Too Much Debt, Not Enough Oil


I just returned from the 2010 Agora Financial Investment Symposium in Vancouver, B.C. This year’s theme, “Assault on Enterprise,” provided a fascinating context for a wide range of investment insights and recommendations.

According to many of this year’s presenters, the assault on American enterprise is intensifying. Because the government has been overpromising, overcommitting and overspending for decades, it is hurtling toward a fiscal train wreck. The numbers have stopped adding up. Looking out, there’s NO WAY that most Western governments can ever pay their ongoing obligations or pay off past debt. But that doesn’t mean that governments won’t try to maintain their expensive and intrusive invasion of the private sector.

In fact, the odds point to rising taxation and tightening strictures on all aspects of capital formation. The effects will be to make you poorer, either by taking your money or by blocking you from pursuing your dreams.

On the first day of the Vancouver conference, for example, former US comptroller of the currency David Walker summed things up, saying, “Government has grown far too big, promised far too much and delivered far too little for far too long.”

Mr. Walker backed up his claim with slides showing how, over just the past nine years, unfunded liabilities on the government’s balance sheet – Social Security, Medicare, Medicaid, etc. – have tripled. For example, Medicare alone has a $38 trillion (“trillion,” no typo) hole in its future.

Meanwhile, according to Mr. Walker, Social Security is now cash-flow negative. That is, Uncle Sam is paying out more out than he receives in revenues. Uh-oh. So where does the “extra” money come from? Out of general revenues. Which means that the federal deficit makes up the difference. Which means that the government just borrows the money and papers over the hole in the budget.

On this track, the nation’s key social safety net – a “retirement fund” (ahem) for elderly people – is moving further and further into the red, forever.

What’s the answer? Well, you could ask the always understated Doug Casey. In Doug’s view, it’s all good – for the moment. That is, he believes we’re in the midst of a “Greater Depression” and right now we’re basking in the calm eye of the hurricane.

The problem, according to Doug, will come when we go through the eye and get hit by the other side of that storm. But Doug is not one simply to identify a problem and fail to offer solutions. Indeed, he shared five ways reduce the inevitable damage:

  • Abolish the Federal Reserve and return the US to a gold standard.
  • Reduce government spending by about 95% – give or take.
  • Withdraw US troops immediately from across the world, and end the ongoing wars in which the US is involved.
  • Abolish the income tax.
  • Do the “honest, ethical thing” and default on national debt. “After all,” says Doug, “We’re never going to pay it back. Or if we do, it’ll be with dollars that are utterly worthless.”

Sad to say, according to Doug, none of this will happen. These proposals are mere “pipe dreams,” he admits. “The government is doing the exact opposite,” says Doug, despite the clear evidence that “the very idea of the nation-state – which has been around only since the 17th century – has failed.”

Thus, instead of a somewhat orderly, controlled financial collapse as governance across the world restructures, we’ll experience the chaos of decline and collapse. Doug’s recommendation? For the individual, buy gold and silver. Doug is also big on productive agricultural land – in remote parts of the world, far from the looming unpleasantness. Otherwise? Well, you just have to do the best you can.

Gloomy, right? In my mind, “provocative” is more like it. That is, if there’s one thing that Doug Casey can do, it’s push the edge of the intellectual envelope. There’s no failure of imagination with Doug and his views of where the economy is headed.

In my talk to the 1,000 or so Vancouver attendees, I discussed the failure of imagination that brought about the explosion and sinking of the Deepwater Horizon (DWH) and the subsequent well blowout in the Gulf of Mexico (GOM).

I noted that when I was in Houston in May for the Offshore Technology Conference, I had a discussion with some people from the maritime insurance industry. One guy told me that before the DWH exploded and sank, the insurance industry rated the risk of such an event as zero. Zero? As in no large deep-water drilling vessel would ever sink. “We thought it could never occur,” he said. “Never.”

In my talk here in Vancouver, I analogized how that sort of failure of imagination was right up there with the idea that the Titanic was unsinkable. Thus did the British Board of Trade not mandate enough lifeboats on the vessel.

I looked back at two other disasters, both in January 1969. I reviewed the terrible fire aboard the nuclear-powered Navy aircraft carrier USS Enterprise on Jan. 14 of that year. The flight deck was an inferno, with 500-pound bombs cooking off. Dozens of sailors were killed, with hundreds more injured. The ship suffered severe damage, and for a time, there was a distinct possibility of the vessel – and its eight nuclear reactors – sinking in the middle of the Pacific Ocean. Yes, heroic actions by the crew saved the ship. But it was a close call.

Then I discussed the Santa Barbara, Calif., oil blowout about two weeks later, on Jan. 29, 1969. No lives were lost, but the environmental impact was severe. Political pressures all but closed off the West Coast of the US to future energy exploration.

Out of these two disasters, the Navy, of course, kept on going with nuclear power, but with much-changed procedures to improve safety and harden against damage. The oil blowout was a key factor in the rise of the modern environmental movement. The offshore industry redoubled its efforts to drill safely, in deeper and deeper waters.

For the past 41 years, since Santa Barbara, there was all that oil coming from offshore, and from deeper and deeper waters, and with equipment that seemed to work safely. It was, to go back to Doug Casey’s notion, like being in the eye of a hurricane. Things seemed OK, for the moment.

In a sense, looking back over the decades, it was almost easy to imagine big, expensive, well-built drilling rigs would never blow up and sink. It sure fooled the normally flinty insurance industry.

Also, considering the track record of operations, it was easy to believe that deep-water wells would never blow out. It apparently fooled the engineering and regulatory community. Surely, no one was ready to deal with the current Gulf of Mexico blowout. As I’ve noted many times, in the past couple of months, we’ve witnessed decades of R&D all compressed into an emergency-level time frame.

The hastily imposed GOM drilling “moratorium” is just one more energy problem for the US. It compounds an already dysfunctional national energy policy. It’s as if we would shut down the entire airline industry just because one airliner crashed – due almost certainly to pilot error, by the way.

The GOM drilling moratorium is terrible policy for medium- and long- term US energy production. We’re already seeing rigs leave the GOM destined for other continents. We won’t see those rigs back here for many years, most likely. And GOM oil output is now destined to fall, meaning that US oil imports will rise – if we can find the oil in a competitive world.

Meanwhile, I discussed how some other energy sources might help the US, but with a hard cautionary note: These other energy supplies might not offer as much as many people believe.

The short version is that there’s not as much shale gas as people believe, although there are some great shale gas investments.

And then I highlighted the promise of Canadian oil sands. Much of that was similar to what I said in the most recent Outstanding Investments issue, in which I introduced readers to Cenovus (NYSE:CVE), an up-and- coming oil sands producer.

I’ll amplify the Vancouver message of resource scarcity in future emails and Outstanding Investments issues. The times may be rough for debt-strapped governments, but there has never been a better time for identifying investment opportunities in the natural resources sector.


Byron King
for The Daily Reckoning Australia

Byron King
Byron King currently serves as an attorney in Pittsburgh, Pennsylvania. He received his Juris Doctor from the University of Pittsburgh School of Law in 1981 and is a cum laude graduate of Harvard University. Byron is also co-editor of Outstanding Investments.

Leave a Reply

Be the First to Comment!

Notify of

Letters will be edited for clarity, punctuation, spelling and length. Abusive or off-topic comments will not be posted. We will not post all comments.
If you would prefer to email the editor, you can do so by sending an email to