OPERATION GULF GREASE: Problem, Reaction, Solution to implement Agenda 21?

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In the days prior to the Gulf drilling operation and ensuing environmental catastrophe, I remember thinking just how odd and out of

What is the United Nations' Law of the Sea Treaty? Click image and read the details.

character it was that Barack Obama had announced his approval for more offshore drilling. On April 1st, The Washington Post quoted Interior Secretary Ken Salazar as saying the administration had broached “a new direction” in energy policy. [1]

Had Obama lost his mind? Had he had some sort of religious experience? This was a president who campaigned against traditional energy sources in favor of so-called “sustainable” alternatives such as wind, solar, etc. This was a president who banned offshore drilling as one of his first acts in executive office.[2] This was a president who admitted in a meeting with the San Francisco Chronicle in January of 2008 that it was his plan to use a Cap and Trade system to cause energy prices to “necessarily skyrocket” in order to force people to transition to “green” technologies. “Under my plan of a cap and trade system, electricity rates would necessarily skyrocket,” Obama stated as documented in a YouTube video. [3]

Hence, the shock at the sudden “turnabout” in energy policy. True, the vast majority of Americans do support drilling for oil as a counterweight against increasing dependence upon the perpetually troubled Middle East and its OPEC cartel. But since when has any president in recent history paid attention to the opines of their electorate?

Now, as the days turn into weeks, and weeks into months — and the oil continues to gush in the Gulf with no sign of ever letting up — Obama has used the crisis as an excuse to not only ban offshore drilling,[4] but also to clamor for passage of his “cap and trade” energy bill.[5] Politico has cited opinion polls that suggest public support for drilling may be eroding.[6]

Was this the Hegelian plan all along? To foment a crisis in the Gulf to condition the masses that the world must adopt Agenda 21 “sustainable development” as its model for energy or pay the environmental consequences? Before you dismiss this notion as insanity, there are many troubling questions that demand answers. Questions that imply foreknowledge and planning. Questions of “coincidence.”

For example, is it “coincidental” the numerous incredible financial and business transactions that took place in the days, weeks, and months prior to the rig explosion?

We know the ties between British Petroleum and Goldman Sachs run deep. Peter Sutherland, the chairman of Goldman Sachs International also served as chairman of BP right up until last year, according to a 2009 bio on the site of the Trilateral Commission. It says,

“Peter Sutherland is chairman of BP plc (1997 – current). He is also chairman of Goldman Sachs International (1995 – current). He was appointed chairman of the London School of Economics in 2008. He is currently UN special representative for migration and development. Before these appointments, he was the founding director-general of the World Trade Organization. He had previously served as director general of GATT since July 1993 and was instrumental in concluding the Uruguay GATT Round Negotiations.”[7]

On April 30th, The Huffington Post published a satire piece about Goldman Sachs, who was embroiled in a Congressional probe over the present and pending financial meltdown just days before the Gulf disaster stole the headlines. The spoof article titled, Goldman Sachs Reveals It Shorted Gulf of Mexico, was actually mistaken by some as a legitimate news story. Written by a comedian, the satirical article said,

“In what is looming as another public relations predicament for Goldman Sachs, the banking giant admitted today that it made ‘a substantial financial bet against the Gulf of Mexico’ one day before the sinking of an oil rig in that body of water.”[8]

After this gag piece was published, various independent researchers began checking into the financial transactions of Goldman. What they found turned out to be a case of art imitating life.

Sterling Allan reported in The Examiner on May 5th,

“It turns out that Goldman Sachs really did place shorts on TransOcean stock days before the explosions rocked the rig in the Gulf of Mexico sending stocks plunging while GS profits soared — benefitting [sic] once again from a huge disaster, having done the same with airline stocks prior to 911 then again with the housing bubble.”[9]

It’s important to note the cozy relationship between Goldman Sachs and the Obama administration. According to McClatchy, while Goldman Sachs was under fire from the Securities and Exchange Commission, and their lawyers were in negotiations with the regulatory agency, Goldman CEO Lloyd Blankfein was a repeated visitor to the White House. He attended events with Obama and met with Larry Summers, Obama’s top economic advisor. Obama’s 2008 campaign benefited from $994,795 worth of campaign donations from Goldman employees and their relatives.[10] The Gulf disaster, coming on the heels of the Congressional hearing and SEC “investigation,” served to distract attention from the ongoing financial fraud and economic meltdown caused by Goldman and others.

We now know from John Byrne at Raw Story that prior to the Gulf oil mess, not only did Goldman Sachs short shares of TransOcean, the owner of the failed Deepwater Horizon rig, they also ditched 4,680,822 shares of BP stock, worth $250 million and representing 44% of their holdings. “Goldman’s sales were the largest of any firm during that time,” writes Byrne. “Goldman would have pocketed slightly more than $266 million if their holdings were sold at the average price of BP’s stock during the quarter.”[11]

Byrne also noted other financial institutions that also dumped BP holdings.

“Other asset management firms also sold huge blocks of BP stock in the first quarter — but their sales were a fraction of Goldman’s. Wachovia, which is owned by Wells Fargo, sold 2,667,419 shares; UBS, the Swiss bank, sold 2,125,566 shares.”[12]

If that weren’t enough of a “coincidence,” we also had The Telegraph out of London reporting that the chief executive of BP, Tony Hayward, also sold 223,288 shares, worth £1.4 million of stock in his own company (over $2 million) on March 17th — only weeks before the BP Gulf mess. The paper noted that by doing so he “avoided losing more than £423,000 ($614,449) when BP’s share price plunged after the oil spill began six weeks ago.”[13] He took the money and paid off the mortgage on his family mansion in Kent.

At this point, a question should be coming to mind: What did these people know that the rest of us didn’t? How is it that stock in BP and Transocean suddenly seemed so unattractive to those closest to the disaster? Ah, the coincidences! But it gets even better.

On April 10th, The Houston Chronicle reported that Halliburton — the company of which former Vice-President Dick Cheney was CEO — was in the process of acquiring Boots & Coots. Reuters reported that the deal was announced on Friday, April 9th — just eleven days prior to the explosion.[14] The Chronicle noted that “Boots & Coots has become well known for putting out some of the world’s largest oil and gas fires.”[15] The company’s website lists services they provide, including “deepwater application and well inspections, as well as blowout prevention and control counsel or assistance…”[16] According to the Orlando Sentinel, their expertise is already being put to use in the Gulf, as they are “one of two primary companies designing relief-well strategies for the BP blowout.”[17]

So when the acquisition deal is formerly approved by the government, Halliburton — the company famous for profiting from no-bid government contracts in war zones — will have collected for themselves yet another “slick” profit.

This is especially intriguing in light of the fact that, according to NPR, Halliburton’s cementing work — completed only hours prior to the explosion — has become a “central focus” of the Congressional investigation.[18] The Wall Street Journal quotes unnamed “experts” as saying the timing of the cementing in relation to the blast “points to it as a possible culprit.”[19]

But Halliburton isn’t the only company that stands to make a killing off the crisis. The Times Online out of the UK reported that TransOcean itself took out a $560 million insurance policy on the Deepwater Horizon rig. The dollar amount was well above the rig’s value. According to the paper, insurance payouts amounted to a $270 million profit from the disaster.

“The windfall, revealed in a conference call with analysts, will more than cover the $200m that Transocean expects to pay to survivors and their families and for higher insurance costs.”[20]

A number of people have questioned why Corexit — a chemical banned in the UK[21] and is much more toxic than the oil itself — was used as a dispersant in the Gulf. Assuming for the moment that chemical dispersants had to be used, the New York Times reported on May 13th:

“Of 18 dispersants whose use EPA has approved, 12 were found to be more effective on southern Louisiana crude than Corexit, EPA data show. Two of the 12 were found to be 100 percent effective on Gulf of Mexico crude, while the two Corexit products rated 56 percent and 63 percent effective, respectively. The toxicity of the 12 was shown to be either comparable to the Corexit line or, in some cases, 10 or 20 times less, according to EPA.”[22]

Yet, despite the EPA data ranking it “far above dispersants made by competitors” for toxicity, BP chose to dump more than 400,000 gallons of Corexit into the Gulf, order 805,000 more gallons with plans of hundreds of thousands of additional gallons should the spewing continue. Why?

The answer may lie in the fact that not only has Corexit production benefited BP and Exxon Chemical Company, it also has ties to the very same banking company that somehow knew to sell nearly half its holdings in BP stock just prior to the disaster — Goldman Sachs. Cassandra Anderson of Morph City connects the dots to the economic ties between the oil industry and the bankers.

“Corexit is produced by NALCO, originally named the National Aluminate Corporation, which formed a limited partnership with Exxon Chemical Company in 1994. Ondeo Nalco was purchased by Goldman Sachs, Apollo and Blackstone in 2003 and is currently a publicly traded company. Given NALCO’s business ties, it seems that safe and natural cleanup methods were avoided in the Gulf to pursue an economic agenda. The use of Corexit in Alaska, after the Exxon Valdez disaster, resulted in toxicity to humans that included respiratory, nervous system, liver, kidney and blood disorders.”[23]

They say that history repeats itself. We know from wire reports that all 125 fishing boats had to be recalled from Gulf cleanup efforts after workers aboard began “experiencing nausea, dizziness, headaches and chest pains.”[24]

What’s going on here? Is the Gulf being poisoned on purpose to enhance corporate profits? Or has this crisis been orchestrated by the illuminists in order to force the United States to ratify the Law of the Sea Treaty (LOST) which would cede control of the oceans — over 70 percent of the planet’s surface — to the United Nations?

One must always keep in mind that Agenda 21 is the game plan for all that happens in the world today. The Hegelian dialectic is the means by which that game plan is implemented — creation of a crisis to condition the minds of the people that an undesired change is necessary, creation of their own controlled opposition to the crisis, finally the introduction of their pre-determined solution.

Chapter 17 of Agenda 21 deals with “Protection of the Oceans, all Kinds of Seas, Including Enclosed & Semi-enclosed Seas, & Coastal Areas & the Protection, Rational Use & Development of their Living Resources.” Who will determine what constitutes “rational use” of the oceans and their resources? If the LOST is ratified, it will be the United Nations.

In July 2009, State Department official Margaret Hayes told the New York Times that the Obama administration was in the process of working to “craft a plan to ratify the U.N. Convention on the Law of the Sea.”

“President Obama is strongly in favor of the United States becoming a party to the Law of the Sea Convention,” Hayes was quoted as saying. “There is discussion going on as to the exact timing of when they might have a hearing and when they might proceed to have the full Senate consider accession.”[25]

The Times goes on to report that the administration is continuing a multi-year mapping of the sea floor in the Arctic in preparation to stake a claim under the LOST.[26]

Furthermore, the World Ocean Council, an alliance of multi-national businesses that are dedicated to ocean “sustainability,” is having its “Corporate Ocean Responsibility” meeting this month — conveniently on the heels of a major maritime disaster. The Sustainable Ocean Summit is described as “the first international, cross-sectoral ocean sustainability conference for the private sector – [that] will catalyze the growing interest among ocean businesses for more effective leadership and collaboration in addressing ocean environmental challenges.”[27] It just so happens that two of the founding members of the World Ocean Council are ExxonMobil and TransOcean.[28]

That the crisis in the Gulf may have been planned and executed with the intention of profiting from it while pushing an environmental control agenda, might explain the pathetic federal response after the disaster. [NWV POLL: Was the Gulf oil spill deliberately created?]

Three days after learning of the Gulf gusher, the Interior Department Chief of Staff Tom Strickland left for the Grand Canyon with his wife and went white water rafting.[29] The Department of the Interior is charged with the task of coordinating federal response to a major oil spill. Yet, Strickland’s priorities were elsewhere.

The “In-Situ Burn” plan was developed by the federal government in 1994 to deal with oil spill disasters in the Gulf, and calls for the immediate use of fire booms. Had the plan been followed, it might have prevented oil from reaching the shoreline. A single fire boom can burn up to 1,800 barrels or 75,000 gallons an hour. Yet, despite the plan, not one fire boom was available anywhere in the Gulf at the time of the incident.[30] [31]

On May 11th, ABC News reported that the U.S. Coast Guard conducted operations in the Gulf, simulating a major oil spill and practicing federal response to it a mere three weeks prior to the real disaster.[32] What was the purpose of the simulation? Obviously, it wasn’t to improve federal response.

In 2002, there was a similar practice operation which ABC describes as “eerily similar” to the current disaster. Lack of experience, poor communications, conflicting roles, and a need for new technology were cited. None of the recommendations were ever put into place.[33]

Wire reports from the Associated Press have said that workers aboard the rig were forced to sign statements that they hadn’t witnessed the explosion. They were told they couldn’t go home, nor could they make phone calls and talk to their friends and family until they signed the statements indicating they had no “first hand or personal knowledge” of the incident.[34]

We now have private military contractors deployed from Wackenhut — the military contractor infamous for its employees’ drunken brawls and vodka shots taken out of each other’s backside — guarding the perimeter of the Deepwater Horizon Unified Command.

Respected attorney Ellen Brown has written about empty Wackenhut buses with prison bars on the windows being driven around for no apparent reason in Arizona. Your writer has personally talked to other people who have seen these buses. Ellen wrote last year:

“The new Wackenhut operation is shrouded in mystery. It has been running its fleet of empty prison buses night and day, apparently logging miles on a Department of Homeland Security (DHS) contract. Multiple buses can be seen driving all over town and even on remote desert back roads. Oddly, except for the driver and one escort guard seated in front, these buses appear to be empty.”[35]

Network news media have been complaining of being harassed and threatened by the security contractors for shooting video of the coast,[36] [37] which we’re told may soon become uninhabitable. Will Wackenhut buses be utilized to relocate mass numbers of people out of the coastal states?

It’s shaping up to be an interesting summer.

Brazil is getting hot. Too hot, too fast

If there is one thing proven beyond doubt during this crisis is that government interventionism in the free market is nefarious.  Developing countries are again and again the victims of globalist inspired management.  Argentina was one notorious case, Iceland and Greece have followed; and now Brazil, a fairly prosperous country in the last decade, is on the way to becoming another victim of artificial implosion.

Financial Times

Brazil’s central bank raised its policy interest rate by three quarters of a percentage point on Wednesday evening in another sign thatBrazil getting too hot the country’s breakneck pace of growth is causing concern over rising prices.

Brazil’s economy expanded by 2.7 per cent in the first quarter over the previous quarter and by 9 per cent over the first quarter of 2009, the national statistics office said on Tuesday. That is much faster than what many economists consider to be the potential, or non-inflationary, rate of about 4.5 to 5 per cent.

“This shows there has been no change in the bank’s position since its previous increase in April,” said Silvio Campos Neto of Banco Schahin in São Paulo. “It is clear from all the indicators that the economy is heating up and inflation is still above target. This is worrying and demands further increases in rates.”

The bank raised its target overnight Selic rate to 10.25 per cent a year, the second three-quarter-point increase at the last two six-weekly meetings of its monetary policy committee.

Consumer price inflation ballooned from a low of 4.17 per cent a year last October to 5.22 per cent in the 12 months to May. Many economists expect inflation to reach 6 per cent by the end of this year, well above the government’s target of 4.5 per cent. Economic growth is expected to be about 6.6 per cent this year.

Mr Campos said he expected the bank to raise the Selic rate to 11.75 per cent by the end of this year.

He said successive interest rate increases would help bring growth back to sustainable levels and predicted the economy would grow by about 4.3 per cent in 2011.

Brazil’s domestic market has recovered quickly from a brief recession during the global crisis, spurred on by a rising consumer class that has benefited from more than a decade of economic stability and low inflation, and from low-cost but effective income transfer programmes.

But the fast pace of growth has exposed bottlenecks such as the poor quality of Brazil’s infrastructure and its heavy tax burden. The rate of investment has risen in recent years but is still short of what is needed to deliver fast, sustainable growth.

Background: Fears of overheating

Brazil’s economy was among the fastest growing in the world during the first quarter, according to figures released on Tuesday that add to fears the economy is overheating and to expectations that the central bank will raise rates again on Wednesday.

The economy grew at a faster-than-expected annual rate of 9 per cent in the three months to March and by 2.7 per cent compared with the previous quarter, according to the IBGE, the national statistics office.

Part of the reason for the growth was an increase in investment, with the rate of investment rising to 18 per cent from 16.3 per cent a year earlier, spurred by gross fixed capital formation, which leapt by 26 per cent year on year, the fastest rate since the IBGE’s current series began in 1995.

“This confirms that the economy is very heated,” said Rafael Bacciotti, economist at Tendências, a consultancy in São Paulo. “The stand-out sectors were industry and services. Employment and wages are also growing strongly and we expect this to continue throughout the year.”

The manufacturing industry grew by 17.2 per cent year on year and the retail sector by 15.2 per cent. Imports also set a record, surging by 39.5 per cent year on year.

The central bank’s most recent weekly survey of market economists showed expectations of overall growth this year rising to 6.6 per cent, the 12th consecutive week of climbing expectations.

But many believe the economy cannot grow at more than 4.5 or 5 per cent a year without provoking an increase in inflation.

The central bank has been forced to act by steadily rising inflation expectations over recent months. Since October, Brazil’s consumer inflation rate has surged from an annual rate of 4.17 per cent to 5.26 per cent in April. However, the central bank’s most recent survey showed a slight drop in forecasts for inflation during 2010, with the average falling to 5.64 per cent from 5.67 per cent a week earlier.

Most economists expect the central bank to announce a second consecutive three-quarter percentage point rise in its policy interest rate, the Selic, at the end of its monetary policy committee’s regular two-day meeting tomorrow.

The committee meets every six weeks to decide whether to change the Selic rate in pursuit of the government’s annual consumer price inflation target, currently 4.5 per cent a year.

If expectations are confirmed, the Selic will rise to 10.25 per cent a year, up from 8.75 per cent when the current tightening cycle began in April.

The Cycle of Debt Deflation

Before It’s News

One of the most famous quotations of Austrian economist Ludwig von Mises is that “There is no means of avoiding the final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion or later as a final and total catastrophe of the currency involved.” In fact, the US economy is in a downward spiral of debt deflation despite the bold actions of the federal government and of the US Federal Reserve taken in response to the financial crisis that began in 2008 and the associated recession. Although the vicious circle of debt deflation is not widely recognized, precisely what von Mises described is happening before our eyes.

A variety of positive economic data has been reported in recent months. Retail sales rose 0.4% in April 2010 as consumer spending rose and the US gross domestic product (GDP) grew at a rate of 3%.  In May 2010, home sales rose to a five-month high and consumer confidence rose 17% (from 57.7 to 63.3). Industrial production rose 0.8% and durable goods orders rose 2.9%, more than had been forecast. However, the modest gains reported represent the continuing adaptation of economic activity at dramatically lower levels compared to the pre-recession period and most of the reported gains have been substantially manufactured by massive government deficit spending.

Despite the widely reported green shoots, in May, the unemployment rate rose to 9.9% while paychecks in the private sector shrank to historic lows as a percentage of personal income, and personal bankruptcies rose. Roughly 14% of US mortgages are delinquent or in foreclosure, credit card defaults are rising and consumer spending hit 7 month lows. To make matters worse, the reported increase in consumer credit, in fact, points to a further deterioration because consumers appear to be borrowing to service existing debt. Outside of the federal government, which is borrowing at record levels and expanding as a percentage of GDP, and outside of the bailed out financial sector, debt deflation has continued unabated since 2008.

Money Supply vs. Debt Service

A contraction of the broad money supply is taking place because the influx of money into the US economy, i.e., lending to consumers and non financial businesses, has fallen below the rate at which money is flowing out of general circulation as a function of debt service (interest and principle payments on existing debt), thus a net drain of money from the broad US economy is taking place. As a result, additional borrowing, as consumer spending falls, appears to be servicing existing debt in a pattern that is clearly unsustainable and that signals a further rise in debt defaults in coming months.
M3
The estimate of the broad money supply (the Federal Reserve’s M3 monetary aggregate) is crashing and the Federal Reserve’s M1 Money Multiplier, a measure of how much new money is created through lending activity, fell off of a cliff in 2008, and remains practically flat-lined.
MULT
Chart courtesy of the Federal Reserve Bank of St. Louis
The contraction of the broad money supply points to a potential slowing of economic activity and indicates that consumers and non financial businesses will be less able to service existing debt. Despite easing somewhat in March 2010, credit card losses are expected to remain near 10% over the next year and mortgage delinquencies, are currently at a record highs, and these dismal predictions implicitly assume a stable or growing money supply.

A tsunami of eventual mortgage defaults seems to be building and loan modifications have been a failure thus far. There have been only a small number of permanent loan modifications (295,348) under the Home Affordable Modification Program (HAMP) in 2009, out of 3.3 million eligible (60 days delinquent) loans and more than half of modified loans default.

Mortgage Delinquencies and Foreclosures
Chart courtesy of Calculated Risk
Although it has been reported that American consumers are saving at a rate of 3.4%, the contraction of the broad money supply suggests savings liquidation. Given a contracting money supply, ongoing debt defaults and declining consumer spending, the increase in non-mortgage consumer loans indicates that consumers are borrowing where possible to consolidate debts, cover debt service, or borrowing to continue operating financially as their total debt grows, thus as they approach insolvency.
CONSUMER
Chart courtesy of the Federal Reserve Bank of St. Louis
The increase in non-mortgage consumer loans has not prevented an overall decline in total household debt attributed to ongoing deleveraging by consumers. While deleveraging (paying down debt) has been interpreted as caution on the part of consumers, or as low consumer confidence, the decline in outstanding credit reflects a reduced ability to borrow, i.e., to service additional debt. This suggests that the recovery of the US economy may be illusory and that the economy is likely to contract further in coming months.
CMDEBT
Chart courtesy of the Federal Reserve Bank of St. Louis
Commercial borrowing has declined more sharply than household debt suggesting that the nominal return to growth estimated at 3% has not been matched by debt financed expansion in the private sector.
BUSLOANS
Chart courtesy of the Federal Reserve Bank of St. Louis
The broad US money supply is no longer being maintained or expanded by normal lending activity. If federal government deficit spending ($1.5 trillion annually), debt monetization and emergency actions by the Federal Reserve (totaling an estimated $1.5 trillion since 2008) to recapitalize banks are considered separately, there remains a net drain effect on the broad money supply. The scarcity of money hampers economic activity, i.e., money is less available for investment, and directly exacerbates debt defaults as consumers and businesses experience cash shortfalls, while at the same time being less able to borrow. Since unemployment is a key indicator of recession, then if the US economy were contracting, it would be evident in unemployment statistics.

Structural Unemployment

Unemployment and labor force data suggest that the US labor market is in a structural decline, i.e., millions of jobs have been and are being permanently eliminated, perhaps as a long term consequence of off-shoring, outsourcing to other countries and the ongoing de-industrialization of the United States. However, the immediate meaning of the term “structural” has to with the fact that jobs created or sustained during the unprecedented expansion of debt leading to the financial crisis that began in 2008, e.g., a substantial portion of service sector jobs created in the past two decades now appear not to be viable outside of a credit expansion.

Officially, the US unemployment rate rose to 9.9% in April 2010, which represents the percentage of workers claiming unemployment benefits. However, the total number of unemployed or underemployed persons, including so-called “discouraged workers” (Bureau of Labor Statistics U-6), rose to 17.1%Using the same methods that the BLS had used prior to the Clinton administration, U-6 would be approximately 22%, rather than the official 17.1% statistic.

U-6 Unemployment
With official U-6 unemployment of 17.1% and a workforce of 154.1 million there are roughly 26,197,000 people officially out of work. Using the pre-Clinton U-6 unemployment calculation of approximately 22%, there would be 33.9 million unemployed. If the average US household consists of 2.6 persons and if 33% of the unemployed are sole wage earners, then 55.5 million US citizens currently have no means of financial support (17.9% of the population).
Unemployment by Duration
Chart courtesy of Calculated Risk
While it has been reported that the labor force is shrinking, the characterization of workers permanently exiting the workforce by choice may be inaccurate. While a shrinking workforce could reflect demographic changes, the rate of change suggests that tens of millions of Americans are simply unemployed.
EMRATIO
Chart courtesy of the Federal Reserve Bank of St. Louis
Setting aside the question of whether or not those “not in the workforce” are, in fact, permanently unemployed, the workforce, as a percentage of the total US population, is currently at 1970s levels. Since many more households today depend on two incomes to meet their obligations, compared to the 1970s, a marked drop in the percentage of the population in the workforce points to a decline in the labor market more significant than official unemployment statistics suggest. What is more important, however, is that structural unemployment suggests structural government deficits, e.g., unemployment benefits, welfare, food stamps, etc. Since more than 2/3 of US GDP (roughly 70%) consists of consumer spending, a sustainable recovery from recession seems improbable if unemployment is worsening or if the labor force is in a structural decline, since that would imply unsustainable government deficits, whether or not they are masked by nominal GDP gains thanks to economic stimulus measures.

Government and GDP Growth

The US federal government is a growing portion of GDP, thus reported GDP growth is largely a byproduct of government deficit spending and stimulus measures, i.e., reported GDP growth is unsustainable. Total government spending at the local, state and federal levels accounts for as much as 45% of GDP, thus nominal gains would be expected when government deficit spending increases. According to some measures, reported gains in GDP are a byproduct of relatively new statistical methods and, using earlier methods of calculation, GDP remains negative.
GDP
Government borrowing and spending may have offset declines in the private sector but only to a degree and only temporarily. The resulting growth in US public debt has an eventual mathematical limit: insolvency. Of course, the actual limit to US borrowing remains unknown. The continuing solvency of the US depends on the ability and willingness of governments, banks and investors around the world to lend to the US, which in turn depends on the tolerance of lenders for the US government’s profligacy and money printing by the Federal Reserve, e.g., quantitative easing and exchanging new cash for worthless bank assets. US Treasury bond auctions will fail if lenders conclude that a sufficiently large portion of their investment will be diluted into oblivion by proverbial money printing. In that event, the US dollar will surely plummet, despite deflationary pressures within the domestic US economy, and the cost of foreign goods, e.g., oil, will rise causing high inflation or triggering hyperinflation.
GFDEBTN
Chart courtesy of the Federal Reserve Bank of St. Louis
According to the Bank for International Settlements (BIS), the federal budget deficit increased from 3.1% of GDP in 2007 to 9.2% in 2010.  Rather than being the result of one-time expenses, such as temporary stimulus measures, much of the deficit represents permanent increases in government spending, e.g., due to the growing number of federal employees. If increased government spending is removed, GDP appears to be declining significantly.
GDP Minus Government Deficit Spending
Chart courtesy of Karl Denninger
Of course, sustainability has more to do with total debt than with deficit spending because a deficit assumes that there is an underlying capacity to service additional debt.

Unsustainable Debt

While asset prices have declined, e.g., real estate and equities, debt levels have remained high due to the federal government’s policy of preserving bank balance sheets, which had ballooned prior to the financial crisis to the point that overall debt in the US economy reached unsustainable levels.
Total Debt to GDP
Chart courtesy of Karl Denninger
The absolute debt to GDP ratio of the US economy peaked in 2007 when debt levels exceeded the ability of the economy to service debt from income based on production, even at low interest rates. Although US GDP began to decline prior to the advent of the global financial crisis, debt coverage had been in decline approximately since the 1970s, coincidentally, around the time that the US dollar was decoupled from gold.
Declining Debt Coverage from 1971 on
Chart courtesy of Karl Denninger
Government deficit spending cannot correct the situation because, for every dollar of new borrowing, the gain in GDP is negligible and some have argued that the US economy has passed the point of “debt saturation.”
Debt Saturation
Chart courtesy of Nathan A. Martin
In a growing economy, additional debt can result in a net gain in GDP because the money supply grows and economic activity is stimulated by transactions that flow through the economy as a result. The debt saturation hypothesis is that, as debt levels rise, additional debt has less impact on GDP until a point is reached where new debt causes GDP to decline, i.e., the capacity of the economy to service debt has been exceeded and, not only is it impossible for the economy to grow at a rate sufficient to service existing debt (since interest compounds), but economic activity actually declines further as a function of additional debt.

A Downward Spiral

The process of debt deflation is straightforward. New lending at levels that would maintain or expand the broad money supply is impossible for two reasons: (1) asset values and incomes have fallen and millions remain unemployed; and (2) debt levels remain excessive compared to GDP, i.e., real economic activity (outside of the government and financial services industry) cannot service additional debt. The inability to lend, actually the result of prior excess lending, results in a net drain of money from the economy. The drain effect, in turn, leads to further defaults as cash strapped consumers and businesses fail to service existing debt, and as debt defaults impact bank balance sheets, putting a damper on new lending and completing the cycle of debt deflation.

Keynesian economic policies, i.e., government deficit spending, are irrelevant vis-à-vis excessive debt levels in the economy and bailing out banks is not a solution since it cannot stop the deterioration of their balance sheets. The process is self-perpetuating and cannot be stopped by any government or monetary policy because it is not a matter of policy, but rather one of mathematics.

Since the presence of excess debt (beyond what can be supported by a stable GDP, or by sustainable GDP growth) impacts the broad money supply, efforts to preserve bank balance sheets, i.e., to keep otherwise bad loans on the books of banks at full value, will ultimately cause bank balance sheets to deteriorate more than they would have otherwise. The fact that US banks issued trillions in bad loans cannot be corrected by changing accounting rules, nor can the consequences be avoided by government deficit spending or by unlimited bailouts, and the problem cannot be papered over by dropping freshly printed money from helicopters flying over Wall Street. The major problems facing the US economy today—a tsunami or debt defaults, structural unemployment, massive government budget deficits, a contraction of the broad money supply outside of the federal government and the financial system, and a lack of sustainable growth—cannot be addressed as long as excess debt levels are maintained. As von Mises clearly understood, sound economic conditions cannot be restored unless and until the excess debt, which resulted from a boom brought about by credit expansion, is purged from the system. The alternative, and the current policy of the United States, is a downward spiral into a bottomless economic abyss.