil in the world (led by US, China, Japan, & Russia). An industry source, BMI, projects that India will experience consumption growth of 4-5% per annum to 2015, reflecting an increase to 4.05 million barrels of oil per day. With a population of 1.1 billion people, India is also poised to consume massive quantities of oil. Although due to the worldwide recession, India’s economy has slowed somewhat, it spent a number of years growing at a rate of approximately 9% per annum.

India’s growth in oil consumption has caused its importation of oil to soar. Its primary source of foreign oil is from Saudi Arabia, and its second largest supplier is Iran.

Following the lead of the United States, which developed its own Strategic Petroleum Reserve after the OPEC oil embargo of the 1970s, India is developing a strategic petroleum reserve (SPR). The goal is to set up a strategic reserve of 36.6 million barrels of crude oil in underground structures, with the project expected to come on line in 2012. India has selected a location for the storage facilities along the coast so that the reserves could be easily transported to refineries during a supply disruption. In spite of this plan, India does not presently have any strategic crude oil stocks.

Effect of The Great Recession on Oil Consumption What effect has the Great Recession had on global growth of oil consumption? Zero, zilch, nada, nothing. In spite of a worldwide recession and global restriction of industralized economies since 2008, oil consumption has continued to increase, particularly in Asia. In China alone, on a month v. month comparison, consumption grew an astonishing 18% from December 2009 to December 2010. China has an insatiable appetite for oil, which we will describe in more detail below. Even Russia has experienced a 12% increase in oil consumption between 2007 and 2010. The growth has continued unabated, particularly in the Asia region, and will continue to do so for the foreseeable future. Comparing the growth of supply and the growth on consumption, China's oil demand grew at eight times the rate of global supply grow

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Chapter 2 OPEC AND MYTHICAL OIL RESERVES

Just Who is OPEC? The Organization of the Petroleum Exporting Countries (“OPEC”) is a consortium of 13 countries. They are Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, The United Arab Emirates and Venezuela. Most of these countries would not be considered to be in the “allies” category as they relate to the United States. On the contrary, it is an understatement to say that they don’t like us very much. They do, however, like taking billions of dollars from us every year for their oil.

OPEC controls the majority of the world’s oil reserves and accounts for 40% of the world’s oil production. By reducing production, OPEC can create oil shortages, resulting in increased oil prices. In the 1970s, OPEC tested its strength by reducing production by a mere five percent (5%), resulting in near chaos in the United States and other oil dependent countries.

The oil producing nations have consistently and intentionally vastly overstated their oil reserves, by constantly revising their estimated reserves upwards when no additional oil has been discovered.

The Myth of Saudi Oil Reserves There is a consistent theme related to the proven oil reserves in Saudi Arabia. The official line from the Saudis is that their proven oil reserves consist of 260 billion barrels of oil. If this statement is accurate, it would make Saudi Arabia the country holding the largest proven oil reserves in the world. The key to that statement is the word “if.”

Are these figures accurate? No one really knows for sure, but a review of the historical evidence

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seems to indicate substantial flaws in the theory that the Saudis have anywhere near this amount of oil.

First, its important to get a grasp of the basics. In Twilight in the Desert, author Matthew R. Simmons describes the process of estimating oil reserves. He calls the process an art, not a science, which struggles to create a picture of reserves from “a jumble of theories, assumptions and measurements,” and no more than an educated guess. The beginning point of this process is to come up with a figure known as OOIP (original oil in place). Traditionally, this figure can be off, either way, by 60% to 80%. Once this figure is designated, the process becomes more complicated. The next estimate is how much oil can actually be removed, which is called the UER, or ultimate estimated recovery. The amount that can be recovered is primarily dictated by two factors: the reservoir rocks and the type of oil. The factors of porosity and permeability of the reservoir rocks, and the viscosity and amount of dissolved gas in the oil, will determine how much oil can eventually be recovered from any particular field. Depending on the permutation of these factors, the amount of oil that can finally be recovered will vary from 5% to 80%. While technological advances have been made, and may affect recovery amounts somewhat, the two key factors described above are still the most important ones, and technology has not changed the picture very much. Experts seem to agree that the oil fields in Saudi Arabia should yield between 20% and 45% of the OOIP. Keep in mind that the original estimate, the OOIP, sets the standard upon which every other calculation is based. If your OOIP is off by 50%, for example, all of the figures in the UER will also be off by 50%. What about the “certainty” of the estimators? The process is further confused by the categorization of the estimates. Reserves are designated as P1, P2 or P3.

These designations stand for proven (P1), probable (P2) and possible (P3). The industry refers to these categories as the “Three Ps.” When describing this entire process, Mr. Simmons frequently uses the term “fuzzy” and refers to estimating oil reserves as “voodoo science.”

If you are an oil company with reserves, and your stock is publicly traded on an exchange in the United States, you are required to comply with the accounting rules of the Securities & Exchange Commission. To ensure the integrity of the marketplace as much as possible, those rules are the strictest rules in the world for reporting oil reserves. On the opposite end of the spectrum, if you are an oil company owned by a nation that is controlled by a single family, the rules are not so strict, and lots of things become more “fuzzy.”

The “company line” is that Saudi Arabia has 260 plus billion barrels of oil in reserve. What effect does this information have? First, it gives the Saudis the power and influence to control OPEC. The other twelve nations look to Saudi Arabia as the leader of the group. When Saudi Arabia speaks, the other twelve listen. Everyone follows their lead. Secondly, it gives Saudi Arabia, and all of OPEC, a strategic advantage. Think about it this way: If GM tells you it is going to stop making Pontiacs (like it did), but tells you it wants to sell you a Pontiac, are you very interested in buying one? GM says “don’t worry, Pontiacs will still be around for a while, and we will still make parts for them.” Most people would be seeking a different form of transportation, and not a Pontiac. They would be looking around for something else to drive, not a Pontiac. To keep

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us from looking around to find something else to drive, Saudi Arabia says don’t worry about it, we’ve got plenty of oil.

A severe reduction in the estimates of Saudi oil reserves might actually wake up many people to realize that we really will be facing an oil shortage in the near future, and that we had better get moving on alternatives to fuel our transportation needs, ie: Pontiac equals oil.

In the 1970s, there were four western shareholders of Aramco: Exxon, Mobil, Chevron and Texaco. Based on Securities & Exchange Commission requirements, these entities were controlling the estimation process of the Saudi oil field reserves. In 1975, they reported 107.9 billion barrels of reserves. In 1977, the reserves were estimated at 100 billion barrels. Control of Aramco (now referred to as Saudi Aramco) changed to the Saudis in 1979. While reserve reports were accumulated on an oil field by oil field basis until 1979, the Saudis did away with that procedure, and in 1980 reported solely on a national basis. Surprisingly, the proven reserve amounts increased to 150 billion barrels in 1980. In 1988, an additional 100 billion barrels were added to the proven reserve figures, bringing their proven reserve figures to 250 billion barrels. Since that time, the number has stayed constant at about 260 billion barrels. It has been estimated that since 1988, 46 billion barrels of oil have been recovered from the Saudi oil fields. Magically, the official proven oil reserve numbers have not reflected any decrease during that time. When the issue was raised to the Saudis, the response was that their numbers were based on “constantly expanding knowledge and improved technology.” Mr. Simmons points out, however, that even assuming this to be the case, there is no evidence indicating how or why the proven reserve numbers increased by 150% during the 1980s. I think we know that Santa Claus is not refilling the Saudi oil fields every night, and he did not help the Saudis more than double their proven reserves in less than a year.

There are two alternative ways to look at the Saudi numbers and to look at the Saudi company line that they have 260 plus billion barrels of oil in reserve. The first would be a worst case scenario, based on a revision of the OOIP to 80% less than originally estimated. In that case, Saudi reserves would amount to 52 billion barrels less the 40 billion used in recent years. The second scenario regarding the amount of reserves is what I believe to be more likely to be accurate. That scenario would mean that Saudi Arabia has about 70 billion barrels of oil in reserve, not 260 billion. Remember that this is my educated guess based on the information I have reviewed. I am not a geologist, or a petroleum engineer, simply an observer accustomed to finding out too late that big companies and the government have not been completely honest with me.

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Many of the other countries that are part of OPEC, including Iran, Iraq, and Venezuela also mysteriously and suspiciously doubled the amount of their reserves between 1988 and 1990, which were not based on finding any new oil. These new estimates appear to be a planned conspiracy to mislead the rest of the world to keep it from discovering that OPEC is running out of oil. I assume that the reserve figures expressed by the other members of OPEC are inaccurate. The following are the approximate numbers reported by some of the OPEC countries as there proven reserves: ● Iran: 140 Billion barrels ● United Arab Emirates: 95 Billion barrels ● Venezuela: 75 Billion barrels ● Iraq: 110 Billion barrels ● Kuwait: 97 Billion barrels ● Saudi Arabia: 260 Billion barrels

Total: 777 Billion barrels Here is what I believe to be a much more realistic view of what the major OPEC countries really have in proven reserves: ● Iran: 45 Billion barrels ● United Arab Emirates: 50 Billion barrels ● Venezuela: 25 Billion barrels ● Iraq: 40 Billion barrels ● Kuwait: 55 Billion barrels ● Saudi Arabia: 70 Billion barrels

Total 285 Billion barrels

Therefore, instead of the six major OPEC countries having 777 billion barrels of proven oil reserves, the reality is closer to 285 billion barrels of proven reserves. But, if everyone on the planet knew that, we would all be moving more quickly to alternative sources, and would not be so frightened of every move that OPEC makes. The sooner we take away all of the money flowing to OPEC, the sooner we solve our terrorism problem, and the sooner we provide jobs for Americans. They are going to run out of Pontiacs and not make any more.

Why would I want one?

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Chapter 3 OUR BIGGEST PROBLEM - TRANSPORTATION There is undoubtedly a looming energy crisis. The transportation sector is the most critical energy segment that must be addressed first.

The most important energy problem we face is really a massive liquid energy shortage, which may occur sooner than most people think, and will certainly catch the vast majority of our population off guard. Many Americans will wake up one day and say “what happened?”

Here are some facts and figures that help define the problem. The following information may be a bit difficult to wade through, but it is there to give you a feel for both American and global oil consumption patterns. Bear with me as we go through these statistics.

There are approximately 240 million cars in the United States. The useful life of an automobile in the United States is approximately 17 years.

Transportation accounted for 33% of oil consumption in the United States in 1971 and 67% today. Passenger cars, SUVs, light trucks and minivans (“light duty vehicles”) account for about 60% of the United States transportation sector’s oil consumption.

On the global level, more than 60% of the 88 million barrels of oil consumed every day go to power the world’s transportation systems. Liquid fossil fuels account for more than 96% of the current energy supply used in the transportation sector.

The International Energy Agency (“IEA”) predicts that light duty vehicles will account for an increase in global oil to 32 million barrels per day in 2030. The IEA projections for light duty vehicles assumes average fuel efficiency of 25 mpg in 2030.

If average fuel efficiency for light duty vehicles were 40 mpg, the global oil demand would be 20 million barrels per day, not 32 million barrels per day in 2030. If average fuel efficiency for light duty vehicles were 60 mpg, the global oil demand would be 13.4 million barrels per day, not 32 million barrels per day in 2030. This would be possible with improved hybrid technology.

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Road transport, which includes light duty vehicles, medium and heavy trucks, buses and two and three wheel vehicles, accounted for 25% of global oil consumption in 1971 versus 40% in 2006, and was responsible for 2/3 of the oil consumption between those years.

If government and commercial vehicle fleets, followed eventually by the mass market, would acquire hybrid vehicles and help work on greater efficiencies, some industry analysts predict that oil consumption could be reduced from 21 million barrels per day to 16 million barrels per day by 2030 in the United States.

There are approximately 1.4 million buses in use globally, which travel 50,000 to 100,000 miles each per year. Fuel consumption for buses is between seven and nine miles per gallon.

Medium and heavy duty trucks consume about 25% of the transportation sector’s total fuel consumption. Medium and heavy duty trucks are used for freight transport and delivery and average between 50,000 and 100,000 miles each per year at a fuel efficiency of four to ten miles per gallon. Most of these vehicles run on diesel fuel.

The IEA is an international agency based in Paris, and has been accused of being overly optimistic with regard to oil industry predictions. As an organization, it has downplayed peak oil and the possibility of a liquid fuel shortage. While this group has consistently taken the stance that everything is fine, and that we should not worry about any shortage, there have been recent reports of internal disagreement regarding this issue. I believe that the IEA is finally realizing that it needs to level with the public to maintain its credibility.

While the United States has about 240 million cars on the road, China, for example, only has about 40 million. Chart 3.2 reflects the growth of automobile ownership in China in recent years, and projected growth to 2020.

Considering the fact that China's population is acquiring more and more cars, and the fact that

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China's population in over four times the size of the United States, it won't be long before China has more cars on its roads than the United States. Looking at it another way, China presently has about 17% as many cars as we do, but over 400% more people.

With a population of 1.1 billion, India is right behind China in its growth in the transportation sector. That puts India at 365% of our population. With America consuming 25% of all of the oil consumed daily on the planet, and China now accounting for 12% of all daily oil consumption, it is easy to understand that if something is not done to alter this trend, the result is all too obvious. If we all continue this unquenchable thirst for oil, the range wars over control of water rights in America’s Old West will look like two kids with pea shooters.

Most of the pain that is on the horizon could have been avoided through the use of existing technologies. Development of alternative fuel vehicles has not been in the best short term financial interest of the oil companies or the automobile manufacturing companies, and the government, even with opportunity presented by the GM bailout, did not force the issue (in spite of the fact that they are well aware of the problem). Vehicles that run on compressed natural gas (CNG) and electricity are in widespread use in other countries around the world, but not in America. You should blame that one on Congress.

Since we are expecting a nearly 30% increase in oil consumption in the United States alone, where will the oil come from to support China's car habit, not to mention India's?

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Chapter 4 NON-TRANSPORTATION OIL USAGE While our biggest problem is the use of oil for transportation purposes, we must not lose sight of the other petroleum based products that are in daily usage throughout the world.

About one-half of each barrel of oil is used for gasoline, with the balance used for the manufacture of thousands of other products. Each barrel of oil contains 42 gallons or 159 liters.

Each barrel of oil yields 19.4 gallons (or 75 liters) of gasoline.

By most industry accounts, there are approximately 6,000 products that are petroleum based.

According to Ranken-energy.com, here is a partial list: Ammonia, anesthetics, antifreeze, antihistamines, antiseptics, artificial limbs, artificial turf, aspirin, awnings, balloons, ballpoint pens, bandages, basketballs, bearing grease, bicycle tires, boats, cameras, candles, car battery cases, car enamel, cassettes, caulking, cd player, compact discs, clothes, clothesline, cold, cream, combs, cortisone, crayons, curtains, dashboards, denture adhesive, dentures, deodorant, detergents, dice, diesel, dishes, dishwasher, dresses, drinking cups, dyes, electric blankets, electrician's tape, enamel, epoxy, eyeglasses, fan belts, faucet washers, fertilizers, fishing boots, fishing lures, fishing rods, floor wax, folding doors, food preservatives, football cleats, football helmets, footballs, glycerin, golf bags, golf balls, guitar strings, hair coloring, hair curlers, hand lotion, heart valves, house paint, ice chests, ice cube trays, ink, insect repellent, insecticides, life jackets, linings, linoleum, lipstick, luggage, model cars, mops, motor oil, motorcycle helmet, movie film, nail polish, nylon rope, oil filters, paint, paint brushes, paint rollers, panty hose, parachutes, percolators, perfumes, petroleum jelly, pillows, plastic wood, purses, putty, refrigerant, refrigerators, roller skates, roofing, rubber cement, rubbing alcohol, safety glasses, , shampoo, shaving cream, shoe polish, shoes, shower curtains, skis, slacks, soap, soft contact lenses, solvents, speakers, sports car bodies, sun glasses, surf boards, sweaters, synthetic rubber, telephones, tennis rackets, tents, tires, toilet seats, tool boxes, tool racks, toothbrushes, toothpaste, transparent tape, trash bags, umbrellas, upholstery, vaporizers, vitamin capsules, water pipes, wheels, yarn.

The Illinois Oil and Gas Association has compiled a list of petroleum based products, by category, which is somewhat easier to follow, and reflects the importance of oil based products on our lives: Agriculture

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Plastic ties, row cover, irrigation piping, polyethylene, polypropylene, bags and packaging, pesticides and herbicides, food preservatives, fertilizers Clothing and Textiles Ballet tights, nylon cord, everything polyester: blouses, pants, pajamas etc., everything permanent press: shirts, dresses etc., beads, bracelets, pantyhose, nylon zippers, plastic hangers, purses, thongs and flip flops, earrings, ribbons, fake fur, windbreakers, sandals, garment bags, shoe laces, rain coats, iron-on patches, sneakers, sweaters, sofa pillow material, tote bags, umbrellas.

Around the Office Ball point pens, thermometer, ink, computers, business card holders, copiers, waste baskets, calculators, printer cartridges, microfilm, name tags, binders, erasers, rulers, scotch tape, magic markers, telephones.

Sports, Hobbies and Games Backpacks, fishing lures, air mattresses, cameras, beach balls, fishing poles, hang gliders, vinyl cases, footballs, glue containers, puzzles, darts, Frisbees, golf ball and golf bags, shotgun shells, ear plugs, knitting needles, waterproof clothing, stadium cushions, earphones, yarn, kites, tennis racquets, fabric dye, decoys, lifejackets, nylon strings, face protectors, volley balls, model cars, plastic water guns, fishing bobbers, soccer balls, oil paints, parachutes, ight sticks, earphones, playing cards, photographs, monofilament fishing lines, diving boards, poker chips, goggles, rollerskate and skateboard wheels, whistles, guitar strings, picks, rafts, ice chests,

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tents, sleeping bags, pole vaulting poles, motorcycle helmets, skis, water skis, rubber cement, plastic flowerpots, hot tub covers ,sails, snorkels, monkey bars, photo albums, wet suits, flippers, tennis balls, boats, insulated boots.

Infants and Children Acrylic toys, baby oil, laundry baskets, waterproof pants, baby aspirin, bath soap, mittens, pacifiers, baby blankets, bibs, rattles, doubleknit shirts, baby bottles, disposable diapers, baby shoes, teething rings, nipples and binkies, dolls, stuffed animals, baby lotion.

Healthcare Allergy medication, cotton-tipped swabs, inhalers, liquid Pepto-Bismol, aspirin, first aid cream, lancets, pill cases, band aids, first aid kits, latex gloves, prescription bottles, burn lotion, glycerin, mosquito spray, rubbing alcohol, chap stick, heart valve replacement, nasal decongestant, surgical tape, syringes, Vaseline, antiseptics, hearing aids, anesthetics, artificial limbs,eyeglasses and sunglasses, antihistamines, cortisone, vaporizers, denture adhesives,laxatives, Bactine, oxygen masks, stethoscopes, prescription glasses, cough syrup, hearing aids.

Kitchen and Household Vinegar bottles, egg cartons, meat trays, trash bags, breadboxes, freezer containers, melamine dishware, tumblers, cake decorations, jars, microwave dishes, utensils, candles, freezer bags, milk jugs, vacuum bottles, coasters, gelatin molds, nylon spatulas, wax paper, coffee pots, ice cream scoops, oven bags, mops, drinking cups, ice trays, plastic containers, fabric softener, detergent bottles, plastic table service, drain stoppers, dish drainers, lunch boxes, pudding molds, sponges, dish scrubbers, brushes, baggies, drinking straws, Styrofoam, paper cup dispensers, measuring cups, Teflon coated pans, table cloths, refrigerator shelves.

Beauty Cologne, hair brushes, lipstick, permanent wave curlers, perfume, hair color, mascara, petroleum jelly, comb, foam rubber curlers, shampoo, contact lenses and cases, hair spray, hand lotion, shaving foam, hair dryers, shoe inserts, dentures, body lotion, face masks, skin cleanser, deodorants, moisturizing cream, soap holders, disposable razors, leather conditioner, mouthwash, sunglasses, facial toner, lens cleanser, nail polish, sunscreen, tooth brushes, toothpaste tubes, vitamins, synthetic wigs, bubble bath, soap capsules.

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Furnishings Carpet padding, Naugahyde, Venetian blinds, extension cords, picture frames, flocked wallpaper, shower doors, Formica, refrigerator lining, vinyl wallpaper, curtains, kitchen carpet, welcome mats, fan blades, lamps, shower curtain, patio furniture, swings, linoleum, upholstery, rugs.

Building and Home Caulking material, light switch plates, plungers, faucet washers, clotheslines, measuring tape, polyurethane stain, water pipes, electric saws, paintbrushes, propane bottles, wood floor cleaner/wax, vinyl electrical tape, plastic pipe, shingles (asphalt), light panels, garden hoses, plastic wood spackling paste, awnings, glazing compound, Plexiglas, spray paint, enamel, epoxy paint, artificial turf, folding doors, floor wax, glue, house paint, paint rollers, toilet seats, water pipes, putty, solvents, roofing material, plywood adhesive, sockets, propane.

Automotive Antifreeze, flat tire fix, street paving (asphalt), car battery cases, coolant, motor oil, tires, loud

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speakers, bearing grease, sports car bodies, traffic cones, car enamel, brake fluid, dashboards, windshield wipers, visors, car sound insulation, oil filters, car seats, convertible tops, fan belts, gasoline.

Miscellaneous Ash trays, dog food dishes, toolboxes, CDs and DVDs, balloons, dog leashes, synthetic rubber, bubble gum, dog toys, flashlights, nylon ropes, bungee straps, flight bags, disposable lighters, flea collars, flutes, lighter fluid, cigarette cases, electric blankets, tool racks cigarette filters, ammonia, newspaper tubes, calibrated containers, insect repellent, phonograph records (vinyl), crayons, ice buckets, pillows, credit cards, flashlights, fly swatters, plastic cup holders, dice, kresin, luggage, charcoal lighter, rayon, safety glasses, gloves, hats, shoe polish, signs, toys, watch bands, waterproof boots, shopping bags, bedspreads, checkbooks, covers, tobacco pouches, clothes hangers, flea collars, flavors, masking tape, safety flares, flags, butane.

Here is the problem: While it makes for interesting conversation when you ask someone “did you know that (blank) is an oil based product?� the real problem that we face is that everything on these lists will increase in price in the coming years, and the shortage of fuel for transportation will be accompanied by shortages of the items on these lists.

I ask you one more time, where will the oil come from?

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Chapter 5 THE TWO CRITICAL REPORTS THAT ARE BEING IGNORED There are two separate reports that have been issued in recent years that outline the problem, and sound the alarm. Both come out of the U.S. government, and both appear to be widely ignored. I still haven’t figured out why.

The Hirsch Report The first of these important reports was issued in 2005. The U.S. Department of Energy funded and published a report titled “Peaking of World Oil Production: Impacts, Mitigation, & Risk Management.” Authored by Robert L. Hirsch, Roger Bezdek and Robert Wendling, the report is an assessment requested by the U.S. Department of Energy, National Energy Technology Laboratory.

This report has come to be known as the Hirsch Report. Robert L. Hirsch is a senior energy program adviser at the private scientific and military company, Science Applications International Corporation (SAIC). SAIC is involved in work in the areas of defense and geopolitical issues.

The Hirsch report was not your typical government study. The authors pulled no punches, and certainly did not try to hide their concern and alarm at the situation.

World Oil Peaking is Going to Happen So much for the head in the sand approach of the government prior to 2005. "World oil peaking is going to happen," the report says. The effects and the economic impact on the United States were of great concern to the authors. "The development of the U.S. economy and lifestyle has been fundamentally shaped by the availability of abundant, low-cost oil. Oil scarcity and severalfold oil price increases due to world oil production peaking could have dramatic impacts ... the economic loss to the United States could be measured on a trillion-dollar scale," the report says.

There goes that trillion dollar sound byte again.

One of the scariest comments is that when world oil peaking occurs, it will likely be “abrupt and revolutionary.” As we have discussed earlier, liquid fuels are the main problem, due to growth in demand, mainly from the transportation sector. This situation presents the world and the U.S. with an “unprecedented risk management problem.” The report states: “As peaking is

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approached, liquid fuel prices and price volatility will increase dramatically, and, without timely mitigation, the economic, social, and political costs will be unprecedented.”

Time and cost are significant factors in this dilemma. “Dealing with world oil production peaking will be extremely complex, involve literally trillions of dollars and require many years of intense effort.” The authors stress that the problem is not a temporary one, and that any past “energy crisis” experience will provide “relatively little guidance.” They instruct us that this problem deserves “immediate, serious attention.”

So far, I have not seen any immediate, or serious, attention from either the automobile industry or the government. In light of the Hirsch Report, the activities and actions of companies like General Motors are even more frustrating. If “business as usual” sunk GM before there was a liquid fuel crisis, what do you think will happen after the crisis is in full swing? My guess is they will be back in Washington with their hands out for more cash. I hope this time around Congress is not so stupid.

The report describes a tremendous price volatility as a result of market forces, including speculators. During 2008, we experienced oil prices reaching $145 per barrel, due primarily to speculation. With the uncertainty in the market, the next run up of oil prices may be permanent, or may be a precursor to the actual price adjustment that will accompany the crisis.

Intervention of governments will be required to maintain some semblance of order. In an unusual approach, which reflects how serious they believe this problem to be, the authors point to a need to exclude public debate and environmental concerns from the process. They say this is needed to speed up decision-making. Based on what we have seen recently with the debate over the debt crisis, it is hard to imagine that bipartisan consensus could be achieved to ignore environmental concerns or to exclude public debate.

Global economies will be seriously affected by this problem. Economies that are substantially dependent upon oil will be disrupted on a massive scale. Countries like Brazil and Denmark that took the first oil crisis seriously and took serious steps to reduce their dependence upon foreign oil will fare much better than countries like the United States.

According to the Hirsch Report, mitigation efforts will require substantial time. A 20 year time frame is required to transition without substantial impacts. A 10 year rush transition with moderate impacts is possible with extraordinary efforts from governments, industry, and consumers. Late initiation of mitigation may result in severe consequences. It is a matter of risk management since mitigating action must come before the peak. Without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. “The world has never faced a problem like this.”

The authors state that economic upheaval is not inevitable. “Given enough lead-time, the problems can be solved with existing technologies.” The problem we face is time, and we have not yet really begun our mitigation process. In my opinion, we don’t have enough lead time.

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When I read, from serious professionals like Robert Hirsch that "the world has never faced a problem like this,” it makes me livid to think we handed over more than $50 Billion to General Motors without requiring them to begin building vehicles that would help us reduce our dependence upon foreign oil, and livid that Congress doesn’t grant more tax incentives to the public to acquire such vehicles. What was Congress thinking?

Remember that the Hirsch Report says that without massive mitigation more than a decade before the fact, the problem will be pervasive and will not be temporary. Previous energy transitions were gradual and evolutionary. Oil peaking will be abrupt and revolutionary.

The Hirsch Report went over like a lead balloon with the Department of Energy. Although the report was funded by the government, no government agency wanted to hear what the Hirsch Report said. In the movie “A Few Good Men,” Jack Nicholson told Tom Cruise “you can’t handle the truth.” The government could not handle the truth. The first reaction appeared to be to bury the report, or at least make it more difficult to find. It looks as if one of the lower functionaries put the report on the Department of Energy website, and when the higher echelon heard about it, the report got pulled, and was not available to the public. Since the cat was already out of the bag, the people who knew about the Hirsch Report made enough noise to get the Department of Energy to put it back on its website. While it became readily accessible again, no one has been successful in getting the general public to understand the implications of the report. It would be hard to imagine how the authors could have said it more clearly. They left no doubt in their conclusions, and no doubt in their recommendations for mitigation. Unfortunately, many Americans will wake up one day and say “what happened?”

We live in a world where if its not today’s emergency, it gets no attention. Planning and contemplating seems to be a lost art. We all focus too much on the mundane, and too little on the big picture. Right now we are in the 11th hour and 59th minute. Will we wake up in time?

While the Hirsch Report came out in 2005, it was unable to be specific with regard to a time frame for the crisis. The report seems to set an outside date of 20 years, which would be 2025.

Sometime after the report was issued, in an interview with eclipsenow.org, Mr. Hirsch said "No one knows with certainty when the world production of conventional oil will peak, but a number of experts think it will happen in the next 5-15 years. Our work illustrates that the oil peaking problem can be mitigated with available technologies, but the time required for implementation is measured on a 15-20 year time line, at best.

Based on the Hirsch interview, he was looking at the crisis becoming acute between 2010 and 2020. The Hirsch Report is the scariest 91 pages you will ever read, and it’s not fiction.

A more recent report, issued in 2010, provides some insight into a plausible time frame

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for the crisis.

Joint Operating Environment Report One evening on the national news in April 2010 there was a five second comment about a report by the U.S. Military warning of a possible serious oil shortage. The comment was so brief, and was downplayed so much, that if I didn’t pay close attention to such matters, I would have completely missed it, just as millions of Americans did.

I had to search high and low, but finally found a reference to the report by Terry Macalister in an April 11, 2010 article written for The Guardian in the United Kingdom. The report in question was issued by the U.S. Joint Forces Command, and is known as the “Joint Operating Environment”, or “JOE.” In describing the JOE Report, the introduction states that “It provides a perspective on future trends, shocks, contexts, and implications for future joint force commanders and other leaders and professionals in the national security field.” JOE Reports are issued annually.

The JOE Report is a 74-page detailed report and it covers areas such as energy, war, climate change, globalization, and natural disasters to food, water and urbanization.

Like the Hirsch Report, the JOE Report contains the typical government disclaimer, which says, in part, that the JOE Report “in no way constitutes government policy and must necessarily be speculative in nature…” This is the typical government wink and nod, and really means although we can’t say this officially, we are warning all of the military commanders that they need to plan for these shortages. And I don’t know about you, but when a General from the U.S. Marines tells me something, I listen.

The most significant statement in the report is that by 2012, surplus oil production capacity could entirely disappear, and as early as 2015, the shortfall in output could reach nearly 10 million barrels per day. The report found that “the discovery rate for new petroleum and gas fields over the past two decades provides little reason for optimism that future efforts will find major new fields.” With the anticipated growth in consumption, the JOE Report states that “To generate the energy required worldwide by the 2030s would require us to find an additional 1.4 million barrels per day every year until then.” Unfortunately, there is absolutely no likelihood of that taking place.

The report places an emphasis on the anticipated increased need for oil, coupled with the obvious inability to provide increased production. “By the 2030s, oil requirements could go from 86 to 118 million barrels a day.” The report includes graphs for the projected energy resources and future world oil production. These graphs show existing and projected development of new discoveries, non-conventional oil, enhanced oil resources, development of existing reserves and

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existing capacities.

The JOE Report states “To meet even the conservative growth rates posited in the economics section, global energy production would need to rise by 1.3% per year. By the 2030s, demand is estimated to be nearly 50% greater than today. To meet that demand, even assuming more effective conservation measures, the world would need to add roughly the equivalent of Saudi Arabia’s current energy production every seven years.” Do you see us adding another Saudi Arabia every seven years? It not only is not going to happen, but it can’t happen no matter what we do. In addition, as we have alluded to above, Saudi Arabia itself probably only has a small percentage of the oil that it is telling the world that exists in its oilfields. Assuming Saudi Arabia has less than one-half of what they say they have, the problem is much more severe than the JOE Report assumes. We need to face reality and begin the mitigation process now, as we don’t have the minimum ten years suggested by the Hirsch Report.

The JOE Report also mentions one of my favorite topics, the number of automobiles in America.

According to the JOE, there are approximately 250 Million vehicles in the United States, and the report makes the point that China has only 40 Million, although China has a much larger population. With the growth of the Chinese economy, and the desire of the Chinese to embrace consumerism, most industry predictions are that in ten years, China’s middle class will equal about 700 Million people. That number is more than twice the entire population of the United States. So, the question goes, how many cars will the Chinese have in ten years? 250 Million?

500 Million? More? And what will they run on? And where will that fuel come from?

Nothing convinced me that the coming oil crisis was real more than the advertising sponsored and paid for by Big Oil. In 2008, the oil companies funded a series of commercials to tell America how great they are and how there is nothing to worry about. My favorite was one where a very professional looking woman walks out and asks the question “where are we going to get the oil to run 60 million cars for 60 years?” and then she answers, “Well, right here in America!” The inference being, don’t worry, we’ve got plenty of oil, all this stuff you are hearing is nonsense. The important part of that commercial is not what she told you, but what she

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did not tell you. We don’t have 60 million cars in America, we have approximately 250 million cars. So, what the oil companies are telling you is that we only have 15 years worth of oil left in America. And being skeptical of anything the oil companies tell us, I would cut any estimate of theirs in half, so as of 2008, the oil companies were probably telling you that we had seven years left. Isn’t that an interesting time frame? The U.S. Military is now telling us that there will be shortages beginning between 2012 and 2015, and the oil companies themselves have told us that we will have shortages around 2015. I think I am beginning to see a pattern here.

It seems obvious to me that the military has identified the problem, and has reached the conclusion that there will be shortfalls, and is now trying to figure out how to deal with the issue.

Keep in mind that the U.S. military is the single largest consumer of liquid fuels in the world, and consequently, they need to be on top of this issue, even more than anyone else. Here are some sobering statistics about the use of oil by the U.S. Military: In 2008, the U.S. military spent $20 billion on energy. Of that $20 billion, 82.5% was to purchase crude oil. Daily consumption by the U.S. Military exceeds 300,000 barrels of oil. The average U.S. soldier used 15 gallons of oil per day in 2007, more than any other soldier in any other country at any other time in history.

Why is this information coming from a report issued by a Marine General and not the Department of Defense? In my opinion, it is because the Department of Defense doesn’t believe that you can handle the truth, and the Marine General is incapable of lying. Some people may argue that it’s not the lack of oil that will drive up prices, but the lack of adequate production capability, based on the fact that refineries are too expensive to build and take too long to put in place. While I don’t believe the production capability argument, I have to ask “what’s the practical difference?”

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What is the downside?

What if the whole concept of peak oil is a myth, that there really is plenty of oil in the world, and it can be used for years to come? Then the good news is we have weaned ourselves off of foreign oil and are no longer dependent upon OPEC. We are no longer at the mercy of our enemies. We are no longer sending half a trillion dollars to terrorists each year to buy oil, when some of the funds are used to undermine our way of life. What is the downside?

Wake up America!

In June, 2011, America imported 343 million barrels of petroleum, which means that we sent $39 billion out of the country in June, 2011, alone. We have spent over $200 billion during the first six months of 2011 on foreign oil. That amounts to $902,877.43 per minute that we have spent on foreign oil, nearly $1 million per minute. On an annual basis, that means that we will spend about $400 billion on foreign oil in 2011. What's wrong with this picture?

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Chapter 6 WHY THE DOLLAR MATTERS IN THE OIL WORLD (and what happens when its doesn't) Why and how is the Dollar important in our world run by oil?

The Dawn of the Dollar Age Since 1945, the dominant global currency has been the US dollar. There are some very basic and obvious reasons for this having taken place. Over 50% of the world economic output was attributable to the United States in 1945. America was spared the destruction that occurred in England, Germany, Japan and numerous other countries during World War II. In addition, most people don’t realize that in 1945 America held more physical ounces of gold than any other country, and that our dollar was backed by gold during that period. Much of the gold that we acquired during the war came from England and other allies in exchange for war materials. The dollar was pegged at 1/35th of an ounce of gold, and was convertible into gold by all foreign central banks. “Bring us your dollars, and we will exchange them for gold.”

In July of 1944, in Bretton Woods, New Hampshire, a conference was held. It was unlike any conference before, and it solidified the dollar was the world’s reserve currency. Over 40 nations participated, all of whom were America’s allies during World War II, and all of whom owed us a great debt of gratitude. What became commonly known as the Bretton Woods Conference was officially called The United Nations Monetary and Financial Conference. As part of solidifying the dollar as the world’s most important currency, two significant entities were created, a bank to deal with the reconstruction of the defeated nations, which is now part of the World Bank, and the International Monetary Fund (IMF), a permanent international body created to deal with monetary issues among the nations. Part of the goal of the IMF was to “outlaw practices which are agreed to be harmful to world prosperity,” and to “assist each other to overcome short-term exchange difficulties.” Stabilizing the world economic system was a substantial goal in 1945.

Coming out of the war, the world had a real economic mess on its hands. The IMF has grown from its original 29 member nations to 186 nations, and actually has its own pseudo-currency known as Special Drawing Rights, or SDRs. It goes without saying that in 1945, America also had the strongest military as a result of World War II, and American political power was supreme. From the late 1800s until 1945, the premier international currency was the British Pound Sterling. That officially changed at Bretton Woods.

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As the principal global currency, the US dollar is the primary “reserve currency� in the world, which means that foreign central banks and international corporations hold most of their reserves in US dollars. While it used to be much higher, now about 60% of all foreign reserves are held in US dollars, with the balance spread mostly among Euros, Sterling and the Yen. Adding to the benefit of the US dollar is the fact that core commodities have traditionally been priced and traded in US dollars, a fact that may cause us great concern in the near future, and that is discussed further along in this chapter.

Times have changed, and traditional barriers to other currencies are falling as the economic power of the United States declines. Presently, the US accounts for about 20% of global economic output, about equal to the European Union. Global economic output for Japan is about 10%, with China having recently passed Japan. China, of course, is growing rapidly and its economic output is rapidly increasing as a percentage of world economic output.

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The Birth of the Euro Since the formation of the European Union, the future of the Euro has been debated heavily.

The Euro has grown in stature and has been discussed by many economists as the potential new global reserve currency. The economic debate continues – will the US dollar remain the greatest world currency, or will it be surpassed by the Euro? The answer has two parts. There is no doubt that the world is moving away from the dollar as the major global reserve currency – but will the world turn to the Euro? That’s part one.

Klaus Regling, Director General for Economic and Financial Affairs, European Commission, has been quoted as saying that over the next one or two decades the world will move toward a “multilateral currency system” where the US dollar will be important, but not the dominant currency. This “formal currency basket” will comprise of three or four major currencies. The Euro will be the result of twenty five economies and be linked with thirty to forty other currencies. The European Union will be the world’s largest trading bloc and the most important financial market.

In effect, this is already happening on an informal basis, since many foreign central banks hold about 30% of their reserves in Euros.

Even Stephen Axilrod, Former Staff Director for Monetary and Financial Policy, Federal Reserve Board, believes that the US dollar will become “one of a lead pack” which includes the Euro and the Chinese Yuan, with the yen and the rupee closely following.

Recent economic problems in the European Union have brought great doubts about the real lasting economic strength of the Euro. This is a result of the problems with the PIIGS – Portugal, Italy, Ireland, Greece and Spain. All of these countries have high government debt and have been running large government deficits relative to their Gross Domestic Product. Based on the economic problems in Iceland, and the huge government deficits in Great Britain, some pundits are now referred to the groups as the PIIIGGS. As entertaining as creating acronyms can be, the issue really is how much of a union is the European Union? If each nation controls its own 43

budget, and nations like Greece decide to play accounting games with American Wall Street firms to manage their debt, how can the other countries really control that, or maintain a comfort level with that situation? While it may be great to talk about their unified monetary system, how unified can it ever really become with numerous independent countries? How do you sort through the problems if one country wants to elect a radical government and another elects a government with diametrically opposed economic views? The key to success as a global reserve currency revolves around perception and confidence. The world must perceive you as the dominant player and have confidence that you can stay on top. While they have done a great marketing job trying to convince the world that they are one trading unit and one monetary system, it seems to me that the European Union is more of a Rube Goldberg machine.

China Part two of the question relating to the dollar’s future is - if not the Euro, then what other currency could become dominant in the world?

The official currency of the People’s Republic of China or PRC, is the renminbi or the Chinese yuan. The People’s Bank of China, as the monetary authority of the People’s Republic of China, issues the country’s currency. The word renminbi translates as “people’s currency” and the word yuan translates literally as “round,” as in the shape of coins. The exchange rate for the yuan has been tightly controlled by the Chinese government, and while the fixed exchange rate has changed and been allowed to float, the float is a closely managed float. Economists believe that the Chinese government has intentionally suppressed the value of the yuan to improve the competitiveness of Chinese exports. For the yuan to become a real world currency, however, it will eventually be required to float freely against other currencies, particularly the dollar.

The Chinese have a plan. They have always been long term thinkers, savers and planners.

While our mindset is virtually on a fiscal quarter to fiscal quarter basis, theirs is more long range 44

– think 20 years plus.

Now, take that concept and look at our position in the world today and what will happen if we are looking so short term, while the Chinese are implementing a long term strategy. We ask dumb, short term questions, like “is the recession over yet?” While we are following the fat, dumb and happy strategy, we will wake up one day, totally eclipsed by the Chinese, and say “what happened?”

Their long term plan is simple. Replace the dollar standard with the yuan standard. Sound crazy? Not so long ago the British Pound Sterling was the currency of choice and London was the financial center of the universe. Just as London was replaced by New York, the Chinese intend for New York to be replaced by Shanghai.

Economists throughout the world recognize the long term strategy of the Chinese, although many don’t believe that they will reach their goal for a while. Barry Eichengreen, Professor of Economics and Political Science, University of California, Berkeley, has stated that the dollar and the euro will “cohabit through the first half of the twenty-first century” and thereafter may be challenged by the yuan. Likewise, Marc Leland, former Assistant Secretary of International Affairs, U.S. Treasury, leans toward the yuan as the potential great global currency thirty years from now. Will it really be that long, considering the course that America is on right now?

Gary Hufbauer, Reginald Jones Senior Fellow, Peterson Institute for International Economics, thinks that the next great currency is the Chinese yuan. He also expects China to create an Asian Monetary Fund, which would bolster Shanghai’s ability to compete with New York and London as a global financial center.

In fairness to all of the economic professionals, they all recognize that China needs to expand its financial infrastructure by creating more liquid markets and making its capital markets more efficient. Believe me, they are working on it. Chinese power and influence are growing.

The Chinese are everywhere To get a better feel for the extent to which the Chinese have invaded the very fabric of America, consider the case of Sara Bongiorni, a journalist, who wrote a book in 2007 called A Year Without “Made in China.” Apparently, the concept was born on a post-Christmas day while she was mired deep in plastic toys and electronics equipment. “Why not try to live for a year without buying anything made in China?” she asked herself.

What she found was that it was not only difficult, but nearly impossible on a day to day basis to avoid buying anything from China. After the year was up, she and her family returned to their old ways and are consuming Chinese products daily, it was just too hard to keep avoiding Chinese products.

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While “Made in China” is not full of facts, figures, or any discussion whatsoever relating to trade issues or global domination, it does make the point that most Americans are dependent upon all of the junk manufactured in China and sold here, to willing consumers.

China in our backyard At its closest point, aptly referred to as “West End,” Grand Bahama Island is only 64 miles from Palm Beach (even closer to Palm Beach than Miami). During the early 1950s, an American named Wallace Groves, along with Sir Charles Hayward, a British investor and financier, were heavily involved in development on Grand Bahama Island. Through their efforts, an agreement was signed with the Government of The Bahamas. The Hawksbill Creek Agreement, executed in 1955, created an international 'Port Area', and instigated the creation of the City of Freeport.

The Port Area, consisting of 230 square miles, is an economic tax free zone which provides substantial concessions for financial, commercial and industrial enterprises.

Hutchison Whampoa Limited, a Hong Kong-based conglomerate, has constructed the largest container port in the world in the Port Area, and is a partner with the Grand Bahama Development Company. Hutchison is the largest port operations company in the world and operates in five of the seven busiest container ports in the world, handling 13% of the world’s container traffic. Hutchison Whampoa also has operational control of the Panama Canal and operates container terminals in Mexico and other parts of the Americas.

Hutchison Whampoa describes its port facility on Grand Bahama as a "dedicated deep water trans-shipment hub." Container ships coming from several directions can off-load their shipping containers, which can be re-routed onto other large or small container ships for delivery to ports in the United States, Mexico and throughout the Caribbean and South America. The port operates much like a major airport serving as a "hub" for travelers going to and from destinations around the globe.

After spending over $2.6 billion on the port, Hutchison announced a $300 million expansion in 2008. The company plans to create a large air cargo facility on land adjacent to the port, and owns half of the Grand Bahama Airport Company. The airport company owns one of the largest airport runways in the world which is over 11,000 feet long and able to accommodate the world's largest cargo and military aircraft.

The Chairman of Hutchison Whampoa is Li Ka-Shing, who was named “Asia's Most Powerful Man” by Asiaweek in 2001. He is said to be worth over $16 billion, and is the fourteenth richest man in the world. He is said to have extensive business ties in Beijing and has “compelling financial reasons to maintain a good relationship with China's leadership."

While some government officials in the United States have expressed concern for security reasons about Hutchison Whampoa’s alleged connection to the Chinese government, the real issue is not military security, but simply the growth of Chinese power and influence on

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international commerce, and the resulting decline of American power throughout the world.

China’s foothold on finance is also growing in our backyard. China is a member of the Caribbean Development Bank and in 2008, it joined the Inter-American Development Bank, contributing $350 billion.

In February, 2011, a consortium headed by the Chinese broke ground on what will be the largest project of its kind in the Bahamas. The mega-resort, projected to cost $3.4 billion, is being built on Nassau's Cable Beach. The plan involves four hotels, a golf course, retail space, a convention center and the largest casino in the Caribbean. Scheduled to open in 2014, it is scheduled to employ 8,000, and add 10% to the gross domestic product of the Bahamas. As I like to say, China is everywhere.

Let me buy your Gold – A sign of the times Everywhere you go today, you hear and see offers to buy your “old gold.” We are bombarded on a daily basis with these offers, on television, on billboards, on radio advertisements, in the newspaper, and yes, even in the malls. In the Town Center Mall, a major shopping mall in Boca Raton, Florida, there is a store dedicated solely to offering to buy your gold. Don’t want to mail it to a post office box? Don’t want to sell it to someone at a weekend show at the Holiday Inn? Don’t want to go to a gold party at your neighbor’s house? Come on down to the Town Center Mall and sell us your gold! We will pay you cash right here and now!

There are so many offers to buy gold from us, that we are numb to what it all means. We see it so often, that it’s just accepted as the norm, like someone has a special use for your old gold and just wants to buy it to make jewelry or something. We don’t even think about it too much, we just accept the fact that we could go sell some gold anytime we want.

Why do you think that someone, anyone, would be interested in paying you today’s market price for gold, when today’s market price is the highest price that gold have ever sold for in the history of mankind? Do you realize that in ten years gold has gone from approximately $300 an ounce to over $1,200 an ounce, and people still want to buy as much of it as they can? Do you realize that the dollar has devalued 400% against gold during that time period? When you think about it

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that way, you start to get a feel for what is going on around you, don’t you?

People with massive amounts of cash will buy all the gold you will sell them, no questions asked. Great deal, huh? Do you think someone knows something you don’t?

Ask yourself this question: if my stock portfolio is in the toilet, and paper currency has little or no value, what can I sell to feed my family? Take a wild guess.

Diminishing Dollar Economists such as Michael J. Boskin, a Stanford University economics professor, says that if the United States becomes a “high tax, bloated welfare state” the outlook for the dollar will worsen. That is a polite way of saying that when the U.S. is forced to raise taxes due to its present state of overspending, the dollar will weaken. Likewise, Daniel Griswold from the Cato Institute has stated that if the United States becomes more protectionist in its trade and limits on foreign investment, continues massive spending, and places high tax burdens on investment, the dollar will lose its “claim to greatness.” That is a very polite way of saying “in the toilet.”

In February 2010, the head of the International Monetary Fund made some interesting observations. Dominique Strauss-Kahn (yes, the same one you read about in the newspaper) stated that it would be “intellectually healthy to explore” a new global reserve currency so that the world was not so dependent upon the dollar. He was expressing concern that the entire international monetary system depends upon the conditions in a single country. Even though America may be the most dominant country in the world, the reliance upon one country is of concern to the IMF. This is not an issue that would even be whispered, let alone spoken out loud, if America were not facing such a grim economic future. What Mr. Strauss-Kahn was really saying is that we (the rest of the world) are all tied to this sinking ship and we had better figure out a way to get untied before it goes down. We must ask ourselves, when the disaster hits, will

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there be another Bretton Woods type conference to quickly create a new world reserve currency which substantially reduces the American dollar’s influence, like we reduced the pound sterling’s influence in 1945?

The debate over dollar denominated commodity pricing There is a debate raging that relates to the pricing of commodities, and everyone, even Sarah Palin, seems to have an opinion about what it means and how it all will affect us. Let’s examine the issue and try to cut through the rhetoric and get to the heart of the problem.

Many commodities, particularly oil and gold, are known as “dollar denominated” commodities.

This simply means that prices are quoted in dollars and trades are executed in dollars. If you don’t have dollars, you exchange what you do have for dollars so you can buy oil. The most liquid market for trading oil is the New York Mercantile Exchange, followed by the London based Intercontinental Exchange.

Some countries, most vocally places like Iran, complain about oil being traded solely in dollars.

Iran has gone so far as to create an “Oil Bourse” where they hope to trade oil in currencies other than dollars. Iran and its lunatic leader have constantly groused about the dollar denominated oil market, and have been trying, to create a market that does not accept dollars.

One line of thinking is that the fate of the dollar will be sealed if and when commodities such as oil are priced in currencies other than the dollar. The theory goes that if the United States is forced to pay for its oil in currencies such as euros, sterling or yen, the value of the dollar could collapse. According to adherents of this philosophy, the dollar is being propped up by the fact that other nations must acquire large amount of dollars so that they can purchase oil, and that the United States can consequently run large deficits because dollars are the only currency accepted to acquire oil.

The other side of the argument is that it makes no difference whatsoever that oil prices are denominated in dollars, that the fact that oil is quoted in dollars means “absolutely nothing.”

This argument of one of these commentators is that it wouldn’t matter if the price of oil were denominated in peanut butter, the market will adjust accordingly. They say that this is simply a “treasury operation” and is no big deal.

The fact is that oil, and gold, as well as sugar and cotton, are dollar denominated commodities.

When a prime commodity is traded in one currency, it simplifies the process and facilitates trade. When there is a homogenous pricing structure, it eliminates currency exchange inconsistencies and arbitrage. The idea of a new reserve currency, which ultimately means nondollar trading in oil, has been floated by China, Russia, Brazil and India, all of which are growing populations, and growing in world political influence. I seriously doubt that it “means nothing” that trading in oil takes place in dollars.

Part of this issue is that China is choking on US Treasuries, and is looking down the road

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for an opportunity to get off the carousel. The more they lend us, the more the value of the dollar declines. They can’t simply dump their US Treasuries overnight, because they would be shooting themselves in the foot, their bonds would become worthless. The plan, it seems, is for China to lead the way in slowly getting commodity trades to take place in other currencies, until such time as the infrastructure around their currency is ready to replace the dollar. China is already testing the waters since it has trade deals with Brazil to use their own currencies in some of their commodity trades. This has been facilitated by the fact that China has become Brazil’s largest trading partner, replacing Brazil’s former largest trading partner, the United States. Watch the trend, its already beginning. As China becomes a larger and larger consumer nation, its currency will strengthen, and will become the currency for pricing commodities.

Does it really matter that we don’t price commodities in dollars? You bet it does. The issue is one of confidence and stability. It is really all a psychological issue. To understand what I am saying, let’s examine the gold standard problems that the United States experienced in the late 1960s and early 1970s.

As we discussed earlier, after World War II, we pegged the price of the dollar at 1/35th of an ounce of gold, and backed our dollars with gold. That means if you (meaning a foreign central bank) delivered $35 to the United States Treasury, we would give you one ounce of gold.

Things worked pretty well for a while, and then human nature kicked in again, and America started spending more than it had, resulting in the Treasury printing more dollars than we had gold. Nobody really complained about it, and everybody knew about it. Finally, in the late 1960s, France started delivering dollars and demanding gold in their place. The Bretton Woods agreements had in essence pegged the dollar to gold, and other currencies to the dollar. Finally, in 1971, due to the strain caused by the cost of the Vietnam War, and the drain on our gold stockpile by demands from France and other countries, President Nixon changed our monetary policy and no longer would allow dollars to be converted into gold.

What do you do when you have just told the world that you are essentially insolvent? How to you maintain the credibility of your currency, when the world was looking to you for financial stability, when you refuse to convert dollars into gold as promised? The simple answer is that you find another way to back your currency so that the world, once again, has faith in your ability to deliver on your promises.

What you do, and what America did, is arrange for the dollar to be the only currency accepted in exchange for a commodity that is far more valuable than gold – a greasy little substance called oil. The indirect effect of the dollar being the only currency accepted for oil made it a currency that, in essence, was backed by oil. If you want oil, you need dollars. It’s that simple.

For anyone with half a brain to suggest that accepting other currencies instead of dollars for oil will mean “absolutely nothing” tells me that they know absolutely nothing. That is why the government in Iran has been working so hard to try to create an oil exchange that refuses to accept dollars, and why it is important that they fail.

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Pressure on the dollar, and its potential devaluation could easily be triggered by Chinese economic blackmail. Let me explain. Many years ago, the Premier of the Soviet Union, Nikita Khrushchev, who was John F. Kennedy’s counterpart, made a statement that enraged many people. His statement was translated as “We will bury you.” Every American alive at that time was outraged. We took it as a threat from the other nuclear superpower. His meaning, however, was much more insidious than an armed attack. He was referring to burying us economically.

He would beat us at our own game. He would crush capitalism with his economic might. Of course, we all know now that he failed. Khrushchev’s brashness has been replaced by a more subtle, creeping disease that I call Chinese flu. The Chinese flu has spread throughout our country slowly, and entrenched itself in our economy, like a time bomb getting ready to explode.

Just as we catch the flu from our friends and family, the Chinese flu has been spread to us by our new “friend” and trading partner. Pretty smart cookies, those Chinese. Produce a bunch of routine day to day stuff that a country like America will buy, and do it on the backs of their people at a cost that no other country can match. What if America doesn’t have the money to buy that stuff? Lend it to them! That way China gets a trade imbalance and interest payments to boot. What a deal!

China has played this game so successfully that they have raised the standard of living of their people through America’s desire for consumer goods. China is reaching the place where they won’t need us anymore, and can’t afford us. They can’t afford us if our dollar devalues, since the value of their debt will decline accordingly.

The last time we faced Chinese pressure was in 2007. America was pushing for tariffs on Chinese exports. China wasn’t quite ready for the resulting decline in Chinese exports to the U.S., so they used all of their economic pressure to stop us. By threatening to sell their US Treasuries, the Chinese generated fear that the dollar would be destroyed. America backed off quickly.

As a result of China being our largest creditor, they are now able to dictate US trade policy.

China has replaced the US Congress as the body with the most power over all of the economic policies of the United States. We have been invaded, and most people don’t even realize it.

While the Soviet Union threatened it, the Chinese accomplished it; they have buried us.

We should not be so surprised by their move. We patented the move during the Suez Canal crisis. Addison Wiggin and Kate Incontrera made reference to our actions in their book, I.O.U.S.A., One Nation. Under Stress. In Debt, which everyone should read. Here is more detail on what happened, and why we should not be surprised that the Chinese pulled the same trick on us. Good learners, those Chinese.

Built in the late 1800s, the Suez Canal was financed by French investors and the Egyptian government. The Canal was the shortest route between the Mediterranean and the Indian Ocean, and obviously became strategically significant. Much like the Panama Canal, if you control the Canal, you control the flow of commerce, as well as military access. A debt crisis

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(sound familiar?) triggered the forced sale of Egypt’s interest in the company that owned the Canal to the British less than ten years after its completion. The British then became partners with the French, and operated the Canal. During World War I, the British and French closed the Canal to non-allied countries. The Canal’s significance became more apparent after the Second World War, when half of the Canal’s shipping traffic consisted of petroleum, and two thirds of Europe’s oil was shipped through the Canal.

After World War II, British power was waning, and the British Empire was shrinking. Great Britain understood the importance of the Suez Canal and its connection to controlling the flow of oil. With limited resources after the war, Britain focused on its important assets, in particular, the Suez Canal. Britain’s former colonialism helped generate ongoing anti-British sentiment in Egypt. During the mid-1950s, political relations between Britain and Egypt continued to deteriorate. One minor crisis after another occurred. Finally, in 1956, troubles between Egypt and western nations came to a head. Egypt officially recognized the People’s Republic of China (aren’t they everywhere?). Officially recognizing Communist China (that is what we used to call it) aggravated the United States, Taiwan’s biggest supporter. America withdrew foreign aid to Egypt as a result, and Egypt countered by nationalizing the Suez Canal. While the nationalization was ostensibly directed at the United States, the impact was on the psyche of Great Britain. Diplomacy was attempted and failed for many months.

Great Britain and France then concocted a plan involving Israel. Instead of taking America into its confidence, the British simply assumed that America would side with them, since Egypt was courting the Communist countries for support. Israel began a war against Egypt, and France and England invaded the Canal region to take control, assuming they would have American support. Eisenhower, however, as President, decided that he should avoid the escalation of a war that might involve a nuclear Soviet Union, and played the economic card against Great Britain. At the time, America was the largest holder of Great Britain’s debt in the form of Sterling Bonds. Some of the debt was obtained in exchange for wartime debt to the US Government and for post-war reconstruction. Eisenhower ordered the Secretary of the Treasury to prepare to sell a significant portion of the Sterling Bonds. Sale of the bonds would have immediately caused the devaluation of the British Pound. “Devaluation” is an understatement, since commentators at the time referred to it as the “nuclear option,” since it would result in a complete meltdown of the Pound Sterling. In response, the British quickly announced a ceasefire, not even warning the French or the Israelis of their intention. America backed off, and did not sell any of its Sterling Bonds, thus maintaining the integrity of British currency. The result of this exercise was that any remnants of the British Empire ceased to exist, at least psychologically in the minds of the rest of the world. Eisenhower obviously believed that he was acting in the best interests of the United States, and did not hesitate to use economic blackmail to accomplish his goal. Whether he was right or not is not the issue. The issue is that he had the ability, and the leverage to get what he wanted, simply by threatening to dump Britain’s debt on the bond market.

China has already threatened us once with the prospect of dumping US Treasuries on the market. If we did it to our greatest ally, and our “mother country,” how can we ever assume that China would not carry out such a threat if it believed such action would be in its best interest?

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What will trigger China’s next threat to sell US Treasuries? Great Britain became indebted to us based on its needs generated by the War. Our dependence on Chinese loans is based primarily on crass consumerism. Britain borrowed money to survive. We borrowed money to buy McMansions. When we need money to survive, where will it come from?

Summary The strength of the dollar is diminishing. Even before the economic crisis began in 2008, the dollar as a reserve currency was declining. Foreign central banks are diversifying into other currencies because of our weakening economic position. There are three prongs to the problem that are weakening the dollar over time. Annual tax revenues of the US government are declining. During the Great Recession, we have lost over 15 million jobs, which means that those 15,000,000 unemployed Americans won’t be paying any taxes on income that they didn’t receive.

As everyone in America now knows, our liabilities are growing at a frightening pace. Throwing someone else’s money at it won’t help, it will only make it worse. As we have said before, we can’t grow our way out of this one.

Worst of all, foreign investors and foreign central banks are petrified about our debt structure and our continuing spending spree. Their desire and appetite for our Treasuries is falling. China has been buying our debt primarily because we are buying their manufactured goods.

To make matters worse, the reaction of Congress has been typically predictable. In mid-April, 2011, there was a massive battle between Democrats and Republicans over a pitiful proposed cut of $38 billion from the next annual budget. Generally, the Democrats claimed that the cuts were affecting those who could afford it the least, and the Republicans were generally arguing that these were important cuts to the budget and should be approved. Over much hoopla, including the “shut down the government” hysteria, the two sides compromised, and both announced a “win.”

If we fight so hard over a miniscule budget cut such as this, we are surely sunk as a nation.

The $38 billion in question represented less than 1% of what the government is scheduled to spend in 2011, and less than one week's worth of debt obligation for our government. When the government must borrow 43 cents for every dollar it spends, to argue and battle over a 1% budget cut tells us that Congress is out of touch with reality.

Here is a headline that sums it all up: “News Flash – The US dollar died today, a victim of its own suicide. It had been ill for a very long time. No international mourners are expected to attend the funeral.”

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Chapter 7 MIDDLE EAST OIL BLACKMAIL AND MILITANT ISLAMIC TERRORISM Since we are freedom loving people, we rejoice as we watched the Spring 2011 revolution in Egypt, and as it spread throughout the Arab world. As riots begin in Yemen, Libya, Tunisia, Algeria and other Arab countries, we make the assumption that this is a good thing, and will somehow result in democracy for the people of those countries.

Our view is a bit naive.

The prior leader of Egypt, Anwar Sadat, was another strongman who ruled Egypt with an iron fist. He surprised and amazed many people by negotiating with Israel and entering into a peace treaty with his former enemies. Sadat was assassinated, and Hosni Mubarak, who was literally sitting next to him during his assassination, took control of the country. The assassination was carried out by the Muslim Brotherhood. Now that Mubarak is out, the Muslim Brotherhood will participate in the creation of a new government, something they were unable to accomplish after killing Sadat. They got what they wanted, it just took them a little longer than they expected. The Muslim Brotherhood is a part of, and is related to, Hamas and Hezbollah, all of whom view the West as their hated enemy.

If these countries, which control a substantial amount of oil that we purchase, decide to flex their muscles against us in the oil world, it will only hasten the problem. While I don't believe that it was on their minds when they wrote the Hirsch Report, the reference to an “abrupt” change in dynamics would be the instant result of economic blackmail by these countries.

The mind of the Islamic Terrorist As a high school student, I learned the difference between crazy and stupid. On the first day of the first course I ever had in psychology, the teacher told us a story. He was demonstrating to us very young people that the terms “crazy” and “stupid” are not interchangeable. Back in those days, if you were a teenager, you might not know the difference. The story is that a man was driving along a highway out in the country, and had a flat tire. He had to pull off the road. The only thing around the area was a mental institution surrounded by a big chain link fence. As he pulled over, he noticed a man inside the fence, watching him. The driver proceeded to take the spare tire out of the trunk, get the jack, and start to remove the flat tire. He put the lug nuts into the hubcap as he removed each one. After he had taken off the flat tire, another car drove past him and swerved. It hit the hubcap, scattering all of the lug nuts, and they were lost. The driver said to himself out loud – what am I going to do now? I have no lug nuts to hold the spare tire in

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place! The man behind the fence now spoke up. “Take one lug nut from each other wheel, that will hold the tire in place until you get into town.

The driver was astonished. He blurted out to the mental institution inmate, “how come you are in there and you thought of that, and I am out here, and I didn’t?”

The inmate calmly responded, “I may be crazy, but I’m not stupid.”

The Islamic Terrorist is not stupid, he or she is cunning, intelligent, and sometimes technologically brilliant. He or she is, however, in my opinion, crazy, unpredictable, irrational and focused on destroying our way of life, and makes no apologies about that position. While we Westerners are careful to be politically correct by stating that this is not a “holy war,” that is exactly how the Islamic Terrorist defines the present situation. The biggest problem that we face is that it is virtually impossible to defend yourself against someone who is determined to kill themselves and as many of us as they can. You cannot reason with a terrorist, you cannot negotiate with a terrorist, you cannot convince a terrorist that killing is wrong and that the slaughter of innocent people violates the very religion that they purport to embrace.

When the 9/11 attacks occurred, I was shocked and dismayed, as were all Americans. Who were these people and how could they possibly hate us so much? Although we were all somewhat aware of the Middle East and the apparent chaos that seemed to plague the region, I admit that I was still in a quandary about the motives that drove these terrorists to act. I came to

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realize, however, that these misguided people were acting on another basic human flaw: deep and abiding resentment.

Apparently one of the results of the first Gulf War was to enhance the seething resentment that already existing in the terrorist mentality. This is another example of the law of unintended consequences. We sent thousands of troops to Saudi Arabia and Kuwait, to drive Saddam out of Kuwait, put out all of the fires after he torched their oil wells, protected the Saudi people from invasion, and returned the region to status quo before Iraq invaded Kuwait. For all the loss of American life, all the work, effort and money spent, what we got in return was resentment from the terrorists, who were “insulted” that we would dare to send so many Americans to their “holy” sandpit.

For some reason, there is a flaw in human nature, and it is not just present in lunatic terrorists, although they are clearly at the extreme end of it. Frequently, those we attempt to help the most, that we bend over backwards for, resent our help and assistance. There are just some people, and the lunatic terrorists are a prime example of them, that are basically ingrates. They lack the capacity for gratitude, and lack the intellect to understand that their benefactors are not looking down on them. Part of their problem stems from a deep seated lack of self respect. They are simply morally and intellectually flawed. Along with the other terrorists, the leader of Iran is a prime example of this personality. It makes him all the more dangerous.

There is another interesting twist and correlation relating to the September 11 attacks. For the seventh anniversary of the attacks, on September 11, 2008, FinancialAidNews.com commented that “Putting aside the wars overseas and their significant costs, the 9/11 attackers also caused our government to act recklessly with regard to our financial policies. The end result was that the government kept interest rates artificially low for far too long following 9/11, creating the housing bubble and mortgage mess that is now unraveling, impacting all aspects of consumer and commercial lending.” While that may be an overstatement, the reality is that the government influence on interest rates created an atmosphere that permitted the Big Banks and Wall Street firms to devise a methodology to move a lot of product, the end result of which is the mess we continue to deal with today.

The War on Terror From the time of the beginning of the wars in Afghanistan and Iraq, through Fiscal 2010 that ended on September 30, 2010, Congress has allocated $1.05 trillion to finance the wars.

According to the National Priorities Project, $747.3 billion has been spent on Iraq and $299 billion has been spent on Afghanistan. Of course, items such as the future cost of medical care and treatment for soldiers wounded in the wars is not included in these figures. We also need to keep in mind that debt service will be incurred by the government based on borrowings used to fund the war efforts. (Much like Rome, and 16th Century Spain, but more on that later).

Since we have spent so much, and will continue to spend in the foreseeable future, to create a long term solution for Iraq and possibly for Afghanistan, we should implement the strategy

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I have been advocating since the beginning of the war(s). Create a series of universities throughout Iraq. Provide full scholarships for the students (using Iraqi oil money), and only permit Iraqi women to enroll as students. Provide security for each campus, even if it means withdrawing troops from the cities. Protect the oil wells, and protect the universities. In five to ten years, you will have a completely different country.

Interruption of the Flow of Oil Finding and producing oil is just one facet of the process. Distribution is the other critical element. How oil flows around the world is nearly as important as how to find it and how to produce it.

When you review the world map, it becomes clear that there are a number of “oil choke points� where the distribution of oil can be interrupted, resulting in a disruption of oil availability around the world.

Unfortunately for us, the terrorists are ruthless and cunning. As you can see from the illustration included in this chapter, millions of barrels of oil pass through a small number of choke points around the globe every day. The terrorists are as aware of this fact as we are, and I am sure that some of them have plans of their own relating to this situation. A number of countries including the U.S., Great Britain and France keep a watchful eye on these areas, and hopefully we be able to meet any threat from the terrorists.

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War on Other Fronts The problem that we face with regard to our military is that we are stretched too thin. We are not in a position either financially, or manpower wise, to fight on another front if it becomes necessary. History is full of examples of nations who became insolvent because they were fighting military battles on many fronts, and simply could not afford to do so.

We are faced today with a dangerous world, and one that will only get more dangerous. It seems that our enemies are many and our friends are few. Iran continues to develop a nuclear capability, and appears very close to being successful. Iran is also working hard to create an oil exchange that will not accept US dollars for oil. Iran is a much more dangerous foe than Iraq ever was.

What about all of our efforts through our Homeland Security agency? The entire purpose of Homeland Security is to give the American people a feeling of security, not real security, and the terrorists will undoubtedly strike again. When, where and how is certainly unknown, but “if� is not the question. They will be back. Maybe not through airplanes, but rest assured, as long as we continue to buy foreign oil, money will flow to support the terrorists in their endeavor to destroy us.

As long as petrodollars continue to come into the hands of countries that are part of OPEC, our way of life is threatened. Look at the OPEC nations again: Algeria, Angola, Ecuador, Indonesia, Iran, Iraq, Kuwait, Libya, Nigeria, Qatar, Saudi Arabia, The United Arab Emirates and Venezuela.

How many of the OPEC nations can we classify as allies or friends of the United States? We need to get it through our heads that we are funding our own demise. We are empowering our own enemies. What makes it worse is that by suppressing alternative technologies for transportation, Big Oil and the American automobile industry have helped this happen.

We are being foolish and we will pay the price.

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Chapter 8 THE PROSPERITY BLIP We are living during an era that will become known as the Prosperity Blip. The Prosperity Blip on the timeline of human existence looks just like that, a blip. An aberration, a deviation, an anomaly, a temporary variation, an unexpected change, a departure from the norm. A blip.

Fueled by cheap oil, the Prosperity Blip started in the mid-1800s, and continues through today.

It has been referred to by economists and theologians as the rise of unprecedented prosperity.

It coincided with the beginning of the Industrial Revolution. Beyond an interesting cocktail party discussion, its effects and nuances will have a startling influence upon an event that I refer to as the Flashpoint.

The two leading economic experts in the study of historical human prosperity are Brad DeLong and Angus Maddison. Both of these researchers have spent many years studying economics, and working on formulas to evaluate and compare economic prosperity over long time periods.

This work is like putting together a puzzle of the same picture, using puzzle parts that are snapshots of the same location taken at different times. How do you compare prosperity in ancient Rome to prosperity in 21st Century Shanghai? The variables are astronomical, and the changes caused by inflation at different times make an “apples to apples” comparison nearly impossible.

To level the playing field and try to compare historical economic prosperity, a concept known as “purchasing power parity” (PPP) has been developed by economists studying in this field.

The researcher uses a fixed dollar amount at a fixed point in time, and the value of income at all other time periods is pegged to this number.

Most experts agree that a subsistence level of income existed that was typical for hundreds of years prior to the Industrial Revolution. The two experts mentioned above have varying views of PPP, and using the measure of 1990 International Dollars (I$), have come up with different values for that subsistence level. Maddison suggests that I$400 was a typical subsistence level of living prior to the Industrial Revolution, whereas DeLong views historic subsistence level of living at I$90.

Addison has studied prosperity back as far as 10,000 BC, while DeLong has focused on the past 2,000 years of mankind’s existence. Both researchers have analyzed annual per capita Gross Domestic Product, which is defined as the total market value of all goods and services produced annually. If you follow their analysis between the years 1600 and 2003, using the 1990 International Dollar standard discussed, what you find is that while they start at somewhat different levels, they both flatline until the beginning of the Industrial Revolution. There is a very

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gradual upswing between 1875 and 1950, and then a dramatic, almost 90 degree turn upwards from 1950 to the present. So, even though they differ on their base historical per capita GDP, they converge in recent years, and seem to be in agreement with regard to the dramatic rise in prosperity for the human race.

It is interesting to note that during the time from 1929 to 1940, while there had been a rise in the prosperity level, it was nothing compared to the increases we have experienced since 1950.

By comparison, the 1929-1940 number was somewhere between I$1,000 and I$1,500, while the number from 1940 to 2000 rose to the I$7,000 number. While that doesn’t sound like much, it means that people in the world are six or seven times more prosperous now than they were during the Great Depression and thereafter. These trends illustrate my thought that the next economic depression will be more dramatic and more personally painful to our citizens than the Great Depression, since the increase in prosperity prior to the Great Depression was not nearly as significant as the increase that we have experienced in recent years.

The world, and in particular America, has experienced a massive increase in prosperity since 1950. People living during the depression era were fond so saying things like, “we were poor, but we didn’t know we were poor, because everybody was poor.” The mindset in America today is that everybody thinks they are rich, and nobody thinks they are poor, or at least they don’t act like they think they are poor. Sure, they might complain that they don’t have any money, but for the most part it does not stop them from doing the things that they want to do. Traveling, dining out, driving their own cars instead of public transportation and similar activities take place without much change.

When you look at the long history of mankind, why and how, all of a sudden, did all this

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prosperity occur? Many people would simply say something like “technology” or “ease of communication” or “ease of transportation.” But look beyond the obvious answer. Look beyond the simple “better technology” mantra. Boiled down to its most common denominator, prosperity was generated in America and the rest of the world by cheap energy, particularly in the form of cheap oil. Cheap energy drives every industry on the planet, and cheap oil is the main component of cheap energy. The answer is always the same, oil, oil, oil. We are truly oil addicts, and will become just as desperate as heroin junkies when we can’t get our fix of petroleum products. Cheap oil has been our savior, and now it is our curse.

Dynasties History is built upon the back of human nature. Great nations have come and gone, feeding upon a continuing cycle fueled by the nature of mankind. A Scottish jurist and professor, Sir Alex Fraser Tytler, described this cycle: “The average of the world’s great civilizations has been 200 years. These nations have progressed through this sequence: from bondage to spiritual faith; from spiritual faith to great courage; from courage to liberty; from liberty to abundance; from abundance to selfishness; from selfishness to complacency; from complacency to apathy; from apathy to dependency; from dependency back again to bondage.” Was Tytler right? An examination of a few of mankind’s great civilizations are illustrative of his viewpoint.

During the 16th and 17th centuries, the world’s most dominant culture and nation was clearly Spain. Spain not only ruled the seas, but controlled vast territories all over the world, including the Americas, the East Indies in Asia, parts of present day France and Germany known as the “Low Countries,” and most of present day Italy.

What caused the decline of Spain? Some very familiar circumstances, it seems. Spain borrowed heavily (sound familiar?) and the high level of debt triggered massive inflation. Spain was forced into a series of debt restructurings (a polite way of saying that they defaulted on their debt and had to rewrite the loans). The average cost of goods quintupled in the 16th century. Spain exhausted much of its wealth in continuous wars. With the financial problems came widespread corruption. Spain, with a far flung empire, had substantial long term commitments that had to be met, much like America today. The massive debt problem, and raging inflation, triggered currency devaluations. Based on these failures and circumstances, the Spanish economy slid into a long decline. Spanish power didn’t disappear overnight, it waned and waned until Spain had become a second or third rate power in the world, not the superpower that it once was. As Spain waned, England and France rose.

Are we far from the Spainish model? We are dealing with wars in faraway places, with ill defined goals and massive expenses. We are struggling with unmanageable debt, which will inevitably force us into some type of debt restructuring. We are facing growing costs of agricultural goods.

And, or course, a coming oil shortage which will undoubtedly cripple us. Are we so different?

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The Roman Empire

They say that Rome wasn’t built in a day. It is also accurate that Rome did not fail in a day. The Roman Empire and America have been frequently compared.

“We are the greatest nation in the history of mankind. Our influence is worldwide. Our culture is admired by all. Our language is international. Our currency is the world’s standard. Our military strength is superior to all others. We have never lost a war. We bring prosperity and protection to our allies. We have the most modern legislative body ever conceived by man. Our citizens are proud of our accomplishments, our generosity and our peaceful existence.”

If you read the above statement closely, it would be impossible to determine if it came from a Roman Senator in the Second Century, or an American Senator in the Twenty First Century.

What happened to Rome? As you travel through Europe, you can still see remnants of Rome’s grandeur, and not just on the Italian peninsula. In places like Switzerland, there are portions of aquaducts, small versions of the Coliseum, ancient walls and stone structures built during the

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reign of the Roman Empire. Rome certainly was a grand and successful civilization.

The curses that came from abundance and success included laziness, entitlement, greed, corruption, selfishness, and ultimately, complete moral collapse. Rome was overextended financially. There were fewer and fewer territories to conquer, little or no revenue growth in the budget, more and more entitlement programs implemented, too much outsourcing of the military duties, administrative costs to run the far flung empire that exceeded taxes collected, all topped off by greed, laziness and stupidity in its leadership. This cocktail for disaster killed Rome. It also sounds like the cocktail that is being mixed for us.

The Rise and Fall of the Great Powers and A Study of History

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In 1987 historian Paul Kennedy authored his historic publication known as The Rise and Fall of the Great Powers – Economic Change and Military Conflict from 1500 – 2000. Mr. Kennedy, a well respected British historian, analyzed the economic power and viability of the leading nations and powers in the world over the past 500 years. The essence of his famous work appears to be that the “greatness” of powerful nations, which fuels their rise to power, is related to the availability to such nations of natural resources and economic resources. In addition, declines of such nations begin when expenses, such as military costs, begin to exceed the availability of such resources. His prediction is that the single most important reason for the decline of a great power is deficit spending.

Another British historian also studied great civilizations, and published a ten volume treatise issued in three installments between 1936 and 1954. Arnold J. Toynbee identified twenty six civilizations in his work called “A Study of History.” Toynbee viewed the rise and fall of civilizations as being based on a series of challenges and responses. Civilizations, according to Toynbee, rise as a result of overcoming great challenges, and progress to greatness as a result of their positive responses to additional and ongoing challenges. A relatively small group within each civilization devises creative solutions to difficult problems, and the civilization advances.

When leadership stops responding creatively, the civilization declines. His main argument was that “civilizations die from suicide, not by murder.” There is no inherent cycle, argued Toynbee, and there is no fatally predetermined course for any civilization. There is only the response by a civilization to its challenges, and how it responds will determine its destiny.

I believe that what Toynbee is saying is that if a civilization makes dumb decisions, which come from leaders who lack vision and creativity, a civilization will decay. To my way of thinking, this “small group” of creative thinkers in a civilization are the ones who recognize the pitfalls of human nature, and take action to avoid the natural tendencies of human nature to be lazy, greedy and wasteful.

“Ancient Rome declined because it had a Senate, now what’s going to happen to us with both a House and a Senate?” - Will Rogers

What About Us? The basic mechanics of civilization failure can be boiled down to the twin curses of overspending and underfunding. The source of this problem, once again, goes back to human nature. Man must find a way to fight the urges that are at the base of these problems. As humans, we are flawed. Unfortunately, many of those who seek to lead us are the most flawed,

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and help hasten our demise. Peggy Noonan, a brilliant former Presidential speechwriter, is famous for saying “Beware the politically obsessed. They are often bright and interesting, but they have something missing in their natures; there is a hole, an empty place, and they use politics to fill it up. It leaves them somehow misshapen.” She also has been quoted as saying “Don't fall in love with politicians, they're all a disappointment. They can't help it, they just are.” At this point in our journey, we must strive to find those “needle in a haystack” individuals who want to serve, are capable of serving, and who have only the best interest of the nation at heart. We can no longer depend upon the “usual suspects” to lead us, since we appear to be in the position of lemmings, happily being lead over a cliff into oblivion. We want to make sure that we are not like the legend about lemmings having a tendency toward mass suicide by stupidly following their leaders. We have not demanded enough from our leaders, and we had better start immediately, if not sooner.

Countries like America became great because we pulled together. Today, it’s every man for himself. When a civilization reaches that stage, everyone loses. Human natures proceeds unchecked. Power and influence ebb and flow. No dynasty lasts forever. Great nations have come and gone throughout the history of mankind. Many civilizations believed that they were destined for greatness and glory, and that the status quo would remain intact. They believed that they were the chosen. They were ordained from on high. They were superior to other nations and no one could stop them. But someone did. They did.

Certainly for a nation to become great in the first place, its citizens must be able to believe in themselves and their country. As Americans, we inherently do not believe that our country will fail. The few who do believe it, generally won’t say it. The problem is that being positive is not enough, we have to actually take positive action, not just positive thought. Our goose is cooked if we don’t get busy to fix our problems, and find some leaders who can use creative solutions to address these issues.

The Spartans didn’t believe they would fail. The 16th century Spaniards didn’t believe it either.

Nor did the Incas, the Mayans, the ancient Egyptians, or the Ming Dynasty. Their seemingly unlimited influence and power waned, and in some cases, completely disappeared.

Will American disappear? Hardly. Will American become a second rate country teetering on third world status? Maybe (and definitely, unless hard decisions are made and revolutionary changes don’t take place soon.) So, Americans of the 21st Century, where will America stand in the 22nd Century?

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Chapter 9 THE ECONOMY MEETS THE OIL CRISIS During the first decade of this century (2002-2007), Americans were recognizing, debating, discussing and planning for the looming energy crisis. From late 2007 until the present (3rdQ 2011), our country has been distracted by the economic problems resulting from the bursting of the real estate bubble. The problems are still much worse than the press or the government cares to admit. Everyone is looking for a return to “normal” times, not realizing that we are simply returning to what was normal for centuries. Unfortunately, after the Flashpoint, we will all realize what is really normal.

At a time when we needed to focus the most on preparing for a worldwide energy crisis, the bursting of the real estate bubble, caused by the greed and arrogance of the big banks and Wall Street, has diverted us and distracted us from the most significant issue of our time.

Remember the admonishment of the Hirsch Report, that we will need years of preparation to reduce the impact of a permanent oil shortage. Also remember that when this happens, it will be “abrupt and revolutionary.”

How It Will Feel A few months ago, on a Saturday morning, I awoke early, as usual, and on my way to my typical early trip to Home Depot, stopped to fill up by tank. Being half asleep, I was not paying much attention to the price of gasoline when I started to pump the gas into my car. I didn't notice the cost until I reached about 10 gallons, and noticed a cost on the pump of over $70.00.

My first reaction was not “there must be some mistake,” no, my reaction was “Oh my God, it has happened.” I assumed that overnight oil shortages had been announced, and that the gas station was reacting to the new market reality. I wanted to immediately turn on the radio to see what had happened. Fortunately, I was wrong, and the station had just made a mistake when they reset their pump.

Unfortunately, that experience will be replayed in the near future, and over night our lives will change. For me, that experience was “abrupt,” even though I am attuned to this situation.

This is an example of what I refer to as the Flashpoint. By definition, a flashpoint is the point at which eruption into significant action, creation or violence, occurs. There will be quite an eruption when you go to the gas station and either cannot get fuel, or must pay astronomical prices to fill your tank.

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When this occurs, which it surely will, Congress will need to allocate huge sums of money to find a solution. Who will fund us? Since we now borrow 43 cents of every dollar that the government spends, just to maintain the status quo, what do we do when we need trillions more to address this problem? We are already experiencing weakness in our ability to sell treasuries.

Our traditional second largest buyer of our government debt is Japan. The aftermath of the earthquake, tsunami and resulting nuclear reactor problems means that Japan will need to be investing its money at home, not abroad.

To fully understand how bad the problem will be, we need to review where we are today, and how we got here.

How We Got Here - Government Thinking (an oxymoron) As a young lawyer, I was typically idealistic, and therefore unprepared for what I would encounter as a government attorney. Working for a large state agency, I was astounded by the utter disregard for fiscal responsibility. During the last fiscal quarter of each year, the agency would make every effort to accelerate spending, in order to be sure to spend their entire annual budget. I would routinely be asked “don’t you need to fly here or there, or take more depositions, or hire more expert witnesses for some of your cases?”

I naively inquired about this seemingly wasteful practice – would it make sense and wouldn’t we be good stewards of the public’s money if we came in under budget? I soon found out that this was thought to be one of the most ridiculous questions that the “lifers” ever heard. “You young fellows don’t know diddley about how this all works do you?” they would ask. “How in the world could we ask for a 25% budget increase if we don’t spend all the money this year?”

I soon came to find out that such practice was typical among all of the state and federal agencies. Bigger budgets mean bigger staff, and more power for the agency heads, more power means more opportunity. Rarely, if ever, do you find an agency head willing to voluntarily reduce budgets – so government on every level continues to grow.

It becomes even more outrageous when an inevitable failure occurs, like a Bernie Madoff scandal. The agencies use their own negligent regulatory failures to squeeze even more money out of the Congress or state legislature. The excuse they always use is not their incompetence, but the fact that they really need more money and more staff to catch the bad guys. If we had more people to watch the industry, the argument goes, we would have caught them. It’s your fault, Congress or state legislature, for not giving us more money last year. Congress or the state legislature duly complies, and provides even more funding to the agencies, usually until another disaster strikes, and the scenario repeats itself. The reality is that the regulatory agencies rarely harass the big companies. Like a schoolyard bully, they usually only pick on the small guy that doesn’t have the money or the ability to defend himself. Besides, those little fish

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aren’t the ones that are going to hire them when they leave the agency, are they? For example, if you look closely at the Deepwater Horizon disaster, you will find that lack of real regulatory oversight was the biggest culprit. Stories are even surfacing that the BP employees were filling out government compliance forms for the government employees, and were given carte blanche when it came to deep water drilling procedures.

Budget Deficits and the National Debt People frequently confuse the budget deficit, which is the annual shortfall for any given year, with the National Debt, which is an accumulation of what we owe for all of the past years. I like to think in terms of the following questions: How much of a shortfall did we have last year? (Budget Deficit).

When you add up all of our shortfalls, how far behind are we? (National Debt).

How much are we committed to pay out in the future? (Unfunded Future Commitments).

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Equating this to Reality Let’s say you made $51,000 in 2009, but your lifestyle required you to spend $85,000. You have no money in savings, so you borrow $34,000. Some of this is on credit cards, and some of it came from Uncle Chin. Based on this situation, and using our three favorite questions, consider the following: I had to borrow $34,000 in 2009 (My Budget Deficit).

Along with the $34,000 I borrowed in 2009, I also borrowed $15,000 in 2008, $12,000 in 2007, $8,000 in 2006, and $5,000 in 2005, for a total of $74,000. (My National Debt) I have committed to pay $40,000 for college tuition over the next few years, $20,000 on my car and $250,000 on my mortgage. (Unfunded Future Commitments).

I don’t have any money in the bank, and my Chinese Uncle says he won’t lend me any more money. What do I do now?

Budget Deficits –What did Bill Clinton and Richard Nixon have in common?

I’ll give you a clue. It had nothing to do with women. It had everything to do with money. In 1969, when Nixon was President, and in 1998-2000 when Clinton was President, there was an annual budget surplus, not a deficit. In 2001, the surplus declined substantially, but was still a surplus, not a deficit, so during Bush 43’s first year, we also experienced a surplus. Over the last 50 years, since 1960, these were the only five years where our government did not have to borrow money to fill holes in its annual budget.

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What if I owned a business, and had to depend upon my credit line to pay my bills every year, and in only five out of fifty years I did not have to borrow money to pay my bills? The answer is pretty obvious to me that the question would never have to be asked because I would have been out of business long before I had a 50 year track record like that.

To get a better feel for where we are today, and where we are headed, we need take a look at the history of deficits since the Kennedy Administration, during the 1960s. Although those were years of great social and political turmoil, they were not what you would call stressful financial years for our government. We certainly had budget deficits, but they were not unmanageable.

During the eight years of the Kennedy-Johnson Administrations, the largest deficit was in 1968, amounting to $110 billion. A total of $250.9 billion was added to the National Debt during those eight years. Although they were not large by today’s standards, there were deficits in seven of the eight years.

Combining the administrations of Nixon and Ford, amounting to another eight years, there were deficits in all seven out of eight. The total amount added to the National Debt during this time period was $702.7 billion, ranging from a high of $188 billion in 1976, to a low of $11.1 billion in 1970 .

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Next, let’s look at the Carter deficits. During Carter’s four years in office, we added $482.8 billion to the National Debt. Carter ran deficits in all four of his years in office.

During the Reagan years, it became fashionable for many people to feel that “deficits don’t matter any more.” During Reagan’s eight years, we dealt with Iranian hostages, the Evil Empire and massive growth in government spending on entitlement programs and defense. That caused us to add $1.94 trillion to the National Debt.

During Bush 41’s four years, we added $1.16 trillion to the National Debt. Bill Clinton ran deficits for his first four years in office and surpluses for his next four years. During the Clinton Administration, America paid down a net $14.2 billion of National Debt and averaged a surplus of $1.78 billion.

Bush 43 added more to the National Debt during his four years than any president before him, coming in a little over $2 trillion for his eight years in office.

Below are the projected deficits for years 2016 through 2025. The projected amounts are from the Congressional Budget Office, and are generally viewed as more reliable than projections that come from estimated prepared by the White House.

2016 $1.368 trillion 2017 996 billion 2018 642 billion 2019 525 billion 2020 463 billion 2021 472 billion 2022 513 billion 2023 521 billion 2024 534 billion 2025 641 billion Therefore, according to the Congressional Budget Office, between now and 2025, we will add another $6.675 trillion, to the existing $14 trillion National Debt. Over $20 trillion in debt. Try to get your head around that number.

Are all budget deficits bad for us? Of course not. I will explain in the next chapter.

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Chapter 10 THE REAL SCOOP ON THE NATIONAL DEBT The National Debt is the culmination of all of those annual budget deficits. When you add up all the money we borrowed (annual budget deficits), and all of the money we made in the good years (budget surpluses), the number you get, roughly, is the National Debt.

There are also some “off balance sheet” liabilities that enlarge this number, but for now we will just focus on what our government refers to as our National Debt.

On May 16, 2011, America hit its “debt ceiling” set by Congress at $14.294 trillion. The Treasury Secretary announced that if the debt limit was not raised by Congress before August 2, 2011, the U.S. Government could default on its obligations. What seemed like a bad dream only got worse, and the political infighting caused chaos around the world. At the proverbial eleventh hour and fifty ninth minute, on August 1, 2011, Congress finally came to an agreement to raise the debt limit. As a direct result of the Congressional paralysis, for the first time in history, Standard and Poor’s reduced the credit rating of US government obligations. This action was unprecedented, and could not even be imagined just a few years ago.

As of June 1, 2010, our National Debt was officially $13 trillion. That is up from $10.6 trillion in 2008. The National Debt has been growing larger and larger in recent years. What does this mean, and why should we care?

Look at the National Debt from our individual perspective, and it becomes easier to understand where we are and why we are in trouble. In the old days, when banks used to really be banks and actually took on risk when they made a loan, they would analyze your “creditworthiness.”

Were you a good credit risk? Did you have a job? Did you pay on time? For example, if you had a good paying job, and wanted to borrow money for a house to live in (not speculate on), and the monthly payments would be equal to 25% of your monthly income, that seemed like a good risk for the bank to take. You could afford to pay 25% of your monthly income to provide a home for your family. No problem.

Now assume you wanted to borrow money for a house, but the monthly payments would be 50% of your monthly income. A little tougher, right? What about 90% of your monthly income?

While the concept of comparing the National Debt to the Gross Domestic Product is a little different than the example, it’s similar enough for you to get the point. There were times in our history where borrowing some money to stimulate the economy made sense and was helpful.

During those times, our National Debt was in the 30%-40% of GDP range. Even 60% would not be a killer under the right circumstances. The problem today is that our National Debt is now about at the 100% of GDP level. Many economists look at countries in the 90%+ level as being in the “red zone.” Other countries in this position include Japan, Greece, and Iceland. As recently as 2007, our National Debt was about $5 trillion, which translated to 36% of GDP.

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As you can imagine from the tone of much of this book, one of my first questions would be “where is China?” According to the CIA Fact Book, China’s National Debt to GDP ratio sits at 18.2%. Similarly bothersome is Russia, at 6.9%. We are reaching the point where in the foreseeable future, the only thing we will be able to afford to pay is the interest on our debt.

Many other world powers are not in this position.

My wife, who has been a teacher for many years, has spent much of her career in Catholic schools, but for some time was in the public school system. In public school, they have a “free lunch” program. She was fond of telling children that there was no such thing as a “free lunch” because somebody had to pay for it, even if it wasn’t you. Unfortunately, we have been dining at the free lunch counter for too many years, and as you will see, it has primarily been at the Chinese and Japanese buffet.

The REAL National Debt Various sources, including the Peter G. Peterson Foundation, have tried to wake us all up with some sobering information. There is a lot more to the National Debt than the government is telling us. Remember Enron? I still think those accountants trained with the U.S. government before getting their Enron jobs. The Enron accountants took lots and lots of liabilities and took them out of the picture so that they were not visible to the naked eye. This very special form of disappearing liability magic worked well for Enron for a while. “Let’s just put these aside in other entities, and make believe they have nothing to do with Enron” was part of the game they were playing.

If you think that Hollywood accounting and Wall Street accounting are particularly magical in their trickery, you are going to love the U.S. government’s version of make believe. What we commonly refer to as the National Debt is simply the amount that has been borrowed from lenders such as foreign governments, international banks, pension funds, individual investors and large corporations.

In the government’s version of make believe we don’t worry about many of the future liabilities that we know are there, such as military pensions, federal loan guarantees, leases on property used by the federal government, bailout costs of Fannie Mae and Freddie Mac, Social Security and Medicare. According to the Peter G. Peterson Foundation, the total figure is equal to $61.9 trillion as of March of 2010. (Yes, I mean trillion).

It is important to know something about the Peter G. Peterson Foundation (PGPF). Peter G. Peterson, the founder, is a former Secretary of Commerce and was a co-founder of the Concord Coalition. The other co-founders of the Concord Coalition were Paul Tsongas, a former Democratic U.S. Senator from Massachusetts and a former presidential candidate, (who has since passed away), and Warren Rudman, a former Republican Senator from New Hampshire.

Mr. Peterson’s Foundation takes on public policy challenges and works to bring the need for

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accountability and responsibility, particularly fiscal awareness and fiscal responsibility to the public’s attention. All of us who want our government to respond responsibly to today’s fiscal situation need to pay attention to, and support this Foundation.

David M. Walker, former Comptroller General of the United States, talks a lot about these unfunded liabilities. While Washington refers to these matters as fiscal exposure, he refers to these obligations as our federal financial hole, or expenses that the government will incur whether they want to or not, expenses that are basically on autopilot to continue. Mr. Walker points out that in the first eight years of the 21st century these amounts have increased from $20.4 trillion to $56.4 trillion, or a 176% increase. Based on the PGPF numbers, that figure now stands at $61.9 trillion, or more than a 200% increase since the beginning of the century, only ten years ago.

We will talk more about Social Security and Medicare, but a large part of the $61.9 trillion that the Peterson Foundation describes is a total of $45.8 trillion related to those programs in the future.

Mr. Walker also paints another scary picture. Based on the Government Accounting Office long range alternative budget simulation, we could hit a brick wall around 2020. That is the projected time period when our interest payments on outstanding federal debt become the single biggest portion of our annual federal budget. Based on the same projections, the payment of interest on federal debt plus our cost of Medicare and Medicaid, eats up all of our annual revenue in 2040. That means no money for anything else at all, no defense, no social security, no roads, no infrastructure, no nothing. And it will probably happen much sooner than that.

Musical Chairs and the Economy When the music stops, you’d better find a seat, otherwise you are out of the game. Is America getting close to being out of the game?

You can spend more than you make for a little while, but eventually, if you keep going that way, you will be bankrupt. I believe that every American understands this simple concept (except Congressmen). We all understand it on an individual level, and usually don’t think much about it on a national level.

Believe it or not, the U.S. government is just like you. You can’t live on borrowed money forever, and neither can the U.S. government. Consider this basic fact: In fiscal 2009, the U.S. government took in $2.1 Trillion in revenue (primarily from income taxes and social security taxes). During the same period, the budget called for spending of $3.5 Trillion. That means we planned to spend $1.4 Trillion that we did not have, just to maintain the status quo. That means that we planned in advance to spend 40% more than we knew we would take in for 2009. A funny thing also happened. We actually spent another $500 Billion, so we really spent $1.9 Trillion more than we took in, so our borrowing consisted of 47.5% of what we spent.

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Consider this: The U.S. government collected $891 Billion in receipts for Social Security taxes in 2009. They only paid out $678 Billion in 2009 for Social Security payments. Sounds good so far, but the government also paid out $676 Billion for Medicare and Medicaid during the same time period. While that $1.35 Trillion was only 39% of what the government budgeted to spend in 2009, it amounted to 64% of all of the revenue received by the government in 2009.

Even the rating agency, Moody’s, who I believe helped create the Great Recession by what appears to be incredible incompetence in rating mortgage back securities, has warned that Washington’s ability to borrow money is in jeopardy if something positive is not done about America’s level of debt. The projected budget submitted to Congress relating to 2011, calls for $3.8 trillion of spending, when tax revenues are only projected to be $2.174 trillion. (My guess is more like $2 trillion unless unemployment decreases substantially). Where will we get another $1.6 trillion (or more)? I guess our Chinese Uncle will have to lend it to us.

Let’s just grow our way out of this Some happy campers argue that we can “grow our way out” of our financial problems. The theory is a lot like the restaurant owner who sells a meal for less than it costs him, and thinks he will “make it up in volume.” That theory makes no sense. The theory goes that if we borrow

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more money, cut taxes, and increase our productivity, we can collect enough tax revenue to pay back our debts and pay for growing programs like Medicare and Social Security. When you think about it, that’s a lot like the fantasy I described earlier where Santa Claus comes every night to refill the Saudi oil reserves under the desert.

When they looked at this concept, the Government Accounting Office itself had to chuckle. With Gross Domestic Product growth at about 3.2% annually during the 1990s, they didn’t seem to think that high double digit GDP growth was even remotely possible, which is what it would take to solve the problem over the next 75 years. Even the Fed Chairman, Ben Bernanke, in April 2010 stated that: “Unfortunately, we cannot grow our way out of this problem. No credible forecast suggests that future rates of growth of the U.S. economy will be sufficient to close these deficits without significant changes to our fiscal policies.” So, no, Virginia, there is no Santa Claus, and there will be no double digit GDP growth each year for the next 75 years.

We will need trillions of dollars to overcome the oil crisis that is upon us.

Where will it come from?

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Chapter 11 US TREASURIES – BILLIONS AND TRILLIONS

The National Debt: Just what are U.S. Treasuries?

To further understand the enormity of the problem that we face with the looming oil crisis, we need to fully comprehend the financial position of the United States, beginning with the basics of how we raise money as a nation.

Treasuries are government debt issued by the United States Department of the Treasury through the Bureau of the Public Debt. Treasuries are properly referred to as United States Treasury Securities. There are four types of marketable treasury securities: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS). There are several types of non-marketable treasury securities. All of the marketable Treasury securities are liquid and are traded on the secondary market. The non-marketable securities (such as savings bonds) are issued to subscribers and cannot be transferred through market sales.

Treasury Bills, or T-Bills, are short term borrowing instruments having a maturity of one year or less. T-Bills are sold in auctions weekly, and are purchased primarily by banks and other institutions that need to keep their funds liquid, yet earn some interest, safely. These securities are viewed as the least risky of the Treasury securities.

Treasury Notes, or T-Notes, have maturities from one to ten years and typically pay interest every six months. The T-Note has generally become the standard bond purchased by investors, although the 30 year maturity Treasury Bond, or T-Bond, is also still popular with pension funds and other investors looking for long term investment. The government stopped issuing T-Bonds for about four and a half years between 2001 and 2006, but brought them back due to investor demand.

The U.S. Treasury also issues inflation-indexed bonds called Treasury Inflation-Protected Securities (or TIPS). The principal amount of the bond is adjusted to the Consumer Price Index, or CPI. The CPI is the commonly used measure of inflation. The coupon rate of the bonds is constant, but generates a different amount of interest when multiplied by the inflation-adjusted principal, which is designed to protect the holder against inflation. TIPS are offered in 5 year, 10 year and 30 year maturities. In February 2010, the U.S. Treasury replaced a 20 year maturity bond with a new 30 year maturity bond.

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Who owns our U.S. government debt?

As of October 2010, according to the United States Treasury, debt in the hands of foreign owners amounted to approximately $4.31 trillion. The largest foreign owner of U.S. Treasuries is, you guessed it, China, with $907 billion in Treasuries, with Japan coming in second with $877 billion. This means that China owns 21% of all foreign owned debt, and Japan owns 20.3% of all foreign owned debt. The U.S. Treasury combines a number of countries into a category called “Oil Exporters.� The Oil Exporters include Ecuador, Venezuela, Indonesia, Bahrain, Iran, Iraq, Kuwait, Oman, Qatar, Saudi Arabia, the United Arab Emirates, Algeria, Gabon, Libya, and Nigeria. Together, the Oil Exporters own $213.9 billion of U.S. Treasuries, or about 5% of all foreign owned U.S. Treasuries. Other large foreign holders of U.S. Treasuries include Brazil, Russia, United Kingdom, Taiwan and Hong Kong.

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The government’s “miracle solution” I wonder sometimes why we hire and pay Congress. The crisis of the rising National Debt is a problem with which they are not only well aware, but have created. Yet Congress continues to simply create commissions to report back to them on what they already know.

Last year, the National Commission on Fiscal Responsibility and Reform was created, consisting of 8 individuals appointed by the President, along with some members of Congress, to suggest a solution to the spiraling debt problem. I guess Congress just can’t handle this themselves.

The Commission rendered its report on December 1, 2010 to devise a plan to stop what is referred to as the “federal borrowing binge.” It truly amazes me that it took a commission of 18 people nine months to tell Congress what it already knows. The report got some short term media attention, and then some other celebrity rehab issue surfaced to take attention away from the important things going on in our country. The report has been widely ignored, by the President and by Congress. Politically, it was either too much or not enough. Plenty of criticism, but no solid counter proposals.

As a result of the debacle surrounding the debt ceiling fiasco, Congress has now created the Joint Select Committee on Deficit Reduction, which as been referred to as the “Super Committee.” I assume the Congress will treat the Super Committee the same way they treated the National Commission on Fiscal Responsibility and Reform. Hopefully, since the public is now completely disgusted with Congress, there might be some minor movement, and Congress won’t be totally

A Deficit Solution?

As you can tell, I am not the biggest fan of Congress. There is one Congressman, however, who has been working diligently on solutions to the deficit issue. Paul Ryan, of Wisconsin, has obviously been focused on trying to find ways to keep us from falling into the abyss. In 2008, he introduced legislation that was designed to eliminate the debt crisis for future generations, while providing stability to Medicare and Social Security, and promoting job creation and economic growth. In addition, his legislation, dubbed the “Roadmap for America’s Future,” would not only accomplish those things, but would add universal health care. His bill died in committee.

Undeterred, Congressman Ryan, in 2009, proposed an alternative to the 2010 US Federal Budget, and in January, 2010, introduced his latest version of his “Roadmap.” His proposals

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are creative and thoughtful, something that is quite foreign to Congress. Again, in 2011, Congressman Ryan has revised and update his plan, and keeps coming back with suggestions.

Whether or not his solutions are right or wrong, at least we are seeing what his thought process is, and there is an obvious effort on his part to propose a plan. Wouldn’t it be great to have a number of well reasoned plans to pick from? Where are all the other plans?

The lack of creative solutions from our leadership is one of the greatest impediments to our future existence. Will we wake up in the 11th hour and 59th minute and start listening to people like Paul Ryan? I sure hope so, but I have my doubts.

The Mentality of Congress A few years back, I was part of a small group that would meet with a U.S. Senator for breakfast or lunch on a quarterly basis. He would share his thoughts and insights into what was happening in Washington, and we would discuss our views of matters coming before Congress.

In one of our first sessions, he told us an interesting story about the inner workings of Congress.

He related to us a story about his initial days in the Senate and how he had wanted to be fully informed on legislation coming up for a vote, wanted to do the right thing for his constituents, and wanted to be careful to make conscious and logical decisions that he thought would be best for the country.

Before his first vote, he not only reviewed the pending legislation carefully, but also talked with numerous colleagues in the Senate. Everyone he spoke to told him the same thing when he asked what they thought of the pending bill. “It’s not needed,” “we already have five or six other agencies that perform the same functions,” “it’s a waste of money,” he heard time and time again. “Easy enough” he thought, why vote for more redundant legislation that spends money unnecessarily? It’s a no brainer.

What a shock and surprise he received when the votes were counted. Not only did the legislation pass easily, but he was one of the only votes against it. “How could this happen?” he thought. When he spoke to his fellow Senators, he soon understood. “Hell, man, there are provisions in that bill that favor children. I can’t vote against children, the folks back home will throw me out of office.” So what if the services were already being provided by other agencies.

So what if it was a waste of money to set up another government bureaucracy. So what if it made no real sense. Just don’t let someone find an issue that they can pick on in the next election, because the point, of course, is to stay in power as long as possible. That’s how Congress works, not unlike the various state agencies. Perpetuate yourself, don’t focus on making the right decision. Make your decisions simply on the basis of politics, and you might stand a chance of staying in power a little longer. The longer you stay, the more you increase your chances of getting your government pension, or maybe even a great lobbying job when you get out.

What about us?

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Billions and Trillions When the Hirsch Report says that we will need trillions of dollars to fix our energy problem, it doesn't really sound so bad. Hey, money can fix it!

We have heard so many large numbers, that they don’t make any difference to us any more.

The numbers “billion” and “trillion” are thrown around so much that we just don’t seem to think much about it. The numbers are not shocking to us, because we have heard these references over and over again on television and in the press. Experts use the word “desensitized” to describe how we feel about the numbers. So what? What’s the difference? It’s just a billion, it’s just a trillion. Don’t worry about it.

That kind of thinking is what got us where we are, and what will be our eventual undoing. At this point, we have little or no perspective about what a billion dollars is, or what a trillion dollars is, and what those number really represent. To fully comprehend our situation, it is important that we gain the right perspective about the importance of those numbers.

It sounds easy and trite to say that a billion dollars is 1,000 million dollars, and that a trillion dollars is 1,000 billion dollars (or a million, million dollars). It still doesn’t mean much to us.

How about this? A trillion is a one with twelve zeros after it, and looks like this: 1,000,000,000,000.

CNN recently ran a story called “Trillion is the new Billion.” In their story they try to help us understand the enormity of the numbers. The CNN story quotes Senator Mitch McConnell, "To put a trillion dollars in context, if you spend a million dollars every day since Jesus was born,

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you still wouldn't have spent a trillion."

McConnell’s comment sounded pretty strange to CNN, so in the true Reagan spirit of “trust but verify,” CNN contacted Temple University math professor John Allen Paulos, to get his take on all this. Sounds like McConnell was right, since Paulos is quoted as saying "A million dollars a day for 2,000 years is only three-quarters of a trillion dollars. It's a big number no matter how you slice it."

Paulos is clearly an expert, so CNN got him to expound on the problem. He came up with an interesting analogy, also using the concept of time as the basis for his explanation.

"A million seconds is about 11½ days. A billion seconds is about 32 years, and a trillion seconds is 32,000 years," Paulos said. "People tend to lump them together, perhaps because they rhyme, but if you think of it in terms of a jail sentence, do you want to go to jail for 11½ days or 32 years or maybe 32,000 years? So, they're vastly different, and people generally don't really have a real visceral grasp of the differences among them."

Paulos also used examples of funding of certain government programs to help us understand the size of a trillion. With a budget of approximately $7.5 billion, the Environmental Protection Agency could be funded for 130 years with a trillion dollars. The National Cancer Institute, with a budget of about $5 billion could be funded for about 200 years with a trillion dollars.

I am also partial to the description provided by ChrisMartinson.com, quoted below: “Suppose I gave you a thousand dollar bill and said you and a friend had to spend it all in a single evening out on the town. You’d have a pretty good time.

Now suppose you had a stack of thousand dollar bills that was four inches in height. If you did, you know what? Congratulations, you’d be a millionaire.

Now suppose you wanted to enter the super-elite of the wealthy and have a billion dollars. How tall of a stack of thousand dollar bills would that be?

The answer is a stack only 358 feet high, seen here barely reaching 1/3rd of the way up the Petronas towers.

Now how about a stack of thousand dollar bills to equal a trillion dollars? How tall would that stack be? Think of an answer.

Well, that stack would be 67.9 miles high.

And I meant stack, not laid end to end or anything cheesy like that. A solid stack of thousand dollar bills, 67.9 miles high. Now that’s a trillion dollars.”

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Without making any political, social, or moral arguments either for or against any of the following, if you Google “what can you buy for a trillion dollars” here are a few of the things you will find listed: ● With a trillion dollars you could buy every sports team on the planet. ● You could double cancer research funding, provide treatment for every American whose diabetes or heart disease is going unmanaged and create a global immunization campaign to save millions of children’s lives, still having more than enough money to sustain these programs for at least a decade. ● With a trillion dollars you could own and operate your own space program with an annual budget of $20 billion for the next 50 years. That’s $2 billion more than NASA spends each year. ● $1 trillion is enough money for everyone in Buffalo, NY to buy their own 65-acre island in Panama. ● $1 trillion is enough money to send everybody in America on an all-inclusive vacation to Tahiti (and some people can stay a few extra days). ● $1 trillion is enough money to buy 88,052, 394′ custom mega yachts ● Assuming the United States consumes about 17 billion barrels of oil a year and assuming the cost of a barrel of oil is about $65, a trillion dollars will buy an entire year’s worth of oil for the USA.

I also found an interesting article on a blog about what you could buy for $1 trillion, written by Tim McClusky of the Family Research Council. He made up a list as an example.

Here is his list: “You could buy: ● 8,700 Porsche 911 Turbos ($126,000 each): $1,097,940,000 ● New York Yankees: $1,200,000,000 ● New York Mets: $482,000,000 ● Every NFL Franchise: $8,600,000,000 ● Dracula’s Romanian castle: $140,000,000 ● 1,000 60SE Lear jets ($11,595,000 each): $11,595,000,000 ● Denver International Airport: $4,822,000,000 ● 10 Picasso’s (113,400,000 each): $1,134,000,000 ● Hard Rock Casino in Vegas: $770,000,000 ● Hong Kong Disneyland: $3,500,000,000 ● South Pacific Island of Katafanga: $38,900,000 ● Buy the whole world 100 cans of Coke: $650,000,000,000 ● Buy 50 Super bowl ads ($2,600,000 each): $130,000,000 ● Build 1,001 Habitat for Humanity houses (at $60,000 each): $600,060,000 ● Build 2,000 miles of Metro rail ($150,000,000 per a mile of track): $300,000,000,000 ● Build 250 hospitals in Third World nations ($41,300,000 each): $10,325,000,000 ● Produce your own Hollywood movie: $150,000,000 ● Buy the Maltese Falcon, the world’s most expensive yacht: $100,000,000 ● Buy 2 Napa Valley wineries ($34,000,000 each): $68,000,000

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Here is another way to look at it: Make believe that you are Warren Buffett, and you are really, really good at making money in the stock market. You are so good, that you made $1 million in 8 hours and 45 minutes. You now decide that you want to be a billionaire, so you don’t take time to sleep or eat for one year, and during that time you make $1 million every 8 hours and 45 minutes. At the end of that year you have $1 billion. Next you decide that you want to make a trillion dollars. This is a little tougher, and even Warren Buffett couldn’t do it. It would take you 1,000 years, making $1 million every 8 hours and 45 minutes to make $1 trillion.

When some of that sinks in, we realize that we are talking about more money than the human mind can easily comprehend. Yet, as astonishing as it may seem, those numbers are thrown around in Congress like they are confetti.

When the time comes for the trillions of dollars that are needed, can we afford it? Can we afford not to do it? Where will the money come from?

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Chapter 12 THE END OF THE OIL ERA What does Economic Chaos look like?

Just as the completion of the first commercial oil well in Pennsylvania in 1858 marked the beginning of the oil era, the Flashpoint will mark the end. The Flashpoint will also signal the end of the Prosperity Blip. The Flashpoint will be followed by economic chaos.

It won’t be pretty.

The Flashpoint will be the day that everyone realizes that the oil era has ended. Nothing will be the same after that day. In spite of all of the warnings, most Americans will be blindsided. I fully anticipate the trigger to be the announcement of liquid fuel shortages in the ordinary course of usage, assuming that neither a massive natural disaster, nor a violent event such as a terrorist attack, or a war, occurs first.

The artificial oil crisis created by OPEC in the 1970s resulted in a shortage of approximately 5% of available liquid fuels. Fortunately, it was a relatively short lived problem. If you were someone with a car in those days, it certainly did not feel like only a 5% problem. Because of the fear it created, most people were “topping off” their tanks as frequently as they could, which only made the crisis worse. There was widespread hoarding, and storing of gasoline in tanks in garages.

There were fights, arguments, and near riots started by people trying to get gasoline for their automobiles. In light of that vision, now think about the JOE Report, and the conclusion that gasoline shortages will reach 10 million barrels a day, and be permanent, not short lived. Based on today’s usage, that would amount to a 13% decrease in availability of gasoline.

While a 13% permanent decrease in availability of liquid fuel may not sound like much, consider the analogy of water and the human body. Alternative energy proponents frequently use this analogy to help understand the importance of what would appear to be a minimal shortage of oil.

The human body consists of over 90% water. A human being does not need to lose all 90% of its water for death to occur. On the contrary, even a small loss of water creates dehydration.

Dehydration, in turn, creates malfunctions in all of the body’s systems. As each system fails, it affects another system. They are all obviously connected and all dependent upon each other.

The human body is the world, and water is the oil. A decrease in the availability of oil affects all of the other systems, most importantly things like transportation, agriculture, and manufacturing.

A 13% liquid fuel shortage can kill. Based on transportation costs and availability, there will be food shortages as a result of the lack of availability of oil, and massive increases in food cost.

Just as Spain experienced a quintupling of food costs in the 16th century, many parts of the world will experience the same problem as a result of the coming oil shortage. Food riots, which have already occurred in some third world countries that have experienced rice shortages in

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2009-2010, will become more commonplace. I expect that we will even see them in American cities. Since most of Americans are urban dwellers, getting sufficient supplies to cities will become more of a challenge.

During the recent “Great Recession,” 8 million Americans lost their jobs, and as of the third quarter of 2011, a total of approximately 15 million Americans were still unemployed. During the economic crisis, unemployment rose to a national figure (officially) of over 10%, the highest since the “Great Depression” in the 1930s, when unemployment rose to 25%. When you account for jobs that were reduced to part time, and you add back in the people who stopped looking for work after being unemployed for over six months, the real unemployment number reached during the Great Recession was closer to 17%.

The government, Wall Street and the big banks would have you believe in a “jobless recovery.”

Tell that to the 15 million unemployed Americans. There is no recovery if you are jobless. Of the 8 million that lost their jobs as a result of the Great Recession, in my home state of Florida alone, over 1 million people joined the ranks of the unemployed. The only thing that seems to have been stimulated is the stock market. Unfortunately, the stock market has become even more disconnected to the real world. Layoffs make some companies high short term profits due to lower employment costs, but is that real economic progress?

Unfortunately, the Great Recession will come to be known as “the good old days.” With official unemployment numbers running between 25% and 30%, the next phase of economic chaos will make the Great Recession look like a picnic in the park. Twelve million more people will join the first 15 million, further straining an already broken system.

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Every American who reaches age 62 will immediately sign up for Social Security. Tax revenues will plummet. Food stamp programs will be swamped with new applicants. Along with gas rationing, there will be food rationing. Home gardens won’t be a hobby, they will be a must. The government will even consider taxing you on your own home food production.

A precursor to a trend was reported recently in the Palm Beach Post, indicating that in the City of Palm Beach Gardens, the City Council had approved “community gardens” that would allow residents to grow crops and flowers on vacant property. Each community garden could be up to one acre, and have a 100 square foot storage shed. Look for a lot more of these around the country. This movement is an outgrowth of the trend toward local food production and consumption. The term being used for people who buy and consume locally is “locavore.” More and more of us will become locavores, whether we want to or not.

While the Great Depression was very difficult for many of our citizens, widespread affluence such as exists today did not precede the Great Depression. Consequently, most Americans in those days were better equipped to tough it out. Today we live in a different world, and much of America has been infected with “affluenza.” When the nouveau riche become the nouveau poor, they are not going to like it, and their reaction may become violent. The riots in Greece in the 2nd quarter of 2010, as a reaction to a government austerity plan, are a classic example of what can happen in America, and will happen if we don’t come up with solutions to the liquid fuel crisis, the debt crisis and the other related challenges that we face.

A very small sample of Chaos Recently I had the misfortune of partially attending a large music festival. Thousands of people were trying to get into a small area, with limited road access and limited parking. Let’s call it a space shortage, because there wasn’t much room to move around, kind of like the old game of cramming ten people into a telephone booth. The result was that cars were cutting in front of each other, people were cursing and swearing at each other, everyone was irritated and frustrated. I couldn’t wait to get out of there. It reminded me vividly of the gas lines during the first oil embargo in the 1970s. Back then, I was pretty young, and had a new car, and wanted desperately to keep fuel in the tank. Radio stations would announce tips on which gas stations had fuel, and people would try all kinds of tricks to get gas for their cars. There were fights and near riots at gas stations. It was a mess. And it will be again.

When the liquid fuel crisis begins, it will dramatically effect the cost of food, simply because of the increased transportation cost. The trucking industry will suffer the most, and shipping by water and rail will rise, since those forms of transportation will be much less expensive. It seems pretty clear to me that this is the main reason that Warren Buffett has been investing in railways in recent years, since rail will once again be the most significant way to transport goods. Air transportation will become much more limited, and more airlines will fail or be consolidated.

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The debt crisis that has severely impacted Europe,Japan and America makes this all the more menacing. We will all need to invest trillions of dollars to solve the liquid fuel crisis at precisely the moment that we can least afford it. Look at Japan, for example. Since Japan is the second largest holder of US Treasuries, Japan could consider liquidating some of that debt to help its own balance sheet. A sell off by Japan could cause panic selling by other countries. As mentioned previously, Japan is one of the few countries with a debt ratio of over 90% of its GDP. When faced with their own disaster, Japan may not hesitate to liquidate debt as part of its own strategy to stave off its own disaster.

The big question, or course, is when will the dominos begin to fall? When will the Flashpoint occur? Without a crystal ball, it’s a little tough to say for sure, but this is what we know: The military thinks that liquid fuel shortages will begin in 2012, and will grow. The Hirsch Report concludes that the shortages will be permanent, and will be sudden. “Abrupt and revolutionary” are the terms used by the Hirsch Report. The Hirsch Report also concludes that it will cost trillions of dollars to prepare for the crisis, and years of intense effort. When the Report was issued in 2005, we might have had a fighting chance to soften the blow of the looming liquid fuel crisis by taking actions such as converting existing vehicles to operate on natural gas. We lost that fighting chance when our entire focus was diverted to the Great Recession caused by the big banks and Wall Street firms. Our chances of avoiding a substantial crisis caused by a shortage of liquid fuel has now been reduced to close to zero. Fasten your seat belts, its going to be a rough ride.

Natural Gas and other alternative fuel vehicles Internal combustion engines can be converted to run on compressed natural gas, with only minor modifications, which are primarily to the fuel tanks. In 2008, I published an article espousing the creation of natural gas hybrid vehicles, which takes the hybrid concept one step further, and such vehicles would run on internal combustion engines fueled by natural gas, and electric motors. This could be accomplished quite easily by simply converting vehicles such as the Toyota Prius hybrid to run on natural gas instead of gasoline. While natural gas is still a fossil fuel, at least it is available and abundant in the United States and Canada. The use of natural gas could be used as a “bridge” to the next non-fossil fuel technology. This concept is not new, and is the core concept of the Pickens Plan. (T. Boone Pickens is right, by the way).

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There are presently no fuel alternatives available that could be implemented in a short enough time to avert disaster. One of the reasons this has not been accomplished to date is because the Environmental Protection Agency has very stringent rules and regulations that do not make it economically viable to convert vehicles to natural gas. I predict that those rules will be suspended as soon as the liquid fuel crisis strikes. Even with this solution, we are unprepared to handle the volume of people who will want to convert, since the conversion kits will need to be produced, the mechanics will need to be trained and the fueling infrastructure will need to be expanded. This is the only short term viable solution that uses a technology that it here now, is proven to work and has the potential to ease at least a small portion of the transportation pain that we will experience. Today, if you wanted to convert your vehicle to run on compressed natural gas, you would only have two options. The first option would be to have an EPA approved conversion done which would cost approximately $8,000. The other option would be to have a black market conversion done in somewhere like Utah. Utah has become a haven for black market conversions because the gallon of gas equivalent cost of natural gas in Utah is about 86 cents per gallon. While the cost of natural gas will rise with the cost of oil, at least it should be available, and there are systems that can be installed in your home to refill your tank, assuming your home already has natural gas service for residential use.

Automobiles with internal combustion engines can also be converted to run on things like ammonia. Ammonia consists of nitrogen and hydrogen and is recognized by the symbol NH3, and is commonly referred to as anhydrous ammonia. Ammonia is an inorganic product that is produced primarily for use in fertilizers. Ammonia was used during the Second World War in Belgium to fuel buses, and was the fuel used by the X-15, a famous experimental rocket powered airplane.

Why have the EPA rules been so strict, and why have more conversions of internal combustion engines not taken place in America, like they have in many foreign countries? We need to look no further than Big Oil and the automobile industry. Remember those people who came to Congress for a bailout? They are the ones who have stifled alternative technologies. In the old days of business as usual, companies like GM could pressure Congress into getting whatever they wanted, whether it was good for America or not. As long as it was good for companies like GM, it was good enough for Congress. Hopefully, those days are over. Congress needs to tell these bailout junkies that their plans need to include actually helping Americans, not just themselves, or they can hit the road.

What is our time frame?

The US military is anticipating that surplus oil production capacity could disappear in 2012. As that becomes more apparent and is widely recognized by the marketplace, the volatility in oil prices will increase. Since markets have a tendency to adjust in advance, it is not unreasonable to assume that we could begin feeling the pain of permanent liquid fuel price increases as soon as early 2012. When we wake up and realize that the crisis is in our lap, Congress will predictably want to throw money at it, and by money, I mean trillions. Where will they get it this

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time? Maybe China won’t be so magnanimous.

Will the turning point be 2012? 2013? 2014? Remember that the Hirsch Report points out that it will cost trillions of dollars to properly prepare for the liquid fuel crisis. I mentioned earlier that the last time we incurred a debt ratio in excess of 100% of GDP was during World War II. That was literally a life and death situation for our country. Unfortunately, based on our spending spree in recent years, we are projected to have a debt ratio of 103% of GDP in 2011, based only on our year to year inability to control spending. We will be in a position, probably in 2013, (after the election) where Congress wakes up, decides to address our energy crisis, and will want to borrow trillions of dollars to address the problem. Like an overextended borrower on a home loan, we will expect our lenders (China, et al) to come up with the money that we need, since we have the inability to provide it through our tax revenues. Just like someone who makes $40,000 a year wanting to borrow $500,000 for a house, will a lender lend? Will China balk?

Wouldn’t you, as a prudent lender, balk? Even if you didn’t balk completely, what restrictions would you place on your loan? Plenty, I would guess.

We are already facing trouble relating to the debt ceiling. The stimulus money (that we borrowed), ran out on December 31, 2010. Have we stimulated much activity with that money?

Other than insuring bonuses for AIG, a bailout for deadhead GM, cash for Bank of America and other undeserving banks, who have we stimulated? How about those 15 million out of work Americans? How about all those firemen and teachers whose pension plans took the hit?

Where is their stimulus? And now what happens. No more stimulus money, no more hype from government that they are growing the economy, no more nothing.

So, as we look at the big picture of where we are today, here is our “report card”: Oil consumption: Unsustainable Oil production: Unsustainable Government Bailouts: Unsustainable Government Debt Levels: Unsustainable The next great depression is nearly upon us. Get Ready. It’s coming.

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Epilogue Working for the government in the 1970s resulted in my philosophy that “I love my country, but I fear my government.” I truly believe that on many levels.

Nothing in the last 30 years since I have left government service has changed my view.

In fact, I believe even more strongly in my philosophy, and think that it has proven itself to be accurate time and time again. My philosophy falls in line with my favorite Ronald Reagan quote about the nine scariest words you will ever hear: “I’m from the government, and I’m here to help.”

Yet we need our government. But, we need a real government that is here to serve real people, not big banks, not big oil, not big anything. We need people in Congress whose only thought is not “who is going to pay me the most when I leave government service?”

We need new leadership, particularly in Congress. It’s easy to blame Bush or Obama. It’s easy to blame big banks and big oil. They certainly have done their share of harm. But, don’t forget, there are 535 people in Washington who are supposed to be watching big oil and big banks, and I don’t mean just watching them make big deposits in campaign accounts. “Asleep at the switch” would be a compliment. Dumb and dumber would be more accurate. Americans need to rise up and say “what about us?” What about the taxpayers who fund all this foolishness?

Why aren’t you looking out for the people you promised to protect? Why are you sticking it to the people who pay your salary?

After reading this book, it would be easy to conclude that I am just another doom and gloom commentator. Surprisingly, if you speak to anyone who knows me well, they will tell you that I have always had a very positive attitude and believe that we can accomplish anything that we decide to achieve. Our problem as a nation is that we have been so misguided and lulled into complacency that we are totally unprepared for the inevitable outcome of the trends that are in place. Without an abrupt turn in the right direction, and a permanent alteration of our course, the future is too easily predictable, and the suffering will be intolerable for many of our citizens. The reality is not that I want us to fail, it is that I want us to succeed, and I want us to wake up and take action. We can’t just have a positive attitude, we must take positive action. We must face reality. We must overcome these challenges or history in the not too distant future will simply see us as just another failed society.

There are obvious negative consequences to the actions that our nation has taken over the past thirty years, and in particular over the past ten years. Can we overcome them?

Will we overcome them? I pray that we can and will.

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