Pastor's Page May 15, 2011

These days a visit to the gas pump is about as much fun as a punch in the gut. With the nationwide average for "regular" at close to four dollars a gallon - with reports here and there, from Florida, California and Hawaii, of stations charging more than five - the dream (announced back in 2006) of a radical environmentalist by the name of Kenneth Chu, (a.ka. America's reigning Secretary of Energy), of RAISING the price of a gallon of gas in the U.S.A. to the levels prevailing in Europe, is rapidly coming true and therewith, as Dr. Chu no doubt is hoping, the goal of shrinking our carbon "footprint". As Saudi Arabia, for reasons of its own, has cut back its daily production of oil, our own federal government seems committed to doing all that it can to limit - or more precisely, to reduce - exploitation of our own quite abundant resources. Meanwhile as China and India increase their demand for oil each year to sustain their expanding industrial production, the law of supply and demand hits home for you and me. In contrast with what we were paying for a gallon of regular ($1.83) when President Obama took his oath of office, two years later the American consumer is being mugged each week at the neighborhood "filling" station.

Joseph Mason, an economist and senior fellow at the University of Pennsylvania's prestigious Wharton School of Business, has probed (on the Op-Ed page of the Wall Street Journal for April 25th) the forces that propel our skyrocketing fuel costs. I find his analysis persuasive. May I share it with you here.

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Time for a Cease-Fire in the War on Oil
By: Joseph Mason
Wall Street Journal, April 25, 2011

This month, one year since the Deepwater Horizon explosion in the Gulf of Mexico, the Noble Clyde Boudreaux - an ultra-deep-water semisubmersible drilling rig - will start operations off the coast of Brazil. Until a few weeks ago it was stationed in the Gulf.

The last two events are not unrelated. Moving the Noble out of U.S. waters is one of the adverse consequences of the Obama administration's overreaction to last year's Gulf Spill.

Despite the president's repeated claims that he's been "encouraging" domestic oil production, administration policies have been driving drilling rigs OUT OF THE GULF (SIX deepwater rigs in ADDITION to the Noble have LEFT the Gulf, with two more possibly on the way out). The overall result has been lower domestic oil production, slower economic growth, job losses and higher energy prices.

In the immediate aftermath of the Deepwater Horizon explosion and spill, President Obama announced a six-month moratorium on NEW deepwater drilling. According to the Administration's own estimates, this cost nearly 19,000 jobs in the Gulf States alone - even though federal researchers then cut the figure by an ad hoc factor of 40% to 60% to make the results more palatable.

In the months AFTER LIFTING the ban, the administration SLOWED drilling permits to a crawl, effectively creating what some have called a "permatorium". Dismayed by the delays, in February U. S. District Court Judge Martin Feldman tried to force the administration to act on seven pending permits, calling the inaction on permits "increasingly inexcusable. " PERMITTING has picked up recently, thanks in part to increasing political pressure, but remains FAR BELOW pre-spill levels.

In December, the White House REVERSED course on its own five-year plan to open portions of the eastern Gulf of Mexico, the Mid-Atlantic and the South Atlantic to offshore exploration. This effectively LOCKS UP 7.6 BILLION barrels of oil and 36.6 TRILLION cubic feet of natural gas.

In March, as part of the release of its energy blueprint, the White House touted figures from the Energy Information Administration showing that domestic production had climbed in 2009 and 2010, with production last year at a level not seen since 2003. "So any notion that my administration has shut down oil production might make for a good political sound bite, but it doesn't match up with reality," the president said.

But an uptick in production - such as the one the White House is currently touting in its press materials - cannot be attributed to permits granted yesterday, last week, or even five years ago. "Companies spend YEARS developing a well - the process can take up to eight years. The increased production we're seeing now is mostly due to permits granted before Mr. Obama took office.

This year, the Energy Information Administration forecasts a 240,000 BARRELS-PER-DAY DROP (13%) IN THE GULF, AND ANOTHER 200,000 BARRELS-PER-DAY DROP NEXT YEAR. [Do the Math! That's a DROP of almost HALF A MILLION BARRELS A DAY!] The Administration blames oil companies for sitting on existing permits. "These are resources that belong to the American people," Interior Secretary Ken Salazar recently complained, "and they expect those supplies to be developed in a timely and responsible manner and with a fair return to taxpayers."

But Mr. Salazar's definition of "inactive" leases includes areas in the gulf and onshore where significant activity and investment are occurring. By Interior's dubious parameters, the administration considers any company working on critical PRE-production activities - such as geological surveys, seismic data collection and environmental analysis - to be "sitting" on its lease.

As the Noble Clyde Boudreaux starts drilling for BRAZILIAN oil - and gasoline prices rise past $4 a gallon-the unfortunate effects the White House could have foreseen from its war on oil are becoming clear to everyone. [Emphasis added].

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Our country is facing a major danger, that of financial collapse, a catastrophe from which, given a likely steep rise in interest rates in the not too distant future, we might NOT be able to extricate ourselves, at least with honor. PRAY for our national leaders, in the hope that they will find the COURAGE TO CALL A HALT to the prevailing insanity of IRRESPONSIBLE SPENDING. May I share with you some sobering reports from the financial front. The occasion is the most recent projection by one of the world's leading credit-rating agencies, Standard and Poor's, that the U.S.A. stands a one-in-three chance of having its credit-worthiness downgraded from a triple A to a double A rating in the next couple of years. Were this to come to pass, we would have to pay much higher interest rates on our immense national debt.

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The U.S.A.: Enron Writ Large
National Review Online
April 18, 2011
By Kevin D. Williamson

Standard & Poor's decision to DOWNGRADE the long-term outlook for U.S. sovereign DEBT came as a shock. It shouldn't have. Credit-rating agencies (CRAS) such as S&P are a govenunent-chartered cartel, with constraints on competition and a customer base guaranteed by statute. They are the sleepy back-waters of the financial world - and they are always the LAST to know. As one investment strategist put it to me this morning: We've been watching this train go by FOR A WHILE now, and this is the CABOOSE....

A little over a YEAR ago, the MARKETS ALREADY were telling us that the GOVERNMENT'S story about how it is FINALLY going to fix its finances is pure FICTION. [Interest] yields on U.S. Treasury bonds went higher [reflecting higher risk] than those on a number of blue-chip corporate bonds, leading your obedient servant to remark:

Who has BETTER credit than Uncle Sam? If you ask the BOND MARKET, that elite list includes Berkshire Hathaway, Procter & Gamble, Lowe's, Johnson & Johnson, and a HOST of other blue-chip corporate borrowers....

The SMART money gets gone long BEFORE credit downgrades start hitting the headlines. As noted in this column, PIMCO, the world's largest bond fund, got clear of U.S. Treasuries some time ago, following the lead of a number of hedge funds. The oil-exporting countries are dumping U.S. debt, too. Perhaps they know something we don't?

Actually, they know something we DO: NOTHING about this is a secret. In the phrase adopted by Rep. Paul Ryan, what is coming is the most PREDICTABLE economic crisis in our history: a NOMINAL national debt of more than $14 TRILLION, a REAL national debt TEN TIMES THAT.... This isn't sophisticated macroeconomic analysis; this is that anvil falling out of the sky onto the head of Wyle E. Coyote, and you don't have to be a super-genius to figure out that it's going to hurt... when it hits. Even S&P gets that.

And that's probably the reason this announcement HASN'T really sent big-time shock waves through the markets: It's just CONFIRMING WHAT EVERYBODY ALREADY KNOWS: Washington's finances are Enron writ large.

But unlike Enron, Washington has the power to tax, the power to print money, and an executive able to resist financial realities for a remarkably long period of time. Thus we have Obama administration officials lashing out at S&P today - as though it were the agency's fault that Obama delivered an entirely implausible speech about deficit-control last week. Austan Goolsbee declared: "I don't think that the S&P's political judgment is right." (What about their financial judgment?) Taking the prize .... is Treasury official Mary Miller, who said, "We believe S&P's negative outlook underestimates the ability of America's LEADERS to come together to address the difficult fiscal challenges facing the nation." Never mind the vacuousness of her claim and the banality of her language - "come together," indeed - did she not watch the president's speech last week? Because he made it pretty clear that coming together with fiscal reality is not on his agenda, never mind coming together with Republicans to do something about the entitlement bomb [Social Security, Medicare and Medicaid) or even discretionary spending ....

Here's the thing to watch: Nobody really knows what INTEREST RATE the bond market is going to DEMAND to finance U.S. debt IN THE FUTURE. Right now, the FED is buying most of the bonds Treasury puts up for sale, and simply printing money to do that. This "quantitative easing" is scheduled to end this summer, at which point Washington will find out what it is REALLY going to cost to finance its debt. In fiscal year 2010, we spent $164 BILLION just on INTEREST payments on the debt - UP 18 percent from the year before. And THAT'S at historically LOW interest rates. IF rates should go back up to their 1970s or 1980s levels, we could easily end up spending MORE ON DEBT SERVICE [INTEREST PAYMENTS] than we spend today on big-ticket items like MEDICARE or national DEFENSE. That's the hidden land mine on our national balance sheet: We don't have to be worried ONLY about the TRILLIONS of dollars in NEW debt that Obama [with Obama Care Et al.] has proposed..., but also about what that proposal is going to do to the cost of PAYING INTEREST ON THE DEBT WE ALREADY HAVE. We already know that we CANNOT AFFORD THE NEW DEBT that Obama would have us endure, but the REAL crisis will come when we FIND OUT THAT WE CANNOT AFFORD THE DEBT WE ALREADY HAVE.
[Emphasis added].

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It takes just a second to SAY the word: TRILLION. But to get one's head around what a trillion MEANS and then to imagine what our current national debt (on the books for considerably MORE THAN 14 TRILLION) actually amounts to? The April 22nd issue of The Economist analyzes what China's present foreign currency reserves (not debt but cash in hand) of some 3 trillion dollars could BUY. Then keep in mind that our national DEBT (which by the end of President Obarna's first term will be double what it was when he took his oath of office) is about FIVE TIMES the sum of China's CASH ON RESERVE. If our DEBT were by magic suddenly transformed into CASH, think what 15 TRILLION DOLLARS could BUY!

Here is The Economist's analysis of the buying power of China's THREE trillion dollars in cash reserves. The analysis conveys at least some idea of what a trillion dollars and multiples thereof REALLY MEAN.

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Who Wants to be a Triple Trillionaire?
Window-shopping with China's central bank
The Economist
April 16,2011

By the end of last year, China's foreign-exchange reserves amounted to $2.85 trillion. Although China ran a rare trade deficit in the first quarter of this year, on April 14th the country's central bank released new figures showing that its reserves at the end of March had soared ABOVE $3 trillion.

China's central bank has a lot of money but not a lot of imagination. It keeps a big chunk of its reserves in boring American government securities. That means it can count on getting its dollars back. But it frets about how much those dollars will be worth should America succumb to inflation or depreciation.

So what else could China do with the money? Instead of the dollar, China might fancy the euro. China could buy ALL of the outstanding sovereign debt of Spain, Ireland, Portugal and Greece, solving the euro area's debt crisis in a trice. And it would still have almost HALF of its reserves LEFT OVER.

It might, alternatively, choose to abandon debt altogether and buy equity. China could gobble up Apple, Microsoft, IBM and Google for LESS than $1 trillion. It could also follow the lead of those sheikhs and oligarchs who like to buy English football clubs. According to Forbes magazine, the 50 most valuable sports franchises around the world were worth only $50.4 billion last year, less than 2% of China's reserves.

Another favored sink for the world's riches is property. Perhaps China should buy some exclusive Manhattan addresses. Why not buy ALL of Manhattan? The island's taxable real estate is worth only $287 billion, according to the New York City government. The properties of Washington, DC, are valued at a piffling $232 billion. China is accustomed to being Washington's banker. Why not become its landlord instead?

China could also allay its fears about energy, food and military security. Three trillion dollars would buy about 88% of this year's GLOBAL OIL SUPPLY. It would take only $1.87 trillion (at 2009 prices) to buy ALL OF THE FARMLAND (and farm buildings) in the continental United States. And China could theoretically buy America's entire Department of Defense, which has assets worth only $1.9 trillion, according to its 201 0 balance-sheet. Much of that figure is land, buildings and investments; the guns, tanks and other military gear are valued at only $413.7 billion.

These frivolous calculations illustrate the vast scale of China's RESERVES .... [and the vastly GREATER scale of our five times larger national DEBT].

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In view of the more than 14 trillion dollars we have ALREADY borrowed, these calculations illustrate with clarity how DEEP IS THE PIT OF INDEBTEDNESS into which we have dug ourselves-and still continue to dig.

As a well-known witticism will have it: "If you find yourself dug deep in a hole, Rule Number One: STOP DIGGING!"

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The intellectually challenged of Minnesota received a check for $200.00, the sum collected here at the Church of St. John in our recent Tottsie Roll sale. The Knights of Columbus would like to thank you for your generosity.

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A hearty thank-you to everyone who helped to make St. John's Lenten Soup Suppers so successful again this year! The parish is particularly grateful to captains Deb Kaczmarek, Mary and Gerry Landgraf, Anna Kolb, and Theresa Fischer and to their dedicated "standing committee" of assistants-Diane Lesnar, Mark Miller, Jack Davidsen, and Cathy Sanford. Additionally we thank the many parishioners who donated food items, assisted with meal preparation and clean-up, and who by faithfully attending the suppers encouraged the project. A final and special word of gratitude is due to the Little Flowers girls and their families who undertook this year a Lenten project to "feed the hungry". Well done, all!

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