Debt, debt, debt, debt, debt! Everywhere you go, it's waiting for you.

From government, to private lives, it has become the number one facilitator of any given action. For proof, we suggest you resist the urge to channel surf during commercials. Instead, why not endure the financing options that will be spruiked at you by hyperactive dancing sales people. Or, for a less painful option, consider the effect an interest rate rise has on the disposable income of new home owners victims.

Money may make the world go around, but it's debt that dominates the world of money.

Like a giant spinning top, the global economy has relied on the increased economic flow and circulation that debt provides. Eventually it will stop spinning and fall over on its side.

You see, it works like this: Central banks are like the tip of the spinning top - the point upon which our debt based economic system expands from and pivots off. It's a very narrow tip.

The Financial Crisis is an indicator that the world economy has become extremely top heavy with debt and is dangerously wobbling around like a slowing spinning top.

Governments and central banks have managed to engineer some more spin, but only at the expense of piling more debt on top of the already wobbling structure. This only increases the stakes of keeping it spinning.

But have we discovered the point where more debt will not provide more growth - only more instability? Who knows? (Other than these two academics, who reckon they've figured it out.)

The key point is that a roaring economy might be great, as the boom period showed us. But if this boom is at the expense of stability, and only artificial spin is keeping it going, then we are going to pay for it eventually.

National Debt

''Prepare for a very difficult economic time, which you will not be able to escape,'' said the chairman of the Netherlands Authority for Financial Markets at the ASIC summer school.

The Sydney Morning Herald (SMH) explains why Hans Hoogervorst is so 'optimistic':

"Australia is unlikely to avoid an imminent economic downturn caused by excessive government debt".

Hans' timing is excellent. But why stick to government debt?

Dan Denning reports that "...in another ABS release we learn that the country's net debt figure has reached a new all time high, both in nominal terms and as a percentage of GDP. The net debt (public, private, household) is $647 billion. It was up $14.2 billion in the December quarter and is over 60% of GDP."

International debt flows are particularly big on the economic agenda for Australia. Michael Stutchbury, in Tuesday's Australian Newspaper, explains that the traditional measure of trade flows serves another purpose for Australia:

"Today's economic orthodoxy suggests current account deficit simply measures the extent to which domestic savings are not big enough to finance the mining investment boom."

Going back to Dan's commentary:

"The net foreign debt and current account deficit are a reminder that much of Australia's current prosperity - from house prices to mining profits - comes via borrowed money. Of the $647 billion in net foreign debt, $426 billion - or 65% - is owed by Australia's financial corporations."

With debt running so deeply in the veins of the Australian economy, would it even be possible to have a healthy type of growth emerge? Or would a pickup in economic activity simply be another re-leveraging, doomed to topple the economy at some point in the future?

Austrian economic theory, to which the Daily Reckoning subscribes, would suggest that a period of "creative destruction" must clear out all the malinvestment and excessive leverage before healthy growth can resume. Some of this has occurred, but nowhere near enough, especially in Australia.

Mortgage Debt

Tim Colebatch at the SMH reports that Australia's mortgage debt has "soared" to more than $1 trillion. That's 15 times what it was 20 years ago. The breakdown of the figures since 1990 is fascinating. A 12 fold increase in mortgage debt for people's own homes, as well as a 30 fold increase in mortgage debt for rental investors, while disposable income merely trebled.

"In January 1990, home mortgages ate up just 28 percent of our disposable income. By January 2000, that had ballooned to 66 per cent, and by January this year, it doubled again to 134 per cent.

"Households' willingness to take on greater debt powered much of Australia's economic growth from 1990-2010, but with our households now as indebted as any in the Western world, economists say that will not be repeated."

All this not only inhibits growth, but exacerbates just how sensitive the Australian economy is to interest rates.

Housing

Apparently, a quarter of Sydney homeowners have already experienced the other side to Australia's housing boom. Nick Gardner at The Daily Telegraph writes:

"Despite a broadly rising market, property analyst Residex has revealed 24 per cent of properties bought and sold between January 2005 and January 2010 fetched less than the vendors had paid.

"The average shortfall was more than $54,000 but varied between suburbs.

"The biggest losses were in the affluent Neutral Bay/Spit area, where typical shortfalls topped $275,000.

"But even in Campbelltown, where the median house price is a modest $346,500, 36 per cent of properties sold for less than was paid, with an average shortfall of $31,000."

No matter how wealthy your suburb, you aren't safe from Mr Market.

The real problem faced by people who have lost value in their homes is that the price of the home they are moving to is likely to have risen. Their loss has two sides to it; the nominal loss on their house and the increased price of the new house.

Assuming this is true, it would point out something which has confounded any neutral observer to property markets since the Stone Age. If house prices across the board rise by say 50%, this would be heralded as a success in the property industry. If you realise this gain by selling and moving out, you still have to live somewhere. Your new place would also have increased in price, forcing you to pay more. So, in terms of standards of living, you have got absolutely nowhere.

Any gain is offset by an increase in the price of the house you move to.

Obviously, house prices don't move identically across the board. This means there are opportunities to gain. But spruiking an increase in a nationwide price index doesn't equate to Aussies being better off. It equates to those Aussies who didn't own a home, but want to buy one, being worse off. That means it's even worse than a zero sum game.

So, the property spruikers will claim that it's all about picking the right locations. Well, if house prices in Melbourne rise by 50%, while house prices in the rest of Australia stay the same, would Melbournites be better off?

No, unless they wanted to move away from Melbourne...

Sovereign Debt

The 'Ouzo crisis' has entered a critical phase. The Greek people are having to make crippling blows to their public and personal budgets. Worst of all, Elly Koufakis, who "...used to buy special SpongeBob SquarePants toilet paper for her children, [says] she doesn't anymore."

Other devastating accounts include that of Haris Georgatou: "After years of spending $15 a day on coffee, he now makes his own at work."

My own countrymen, ze Germans, have heard their Chancellor rule out a Greek bailout. She stated it in very Deutsche terms:

"There is absolutely no question of it. We have a (European) treaty under which there is no possibility of paying to bail out states in difficulty. Right now we can help Greece by stating clearly that it has to fulfil its duties."

Germany's history isn't great when it comes to treaties.

It would seem that the statements are just a game of terminology anyway. A German bank (rumours are amassing around KfW Bankengruppe) may be backed by the German government in a Greek bailout.

Die Welt put it unambiguously:

"The pressure is growing -- the chancellor knows that. She is still waiting for the right time to justify the billions (in aid) for Greece... But by then the situation in the financial markets could have spun out of control... The billion euro question is now therefore 'when will Merkel move?'"

Apparently investment banking giant JP Morgan considers California (the Vino crisis?) to be a bigger worry than Greece.

Dan Weil explains this is because of the possibility of contagion. Also, JP Morgan hedges its European exposure, so others bear the risk. Those two points appear largely contradictory, but oh well.

Economic Outlook - Look Out

Some nice examples of how government intervention works come from Sean Hyman at Moneynews, with his article titled "Don't Believe What You Hear: It's Not Getting Better".

"Now Fannie Mae says ... that it needs another $15 billion, bringing its total to more than $75 billion. This company is such "crap" that it's had 10 consecutive quarterly losses. Its latest quarterly loss was $16.3 billion.

"AIG lost $8.87 billion in the fourth quarter.

"The FDIC has shut down more banks in Nevada and Washington. That makes 22 bank failures this year (and 140 banks last year and 25 the previous year)."

Then Reuters chimes in with this:

"Some 400,000 jobless Americans could exhaust their unemployment benefits over the next two weeks, the Labor Department said. By the end of March, 500,000 workers could lose the COBRA subsidies that help them pay for health insurance."

And the Washington Times reports the statistic that sums it all up:

"Moreover, for the first time since the Great Depression, Americans took more aid from the government than they paid in taxes."

That is worth reading twice.

If you are wondering what the Reserve Bank of Australia (RBA) is thinking as it continues its rate rises, check out their October 2009 minutes. It seems the RBA is reading up on Austrian economic theory. The ABC even considered it worth quoting this part of the minutes directly:

"Very expansionary policy could result in the build-up of other imbalances in the economy, which would ultimately be detrimental to economic growth."

This revelation should make RAB governor Glenn Stevens very nervous when he looks to his comrades' rates overseas. The nearest rate of a developed nation is 0.5%. That's 1/8th Australia's and "very expansionary".

Retirement advice for Terrorists

The London based Daily Mail reports that the cancer stricken Lockerbie bomber is alive and well, having so far lived twice as long as predicted when he was released from a Scottish prison on compassionate grounds.

Yes, terrorist and compassionate grounds.

Anyway, upon hearing of the luxury and heroic status being enjoyed by the bomber, American blood began to boil. James Taranto of the Wall Street Journal spun the whole thing like a magician to apply to the socialised healthcare debate, which seems to be reaching our own shores:

Great Moments in Socialised Medicine

"In Britain, the government itself runs the hospitals and employs the doctors," claims former Enron adviser Paul Krugman. "We've all heard scare stories about how that works in practice; these stories are false."

"This defence becomes harder to believe when a cancer patient can get better care by going to Libya."

To be fair, James Taranto's comments on a daily compilation of amusing articles are not entirely serious.

Global Warming Casualties

There have been further casualties on the global warming front, with a baby girl surviving a gunshot wound in her family's suicide. The wounded survivor lay among her dead family members for three days. Why did they have to die? The suicide note explained it was their fear of global warming.

Dr Mark Perry of the University of Michigan posted the following on his blog:

"From Al Gore's article We Can't Wish Away Climate Change in today's NY Times:

"It would be an enormous relief if the recent attacks on the science of global warming actually indicated that we do not face an unimaginable calamity."

Dr Perry has degrees from George Mason University, the only university in the world which offers a specialisation in Austrian economics (as far as I know).

Lastly, my apologies for providing a reference to an outdated article on Eastern Europe and thanks to the readers who pointed this out. I was intending to feature Eastern Europe in its own section and did not revise the content that I decided to keep. Considering Eastern Europe still exists, it seems the article's forecast did not eventuate - yet.

Have a great weekend.

Nickolai Hubble.
The Daily Reckoning Week in Review

• Global Illness of Too Much Debt has Been Remedied by More Debt
• CBA and Their Bad Debt Problem
• Central Bankers Encourage Debt Booms That Become Debt Bombs
• China Stepping Up Purchases of U.S. Treasury Debt
• Apparently More Debt is Now Acceptable in Australia

One of the highlights of my trip was taking a group of subscribers to visit one of the world's best resource investors - Rick Rule - at his farm outside of Auckland, New Zealand. After eating lunch, we got down to the business of the market.

Rule expects markets will be extremely volatile this year, which he considers a gift. It's what allows you to pick up assets on the cheap. Specifically, assets in his favorite sector, natural resources.

There are simple reasons why Rule likes resources: For a long period of time, very little new investment occurred in most resource industries. So now they are playing catch-up. From 1982-2000, there was no net investment in the resource sector, Rule maintains. These industries require continuous investment because they are, by definition, self- depleting. If you run a mine, for example, every day you run it, the deposit gets smaller.

At the same time, global demand for resources has been booming. "When Indonesians make a little extra money, they buy stuff," Rule explains simply. "They upgrade from bicycles to cars. They buy air conditioners for the first time. They buy refrigerators." All of these things use basic materials - steel, aluminum, and other metals. They use energy.

Rule sums it up this way: "When we Americans spend money, we buy services. When poor people spend money, they buy stuff." He points out China uses only 3% as much oil as the US on a per capita basis. Therefore, if Chinese oil demand were to rise only to the level of South Korea on a per capita basis, which is 16% that of the US, then China's incremental oil demand would account for all of current world production.

Not surprisingly, Rule's favorite sector in the resource sector is energy. "Energy is cheap, and it's not going to stay cheap. Natural gas is the same price as it was in 1980 on inflation-adjusted terms."

Demand is going up and supply is problematic. Rule points out that most of the oil in the world is produced by national oil companies (NOCs), like those of Venezuela, Peru, Iran, Mexico, and Indonesia - not by the ExxonMobils and Chevrons of the world. These NOCs are starving themselves of much-needed reinvestment so that they can spend the proceeds on social programs or to advance political objectives. Many of these countries are on the verge of halting oil exports, simply because local demand is close to consuming all the local oil production.

Another factor in favor of rising energy prices is "carbon hysteria." Skirting the issue of whether global warming is real or not, there are consequences to the current drive to reduce carbon emissions. For instance, "coal is bad" has become the pervasive governmental point of view. So if you found a bunch of coal in Australia or New Zealand and wanted to develop it, Rule says, you probably couldn't. Governments hate coal, despite the fact that most of the world still relies on coal.

So what does Rule like here? His favorites are geothermal and uranium.

"I really like geothermal," he says. And the US is one of the best places in the world to develop geothermal reservoirs into power-generation facilities. Political consensus in the US is that geothermal is good. Power companies want it and are willing to pay up for it because it's "green." Political subsidies make the economics of geothermal even more compelling. Rule maintains you can earn a 22% internal rate of return with a cost of capital less than 5%. These are far better returns than solar or wind projects generate.

"I can't say when geothermal stock will take off," Rule said. "But the businesses work stupidly well. They really work. It almost doesn't matter what stock you buy, just own the sector." Rule reeled off four names to own - Ram Power, Nevada Geothermal, Sierra Geothermal, and US Geothermal.

They are speculative little ventures, but owning a basket is probably a good move. As for the speculative nature of the stocks, Rule said the best stock he ever owned was an Australian penny stock. "I bought it for 1.5 cents per share and sold it for $10 per share," he said. "It was the best stock of my life."

He also likes uranium. Uranium had a mania and then the price collapsed, and the stocks with it, but the businesses kept getting better and better. "The uranium story that fed the mania is still in place." Rule said we consume more uranium than we produce. "The uranium price has to go up. And more importantly, it can go up." Meaning, the price of uranium is very low. It could double and still not have any meaningful impact on the economics of a nuclear plant. "People don't care much about uranium today, but in three years, they are going to care a lot."

Rule's favorite themes are much the same as mine. As I explained in the January 27th edition of The Daily Reckoning, I'm a big fan of buying mid-sized oil and gas stocks right now because, like Rule, I believe oil and natural gas prices are going to be higher three years from now. But I'm also digging into other energy sectors like geothermal and nuclear.

I am persuaded by Rule's analysis.

Regards,

Chris Mayer
for The Daily Reckoning Australia

• A Hot Future for Geothermal
• Energy Debate in Australia Needs to Get Serious
• Uranium: A Carbon-friendly Substitute for Coal
• Thorium as a Nuclear Fuel
• The Energy Resources Are Out There

"The move to restrict lending is a sign the government is increasingly concerned about asset bubbles and worsening credit quality." The concern is welcome, but probably a little too late. Chinese stocks and real estate have soared in the last year on the $1.5 trillion lending boom. Check out the chart below.

Click to enlarge

You can see that Shanghai's composite index was up nearly 78% from the March low to the August high. Since then, it looks fairly range bound. And below it, the red line shows you the rough correlation between the All Ordinaries and China. The main difference now is that Aussie stocks are just off a new high made early in the New Year.

We freely admit to knowing very little about China, other than what we read and what we think about in our own head. But the numbers - those published by the government - show a huge fixed asset investment book over the last ten years. Whether that boom has become an unsustainable bubble is a good question. But the answer may not actually matter that much.

The point of contention is whether China's resource-intensive phase of growth - the massive support of Australian resource prices and resource stocks - is fully mature, or has years to go. If it's fully mature, resource demand is going to be lower and probably stock prices too. We'll see about that.

The other global downer on the newswires comes from the U.S. housing market. New housing starts fell by 4% in December and index of homebuilder confidence fell too. But by far the more alarming news was that the Federal Housing Administration is increasing mortgage insurance premiums, demanding higher credit scores, and requiring larger down payments from new borrowers.

Don't worry. It's not like the FHA is getting too tight with taxpayer money. Mortgage insurance premiums are rising from 1.75% to 2.25% and the down payment required for a new loan is just 3.5%. It's hard to imagine these moves significantly improving the FHA's balance sheet.

According to the agency's own figures, its share of the mortgage market has gone from 3.7% four years ago to 30% in 2009. It was a key agent - along with Fannie and Freddie - in the nationalisation of the American mortgage market. Yes, the U.S. government is keeping the mortgage market afloat...but the FHA's cash reserves are down to 0.5% of loans outstanding (instead of the robust 2% required by an inept Congress).

All up, it could be another very bad year for American housing. That would be bad for banks, who still own a lot of housing collateral (and have carried it at what can only be described as "hopeful" valuations. And if banks are worried about further collateral destruction, they aren't going to be in any hurry to lend money into the economy.

Instead, look for them to borrow short-term from Uncle Sam and loan the money right back to him at a higher rate. This is the dynamic that fuelled bank and brokerage trading earnings last year. Falling house prices and a stagnant mortgage market set up 2010 for more of the same.

Some people say they're contrarian and some people really are contrarian. We just got off an hour long phone call with our friend and Strategic Investment editor Jim Davidson. Our pen literally ran out of ink during the call. We'll let you know more about Jim's new project later. But here are some excerpts from today's chat.

"The earth is not getting warmer. It's getting colder. The climate Nazis at the UN admitted this week that their claim that the Himalayan glaciers are melting away was false. I may as well have said the Great Salt Lake is going to turn to sugar."

Jim's put together a "Little Ice Age Portfolio" as a response to the climate change hysteria. But the investment response is secondary to the seriousness of the issue, he says. "There's very little evidence that rising carbon dioxide levels lead to rising temperatures. It's more likely - as temperature records show - that changes in climate are correlated to solar activity and sun cycles. Imagine that."

"If it were true that reducing carbon dioxide emissions into the earth's atmosphere reduced the earth's temperature, it would be a bad idea to do it. In the Dark Ages, another period of lower solar activity, the Nile River froze. On the other hand, Rome prospered because agriculture thrived and you could grow grain in Carthage."

"In a colder world, Canada would be an iceberg and one of the great grain growing regions of the world would disappear. People believe that because farmers plant a crop, it will be harvested and the modern world can live on a diet of high-fructose corn syrup that malnourishes people and makes them fat. But in another Little Ice age, hundreds of thousands of people would die if the world's grain growing regions marginally declined. Billions would die if the impact was more severe."

"The Black Death hit Europe in the Little Ice Age, too. Lower crop yields reduced the quality and quantity of nutrition available. This weakened immune systems and made people more exposed to infectious diseases. Why, if you're a humanitarian, would you pursue a public policy that pushes a billion people who are already on the edge of starvation into outright famine?

"If winter comes early or stays late, whole crops will be wiped out. Reducing the output of food - something that would result from a colder Earth - is evil. It's based on non-existent science in which people forecast things that may happen centuries from now based on their ideological resistance to prosperity. They are trying to force down living standards in the Western world based on their own guilt about prosperity and income inequality."

"Global warming just another phrase for good weather. If it's true carbon dioxide emissions warm the planet, we should burn more coal. You can tell the science is dubious because you now have a bizarre feedback loop in which warming makes the world cooler. It's rubbish."

"The big risk in the discrediting of the global warming crowd is that it could discredit other, more legitimate concerns about the climate, like the huge amount of harmful chemicals in our water supply. The persistence of dangerous chemicals in our recycled water is something to be really worried about. You don't want the environment to turn into a sink for man-made chemicals."

There was much more to report. But we'll have to leave the rest for another day. Jim is hard at work on the January issue of Strategic. He's analysing the possibility of a fiscal collapse in the United States, and where investors can seek refuge before it happens. Until then...

Dan Denning
for The Daily Reckoning Australia

• Cattle Prices Have Risen Only 1% This Year
• Americans Are Hoarding Food
• An Old Friend With a New Idea on Global Warming
• Equity Premium Will Be Replaced With a Tangible Asset Premium
• Posco’s Production Cuts May Be Bad for Australian Iron Ore

The first is that Abu Dhabi extended a $10 billion in financing to debt-distressed Dubai. Hossanah! Remember, Dubai is not Lehman. It's Bear Stearns. It's merely the reminder that there are lot of leveraged investors in the world who've used borrowed money to buy assets that aren't very productive. They'll get theirs soon enough.

The second bullish item is that ExxonMobil (NYSE:XOM) made a US$41 billion all stock bid for Houston-based natural gas company XTO. This sent Exxon shares down 4.4%. Thus the Dow's rally was a bit tepid (XOM is a Dow component).

By the way, we've probably mentioned it before, but it's normal for the shares of the acquiring company to fall on an acquisition announcement. The shares of the company being acquired, obviously, usually rise to near the price per share indicated by the value of the bid. You can engage in this kind of arbitrage trading...if all you do is sit around at a desk all day and figure out who's going to be acquired and who's going to do the acquiring.

Exxon is either getting a bigger foot in the U.S. natural gas market or hedging against cap-and-trade legislation, or both. We vote for both. No one is in a better position to know about the constraints on global oil production and discovery of new reserves than a major company like Exxon. And Exxon has seen firsthand that unconventional natural gas can be a lucrative little market.

But are those two bits of news really enough to send the market higher? Probably not. Who knows why the market goes higher? It does what it does. There's an alternative explanation.

The alternative explanation is that the Copenhagen climate talks look like they're collapsing into confusion and President Obama's legislative agenda is in tatters. The private sector absolutely loves this.

Mind you we're not addressing any public policy issues here. We're not that smart. But politics has an effect on markets and lately one of those effects has been a huge increase in uncertainty...uncertainty about the cost of carbon dioxide emissions...the cost of health insurance...the size of government deficits...and more regulation in all aspects of corporate and private life.

Good policy? Bad policy? Who knows? All we know is that the more uncertainty you introduce into the markets, the more conservative and defensive investors are going to get. It's hard (and unwise) to make long-term plans when short-term laws and regulations are always changing. No wonder bond yields are so low. A near-nothing return on cash is still much safer than taking your chances in the equity market.

That's not to say that a deal won't come out of Copenhagen. Maybe the planet will be saved. Or maybe Copenhagen is the sell signal for global warming as a big idea/moral issue with which to bash the public. But either way, we reckon the stock market actually likes the idea that no climate deal is imminent and that healthcare legislation in the U.S. Senate can't seem to get 60 votes.

Dan Denning
for The Daily Reckoning Australia

• Messages from Copenhagen Climate Change Conference
• One of the Biggest Humbugs in Capitalism is Private Equity
• Aged Pension MkII
• An Old Friend With a New Idea on Global Warming
• A Trader’s Market or an Investor’s Market?

Remember the world's tallest office tower, in Dubai? Economist Andrew Lawrence came up with the Skyscraper's Index. Apparently, the buildings go up in bubble economies. Then, the bubbles explode...leaving the buildings standing. The owners and builders typically go broke in the aftermath. Note the last line of the chart.

Most of world's most popular undertakings are mostly giant frauds.

Hitler said his people needed 'living room.' Besides, the Germans were the people who were supposed to unite Europe against the Bolshevik/Jewish menace. Would the typical mitteldeutschelander be better off as a result? There was no reason to think so; it was just a popular flimflam.

The Russians supposedly rose up in 1917 to create a 'workers' paradise.' The Chinese followed suit 30 years later. Did the workers get a paradise? Quite the contrary, they got Hell on earth.

Towards the end of the century came the promise of technology...which blew up in 2000...and then the War Against Terror in 2001. And now, there's a war against depression, similarly hopeless, futile, and expensive.

And, of course, there is the campaign to control the world's climate. We hadn't kept up with the battle to control CO2. But it has suddenly burst into the headlines, see below...

Is the planet heating up? If so, is human activity the cause of it? No one knows. But thousands...millions...of people make their reputations, their careers and their fortunes by promising to do something about it. Al Gore, for example, has made millions of dollars by promoting his alternative energy investments.

"Anthropomorphic Global Warming," is just a hypothesis. It is also a scam, says The Daily Express:

All of a sudden, global warming is getting bad press. Why? Some of the top scientists pushing global warming were caught in flagrante delicto...apparently ready to bury data that didn't agree with them and shun unbelievers. One of them has since resigned.

"Climategate," the press is calling it.

Bill Bonner
for The Daily Reckoning Australia

• Global Warming Temperatures Falling for the Last 10 Years
• An Old Friend With a New Idea on Global Warming
• Every Major Bull Market Needs a Major Bear Market
• Global Warming and the Children of Israel
• Another Very Bad Year for American Housing

Folks in the Rockies are shivering. "Western Montana breaks records," says a report. Missoula reported a low of 8 degrees yesterday...14 degrees lower than the previous record for this early in the season.

Nearby Idaho had heavy snow last week too. Same thing in New Zealand, where roads were blocked by heavy snow.

In New Zealand, two major North Island highways remain closed after unseasonal heavy snow days stranded motorists for two nights. "Even if this was the middle of winter this is extreme," said an analyst.

And right now, it's spring in NZ. They had a spring snowstorm that put their winter snowstorms to shame.

"Forget global warming," says old friend Jim Davidson. "Get ready for another ice age." Buy Brazil, he advises; the cold will drive down farm output in North America and Europe.

As the BBC reports, worldwide temperatures are not increasing; they've been falling for the last 10 years. No one knows why. Global warming enthusiasts say the trend is still towards higher temperatures. Their opponents say the world is actually beginning a major period of cooling - driven by solar activity, not by man-made carbon emissions.

Who's right? We get out our mittens and wait to find out.

Until tomorrow,

Bill Bonner
for The Daily Reckoning Australia

• Salt vs. Snowflakes
• Global Warming Getting Bad Press
• Here Comes More Snow!
• An Old Friend With a New Idea on Global Warming
• Global Warming and the Children of Israel

Just over the horizon, things are about to become dicey. This week, the International Energy Agency (IEA) will release a new report on the future of world energy. In its World Energy Outlook, the IEA will state categorically that "Current global trends in energy supply and consumption are patently unsustainable."

There's not much wiggle room in that statement. According to the IEA, despite the recent fall in oil prices, the medium- and long-term outlooks for energy supply are grim. Conventional oil output is destined to decline. Demand will still grow, however, especially in the developing world. And the twain shall only meet by prices rising to clear the market. "It is," as our Arab friends like to say, "written."

The IEA performed a comprehensive study of 800 of the world's largest oil fields. And it concluded that depletion in conventional oil fields is occurring at a rate in excess of 9% per year. (That's an average. We see depletion rates in excess of 15% in Mexico's Cantarell field, for example.) This means that absent large amounts of new drilling, new investment in enhanced recovery and new discoveries, the current worldwide oil output will decline by over 9% per year. And if it keeps going along this trend (there's no reason why it won't), the base of world oil output could conceivably dry up within seven-10 years.

Don't get me wrong. The world won't run out of oil in seven-10 years. That's not how it works. It's just that volumes of conventional oil are declining. The takeaway point is that the energy markets will tighten up, like a hangman's noose around the collective neck of the oil-consuming world. We might not quite realize it, but when it comes to oil, we are all walking that long green mile.

The investment angle for OI is that the companies that own oil reserves in the ground, and the oil service companies that extract oil and natural gas, should profit in the future. Yes, the portfolio is down. It has been a hard hit to everyone (me too) who bought into the market up until midsummer. We've all lived through a midsummer's nightmare on this one.

So how long will we have to wait for this "future" to show up? Well, how long will the current worldwide recession last? I don't know. But I do know that many energy companies in the OI portfolio are at long-term lows in share price. If you can afford to be patient with your funds, these firms should eventually stage a comeback as oil prices rise again. As I said above, "It is written."

Says who, you ask? Written by whom? Well, how about the IEA? According to the IEA, even with massive levels of investment in the oil patch, the best estimate is that the global oil industry can reduce the rate of depletion to perhaps the 6% range. So the world energy industry will have to run faster just to keep from falling too far behind the demand curves.

Again, you need to keep in mind that current energy prices are just too low to support the level of energy investment that the world needs going forward. (Meanwhile, the U.S. government is spending trillions of dollars forward just to bail out the banks and bankers, not one of whom runs pump jacks.)

The IEA estimates that the oil industry will have to invest over $350 billion per year to counter the steep rates of decline in output. And even that will not be sufficient to maintain levels of output for traditional forms of crude oil. Thus, much of the future investment will have to go toward extracting other kinds of hydrocarbon substances.

What do I mean by "other kinds" of hydrocarbon substances? Fortunately, there are many different kinds of hydrocarbon molecules out there. The total worldwide carbon base actually adds up to a very big number, and that is NOT including the carbon that is part of the current living biology of the planet. For now I'm just discussing the fossilized carbon like oil, natural gas, bitumen in tar sands, oil shale and coal.

The big problem for the nonoil forms of carbon is affordability. That is, are people willing to pay? It takes a lot of steel and technology to transform some kinds of carbon into something we want to use. We see that, for example, in the Canadian tar sands projects. Lots of steel, concrete, labor, machinery, water and energy input - all to extract this thick, gunky crud that has to be upgraded to something that looks like diesel fuel. And the whole thing emits lots of carbon dioxide (CO2) in the process, as well.

The other big problem is whether or not there is the political will to "do carbon." Will the governments of the world allow - let alone promote - industry to invest in the industrial base that will be required to transform the varying kinds of carbon into something that the world can use? Because the other side of this coin is ever-increasing CO2 emissions, global warming and climate change. The more carbon that gets burned, the more CO2 that goes up the flue and into the atmosphere. In essence, within about two centuries, mankind is undoing the geological work of tens of millions of years.

This is not a "global warming" article. But most nations of the developed world have governments that are more and buying into the global warming thesis more. The political gun sights are on carbon. But if we collectively decarbonize the economy, the energy supply will dry up and we'll wish for the "good old days" when we had to worry only about Wall Street crashing. And besides, try telling the developing world not to develop. People have fought wars over lesser issues.

Do you want some numbers on hydrocarbon resources? Here are estimates of the total hydrocarbon resources in the world and the relative costs to convert them. This is my summary, based on several different government and academic compilations:

These are big numbers, right? And they can supply a lot of energy over a long time, but only if the world collectively decides to utilize the resources. If not? Well, you had better own some gold too.

The stark assessment from the IEA described above comes just as much of the world's banking and finance system lies in ruins. Many forms of lending have dried up, and much of the former system of world commerce is just not functioning.

So the politicians, bankers and investors of the world - including us - have their work cut out.

• Global Warming Temperatures Falling for the Last 10 Years
• The Energy Resources Are Out There
• Latest Energy Bull Market Won’t Be Confined to Crude Oil
• No Spike in Oil Price Following IEA “Third Oil Shock” Announcement
• My Favorite Energy Plays: Geothermal and Nuclear

“Global warming is much more of a threat than I thought. I’m embarrassed that I dismissed it for so long without any evidence. Apparently, there is much less dispute in the scientific community on this subject than we thought. Very few real scientists doubt that the climate is changing...and that the changes are at least in part caused by man. And from what I hear, since it is a problem caused by man, it is also something that we can fix at relatively little cost – or, at least that part of it caused by mankind.

“Not that I’m sure of any of this. Maybe the whole thing is wrong. I don’t know. But then, I don’t know if my warehouse is going to burn down either. And I still buy insurance. From what I’ve heard, the cost of insuring the world against the worst effects of climate change – if the theory is correct – is relatively low. Of course, the world doesn’t work as a business...or a household. But if I were running the world...and I were treating it as a business, I’d buy the insurance. Even it fit turned out to be untrue, I’d still think it was a good buy.”

Bill Bonner
for The Daily Reckoning Australia

• Goodbye to an Old Friend
• Majority of Australians Believe House Prices Will Rise in Next Twelve Months
• Copenhagen Climate Talks Possibly Sent the Market Higher
• Gold, A Good Bet Against Bernanke & Co
• Global Warming and the Children of Israel

We begin by telling a story that a Jewish colleague told us yesterday.

“You really have to be careful to maintain good relations with your neighbours. That’s something my family discovered in WWII. My father was just a little boy in Paris when the war broke out...and then the French surrendered. You know, France was divided in two...there was the zone occupied by the Nazis and there was the unoccupied zone to the South. Since they were Jewish, they figured they’d sneak across the line and once they got to the unoccupied zone, they would just keep a low profile, not mention to anyone that they were Jews, and they would be safe. But my father was only a kid. And when they put him in the local school, in the little town they were staying in, the first thing he did was tell everyone that he was a Jew. So everyone knew why they were there. And then, when the Germans took over all of France anyone in the village could have denounced them and get them sent to a concentration camp. But no one did.”

This recalled another story. A disagreeable French woman, then in her ’70s, once told us that during the war she had been the directress of a boarding school for little children. It was a Catholic boarding school. But it was wartime and a few of the children were Jewish, sent there by their parents in the hopes that they would be safe.

“When the Germans came to Lyon, they came around to the school. They demanded that we send out the Jewish children. The truth is, I don’t like Jews. But I disliked the Nazis even more. I had already changed the school’s records so the Jewish names didn’t show up anywhere. So, I told the lieutenant that we only had Catholic children. And I showed him the list. If he had wanted to pursue the matter, he probably would have found the Jewish kids and then sent them and me to the camps. But maybe he didn’t really want to find them...you never knew; it was a strange time.”

Well, times are always strange, we guess. And we find our little bits of courage and grace here and there...in odd places...and generally in the shadows. In the harsh light of the public eye, these civilized little acts of kindness and courage wilt like wildflowers...or get run over by a campaign bus.

When a presidential candidate discovers that a former friend or supporter has become a liability, for example, he is “thrown under the bus.” Jeremiah Wright has the tire tracks to prove it – since he was thrown under the bus of the Obama campaign. The Obama group also sacrificed Robert Malley, an advisor on the Middle East, after it was revealed that he had met with Hamas officials. As every American knows, the Hamas fellows are bad hombres, and anyone who meets with them is no friend of Israel. Since being a friend of Israel, like wearing a flag on the lapel, is a requirement for America’s top office, Obama had to push Malley off the team and then run him over with the bus.

Zbigniew Brzezinski, former national security advisor, said he thought the Jewish lobby has become too powerful and is showing a “McCarthyite tendency...by slandering, vilifying, demonizing. They very promptly wheel out anti-Semitism...”

So far, Mr. Brzezinski hasn’t been dropped under the bus, but he should probably check his ticket.

Over on the McCain bus, another man of faith has been tossed beneath the treads. The Rev. John Hagee has views worthy of a man with great faith. According to Gideon Rachman’s Blog in the FT , he believes the European Union is headed by the Antichrist. In his mind, the EU is a prelude to Apocalypse. And who are we to say he is wrong? There’s no mention of it in the EU charter, but who knows what they’re up to?

If Mr. Hagee had stopped there, he probably would have been all right, since most Americans agree that there is something ungodly about Europe. But then he goes further...and says that the Jews were murdered in WWII for a good reason – to drive them to Israel. It’s all part of God’s plan, he says; God made Hitler so the Jews would move to Israel, so the Apocalypse would come, followed by the second coming. How he knows God’s plans in such detail, we can’t imagine, but that’s the beauty of faith; you can believe anything you want...until you put it to the test.

Rev. Hagee is a McCain supporter. But McCain is no longer a Hagee supporter; the reverend had to go “under the bus.”

Under the bus, too, is where skepticism regarding global warming is going. George W. Bush fairly recently got on board, agreeing that the earth’s climate is changing and the humans are to blame for it. And now all three candidates not only favor doing something about it – all endorse the idea of “cap and trade” as a palliative measure.

Here too, faith conquers wit. No one really knows what direction the earth’s mean temperature is going...or why. There are only hypotheses.

“But if you really want to know what it’s like to be a 16th-century heretic, try saying you’re a bit skeptical about man-made global warming,” writes Harry Mount in the Daily Telegraph .

In the middle ages, the Catholic Church made money by offering sinners a way to buy their way out of Hell – with an indulgence. In today’s secular world, you will have to buy your way out of the sin of using too much fossil fuel, by buying “carbon rights.”

Bill Bonner
The Daily Reckoning Australia

• Global Warming Getting Bad Press
• Global Warming Temperatures Falling for the Last 10 Years
• An Old Friend With a New Idea on Global Warming
• Renting Apartments in Paris
• Britain, the Empire Which Had Paramount Global Power