Tuesday, August 31, 2010

An Addendum to the 'Flations - Gold $5,000

Federal Reserve Chairman Ben S. Bernanke delivered a much-anticipated speech on Friday, August 27, 2010. There was no reason to think this talk would be more or less important than his other talks except for the degree of hysteria whipped up by the media in advance. Bernanke was addressing an audience of fellow central bankers and their camp followers at an annual gathering in Jackson Hole, Wyoming. There have been memorable comments at these late summer getaways, such as, in 2005, when past-Federal Reserve Board Vice Chairman Alan Blinder claimed then-current-Federal Reserve Chairman Alan Greenspan might be the "greatest central banker who ever lived."

But Ben Bernanke said nothing new. The post-mortem analysis of the world’s most influential central banker can be reduced to four of his claims from Jackson Hole:

1 - “The issue at this stage is not whether we have the tools to help support economic activity and guard against disinflation.” [Because the economy is noodling along – #4, below.]

2 - “A… policy option, which has been proposed by a number of economists, would have the Committee increase its medium-term inflation goals above levels consistent with price stability.”

3 - “However, such a strategy is inappropriate for the United States in current circumstances.”

4 - “I expect the economy to continue to expand in the second half of this year, albeit at a relatively modest pace. Despite the weaker data seen recently, the preconditions for a pickup in growth in 2011 appear to remain in place.”

In summary, Bernanke’s strategy of inflating is “inappropriate,” given Bernanke’s stated outlook.

Bernanke’s stated outlook is wrong. On August 17, 2010, the Federal Reserve Bank of New York reported $986 billion of “severely delinquent” consumer debt, defined as 90 days overdue. On August 18, the Wall Street Journal published a survey by CareerBuilder.com. Of 4,500 white-collar workers who were asked, 9% had taken a second job in the past year and an additional 19% intended to do so in 2010. This is probably due to constrained income and shrinking access to credit (see The 'Flations).

At some point, Bernanke’s outlook will be untenable. The Fed chairman is habitually slow to understand changing circumstances, but Dow 5,000 could do the trick.

It looks as though the U.S. Postal Service is prepared. It has listed instructions on its website to convert Priority Mail International insurance from U.S. dollars to SDRs (Special Drawing Rights). SDRs were conceived in 1969 as a possible substitute when the U.S. dollar was chasing U.S. prestige down a rat hole. It originated under the auspices of the IMF (International Monetary Fund) which defines it as “a basket of currencies, today [August 30, 2010] consisting of the euro, Japanese yen, pound sterling, and U.S. dollar.” (The value of the SDR translated into dollars is calculated by the IMF daily “except on IMF holidays and when the IMF is closed for business.” A currency that that takes a lunch break is doomed to fail.)

The U.S. dollar is still the currency that dominates international transactions, although the percentage of trade in other forms of payment has been rising for the past several years. China, Russia, and other countries have attempted to shift settlement into other currencies, including the SDR. This is understandable given how the overpopulation of U.S. dollars around the globe leaves foreign central banks with redundant dollar reserves and another housing bubble.

From the USPS website:

323 Priority Mail International Insurance

323.62 Accepting Clerk’s Responsibility

The accepting clerk must do the following:

a. Indicate on PS Form 2976-A the amount for which the parcel is insured. Write the amount in U.S. dollars in ink in the “Insured Amount (U.S.) block.”

b. Convert the U.S. dollar amount to the special drawing right (SDR) value and enter it in the SDR value block. For example:

$100.00 (U.S.)
65.76 SDR

c. See
Exhibit 323.62 for a table showing the conversion of U.S. dollar values up to $600 to SDR equivalents. To determine SDR equivalents above $600, multiply the insured amount, rounded up to the next full dollar, by the conversion factor of 0.6576.

Note: Use the following rates when converting between U.S. dollars and SDR values:

1 U.S. $ = 0.6576 SDR
1 SDR = $1.52 ($1.5206 U.S.)

The world has operated on the U.S. Dollar Standard since America defaulted on the Post-World War II Gold-Dollar Standard in 1971. Has the U.S. Dollar Standard ended? If it has not, Simple Ben’s intention to inflate the United States to prosperity will do the trick.

If “USPS Updated Postal Revision Through July 15, 2010, Section 323.62” has been discussed in the major media, it must have been in the Society pages. The website Zero Hedge carried the story last week. Whatever its chances of adoption, it certainly deserves more debate than the boring and trivial analysis of a boring and failed economist who has stated his intentions to hyperinflate for the past 30 years. Maybe a mole from the IMF infiltrated the USPS. Accentuating the trivial and ignoring imminent cataclysms is the story of our times.

Wednesday, August 25, 2010

The 'Flations - Part II

Inflation versus deflation discussions are the rule for columnists, economists and BubbleTV. This false distinction is potentially harmful for investors and shoppers who think they must decide between the two, then act. Inflation and deflation act contemporaneously. The relative movement of what is inflating and what is deflating (e.g., common stocks vs. gas, bonds vs. bread) influences, and possibly changes, the way we live.

An additional problem with each of the discussions, at least as presented in popular formats, is misstatements of the nemesis. The deflation to be concerned with is not prices, but rising levels of unserviceable debt and the attendant consequences - for example, falling income and access to credit. The inflation to watch is Federal Reserve and Treasury Department actions, whether a spree of money printing or rearrangement in how the government distributes money in the economy.

As for timing, the undertow of deflationary tendencies is palpable. The 'Flations addressed the areas most susceptible to this course. Investors should be vigilant of being pulled under water in a deleverging economy, a process that is still in its childhood. An ever-present possibility is that of frozen credit markets, initiated, for instance, by an institution (a bank, a government) that loses access to funds. The disruption could frighten other markets into panic. A put strategy, either literally or in another form of protection against markets that suddenly break, is advised.

Inflation is also present and is to the primary topic of The'Flations - Part II. It goes largely unrecognized because it is most evident in assets, though food prices may be about to burst forth in the United States. They have been rising fast in other parts of the world. An investor should consider the possibility of asset markets rising to new highs if the dollar drops to new lows. The rise in stock prices (for instance), might not fully compensate for higher prices of food, but then again, they might.

The U.S. government seems universally intent on refloating the economy through a tag team effort of spending (fiscal policy) and Federal Reserve money expansion (monetary policy). These tactics have already failed, but reputations demand more of the same.

The federal government is spending as if there is no tomorrow. Assurances of fiscal forbearance are empty. The commitments grow and all we need is for the stock market to fall 40%, quite possible if not predictable, to witness another unseemly spectacle in Washington. An emergency trillion dollar accretion to insolvency will whip its way through a confused Congress, smothered in patriotic ardor but with anarchic purpose, during an emergency government sales campaign that frightens the electorate into temporary fear. This is predictable because the national politicians have ignored our sources of instability (primarily, their own past policies) so have made no other preparations.

Such fiscal inflation will be complemented by more monetary inflation. Headlines such as "Will the Fed Do More" and "What Ammunition Does the Fed Have Left for the Economy?" are daily fare.

Patience, please.

Simple Ben has every intention to fulfill his destiny. A century of inflation has reached its final stage. All previous Federal Reserve chairmen inflated the supply of money, but all struggled against the urge to do so. Their statements of rectitude may have been authentic or may have been for show, but they expressed a concern and understanding that money in excess of a constructive need is destructive. Federal Reserve Chairman Ben S. Bernanke's mind is not so encumbered. His most famous speech was not "Inflation: Making Sure 'It' Doesn't Happen Here." Such a topic would never occur to the professor, though it is a plausible title for a speech delivered by any of his predecessors.

Starting in 1913 with the founding of the Federal Reserve, the stability and strength of the dollar might be pictured as a seven-layer wedding cake, the thickest buffers of confectionary ingredients at the bottom, then rising, in thinner and less resistant stages as time passed until all we have is a little, hollow, plastic man standing on top, cloaked neither in batter nor frosting, bearded and bald.

Bernanke's most quoted speech was delivered on November 21, 2002. The (then) vice chairman of the Fed delivered a speech to the Washington National Economists Club with the title. "Deflation: Making Sure 'It' Doesn't Happen Here."

To be clear, when Bernanke spoke (and speaks) about deflation, he fears falling prices. As discussed in The 'Flations, falling prices may be good or bad. The inflation to fear, and which neither the Federal Reserve chairman nor his money-printing policy address, is the debt deflation of a deleveraging economy.

The paragraph most cited from this speech has been quoted so often that only a fragment seems necessary: "Like gold, U.S. dollars have value only to the extent that they are strictly limited in supply. But the U.S. government has a technology, called a printing press (or, today, its electronic equivalent), that allows it to produce as many U.S. dollars as it wishes at essentially no cost." [My italics.]

It is the acknowledgement of "its electronic equivalent" that ensures Bernanke's moment of destiny. He is not constrained - as Germany was in 1923 - by the speed of the printing press. Simple Ben was already prepping for this moment in a 1999 paper, "Monetary Policy and Price Stability." He suggested the Fed could go beyond its mandate of purchasing short-term government debt in open-market operations. Long-term Treasury bonds, common stocks, and corporate bonds were his suggestion. In other words, the governmentcould print money and the Fed could buy anything.

The effort to hire Federal Reserve governors who complement the chairman, and are so willing to exceed the institution's mandate, is a reason to expect vast money printing (or its electronic equivalent) in the months ahead. Bernanke recently stacked the deck by choosing Janet Yellen as his new vice chairwoman. The Senate Banking Committee has approved her selection. The full Senate needs to vote its approval, which looks certain.

As the current president of the San Francisco Federal Reserve Bank, Yellen showed she has what it takes to serve. She is as confused about how the world works as is the chairman: "Even with my moderate growth forecast, the economy will be operating well below its potential for several years," she said on Feb. 22, 2010. "If it were possible to take interest rates into negative territory I would be voting for that."

A negative rate would boost price inflation above the cost of borrowing and on savings. This could be the death of money-market funds and salvation of the stock market, though - and this is all-important, the most important sentence in this diatribe - a 10,000% return on stocks might buy 90% less food.

Such Mad Hatter theories are already well-established within the Federal Reserve and among panderers to such. Greg Mankiw, economic adviser to George W. Bush, professor at Harvard, and ingratiating supplicant who can never stoop too low in his attempt to grab the seat Yellen shall soon occupy (See AuContrarian blog "The Best and Brightest Protect Greenspan and Betray the American People"), proposed to his New York Times readers that the Federal Reserve set a target interest rate of negative 3%. For all his faults, Mankiw is at least worldly enough to understand the banking business is likely to falter, if, for every $100 lent, the borrower pays back $97.

Unlike the present suicidal strategy of the Federal Reserve governors, Mankiw's (even more suicidal) theory proposed a solution to a practical problem: "We [need to] figure out a way to make holding money less attractive. Imagine that the Fed were to announce that, a year from today, it would pick a digit from zero to 9 out of a hat. All currency with a serial number ending in that digit would no longer be legal tender. Suddenly, the expected return to holding currency would become negative 10 percent. That move would free the Fed to cut interest rates below zero. People would be delighted to lend money at negative 3 percent, since losing 3 percent is better than losing 10."

Delighted, indeed.

Mankiw may sound deranged, but most of the actions taken by the Federal Reserve over the past two years were inconceivable ahead of time, other than to those who were already preparing for this opportunity. In May 2003, the Dallas Federal Reserve Bank published a research paper in which the authors proposed a tax on savings, akin to Mankiw's thesis, which doesn't even deserve credit for originality. His function was to contaminate the public arena with a notion already articulated in the bowels of the Fed.

To make sure Americans keep spending, according to the Dallas branch, the currency would be stamped periodically, and savers would pay a tax "in order to retain its status of legal tender." The staffers seemed to favor 1% a month, or, 12% a year.

As an alternative approach to achieve Dow One Million, a senior policy staffer at the Fed told the Financial Times in 2002 of how he would turn the dollar into Monopoly money. The Fed "could theoretically buy anything to pump money into the system" including "state and local debt, real estate and gold mines - any asset." So, don't bet the ranch shorting municipal bonds.

A corollary, in this age of electronic money, is for the Fed to wire dollar deposits to Americans' banking accounts; let's say, $100,000 to each. As ridiculous as this sounds, it is worth recalling that Federal Reserve (and Obama administration) policy is the playground for academics, those who have ravaged the economy and left the United States in such an impoverished state. They are fortunate the American people do not understand - yet - their policies are the most compelling source of our woes, and are willing to follow their conclusions to a hyperinflationary end to prove themselves right.

A lingering question is whether the Fed would dare take such steps. Congress has not stopped the Fed from irregular and illegal activities (e.g.: "the Federal Reserve and the Treasury decided to ignore existing law and provide a bailout to the benefit of Bear Stearns' bondholders at public expense." - John Hussman, Hussman Funds' Weekly Commentary, March 31, 2008). The legislators are too dumbfounded to press charges. This may change of course, at which point the little man on the wedding cake may be shipped in a wooden crate to Waziristan, but the central banking world is still busy spreading propaganda to boost credibility for its hare-brained plans.

(This raises the all-important question of whether the Fed's blueprint could be thwarted by peasants bearing pitchforks. Yes, indeed. But the questions of when and if it reaches a fever pitch is difficult to assess. It is better to prepare for the worst and then recalibrate later if the Fed's inflationary impulses are suppressed.)

The Riksbank is both the central bank of Sweden and supervisor of the annual Nobel Prize in economics. In fact, there is no Nobel Prize in economics. It is officially the "Sveriges Riksbank Prize in Economic Sciences in Memory of Alfred Nobel." It was funded by the Riksbank and is awarded annually to some economist who fulfills the current mandates of central banking interests.

In 2009, the Riksbank instituted a negative interest rate for banks (presumably, for those that hold deposits at the central bank.) The Financial Times reported: "[T]he most vocal advocate of the policy is deputy governor Lars Svensson, a world-renowned expert on monetary policy theory and a close associate of Ben Bernanke, chairman of the US Federal Reserve, since they worked together at Princeton University."

Svensson was quoted in the article: "There is nothing strange about negative interest rates." These guys will say anything. Then, they hand out Noble Prizes (sic) to each other knowing the award and those awarded are treated with reverence.

In summary, a deleveraging shock is an ever-present worry, and investors should protect themselves. It is the fear, undoubtedly whispered in Fed governor ears by Wall Street bankers who stand to prosper from ignorance, that the Dow could fall to 1000 and house prices dive another 70%, which helps to explain why the crosscurrents of speeches by Federal Reserve governors sound like transcripts from talent shows at a lunatic asylum. The best protection is to hold real assets, such as gold, silver, a farm, and other commodities, as well as paper assets that are the most likely destination of flows from money-market funds. Common stocks, across a wide spectrum of countries and currencies, are a place to look.

Friday, August 13, 2010

The 'Flations

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009).

The incessant debate of whether the economy is inflating or deflating suffers from a vocabulary problem. This is as it must be since some (Federal Reserve Chairman Ben S. Bernanke) discuss deflation as falling prices of stuff while others concentrate on the debt deflation of an overleveraged economy. The latter is what matters.

This debate often fails to address the important question of "what does it matter to me?" What matters most is the changing relationship of prices. For a worker who pays $3 instead of $2 for eggs, "inflation" is his greatest worry. If, at the same time, the worker receives a 20% pay cut, there may be many causes, and it is at least symptomatic of "deflation."

The "inflation" and "deflation" debates (at least, in the major media) are of limited interest when they take an either/or approach. In fact - back to "what does it matter to me?" - both conditions are present and moving towards a chaotic conclusion. This should be expected when the Main Street economy is appended to a financial economy, which by its nature (and high-frequency trading) is more unstable than a production economy. Since money-printing is still ascendant, more violent changes in price relationships are certain.

The Bernanke, Geithner, and Summers economy (that is, the economy of the United States) is following the historical script to hyperinflation, total war or social disintegration. In War and Peace, Tolstoy describes the prelude, those halcyon days in Old Moscow: "in those brightly colored rooms - with the music, flowers, dances, the Emperor, and tables set for eighty ... The mirrors on the landing reflected ladies in white, pale-blue and pink dresses, with diamonds and pearls ... In the first hall were the nobility and gentry in their uniforms ... In the noblemen's hall was an incessant movement and buzz of voices."

The atmosphere was about to change, as some knew but many chose to ignore: "On the arrival of the news of Austerlitz, Moscow had been bewildered. At that time the Russians were so used to victories that on receiving the news of defeat some would simply not believe it, while others sought some extraordinary explanation of so strange an event." Chairman Bernanke chose (circa 2004) to believe such odd-ball theories as "the great moderation" and "the global savings glut," both extraordinarily inept descriptions of a world about to turn over.

Today, still ignorant of the debt deflation that plagues the deleveraging economy, Bernanke gabs before senators of a fanciful world, akin to a shell-shocked survivor raving before the Muscovite cognoscenti of the great Russian victory at Austerlitz. The beautiful people find this reconstruction most pleasing, so choose to trust it. (This is also a simplified version of how the most (not best) educated Americans - who dominate government, the media, think tanks, Wall Street, universities and wherever else they bray - came to ignore Alan Greenspan's grave deficiencies and to deify him.)

The best families in Moscow held the most possessions and prestige, so they, as is true of their current-day American counterparts, were the least likely to acknowledge Russian weaknesses. Respected Muscovites of title and pedigree were trusted by many of lower rank, and understandably so. Since princes and counts had the most to lose if Napoleon invaded Moscow, and, the aristocrats were privy to insider information from the very top, surely it was wise to follow their bettors' example.

Alas, those who were surest of their own invincibility were the least prepared for Napoleon's invasion. Tolstoy wrote of simultaneous inflations and deflations, vast redistributions of wealth, sometimes accumulated over generations, lost in a matter of hours: "Prices that day indicated the state of affairs. The price of weapons, of gold, of carts and horses kept rising, but the value of paper money and city articles kept falling ... Peasant horses [ed. note: a humble breed] were fetching five hundred rubles each [ed. note: a life savings] and furniture, mirrors and bronzes were being given away for nothing."

Not to be neglected are the recriminations. Said the Countess Rostov: "Listen to me Count, you have managed affairs so that we are getting nothing for the house.... You said yourself that we have a hundred thousand rubles worth of things in the house.... Look at the Lopukhins opposite, they cleared out everything two days ago. That's what other people do. It's only we who are such fools." Live and learn, Countess. That's what happens when you marry the decaying order.

Currently, inflation is present in the money supply, price of gold, and the U.S. stock and bond markets. These are old themes here, so will be held in abeyance to discuss an acute deflationary threat. That is income. It is falling and prices are rising.

David Rosenberg, economist at Gluskin, Sheff, an investment advisory firm in Canada, calculates that "private incomes" (non-government jobs and transfers) in the United States have fallen from $8.7 trillion in the third quarter of 2008 to $8.2 trillion in April 2010. Americans lived beyond their incomes for years. The main source of overconsumption was consumer credit which fell at an annualized rate of 3.75% in the second quarter of 2010. This demonstrates ingenuity on the consumers' part given that "the big six issuers have trimmed total credit available to their customers by 25 percent, partly by shrinking credit lines and not renewing expired cards," according to an analyst at Credit Suisse.

Again, there were other sources of spending for the consumer, such as home equity withdrawal (HEW). In 2005, homeowners cashed out over $800 billion of HEW. In the second quarter of 2010, this fell to $8 billion. It was hardly worth filling out the forms.

The government has plugged some holes such as its army of make-work census takers. (It cost the government $15 to count each head in 2000 and $25 per scalp in 2010. This is the Information Age?) President Obama intends to extend make-work to the far abroad, or, at least he did on June 30, 2010, when he told an audience in Racine, Wisconsin: "When you look at a place like Afghanistan, or you look at a place like Iraq, so many of our military personnel are having to engage in work that really should be civilian. So what I'm trying to say is, don't put all the burden on the military. Make sure that we've got a civilian expeditionary force that when we go out into some village somewhere.... let's make sure that we are giving them the support that they need in order for us to be successful on our mission." [Italics added.] Who said government workers have no imagination?

Over 40 million Americans used food stamps in May 2010, more than one-eighth of the population. According to Bill King (The King Report), U.S. government anti-poverty spending has risen 89% since 2000 - from $342 billion to $647 billion. This includes such programs as Medicaid grants, food assistance, housing vouchers, and child nutrition programs. Unemployment benefits have been extended several times in the past two years, to 99 weeks at present. The Labor Department estimates that 1.4 million workers have been unemployed for at least that amount of time. Nearly 46% of the country's 14.6 million unemployed have been without a job for more than six months. Despite the fevered attempts to put money into hands of Americans, there were more house foreclosures in the second quarter of 2010 - 269,962 - than ever before. That was a 38% rise from the second quarter of 2009.

This has the feeling of a dyke about to burst. The government's finger is forestalling the flood with Federal Reserve mortgage security purchases and government agencies that now issue over 90% of home mortgages. This does not put beer on the table which is a reason to think the housing market is going to topple again.

It is rare for beer sales to decline, yet, as described in the May 28, 2010, issue of Grant's Interest Rate Observer: "In the 10 years to 2007, American beer shipments rose by an average of 1% a year. They rose by even less than 1% in 2008 and fell by 2% - a virtual collapse in beer terms - in 2009." (There has been a drift to wine and spirits, but an attempt to find comparable sales data was unavailing.) In another land with stagnant incomes, or, at least where the sun seems to be perpetually setting - Japan - "Spending by Japanese businessmen on beer and sake is at an eight-year low as tighter household budgets squeeze their entertainment expenses. Salarymen go out drinking on average 2.9 times a month, spending about 4,190 yen ($46) each time, a 19% decline from a year earlier." (Bloomberg, June 10, 2010). Cigarette sales are also falling in the United States, and, in Europe, cell phone usage dropped 4% in the first half of 2009. These trends indicate that "necessities" may be defined down as well as up.

Reduced circumstances will grow more acute as prices continue to rise. The U.S. government contends prices are not rising. Count Rostov could do a better job. Almost anyone who pays health insurance premiums (health costs are 16% of the economy but only 4% of the consumer price index); tuitions (Harvard's are increasing 4% this year); utilities ("The Los Angeles Department of Water and Power is planning to boost the electricity bills of its customers by 37% over the next four years as part of its effort to cover steadily rising costs." - L.A. Times, March 26, 2010); and cable bills ("Your cable bill is going up this year -- and next year, and the year after that -- with no end in sight." CNN - January 9, 2010); and who buy food and gas are falling behind in relation to the nation's income.

A food study might be most illuminating, but the reader will be spared such a discourse. It is worth remembering though, that food and energy are not priced in the United States. Brazil, which is booming, sends this reminder from a member of our happy Global Village: "Brazil is running out of beer cans and farmers are leaving crops in the field as surging demand and Chinese-like growth leads to shortages in Latin America's biggest economy. Cia de Bebidas das Americas, the region's largest brewer, had to import beer cans for the first time in its 125-year history after local supplies were exhausted. Acucar Guarani SA, the country's third-biggest sugar producer by market value, left 10% of its crop sitting in the fields an extra 40 days because of a shortage of tires for its harvesters, even after the commodity hit a 29-year high in February." (Bloomberg, June 8, 2010)

On August 3, 2010, Chairman Ben Bernanke told an audience in Charleston, South Carolina: "[R]ising demand from households and businesses should help sustain growth," and consumer spending "seems likely to pick up in coming quarters from its recent modest pace." Well, consumers will be spending more on sugar, beer cans, and cell phones (if they still use them) and Simple Ben's money printing will ensure a chaotic, and impoverished, finish. The Countess Rostov should mop the floor with him.

Wednesday, August 4, 2010

How to Look for a Job

Frederick Sheehan is the author of Panderer to Power: The Untold Story of How Alan Greenspan Enriched Wall Street and Left a Legacy of Recession (McGraw-Hill, 2009).

Unemployment is stuck in a rut. One reason is the tendency to look backwards. Trillions of dollars have been spent (with no end in sight) to bail out financial institutions, homebuilders, and failing industries. The federal government is spending $787 billion on a rejuvenation plan: ARRA - the American Recovery and Reinvestment Act of 2009. In the bill, $500 million is sequestered to metamorphose former credit-default swap salesmen into nurses and public health workers. Assuming the government wastes half of that money filling a new bureaucracy to administer the training, that still will be a lot of new nurses.

We always need nurses, but the question arises whether there are enough hospitals, doctors, machinery and bedpans to employ the trainees. There are plenty of unemployed nurses now. For those who pursue this path, they may be entering at a market top. This would not be the first time. Remember the CEO's who left their firms in 1999 and 2000 to start Internet companies? In that case, technology and telecom companies had risen from 5.6% of the S&P 500 in December 1993 to 38.8% in June 2000.

Today, health costs in the United States are about 16% of the national income (GDP), over twice the percentage in Japan, Finland and Norway, all of which have longer life expectancies than in the U.S. The proportion of the American economy devoted to health care will no doubt rise before it recedes, but recede it will.

Instead of joining the battalion of nurses, it could be more profitable to study a field that is bound to grow: energy. The cost of energy is about 5% of world GDP. This will rise considerably. Andy Lees, who heads a macro sales team at UBS in London, estimates the proportion will rise to around 16% of world GDP. Lees wrote a book in which he explains his calculations, The Weakest Link (which can be downloaded at http://r20.rs6.net/tn.jsp?et=1103599201225&s=0&e=00168p5eKisNm2ePOsUMC8Gep0gl0I6QRDjsfgyYtG7u_FlWYNWX4ymzaba4HEOKBG2XPkWnO9VM0NuQkPJKsqXY8PDjLQhOjdZv4yyg39MBnsLr0ETBrKZvFEm8gfzB9_n2u2oyz1Xf78aZal3kGj58TdoT8KkU77k).

For purposes of career guidance, it is sufficient to say that oil-out-of-the-ground is less of a burden on the world economy than other forms of energy. Onshore oil production peaked in 1978. Offshore oil has carried the torch, but its extraction is less efficient. Efficiencies attenuate from "factor inputs" (Andy Lees' term). The factor inputs are land, labor, capital, and resources.

Oil consumption is the product of inputs. Since more inputs are required to produce a barrel of offshore oil, fewer inputs are available for health care. Natural gas, liquefied natural gas, wind power, solar power, ethanol, nuclear fusion may substitute for oil - at a cost. This also presents opportunities.

Back to the nursing program, the graduates are only employable if energy is available. The more expensive or unwieldy the energy, the fewer number of nurses will find jobs. This relationship can be extended across the world economy. Energy might be considered a cost of the world's work. The combination of factor inputs compose that cost. The race will be on to produce energy with the lowest consumption of inputs.

Not much thought is given to these factors, possibly because we do not rely on alternative energies yet, so myth-making and waste is still possible. A look at substitute energies might help the job seeker evaluate future employment.

Solar power loses about 70% of its energy during storage. Around 70% to 80% of energy is lost in the process of upgrading corn into ethanol. Wind power suffers from loss of energy in storage, in transmission, and from the declining grade of copper from mines. (Copper is used in wind-power transformers and ground rings.) Copper ore grades have declined for many years so costs have risen. Costs include more exploration (requiring more land, labor and capital), water (Chile recently banned miners from using fresh water, forcing the companies to build desalinization plants and possibly importing water from Argentina), and longer shipping routes (as remote areas are explored and mined). Longer shipping routes consume more energy (fuel), steel (ships), iron ore (to produce steel), land (mining sites) and labor (to fulfill these requirements).

This case study barely touches the costs and opportunities ahead. The reader might consider where pressures will be greatest, and where employing one's own land, labor, capital, and resources will be most profitable.

While exploring these paths, it is important to consider timeliness. The United States is a laggard. Following are stories read on the same day (July 14, 2010). China is building an oil refinery in Lagos, Nigeria. In Argentina, China is building a rail network (for cheaper transportation of farm crops) and a subway system. Brazil is building a high-speed rail network between Rio and Sao Paulo. Diamond Offshore Drilling is moving a second deepwater rig out of the Gulf of Mexico to the Congo. Americans seem to think Washington will set the course, a vain hope. Time would be more profitably spent buying a farm or an airplane ticket.