GUNS AND BUTTER

How War's Expense Didn't Strain Economy
Foreign Lending,Lessons From LBJ; How Long Will It Last?

By DEBORAH SOLOMON
February 5, 2007; Page A1

WASHINGTON -- Since President Bush took office, he's boosted annual defense spending by 50% -- including $500 billion over five years for fighting in Iraq and Afghanistan -- and doubled spending on homeland security. At the same time, he's cut taxes, expanded Medicare to cover prescription drugs, approved $100 billion to clean up after Gulf Coast hurricanes, and signed bills that spend a little more each year on domestic programs.

For years, critics said it couldn't last, backed by some historical precedent: President Johnson is blamed by many for triggering inflation in the 1970s by spending on both guns and butter.

But this time, it's been nearly painless. Inflation is in check. The federal budget deficit is down from its 2004 peak, and rests near its historical average of 2% of gross domestic product, a measure of the nation's total output. Long-term interest rates are relatively low.

What's Mr. Bush's secret? Ingredient one: strong revenue growth driven by an economy distinguished by surging profits and rising incomes at the top, which are taxed more heavily than incomes at the bottom. Ingredient two: tax cuts and spending increases, which arrived when the U.S. economy needed a boost. Ingredient three, and perhaps the most significant: the willingness of foreigners to lend to the U.S., which finances the budget deficit without pushing up interest rates at a time when Americans don't save very much.

"This situation is what you'd call an exorbitant privilege," says Menzie Chinn, a University of Wisconsin economist. "We've gotten a pretty good deal so far."

No one knows when this bonanza might end, although end it must. For the coming year, Mr. Bush is expected to shave costs from programs and agencies unconnected to defense. In the future, the flow of cash from foreign lenders could dry up. Health care and Social Security could swamp the federal budget. In the shorter term, the combination of military spending and tax cuts could collide with spending priorities outlined by the capital's newly empowered Democrats.

For now, the budget the president will offer today essentially counts on continued good luck. Both he and Congress recognize that neither the war in Iraq nor the buildup in homeland-security spending is a one-time-only expense. Both sides are talking about the need for a larger military, a sharp contrast to the decline in post-Cold War defense spending that helped produce Bill Clinton's surpluses.

Mr. Bush's budget estimates Iraq and Afghanistan over the next two years alone will cost about $300 billion, and analysts say the five-year price tag could reach $500 billion. Mr. Bush is seeking to add 92,000 troops to overall Pentagon forces over the next five years. Democrats are even more eager to increase homeland-security spending than Mr. Bush. Indeed, the Congressional Budget Office last week estimated a bill the House has passed to improve aviation security and implement other recommendations of the 9/11 Commission would cost $21 billion over six years, a sum equal to roughly half the Department of Homeland Security's current annual budget.

Democrats also have a long list of other domestic priorities to fund, which include lower student-loan rates and more science and health research. They've pledged to balance the budget and adhere to rules that require tax cuts and benefits increases to be offset somehow.

"It will be hard to attain those goals because of the squeeze that the defense budget, and in particular that the cost of war in Iraq, is placing on us," says House Budget Committee Chairman John Spratt, a South Carolina Democrat. "These expenditures at this sort of level are consequential -- they necessitate trade-offs."

In the budget for fiscal 2008, which begins Oct. 1, Mr. Bush has said he will show how the deficit can be eliminated by 2012 without raising taxes. The budget will give the administration's best guess (about $141 billion) at the cost of Iraq and Afghanistan for 2008, a departure from past practice, and what one administration official calls "a plug number" for 2009 -- an estimated $50 billion -- but nothing beyond that.

The president is also expected to project spending less, in inflation-adjusted terms, on annually appropriated spending outside of defense and homeland security. Much of that squeeze is expected to come in proposed freezes or cuts to federal agencies and programs.

"It's going to be the tightest budget we've seen," says Brian Riedl, a budget expert with Heritage Foundation, a conservative think tank. He predicts a call for "freezing most discretionary programs for the next five years."

The big problem, however, remains the government's entitlement programs. Treasury Secretary Henry Paulson says the budget deficit is "well below where anybody would have expected it to be several years ago" despite the costs of war and hurricanes. He credits a strong economy and record tax receipts.

But he warns of "a looming collision with entitlements," and adds: "I have no doubt we will deal with it. But the longer we wait to deal with it, the more expensive and the more painful it's going to be to do it."

Some academic economists are beginning to gauge what the sums spent on Iraq could have financed -- a down payment on a Social Security fix, for instance. Nobel laureate Joseph Stiglitz predicts Iraq will cost at least $1 trillion, assuming troops are withdrawn by 2010. "Half that sum would have put Social Security on a firm grounding for the next 75 years," he wrote last year in a paper. "If we spent even a small fraction of the remainder on education and research, it is likely our economy would be in a far stronger position."

Comparisons to Vietnam are tempting but Iraq isn't, at least yet, as costly as Vietnam, when compared to the overall economy. It's running about $100 billion a year, or about 1% of GDP. By the time it was over, Vietnam cost the equivalent of about $660 billion in today's dollars.

Overall defense spending today is higher than it was during Vietnam, when adjusted for inflation, but is just about 4% of GDP. That's an increase from when Mr. Bush took office, but far from the Vietnam peak of 9.5% of GDP in 1968, and less even than the 1980s Cold War buildup. Even with the planned troop surge, the U.S. will have about 160,000 troops in Iraq, well below the 550,000 Vietnam peak.

It was the combination of military spending and President Johnson's "Great Society" programs -- Medicare health insurance for the elderly and Medicaid for the poor -- that many say led to the "Great Inflation" of the 1970s. Like Mr. Bush, Mr. Johnson at first tried to fund the war through supplemental spending bills, a move historians and contemporaries believe was aimed at cloaking the true costs so Congress wouldn't scale back his ambitious domestic agenda. Inflation, which had been below 2% in the early 1960s, was running at above 6% in 1970. By 1970, the U.S. was in a recession.

Vietnam-era defense spending added fuel to an economy that was already running at full employment and producing at capacity. Mr. Johnson resisted calls for tax increases to reduce the inflation risk, fearing Southern Democrats would instead insist on cutting social programs. The Federal Reserve, partly under pressure from Mr. Johnson, but also because it mistakenly believed the economy had spare capacity, was reluctant to raise interest rates. To control inflation, it had to raise rates higher later on. By the time Mr. Johnson imposed a 10% surcharge on individual and corporate income taxes in 1968, it was too late.

Although the government borrowed heavily in the 1960s, most of its borrowing came from inside the U.S. Interest rates rose as a result. The yield on 10-year Treasurys, a benchmark interest rate, began the 1960s at 4.72%; it ended the decade at 7.65%. But the private sector saved enough to offset government borrowing, and the U.S. economy was a net lender to the world.

This time, interest rates haven't risen as much, because foreigners, particularly in Asia, are eager to lend to the U.S. economy at fairly low rates. The economy as a whole is a heavy borrower from the rest of the world.

In fact, the U.S. government is particularly dependent on the willingness of foreigners to lend it money. As of November 2006, foreigners owned about $2.2 trillion of U.S. Treasury securities -- or about 52% of the public debt not held by the U.S. government, compared with about 20% in the early 1990s. (The total U.S. debt, which includes what the government owes itself, is about $8.7 trillion.)

Mr. Bush's ability to sustain spending and tax cuts depends largely on the willingness of foreigners to continue lending the U.S. money. Mr. Chinn, the economist, says that at some point, global investors will lose their appetite for ever-larger amounts of American debt. That would trigger a decline in value of the U.S. dollar and an increase in interest rates.

"So far it's not a problem because foreigners are willing to lend, but you've got to wonder what happens when the rest of the world says, 'We're tired of taking paper that loses value pretty quickly,' " says Mr. Chinn.

The Bush era upturn in defense and homeland-security spending came not during a 1960s-style boom, but in a lull in the U.S. economy, which had tumbled into recession even before the Sept. 11, 2001, attacks. That meant the economy had plenty of slack to absorb increased government spending without sparking inflation. Lee Price, an economist who until recently was research director at the Economic Policy Institute, a liberal Washington think tank, says defense spending created 1.3 million private-sector jobs between 2001 and 2005 while all other private-sector employment fell by 1.2 million.

At the same time, the Bush administration cut taxes in 2001 and 2003 on individuals, dividends, capital gains and estates, among other areas. The administration and some economists credit the cuts with spurring economic growth, saying they provided incentives to business to invest and buoyed consumer spending.

The moment of economic slack may be in the past, which raises the specter of inflation. Unemployment is about as low as the Fed will tolerate, and there are some hiring bottlenecks of the sort that were common during Vietnam. "We're starting to see tightening up in the high-tech market, and people who were tied up with defense or homeland security are not available," says EPI's Mr. Price.

War has other costs, too. Some companies are struggling to keep jobs open for military reservists. A 2005 Congressional Budget Office report found that "some businesses may absorb the loss of personnel at little cost, but others may experience slowdowns in production, lost sales or additional expenses as they attempt to compensate for a reservist's absence." The problems are more severe for small businesses or those that employ highly specialized workers, the CBO said.

At Fallon Ambulance Service in Quincy, Mass., more than 20 of the company's 500 full-time employees are reservists, and several have been deployed for stints lasting as long as two years.

"It does at times put a strain when we have large deployments," says Stephanie Eastwick, director of human resources for the family-owned company.

In the end, it may be Johnson's ballooning programs that prompt tough decision making. The government has expanded greatly since the 1960s and has made all sorts of promises to pay benefits, particularly to older Americans, in coming years. As war costs preoccupy official Washington, the retirement of the baby boom generation is growing closer; the oldest boomers turn 60 this year. There is no sign of a political consensus on changing Social Security, which has expanded since Roosevelt launched it, or on making more affordable Mr. Johnson's health-care programs.

Social Security, Medicare and Medicaid already consume 36 cents of every dollar that the government spends, about $1.2 trillion this year, and are growing faster than the economy as a whole. Defense accounts for about 20 cents of every dollar, up from 16 cents when Mr. Bush took office in 2001, more than the government spends on education, transportation, scientific research and housing aid combined.

"We can continue doing what we're now doing subject to foreigners being willing to finance it but eventually it's going to do us in because Medicare and Social Security are going to overwhelm the budget," says Charles Schultze, a Brookings Institution economist who was among Jimmy Carter's advisers.

The Fed is watching carefully, the lessons from the 1960s inscribed in the minds of today's policy makers. "There were plenty of signs in the 1960s that inflation was accelerating, yet monetary policy wasn't fundamentally changed," says former Fed Governor Edward Gramlich. "Today, would be more alert and is more likely to react forcefully to signs of accelerating inflation."

Almost no one is saving any money in the United States today. Saving rates are very low or negative. The US debt grows by about $1.5 billion every weekday and has now reached about $6.5 trillion dollars. Private household debt has reached $11 trillion and 50 per cent of these debts have been incurred since 1998. The Americans are enjoying the present spending spree at the cost of their own future and future generations. The fact is that the expanding consumer debt drives the US economy.

The largest employer in the world announced on Dec. 15 that it lost about $450 billion in fiscal 2006. Its auditor found that its financial statements were unreliable and that its controls were inadequate for the 10th straight year. On top of that, the entity's total liabilities and unfunded commitments rose to about $50 trillion, up from $20 trillion in just six years.

If this announcement related to a private company, the news would have been on the front page of major newspapers. Unfortunately, such was not the case -- even though the entity is the U.S. government.

To put the figures in perspective, $50 trillion is $440,000 per American household and is more than nine times as much as the median household income.

The only way elected officials will be able to make the tough choices necessary to put our nation on a more prudent and sustainable long-term fiscal path is if opinion leaders state the facts and speak the truth to the American people.

The Government Accountability Office is working with the Concord Coalition, the Brookings Institution, the Heritage Foundation and others to help educate the public about the facts in a professional, nonpartisan way. We hope the media and other opinion leaders do their part to save the future for our children and grandchildren.

DAVID M. WALKER

Comptroller General of the United States

Government Accountability Office

Washington

Mortgage Lenders Network USA stops funding new loans

By David Enrich, Dow Jones Newswires | January 2, 2007

NEW YORK --Mortgage Lenders Network USA, a major issuer of loans to people with blemished credit histories, says it has stopped funding loans and accepting applications for new loans.

MLN, which bills itself as one of the country's top subprime mortgage lenders, also is "currently exploring strategic alternatives" for its wholesale business lines, according to telephone recordings at at least two of its wholesale lending offices.

MLN, based in Middletown, Conn., says its goal last year was to produce more than $12.1 billion in loans, 80 percent of which would be in the subprime space. The company has four regional wholesale lending offices.

MLN's outside public relations representatives referred inquiries to company executives. MLN officials, including the chief executive and general counsel, didn't respond to phone calls or e-mails. On Dec. 8, the company posted a note on its Web site saying it continued to operate normally.

MLN also has a big mortgage servicing arm, with a portfolio of more than $14 billion and over 100,000 accounts, according to the company's Web site. The status of the servicing business wasn't clear.

The decision by MLN to stop funding new loans, and to consider alternatives for its wholesale business, is the latest sign of an ongoing shakeout in the subprime mortgage industry. Late last year, for example, two subprime lenders, including Ownit Mortgage Solutions, shut down citing "the current unfavorable conditions of the mortgage industry."

Some subprime issuers are facing liquidity problems as their so-called warehouse lenders withdraw credit lines. Among MLN's warehouse lenders is GMAC's residential-mortgage arm, ResCap. In mid-December, a ResCap spokesman said that "We have a relationship with MLN which includes purchases of loans and warehousing. We continue to support MLN through these programs."

Stephen Dupont, the ResCap spokesman, declined to comment on the latest developments at MLN.

DUBAI, UNITED ARAB EMIRATES — The wilting U.S. dollar is pushing the United Arab Emirates, a close U.S. ally, to convert 8 percent of its foreign exchange reserves into the healthier euros, the central bank governor said Thursday.

The Emirates' nearly $25 billion currency reserves are currently 98 percent dollars. That percentage will drop to 90 percent in six to nine months if the bank's directors approve the switch as is expected, Central Bank governor Sultan Bin Nasser al-Suwaidi said.

The sale itself is a small one, worth about $2 billion. But the implications of a cash-rich friend of Washington selling off its dollars is a sign that central banks elsewhere may be looking to cut losses from a dollar expected to slip further in 2007.

The decision to sell off its dollar holdings comes against a backdrop of strain in its normally warm relations with Washington. Many here were upset when Congress blocked the sale of U.S. port operations to Dubai-based DP World — a move that officials here said smacked of anti-Arab bias.

In 1995, Jeremy Rifkin posited that there would be an End to Work. This has been brought on by automation, and the redundant jobs being replaced partially by lower skilled jobs, and also by less than full employment. The amount of American Manufacturing jobs in our work force has dropped from 33% to 17% over the last 30 years. Many blame outsourcing, and illegal immigration for this phenomena, but one of the critical components is actually technology.
Take China for example. During their great run over the recent past, from 1992-2005, they actually lost 15% of their manufacturing jobs. Brazil has dropped 20%, the US has dropped 11%, and Japan 16%, all just in a 7 year time period.
The US is still the #1 manufacturing producer, but we are dropping. However, in terms of amount of goods, we actually produce much more with lesser workers than we did during the hey day of US blue collar employment. This rarely gets discussed during the jobs debate, but unless we want to become luddites, manufacturing is basically dead. It's not going to China, or Brazil, or India. It's going to that robot and machine driven plant with skeleton work crews.

Our McJobs at Mcdonalds aren't going overseas. They now have automatic drink dispensors, and now kiosks to take your order and for you to pay directly, eliminating the need for workers. There already is an automated hamburger griller brought to us by the same company that produces breakfast sandwiches entirely on an automated line. Here is a handy video of these sandwiches being made. No human worker, even those who make 25 cents an hour in the third world can compete once the system has paid for itself. No sick days, no workman's comp, no unions, no coffee breaks, just automation. The robot slices a bisquit that another machine made, and different arms add frozen sausage, cheese, egg and the tops of the bisquits all without the help of any busy bee workers save for the person operating the machine.

The end of work is coming. Blue collar isn't the only thing that will go. What jobs are there that actually aren't replaceable? Any lecturer, or professor at a small college for a lecture style class has to be worrying that instead of paying their salary, their fringe benefits, that the school will pay about half of that to buy lectures from say a Harvard professor. A grad assistant TA will grade their tests. Think of the savings.

Is your job really safe? In 20 to 30 years will it be there for your kids and grandkids? What do we really do that can't be replaced by machinery unless it's of a creative, athletic, or artistic nature? As we worry about the jobless recovery, I would like to suggest that it isn't going to get better. We either smash the machines or accept a future with unemployment the norm rather than the exception. If this society is coming, we need to radically reorganize society. With no work, the market economy fails to function. If you can be replaced, you shall be replaced. We can not all be software coders, or machine repairmen. What do we do then?

High Stakes in China
Aired: Thursday, December 14, 2006 10-11AM ET

Extraordinary meetings underway today in China. A third of the US cabinet members, led by Treasury Secretary Henry Paulson, plus Fed chief Ben Bernanke and the head of the EPA, all in Beijing.

An unprecedented rollout of American officials urgently seeking economic reform and favors from China.

The so-called U.S.-China Strategic Economic Dialogue is partly to kowtow to China's soaring global economic clout, and partly to cajole Beijing into changes Washington is desperate to see.

At stake: jobs, interest rates, prices at Walmart and everywhere else, and maybe the global economy. The finance men fear a Chinese meltdown, a US meltdown, or maybe both and more.

This hour On Point: American power goes to China.

Guests

· Krishna Guha, chief US economics correspondent for the Financial Times
· Kenneth Rogoff, professor of economics, Harvard University and chief economist at the World Bank from 2001 to 2003
· Stephen Roach, managing director and chief economist, Morgan Stanley

I have what is hopefully a simple question:

The Clinton years boasted surpluses. The Bush years reveal record deficits.

Is the only difference between these two claims a spreadsheet tally that respectively includes, or not includes, Social Security surpluses?

I'm just trying to clarify if the commonly-accepted statements are true or not.

...Once people were able to create "money" at virtually no expense, no one ever resisted doing it to excess. No paper currency has ever held its value for very long. Most are ruined within a few years. Some take longer. Even the world's two most successful paper currencies - the American dollar and the British pound - have each lost more than 95% of their value in the last century , with is especially remarkable since both were linked by law and custom to gold for most of those years. For the dollar, the final link to real money was not cut until August 15, 1971. That was when the world found out what the greenback was really worth - nothing much.

Whatever promises the Feds made with regard to the dollar, they could unmake whenever they wanted.

Some paper currencies are destroyed almost absent-mindedly. Others are ruined intentionally.

But all go away eventually. By contrast, every gold coin (and silver, for that matter) that was ever struck is still valuable today - and the coins almost always have more value than when they first came out of the mint.

Due to our dependency on foreign financing of our trade imbalance, which in turn requires confidence in the dollar, we can’t behave like normal countries -- let our currency fall, and thereby make our products cheaper in world markets, which would improve the trade imbalance.

The longer an adjustment is delayed, the more serious will be the eventual crash. And if the dollar crashed, the Federal Reserve would be torn between raising interest rates to restore foreign confidence in the dollar (and creating a domestic recession) or lowering interest rates to stimulate a domestic recovery (and scaring off even more foreign lending on which we depend).

The alternative to this mess is a more assertive trade policy, so that other countries stop playing protectionist games at America’s expense. If we exported more and imported less, we would not be so dependent on foreign borrowing to finance the trade deficit. But that strategy is off the table, and in any case it would take time to work.

The precarious dollar is also weakened by the big federal budget deficits and the increasing role of hedge funds, which operate like a herd and exaggerate normal swings in currency markets. But Secretary Paulson wants even more tax cuts and more financial deregulation.

The dollar dilemma is the Republicans’ economic Iraq. It has no easy solution, and could be one more disaster on the watch of George W. Bush.

Bernanke Is Flooding the Economy With Money ...

Foreclosure filings increase 42 percent from 2005
More than one million homes foreclosed this year

“Just a few days ago the US Treasury reported that the net capital inflows from the rest of the world into the US fell for a 6th month in a row. Private (purchases) from abroad fell to $34.7 billion in August and from $72.9 billion in July. Asian central banks made up for the shortfall. If they hadn’t the current account deficit would have exploded. The NY Times quoted Ashraf Laidi, a currency analyst at MG Financial Group as saying, “foreign central banks saved the dollar from disaster. The stability of the bond market is at the mercy of Asian purchases of US Treasuries.”

Swanson poses an interesting theory, but it can’t be verified since we the Fed stopped printing the M-3 (which would provide the relevant facts about the current cash inflows) and since China and Japan have slowed their purchases of UST Bonds.

Jim Willie of GoldenJackass.com, offers an entirely different theory in his recent article “Spent Dollar Momentum”. Willie opines:

“Behind the scenes are the many illicit London-based firms busily buying US Treasury Bonds with freshly-printed money from the Dept of the Treasury. Their tracks are covered by the blackout on the money supply statistic. (M-3) An isolated US government with a well-oiled printing press as the primary support device makes for a dangerous currency situation.”

Willie’s “conspiracy theory” jives nicely with the US Treasury’s figures on the “Foreign Financing of US Government Debt” (June 2006) Surprisingly, between 2005 and 2006 our friends in the United Kingdom purchased an additional $142 billion of USD bringing their stockpile of dollars to $201.4?!?

Why?

Why would UK investors suddenly stock up on dollars when everyone else in the currency market is bemoaning the greenback’s systemic problems?

Could it be that banks in the UK are just hiding the paper trail for friends in America who want to forestall a collapse in the dollar until after the election?

Of course, there could be another explanation for the irregular activity in cash inflows, (purchase of US Treasuries) that is, that we’re still living in a "faith-based" Wonderland where our overseas trading partners are more than willing to buy an endless supply of worthless paper from a well-meaning Goliath who is busy spreading democracy to the "great unwashed" in developing world.

This is an utter fiction. The world is backing away from the dollar and whether one accepts the conspiracy theories or not, it’s clear that the Federal Reserve is trying to cover its tracks and conceal its shadowy maneuverings.

There is nothing accidental about the crisis we'll soon be facing. Officials at the Federal Reserve and the US Treasury are fully aware of the devastating effects of massive trade deficits, increasing the money supply, and self-serving interest rates manipulations. They have set the country on the path to ruin as part of a broader scheme for remaking the global-system according to well-known precedents. In truth, the plan to modify the present system has a long history; going back to the 1980s when many of the same actors in government today were in positions of power in the Reagan administration. For the last 6 years they have been patching together their strategy; producing record deficits, unfunded tax cuts, mammoth government expansion, and doubling the money supply.

How can anyone argue that they did not understand the implications of their actions?

Did Greenspan know that by lowering interest rates in 2001 to 1.5% that he would sluice trillions of dollars into the real estate market producing the largest equity bubble in history? And, if he didn't know, then how is it that the Fed provides the statistics which state precisely how large the housing bubble really is?

Didn’t Greenspan read the charts and graphs put out by his own organization?

And why did Greenspan support the shaky “no down payment”, “interest-only” loans and ARMs which allowed “high-risk” people to qualify for mortgages when the Fed knew, according to their own figures, that when interest rates went up, foreclosures would skyrocket?

Of course he knew; they all knew. How could they NOT know? They produce the facts and figures themselves! It’s all part of a madcap scheme to shift wealth to the top 1% and drive a wooden stake into the heart of the middle class. When Greenspan saw that doomsday was approaching, he got “cold feet” and bailed out. Now the scholarly Bernancke is left to supervise the economic meltdown and face the public scorn.

Trouble Ahead

Currently, the U.S. economy is held together by the slimmest of threads; literally duct-taped together by massaging all of the crucial economic numbers, pumping as much cheap fiat-currency into the system, and by "increasingly-suspicious" maneuverings in the futures markets. After the elections, they’ll be no reason to conceal the rot at the heart of the system. After all, we are not facing an unforeseen catastrophe, but a planned demolition intended to increase the disparity between rich and poor to such an extent, that democracy, as we know it, will no longer be possible.

Nothing is more repugnant to America’s ruling elite than the notion that every man, however broke and insignificant, can participate in our system of government.

The Federal Reserve's bloody fingerprints are all over our present dilemma. The privately-owned Fed has never operated in the public interest. By doubling the money supply in the last 7 years and keeping interest rates artificially low, the Fed has generated a $10 trillion housing bubble while, at the same time, ignoring a $800 billion trade deficit which is sucking up American assets and crushing American industry at an unprecedented rate.

This massive expansion of debt has increased the likelihood that an unexpected event, like a bank failure or a teetering hedge fund, will cause a major disruption in the markets sending tremors through the global system. Even if nothing explosive happens, the faltering real estate market will continue to swoon, consumer spending will dry up, and the fragile economy will crash to earth. In fact, this is taking place right now; retail sales are anemic, residential housing dropped a whopping 17% in the last 3 months, and economic growth shrunk to a measly 1.6% in the third quarter. The only thing keeping the economy from collapsing entirely is the sudden drop in oil prices which “conveniently” coincided with the midterm balloting.

This won’t last. According to industry analyst Matthew Simmons the world production of oil may have already peaked setting the stage for a leveling-off period before the inevitable decline. Simmons has data to show that “world supply of oil has declined to 83.98 million barrels per day in the second quarter after hitting 84.35 million bpd in the forth quarter of 2005.” Oil production is going backwards not forwards.

GAO chief warns economic disaster looms