Why The Collapse Of The U.S. Economic & Financial System Has Accelerated

The collapse of the U.S. economic and financial system accelerated this year, thus pushing the country closer to a third-world status.  Most Americans are unaware of the dire consequences facing the nation, so they continue to believe business as usual will continue indefinitely.

Unfortunately, lousy reporting by the Mainstream media along with the public’s denial and delusional thinking is a recipe for disaster for most Americans over the next several years.

The U.S. economy is being propped up by a great deal of monetary printing, Fed stock and bond purchases and extreme leverage in all areas of the market.  While these policies have given the “ILLUSION” of continued prosperity, or at best a sustainable slow growing economy, the debt now in the system is unsustainable.

Still to this day, most investors (including precious metals investors) do not understand the real reason for the massive increase in U.S. Federal debt.  They believe the debt was either increased to enslave Americans or to fund continued economic growth.  While the second reason is more accurate, they still fail to understand the “ROOT CAUSE” of the debt increase.

The Massive Increase In U.S. Debt Tied To Falling U.S. Oil Production & Rising Oil Prices

This chart puts the huge increase in total U.S. debt in perspective:

U.S.-Debt-Peak-Oil-Rising-Oil-Price

The annual increase in U.S. debt was very small up until the 1970’s.  This was due to the peak of cheap U.S. domestic oil production.  U.S. oil production peaked in 1970 at about 10 million barrels per day (mbd).  That year, total U.S. debt was $370 billion.  That’s hilarious, because the annual deficits today are larger than the entire U.S. debt in 1970.

As the oil price increased in the 1980’s and as U.S. oil production declined, total U.S. debt continued to increase.  However, in the late 1990’s, the U.S. debt leveled off.  This was due to the price of oil declining below $20, reaching $14 in 1998 and $19 in 1999.  In 1999, U.S. debt had increased to $5.4 trillion.

Then as the price of oil increased from $30 in 2000 to nearly $100 in 2008, total U.S. debt nearly doubled to $10.5 trillion.  In addition, U.S. domestic oil production declined nearly 4 million barrels per day from 1985 to 2008.  This also had a negative impact on U.S. debt levels.

While it’s true that the cost of energy is only a small part of U.S. GDP,  its impact is multiplied when the U.S. economy and government try to provide the same standard of living as it did prior to 1970.  Furthermore, the EROI- Energy Returned On Invested of U.S. oil production declined significantly since the 1950’s.  The EROI of U.S. oil and gas production in 1970 was 30/1, however shale oil comes in at a low EROI of 5/1.

Thus, the falling EROI means less profitable barrels to provide the same (higher) standard of living as Americans enjoyed before 1970.

The U.S. Economy Is Propped Up By Massive Govt Spending

In fiscal 2015, the United States Govt. (supposedly) spent $3.8 trillion on mandatory, discretionary funding and interest on the debt.  Total revenues were only $3.18 trillion, so the U.S. Govt had to borrow $583 billion to pay its bills:

United-States-2015-Budget

These next two charts break down the “Mandatory” and “Discretionary” spending:

U.S.-Govt-Mandatory-Spending-2015

U.S.-Govt-Discretionary-Spending-Fiscial-2015

The $3.8 trillion in U.S. Govt spending is 21% of total U.S. GDP for fiscal 2015.  Even though the U.S. Govt spends a lot of money on many different areas, let’s focus on Social Security and Medicare-Health.  These two parts of the mandatory spending equal $2.2 trillion of the $3.8 trillion total Federal budget.  This is nearly 58% of the total budget.

That $2.2 trillion spent in the U.S. economy has a “MULTIPLIER EFFECT”.  This is the reason the Fed and U.S. Govt won’t allow a collapse in stock, bond or real estate values.  The revenues collected by the U.S. Govt depend on elevated stock, bond and real estate prices.  Once these start to collapse, then revenues plummet causing the annual budget deficit to balloon higher.  If the budget deficit was $583 billion (that’s what the Govt reports) in 2015 ,then what happens when the market cracks and highly inflated stock, bond and real estate prices collapse?

Well, we already experienced that in 2008.  Here is the most recent update of the U.S. Retirement Market as of Q1 2016:

U.S.-Total-Retirement-Market-Q1-2016

The total U.S. Retirement Market collapsed 21% from 2007 to 2008 ($17.7 trillion down to $13.9 trillion).  The current U.S. Retirement market is valued at $24.1 trillion.  When the U.S. broader markets finally crack, I forecast a 50% decline in the U.S. Retirement market in the first wave.  This could take place over a few years.  A 50% decline would put the U.S. Retirement market at $12 trillion, a little less than what it was in 2008.

This is highly likely as the markets have been propped up with a lot of leverage since 2009.  A 50% decline in the stock and real estate prices will cause serious trouble to the entire U.S. economy and financial system.

…… THIS IS THE CRASH WE NEVER COME OUT OF.

U.S. Financial & Economic Market Suffered Two Big Blows

As I mentioned in the beginning of the article, ENERGY has been the key in pushing the U.S. debt to record levels.  Now, you would think that the huge increase of domestic U.S. shale oil production would have helped stabilize the annual increase of U.S. debt….. IT DIDN’T.  Actually, it did the opposite.

Unfortunately, the addition of U.S. shale oil production came at a huge cost.  It only added more overall debt to the system.  Even though the price of oil remained above $100 for three years, most of the shale oil companies made no real profit.  Which means, the increase of U.S. domestic oil production from 5 mbd in 2008 to a peak of 9.6 mbd last year, did nothing to keep the U.S. debt from rising.

This was due to two reasons:

  1. The U.S. Govt continued to print money while suffering even larger annual budget deficits to provide a standard of living for Americans that it really couldn’t afford.
  2. The EROI- Energy Returned On Invested of U.S. shale oil production of 5/1 was way too low to sustain our modern economy that needs something north of 12/1.

While the situation for the United States became even worse as domestic oil production surged higher, the consequences will be even more dire as oil production plummets over the next several years.

Top Two Shale Oil Fields Suffer Hugh Production Losses

The top two shale oil fields in the U.S. suffered huge production losses over the past year… especially over the last six months.

The Bakken Oil Field in North Dakota was touted to make the U.S. energy independent.  While the author of this article never believed the hype by the U.S. Energy Industry, many Americans fell for this delusion.  As the price of oil declined on top of exceedingly high decline rates, Bakken oil production has dropped significantly.

How much??

Bakken-Oil-Field-Production-Lost-Forever

If we go by the minimum production between August 2014 and December 2015, the Bakken is down 137,000 barrels per day (bd).  While the Bakken achieved a much higher production peak, I am going by the minimum oil production achieved in that time-frame.

Thus, the Bakken will now lose 4.1 million barrels of oil in a month and 50 million barrels in a year compared to what it was producing last year.  A loss of 50 million barrels in a year from the North Dakota industry is a BIG DEAL.  That being said, the Bakken will continue to lose production going forward so the annual production loss will be even greater than 50 million barrels.  At $50 a barrel, North Dakota is losing $2.5 billion a year.

NOTE:  A small part of the Bakken is located in Montana, but this doesn’t really change the overall situation for North Dakota all that much.

Now, if you think the loss of production from the Bakken is bad, you need to take a look at the disaster taking place at the Eagle Ford Field in Texas:

Eagle-Ford-Oil-Field-Production-Lost-Forever

The Eagle Ford has lost 300,000 barrels per day since its minimum production between Aug 2014 and Dec 2015.  That’s one hell of a lot of oil.  In Dec 2015, the Eagle Ford was producing 1,508 thousand barrels per day (1.508 mbd) and is forecasted to decline to 1,212 thousand barrels per day in June.  This is a 20% decline in six months.

Thus, the Eagle Ford will now lose 9.1 million barrels of oil per month and a whopping 110 million barrels annually.  Again, this is only if production stabilizes.  That figure continues to increase as Eagle Ford production continues to decline.

While some individuals believe the decline in U.S. shale oil production was due to falling oil prices, this was only part of the reason.  According to the energy analysts that I have been reading, these two shale oil fields were going to peak between 2015-2017, even with higher oil prices.  So, yes… the low oil price forced the peak a little sooner than later.

What happens as U.S. shale oil production continues to decline??  Well, it puts more pressure on the U.S. energy sector that is saddled with debt up to their eyeballs.  Here is a chart I published in one of my articles a few weeks back:

U.S.-Energy-Sector-Interest-Payments-On-Debt-%

If the U.S. Energy sector is paying about 50% of its operating profits just to pay the interest on its debt (2015)… WHAT HAPPENS AS OIL PRODUCTION DECLINES??  Correct… it just makes a bad situation WORSE.

Americans have no clue the dire situation they face.  No longer will we be able to offer U.S. Treasuries in the future for oil.  Of course, this won’t end overnight, but the trend is not on our side.

The healthy U.S. economy and financial system in the 1950’s-1960’s was powered by its cheap domestic rising oil production.  This is why we were the powerhouse of the world.  However, as the years went by and domestic oil production declined as prices increased, we were forced to use the ENERGY CREDIT CARD. 

While this worked for many decades, the ENERGY CREDIT CARD BALANCE now is unsustainable.  The decline of U.S. shale oil production will speed up the demise of the U.S. economy and empire.

If Americans haven’t connected the DOTS by purchasing physical precious metals, the majority of their supposed wealth will EVAPORATE into thin air.  Even though owning precious metals doesn’t guarantee an individual will make it through the coming economic and financial collapse unscathed, it will at least offer better options than 99% of the Americans out there.

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13 Comments on "Why The Collapse Of The U.S. Economic & Financial System Has Accelerated"

  1. Bill Sodomsky | June 28, 2016 at 7:55 pm | Reply

    Hi Steve,

    Another extraordinary article, jam packed with confirming analytics. I have a small point to add to an already dismal circumstance. During those heyday years of cheap fuels, we built out an infrastructure of roads, bridges, sewer systems, buildings, bureaucracy etc., to accommodate the suburban sprawl, the industries, and the happy motoring, all the while burning up the energy reserves that served as the collateral for the investment loans. Now, we’re left with the servicing costs on all of those investments, all the cheap energy is gone and what we need to retire the mountains of debt (more cheap energy) is also gone. So… for now, the Masters of the Universe will simply substitute currency out of thin air as a surrogate for fossil fuels (real capital). You know… until energy prices come to their senses and shoot back above $100 per barrel. Then all will be well! EXCEPT the world can no longer afford $50 per barrel oil let alone $100 per barrel.
    Each and every day the loans of the drillers and the loans of the consumers grows unabated because both are insolvent. Each and every day, the Central Bankers print more worthless currency to mask the insolvency of both parties hoping for a miracle. There will be no miracle, no new found energy source to replace the energy that fueled our modern industrial society. The ONLY thing that will be left will be the worthless debt that nobody as of yet is prepared to recognize. But, as the old saying goes; “every dog has its day.”

    • Bill Sodomsky,

      CORRECT… we built the U.S. Infrastructure on HIGH EROI ENERGY. Now, we are trying desperately to maintain it with LOW EROI ENERGY. Unfortunately, this will end badly.

      steve

  2. Steve,
    What you say is true, but you cannot deny that we have also foolishly overspent on many things (endless wars, failing expensive social programs, etc) as well as we have foolishly allowed ourselves to be de-industrialized via bad trade deals, high corporate taxes, etc. So our expenses went up as our nation’s growth & prosperity went down. Fiat currency helped mask our problems because having the world’s reserve currency we could virtually print money out of thin air (for a while) to pay for it all. But debt-based fiat currency was always also a Ponzi scheme doomed to fail. So we need much more than just a return to cheap energy to keep our system going in the long run. Lack of abundant cheap energy just makes our non-sustainable system fail sooner.

    • FrankO,

      Yes, you bring up good points. However, we must realize that WARS, SOCIAL PROGRAM and ETC are apart of the policy to keep American’s living standards high. The wars since the 1970’s have been used to keep the U.S. Military the number one in the world which allows us to extract HIGH EROI goods from foreign countries on the cheap.

      Furthermore, the “De-Industrialization” of the United States to a service economy postponed the inevitable a few decades longer. By sending our high paying manufacturing jobs overseas (which we couldn’t afford to support as our EROI was falling) we used debt to continue building homes, strip malls, restaurants and etc to continue the SUBURBAN LEECH & SPEND ECONOMY going.

      steve

  3. Great read Steve. Regarding the 2015 deficit it was once again over a trillion dollars. In fact we have had annual deficits north of a trillion a year since 2009. I notice that they have been hiding it for the past few years. Towards the end of the fiscal year they have been borrowing from government pensions, so it looks like the deficit has been shrinking and once congress raises the debt ceiling they have been paying it back. Please take a look at the attached link and compare the total debt at the end of the month for any month this year and look at the same month last year and it’s been at a trillion. The government has been fooling the “beer, football and reality TV” sheep for sometime. Thank you. http://www.treasurydirect.gov/govt/reports/pd/mspd/mspd.htm

    • Jessie,

      Thanks for that info. I have been checking that website from time to time, but I did not realize the Govt was borrowing that much from the pension plans and probably from social security. This is just another NAIL in the COFFIN.

      I imagine things are much worse than we realize. Thus, the crash will be much more breathtaking when it finally arrives.

      steve

  4. First, you cannot tie US debt to the oil industry. Some of your arguments sound like old arguments from 30 years ago when they said Texas was OUT of oil.

    Try tying debt to tax and spend liberals and their pork barrel socialist policies. Lyndon Johnson’s “Great Society”, Social Insecurity, WIC, HUD housing, bail outs for TBTF bank… You name it. In short, the policies take from those who work and give it to everyone else who doesn’t work. Next, try demographics, too. There are fewer working people supporting a bigger (Bloated) government… None of this is related to oil and gas! Finally, America might try spending less than it take in. American households have to do this but the government does not. Why? Because America is the world’s reserve currency… that’s why! And another thing… and I’ve mention this to you before… 1/2 of America’s Federal Land’s are not open for exploration, and we know there is oil and gas there.

    It’s true…production is falling because no one is drilling. Rigs are offline. Yes, money was thrown at oil companies to drill… and drill they did. I have personally reviewed wells that a Major had and sold to a private independent where all you had to do was re-frack the well, and it would go gang busters. So, all your hype about all wells have petered out does not jive. Shale wells (Horizontal Wells) have only about a 7 year life span. That is a known fact. They do not last as long as conventional, old school, Vertical Wells.

    That said… The debt bomb that will go off in the oil industry will be HUGE! That’s the banks fault for not doing their due diligence and just throwing money at projects looking for yield. But I have written the reports with defects and recommendations, and I know… what’s up!

    I read what your write, but I don’t agree with it all. You have a major slant against the oil industry maybe due to your political beliefs and/or tree hugging save the Earth platform… I’m not really sure. But solar, wind, and hydro power will never replace oil and gas. And oil and gas is not the reason that America is in debt. Taxes have gone from 7% back in the day to 25%-50%, today. Ouch! And America cannot get her house in order? That’s not the oil industries fault!

    • It’s one big pogrom (not misspelled!) of credit expansion. Mises explained it well (paraphrased):

      Every debt expansion results in a subsequent bust, and if that bust is suspended by monetary policy, then the end result is currency collapse.

      Mises explained it in one sentence. Steve took the time to explain it in detail.

  5. Mr. Steve,
    I was skeptical at first but then you convinced me. Energy goes into everything so in the end your thesis makes sense. Now here’s a thought:

    Nixon lifted the gold exchange standard in 1971. And history touts that this had everything to do with Vietnam as well as LBJ’s welfare programs….all true of course. But now mix in peak oil! I wonder just how that idea also influenced the DC central planners?

    In the end, I think your ideas of limited domestic energy are 100% correct, so maybe peak domestic oil production factored into Nixon’s calculus?
    Regards!

  6. Me too agree that all these numbers would scare the Mikey Mouse Republic but USA is a hegemon and it will stay like this for long. A hegemon is at the right side of the shaft.

    I agree too that Americans should not do numbing manufacturing labor and leave this for others.

    Nice pitch for gold buying propaganda.

  7. An excellent article IMHO. Well researched and written for an economical novice like myself. I would like to comment however that while government debt may not have occurred “to” enslave the people ( and that can be debated at another time) it certainly “has” enslaved people both living and especially those not yet born. THAT, as your article has most definitely has proven,is not debatable! Again, thanks for an excellent read

    • AN EDUCATED ECONOMIST | July 12, 2016 at 6:53 am | Reply

      much of the debt sustained by the U.S. and much of Europe is owed to Rothschilds central banks, who, for the most part, have ‘enslaved’ virtually all modernized nations with odious debt that cannot ever be repaid, and the Rothschilds have engaged in ‘toilet paper laundering’ with their fiat currencies that have no collateral backing to them of any kind other than ‘the belief’ by the moron sheeple that this ponzi scheming game is a good idea in the long run.

      so I beg to differ with your assessment that it wasn’t intended to enslave. absolutely it was.

      • Good points. I certainly agree with what you wrote and would find it difficult for another argument to be used. There may be however others that would argue the Rothchilds and central bankers have enslaved nations out of greed with enslavement as the outcome.

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