Healthcare Costs Could Overwhelm U.S. Economy

The U.S. Supreme Court is expected to rule in June on the Constitutionality of the Affordable Care Act, also know as 'Obamacare'. The latter name is either used pejoratively by the President's adversaries or in complimentary fashion by his supporters.

For better or for worse (and since the law won't fully go into effect until 2014, it may be too soon to tell), crediting or discrediting the President for the law is misleading. After all, the 2,700-page law was crafted by Congress, in conjunction with the healthcare, insurance and pharmaceutical industries.

However, the final bill was passed with no Republican votes, which made it immediately controversial.

A reasonable argument can be made that the law is too long, too complex and had far too much input from the private industries that stand to benefit from the law's existence.

The one thing that most Americans — conservatives and progressives alike — seem to dislike about the law is the mandate requiring every American to carry health insurance coverage. Conservatives see it as a direct assault on their freedom and progressives see it as a generous gift to the private health insurance industry.

No matter how one views the law, there is no denying the litany of problems with the current U.S. health care system.

Health care spending now accounts for 18% of the US economy — the highest proportion ever, according to the government. As recently as 1980, health care expenditures were just 4.2% of gross domestic product.

By comparison, in 2009, industrialized nations spent an average of 8.9% of GDP for healthcare expenditures, according to the OECD. If the U.S. spent 9% instead of 18%, the annual savings to the nation would be roughly $1 trillion annually. That's stirring when your consider that Americans spent $2.6 trillion on health care in 2010.

The saddest thing is how little Americans get for their health care dollars.

The United States spends more on health care than any other country. But, at 78.2 years, American life expectancy is just 27th in the world. On the other hand, Japan spends $2,878 per person — about $5,000 less than the U.S. — and has the highest life expectancy among developed nations.

In most of the OECD countries, health care expenses come to more than $2,000 per person each year. In the 10 countries with the highest costs, expenses are roughly twice that.

However, in the U.S., spending on health care per capita comes to nearly $8,000 per person, approximately $2,600 more per person annually than Norway, the second-highest spender.

In four of the countries with the most expensive health care, pharmaceutical expenses come to at least $600 per person per year. In the U.S., those costs are more than $950 per capita, the highest in the world.

Even if the health care system ultimately saves lives, attempting to pay off all its associated debt is destroying many others.

From 1999-2009, health insurance premiums for families rose 131%, while the general rate of inflation increased 28% over that period. The increases in health insurance costs are not relative to anything else in the economy. They exist in a world of their own, driven by profit, high executive pay, advertising and marketing.

A recent study by the American Journal of Medicine found that 62 percent of all bankruptcies filed in 2007 were tied to medical expenses. The more striking thing is that three-quarters of those who filed for bankruptcies in 2007 had health insurance. This is further evidence of a truly broken system.

However, last year, roughly 50 million Americans were without health insurance, according to Census Bureau data. This amounted to 17% of the population in 2011. A report by the Kaiser Family Foundation found that three-quarters of the 50 million uninsured in the US are actually employed. Again, more evidence of just how broken the existing system is.

Sadly, things are moving in the wrong direction. Due to the struggling economy, more Americans lack healthcare today than just four years ago. In 2010, the total number of Americans with health insurance fell for the first time in decades.

Yet, the nature of many accidents and illnesses is that they are unpredictable and often unpreventable. Invariably, the uninsured end up in the emergency room with no means to pay the bill. Hospitals still treat them, but the ensuing costs are passed along to the Americans who are insured in the form of higher prices.

For this and other reasons, the unfortunate reality is that the U.S. has an exceptionally expensive healthcare system that doesn't deliver much value for all of its massive costs. As previously noted, this is largely attributable to the fact that the system is profit-driven and bloated by expensive marketing and advertising costs. The system is also inflated by generous executive compensation packages and the need to satisfy Wall St expectations.

For example, the U.S accounts for almost half of the global pharmaceutical market, with $289 billion in annual sales, followed by the EU and Japan. For years, the pharmaceutical industry has been the most profitable of all businesses in the U.S. In the annual Fortune 500 survey, the pharmaceutical industry topped the list of the most profitable industries, with a return of 17% on revenue.

The profit motive is clearly one of the primary drivers of costs. But perhaps the most worrisome issue is how little we get in return for what we spend.

According to a 2007 report issued by the Commonwealth Fund (a non-profit group that studies healthcare issues), America has the most expensive, least efficient healthcare system compared to five other industrialized nations.

The report found that — in order — Germany, Britain, Australia, New Zealand and Canada all provide better care for less money.

The reports’ issuers said, “The U.S. healthcare system ranks last compared with five other nations on measures of quality, access, efficiency, equity, and outcomes.”

The report also studied convenience, such as waiting more than four months for elective, non-emergency surgery. The U.S. didn’t fare as well as Germany, but was better than the other countries.

The Commonwealth Fund has consistently found that the U.S. — the only one of the six nations surveyed that does not provide universal healthcare — is inferior to the other nations in many measures of healthcare.

Though the Affordable Health Care Act has yet to be fully implemented, things haven't improved in recent years.

If the US wants to continue thinking of itself as a world leader, then it has to be able to do better than other industrialized nations. Like education, the health of the nation's citizens is not just critical, but fundamental.

Unquestionably, the U.S. has a highly advanced, highly technological healthcare system. If you are in crisis and in need of intensive care, or some form of life-saving surgery, the U.S. is among the very best. The problem is that the U.S. system focuses very little on prevention and health maintenance, both of which mitigate future costs.

As of 2008, 80 percent of all healthcare dollars were spent on chronic conditions. As the old saying goes, an ounce of prevention is worth a pound of cure — and it could also be worth billions in savings. Quite simply, prevention is a lot cheaper than treatment.

However, cost will not be part of the equation in the Supreme Court's decision-making. The Justices will simply determine whether or not it is Constitutional for the government to mandate that the American people purchase health insurance.

If the Court rules that it is not Constitutional, it could call onto question the government's ability to mandate many things. After all, laws are supposed to be compulsory, not optional.

Would the overturning of the mandate invalidate the Massachusetts healthcare law signed by Mitt Romney in 2006?

While conservatives now vehemently oppose the Affordable Care Act, the concept of an individual health insurance mandate originated at the Heritage Foundation, a conservative think tank, in 1989. Republicans also introduced health care bills that contained an individual health insurance mandate twice in 1993. And of course Republican Mitt Romney championed and signed such a mandate into law as Massachusetts' governor.

The conservative approach has been to create a truly national health insurance market, allowing people to purchase insurance from any of the 50 states. This seems logical. The larger and more competitive a market is, the lower prices tend to be.

However, the U.S. problem is a matter of high costs, which ultimately drive end-prices for consumers.

The other long-time conservative solution to soaring costs is tort reform. However, the 15 leading insurance companies had a 5.7% increase in malpractice payouts from 2000 to 2004, while increasing premiums by 120% during that period. Since malpractice lawsuits don't appear to be the problem, tort reform is not the solution.

That said, a solution must be arrived at soon because health care spending will eventually strangle the economy.

The U.S. healthcare system encourages hospitals and doctors to perform unnecessary medical procedures on people who don't need them, while denying procedures to those who do.

According to a 2005 report by researchers at the Boston University School of Public Health, about 10% of the U.S. population is responsible for 70% of its health care costs. That group consists primarily of the elderly and the chronically sick.

While we can’t stop the aging process, we can do more to avoid lifestyle diseases such as heart disease, hypertension, and diabetes. We can also stop spending so much on end-of-life care, which simply prolongs the inevitability of death.

The health care costs related to our aging population are poised to worsen. The health care system is on a collision course with reality.

The U.S. is on the threshold of becoming the first-ever mass-geriatric society. For the first time in history, people 85 and older are the fastest growing segment of the population. Over the next 20 years, the number of people over the age of 65 will double to more than 70 million, or 20% of the population.

Ultimately, America needs to spend more money preventing disease than treating it. In order to regain control of spiraling costs, the focus must shift to prevention. It's the chronic conditions that people ignore for so long — usually because they don't have insurance — that are so expensive to treat.

However, the government, doctors, hospitals, and insurance companies can only do so much. Ultimately, we need to do a better job of taking care of ourselves.

Two-thirds of Americans are overweight or obese, and this is the public health issue of this generation. The CDC has reported that obesity is now overtaking smoking as the leading cause of preventable deaths.

Additionally, diabetes is now viewed as an American epidemic and it is projected to become this nation's most costly disease. Incredibly, 90% of diabetes cases are Type II, meaning they are almost entirely preventable.

Yet, Americans refuse to change their behaviors and their lifestyles.

Our physical well being is largely in our own hands. Until we start taking better care of ourselves, the personal and economic costs will become increasingly burdensome to our nation as a whole.

U.S. Corporate Tax Rate Quite Deceiving

Much has been made of the recent news that after Japan drops its corporate tax rate to 38.01 percent, the U.S. will then have the highest rate in the developed world, at 39.2 percent.

However, to fully understand this story you have to read between the lines and look past the political posturing.

Few U.S. corporations actually pay the 39.2 percent rate because the loophole-riddled tax code gives them lower "effective" rates.

The tax code has not been thoroughly overhauled in 25 years and it is in desperate need of fixing. Corporate lobbyists worked hard at putting all those loopholes in place, and they are determined to keep them there.

However, due to a shrunken tax base, a signifiant revision may be on the way.

In February, President Obama proposed a corporate tax reform blueprint that included a 28 percent top rate. Such an idea seems like one that Republicans would love, and it provides an opportunity for genuine consensus and true bipartisanship.

The problems with the tax code are egregious, and they are robbing the Treasury of much needed revenue. In 2010 the federal government brought in $2.16 trillion in revenue — down from $2.56 trillion in 2007 — putting revenue at a 60-year low.

Much of that is due to the effects of the Great Recession. But corporations are also taking advantage of the tax code and paying lower rates than most individual taxpayers, or avoiding taxes altogether.

Of the 30 companies in the Dow Jones industrial average, 19 told shareholders their effective rate for their 2011 fiscal years (most of which ended on December 31) was below Obama's proposed new tax rate, according to a Reuters analysis of securities filings.

Verizon, for example, paid an effective rate of just 2.7 percent. Even more remarkable, AT&T, Bank of America and Travelers Insurance actually posted a tax gain.

From 2007 to 2009, accounting tricks helped lower Pfizer's average tax rate to 17 percent; Merck to 12.5 percent, and GE to just 3.6 percent.

Those relaxed rates are well below the rates paid in other industrialized nations.

The average 2012 corporate tax rate for the 34 developed countries is 25.4 percent, according to the Organization for Economic Co-operation and Development. The Obama plan would put the U.S. just above that average.

The key to reform is to fully eliminate all deductions, exemptions and loopholes. The code must create a level playing field that is fair, straightforward and incorruptible. Presently, U.S. corporations are making a mockery of the tax code.

A 2008 report by the Government Accountability Office (GAO) found that approximately two-thirds of all corporations paid no federal income tax in 2005. However, it was part of a longer trend.

The GAO — the investigative arm of Congress — also found that two out of three US corporations paid no taxes from 1998 through 2005. The study covered 1.3 million corporations of all sizes, with a collective $2.5 trillion in sales. It also included foreign corporations that do business in the U.S.

The Wall Street Journal reported that 69 percent of U.S. corporations were organized as nontaxable businesses in 2008, up from 24 percent in 1986.

Last year, 30 of the biggest corporations spent more on lobbying than taxes. How crazy is that?

Corporations have gamed the system in their favor. So assertions about how punitive and restrictive the corporate tax code is are plainly absurd.

A government report shows that last year total corporate federal taxes paid fell to 12.1 percent of profits — a level not seen since 1972.

Things weren't always this way. In the 1950s, US corporations contributed a 30 percent share to the federal tax base. Today it's down to 6.6 percent.

Corporations paid a higher share of revenues in the past and the economy was a whole lot healthier. Revenue from corporate income taxes was between 5 percent and 6 percent of gross domestic product back in the early 1950s.

However, federal corporate tax collections made up only 1.3 percent of U.S. GDP in 2010, down from 2.7 percent in 2006.

The lobbyists did what they were paid to do, and they did a really good job. Congress, ever the loyal servants to their corporate masters and benefactors, did what was asked of them and rigged the tax code.

The consumer group Citizens for Tax Justice said it surveyed major U.S. companies and found that 26 on average paid no net federal income taxes between 2008 and 2011, among them General Electric and Duke Energy.

This nation is essentially broke. In Fiscal 2011, the U.S. government borrowed roughly 36 cents for every dollar spent. Fiscally, the country is teetering on the edge of a cliff. The government simply cannot allow huge, profitable corporations to continue paying zero taxes or, worse, post tax gains.

It's also time for corporations and their Congressional cronies to drop the act; they are not burdened by high or punitive taxes. Quite the contrary. Further, U.S. corporations are fortunate to be subject to the rule of law and all of the protections that this allows.

If the tax code is rewritten, it would benefit the corporations that don't get the special sanctions and the generous tax benefits. Ultimately, the playing field should be leveled and made equal for all.

Moreover, the tax code doesn't need to be rewritten for the benefit of corporations; it needs to be rewritten for the benefit of the rest of the nation. More revenue is desperately needed by the Treasury, which is presently being swindled by corporations.

U.S. Debt Crisis, Straight Ahead!

Within the next five years, $5.9 trillion — or 71 percent — of the U.S. government's privately held marketable debt will come due.

This means the government will somehow have to roll over nearly three-quarters of its debt by 2017 — almost certainly at higher interest rates than at present.

Simply put, an enormous amount of debt — perhaps too much — will come due in a very narrow time frame.

The U.S. has become overly reliant on short-term funding; only 10 percent of the public debt matures beyond ten years. This creates constant pressure to issue new debt and get debt holders to roll over existing debt with the promise of even more interest payments down the road.

The U.S. paid $454 billion in interest on its publicly held debt in fiscal 2011, which ended September 30. For perspective, the entire U.S. budget deficit in 2002 was $421 billion. The current interest payments alone now exceed that figure.

The scary thing is that even if Congress manages to balance spending with revenues, it would still have roughly half-a-trillion dollars in interest payments to make this fiscal year. And the situation can get even worse.

As interest rates rise — and they surely will — the interest payments will become even more cumbersome. Based on the current structure, a one percentage-point increase in the average interest rate will add $88 billion to the Treasury’s interest payments this year alone, according to Lawrence Goodman, president of the Center for Financial Stability. Goodman is an expert in such matters; he previously served at the U.S. Treasury.

When rates return to historic norms, the interest payments will become unmanageable.

In 1970 the yield on a 10-year Treasury averaged 7.35 percent; in 1980 it was 11.43 percent; in 1990 it was 8.55 percent; in 2000 it was 6.03 percent; and in 2010 it was 3.22 percent. You can see the long term downward trend. But rates can just as easily trend upward instead.

It is reasonable to ask how the government will convince foreign governments and sovereign wealth funds to roll over their existing debt, rather than taking their money and going home.

After all, the U.S. private sector — namely banks, mutual funds, corporations and individuals — reduced its purchases of U.S. government debt to a meager 0.9 percent of GDP in 2011, from a peak of more than 6 percent in 2009. That's because they're all chasing higher yields in riskier markets.

Buyers of U.S. debt have become scarce enough that last year the Federal Reserve purchased a stunning 61 percent of the total net Treasury issuance. That is simply insane. It is also patently unsustainable.

The Fed is effectively subsidizing U.S. government spending and borrowing. This masks the reduced demand for U.S. debt by sovereign entities and the U.S. private sector.

Simply put, the U.S. government would cease to function without the absolutely massive intervention of the central bank. But there are limits to all of the Fed's money-printing schemes.

At present, the U.S. government's demand on the credit markets for its annual interest and principal payments is equivalent to 25 percent of GDP, according to Goodman, which is 10 percentage points higher than the norm.

This level of indebtedness cannot continue. Interest payments on the debt steal from more productive uses, whether its infrastructure, research & development or education.

More importantly, at some point large interest payments can force some rather unfortunate social choices and even the potential of default. Never in the history of the Republic has that happened. But there is a first time for everything.

The likely outcomes are a debt crisis, spiking interest rates, and spiraling inflation due to all of the Fed's monetization of the debt (meaning, printing money backed by nothing so that the government can maintain its deficit spending).

One needs only to look at the European sovereign-debt crisis to see how this all ends. Things can seem just fine for many years, until there is a sudden shock to the system.

In other words, everything can seem just fine until, quite suddenly, it isn't.

Strategic Petroleum Reserve for Supply Crisis, Not High Prices

Attempting to offset rising oil prices by tapping the Strategic Petroleum Reserve would be both shortsighted and ineffectual.

The price of oil seems to be front-page news nearly every day now, and it's clearly a hot topic among American drivers filling their cars with gasoline each week.

The price of West Texas Intermediate (WTI) crude reached $100 per barrel in November and has experienced highs of at least that level for five consecutive months.

WTI is domestically produced oil and it is the benchmark for oil pricing on the Chicago Mercantile Exchange.

In January, the U.S. Department of Energy predicted that, for the first time ever, the price of crude oil would average more than $100 a barrel this year.

The elevated price of oil is raising food costs, as well as the costs of all other transported goods. Shippers, such as UPS, have raised their rates and airlines are also raising ticket prices to compensate for rising fuel costs.

The current state of affairs is spurring some people, including assorted politicians and news pundits, to call on the President to release oil from the U.S. Strategic Petroleum Reserve (SPR).

However, such a move would be unwise and ineffective.

According to the U.S. Department of Energy, with a capacity of 727 million barrels, the SPR is the largest stockpile of government-owned emergency crude oil in the world. It is stored in four locations; two in Louisiana and two in Texas.

"Established in the aftermath of the 1973-74 oil embargo, the SPR provides the President with a powerful response option should a disruption in commercial oil supplies threaten the U.S. economy," reads the DOE's Website.

The purpose of the Reserve is to to maintain a backup oil supply in case of national emergency, such as another oil embargo that could cripple the U.S. The SPR also provides a reserve for the national defense.

The President can order the release of oil from the Reserve in the event that the United States faces an economically threatening disruption in oil supplies. This has occurred just three times since the creation of the Reserve in 1975.

The first was in 1991, at the beginning of Operation Desert Storm.

The second was in September 2005, after Hurricane Katrina struck the Gulf Coast and devastated the vital oil production, distribution and refining industries in the region.

The third Presidentially-directed release came on June 23 of 2011 and was used to offset the disruption in global oil supplies caused by unrest in Libya and other countries.

Though the Reserve has a capacity of 727 million barrels, the current inventory is 696 million barrels. At the current usage level of 19 million barrels per day, the reserve would supply oil to the U.S. for just 36 days.

Apparently, those calling for the release of oil from the SPR are unaware of this fact. Attempting to offset rising prices in this way would be both shortsighted and ineffectual.

Moreover, the maximum total withdrawal capability from the Reserve is just 4.4 million barrels per day, less than a quarter of current daily usage. At that draw-down rate, it would take 160-plus days to exhaust the supply.

So even a full emergency release wouldn't offset a foreign oil embargo, the results of which would devastate the U.S. economy.

Critically, the price paid for the oil in the SPR is $20.1 billion (an average of $28.42 per barrel). If the U.S. were to run through the Reserve supply and then have to replenish it, the cost would be nearly four times the previous expense. This makes tapping the Reserve a last ditch effort.

The Strategic Reserve was designed as an insurance policy in case of significant supply disruptions; not rising prices due to rising global demand or the behavior of unscrupulous Wall St. speculators.

At this point, the U.S. is not facing a genuine oil shortage or energy emergency. Drawing down the SPR would leave the U.S. defenseless in the event that a genuine global crisis should erupt.

Federal Reserve & National Debt Have Set Stage For Soaring Inflation

In 2011, the U.S. inflation rate averaged 3.2 percent. So far in 2012, the rate is still averaging roughly 3 percent. Yet, Americans are seeing even more significant increases whenever they buy food or gasoline.

The concern among many economists and analysts is that the U.S. could be headed for a much higher inflation rate in the not too distant future.

From 1914 until 2010, the average inflation rate in United States was 3.38 percent. It's reasonable to ask, What's behind this?

Most people associate inflation with rising prices. However, rising prices are merely a symptom of inflation, not the cause.

In reality, rising prices are the result of money losing its value — its buying power. Money is driven by the same laws of supply and demand that affect almost everything else. The more rare something is, the more valuable it is. Conversely, the more readily available something is, the less valuable it is.

Money is constantly being created by the world's central banks, including the Federal Reserve Bank. When the supply of money exceeds the supply of goods and services in an economy, it devalues the currency — meaning the currency loses buying power.

The Fed is allowed to create money out of nothing. Yes, as incredible as it seems, the Federal Reserve is legally entitled to create something of value out of absolutely nothing. All of the world's central banks do this. All paper money is fiat money, meaning it is simply assigned a value by government decree. Yet, paper money has no intrinsic value. It's just paper with ink, backed by nothing of value.

However, only about three percent of the world's money is in the form of bills and coins. The other 97 percent is just numbers typed into bank databases and shown on computer screens.

Most troublingly, all money is loaned into existence. But the interest portion of all loaned money is never created; only the principle is created. So, the system is always out of balance, right from the start. The only way for the interest on debts to be paid off is by creating even more money. In essence, money is created as debt.

So, by design, our monetary system must constantly create new money, or new debt. And price inflation is the end result every time a central bank creates new money. It's the money supply that is being inflated, and all of this new money continually devalues the existing supply of money.

What is really worrisome is that the creation of money has been happening at an alarming rate.

The U.S. monetary base (the supply of money) nearly doubled between 1994 and 2006. Then it doubled twice more, increasing by an additional 221% from 2006 to 2011. That's simply staggering. In fact, it's alarming.

The result has been a devalued dollar, manifested in the form of rising prices, which is affecting all Americans. This process will continue to play out in the coming years, but the consequences are likely to become considerably worse over time. If you don't understand this, just think supply and demand.

The U.S. government has created so much debt for decades that the Federal Reserve would have to manufacture about five times more dollars than exist today merely for the Treasury to meet its obligations. The U.S. government's unfunded liabilities currently amount to $70 trillion.

Yes, you read that correctly. The U.S. government has $70 trillion in future obligations and it doesn't have the funds to pay them.

Due to its fears of deflation and persistently high unemployment, the Federal Reserve has bought trillions in mortgage-backed securities and Treasury bonds over the past couple of years, all with freshly created money. The funds from those purchases have flooded the economy with inflation-fueling liquidity, pumping up the stock market in the process.

Much of the excess liquidity has also ended up in commodities markets, which has sent crude oil and food prices into an upward trajectory.

All of that liquidity flowing through the economy has enabled the government to continue producing annual trillion dollar deficits. Whatever funding the Treasury cannot raise in the bond market, the Fed simply prints.

But the Fed isn't acting alone. The European Central Bank, the Bank of England, the Bank of Japan and the Chinese Central Bank have all been printing like mad, pumping absolutely massive amounts of liquidity into global markets.

The end result will be skyrocketing inflation.

There are limits to everything. This level of debt creation cannot go on indefinitely.

As Dr. Chris Martenson has astutely observed, beginning in January 1970, total credit market debt doubled five times by 2010. This includes all debt — financial sector debt, government debt (federal, state, local), household debt, and corporate debt.

In order for the 2010 decade to mirror, match, or in any way resemble the prior four decades, credit market debt will need to double again from $52 trillion to $104 trillion.

Does this seem reasonable or even possible to you? How can the current amount of debt ever be repaid, much less another doubling?

What is clear is that no matter how this all ends, it will not end well.

The dollar has already lost over 95 percent of its buying power since the creation of the Federal Reserve in 1913. And there is no let up in sight to all of this unrestrained money printing. Once foreign governments and sovereign wealth funds stop buying Treasuries — out of fear that the U.S. already has too much debt to ever be repaid — the only option will be for the Fed to super charge its already rampant money creation.

As it stands, the national debt already exceeds the gross domestic product. That's troubling because when public debt reaches 90 percent of the GDP, research suggests that economic growth slows by about 2%. And slow growth can pile on even more debt.

In their book, "This Time It's Different: Eight Centuries of Financial Folly," Carmen Reinhart, a University of Maryland economist, and Harvard professor Kenneth Rogoff find that a 90 percent ratio of government debt to GDP is a tipping point in economic growth. Beyond that, developed economies have growth rates two percentage points lower, on average, than economies that have not yet crossed the line.

History indicates that the U.S. will not be able to grow its way out of debt. And the long term trends for the debt and dollar are frightening.

Under the CBO’s rosiest estimates, total Federal Debt is projected to rise to at least $21.7 trillion by 2022. However, the debt could also be as high as $29.2 trillion by that time.

The end result will be an even more devalued dollar with even less buying power.

The inflation of our currency is already leading to inflated prices throughout the economy, Yet, the current inflation rate is merely a hint of the explosion that is yet to come.

The inflation rate hit a historical high of 23.70 percent in June of 1920 and got as high as 13.5 percent as recently as 1980. It shouldn't be a surprise to anyone when inflation rises to a level somewhere between those two points in the coming years.

Then we'll all sound like our grandparents, reminiscing about how cheap things used to be back in 2012.

John Maynard Keynes Was Right (and not for the reason you think)

For more than eight decades, famed economist John Maynard Keynes has been the subject of much discussion and debate.

Many observers attribute his scholarly positions on monetary policy with ending the Great Depression, while others have negatively viewed him as a champion of big government and unsustainable deficit spending. The latter has made him a scourge to conservatives ever since.

However, what is often overlooked is that Keynes advocated both tax cuts and budget surpluses. Deficits, he believed, were to be begrudgingly accepted as a necessary evil only in some circumstances.

Like all economists, Keynes theories on economics boiled down to the basic laws of supply and demand.

However, unlike others before him, Keynes believed that demand drives supply. In Keynes view, insufficient demand leads to unsold goods, which leads to layoffs. Ultimately, insufficient demand leads to a downward spiral of unemployment, poverty and even depression.

Keynes' remedy in these instances was to artificially stimulate demand by increasing government spending or cutting taxes, which ultimately encourages the public to increase its spending instead. The idea was to cause either the government or the public to increase spending to stimulate the economy.

These goals were to be achieved through fiscal policy; spending measures or tax cuts. Yes, Keynes actually advocated cutting taxes.

Keynes favored deficit spending only to combat depressions, not to fight low levels of unemployment. He also advocated creating surplus budgets to eliminate government debt in times of prosperity.

Yet, that approach has been largely ignored for decades. The overall debt has increased under every president since the 1940s, regardless of which party has controlled Congress. Even during times of extraordinary economic expansion, debt has continued to pile up.

The primary concern about large government debt is that it can fuel inflation.

Notably, Keynes believed that inflation could be cured with the help of budget surpluses and/or restrictive monetary policy. If demand (or spending) are reduced, then prices start falling.

Though Keynes argued for budget deficits to stimulate demand, he also advocated for subsequent budget surpluses to eradicate debt. That part of the equation seems to have been forgotten by many.

The public debt has increased by over $500 billion each year since fiscal year (FY) 2003, with increases of $1 trillion in each FY since 2008. The fiscal year begins on October 1 and ends on September 30 the following year.

The national debt is now in excess of $15.5 trillion and there is no end to the deficits in sight. Interest payments are consuming an ever-larger portion of the budget each year as the debt grows. And, though currently at historically low levels, interest rates are poised to increase — perhaps significantly — in coming years. That could make debt management impossible.

Budget surpluses now seem like a pipe dream. They are a distant memory from the 1990s. Keynes would surely be disappointed, if not appalled.

And though consumer demand remains constrained by a variety of factors (high unemployment, stagnant wages, the bursting of the housing bubble, etc.), with such an enormous debt the government is hamstrung to engage in further deficit spending to stimulate demand.

The nation's infrastructure is crumbling and received a cumulative grade of D from the American Society of Civil Engineers. And the nation desperately needs to invest in scientific research to remain competitive in the 21st Century.

Yet, in both instances, the government is handcuffed by its enormous debt. With trillion dollar deficits adding to the mammoth debt each year, how can anyone reasonably argue for piling on yet more debt, no matter how worthy the cause?

When Vice President Dick Cheney famously stated, "Reagan proved that deficits don't matter," he was wrong. Very wrong. They do matter. A lot.

Keynes knew this all along.

Tar Sands Too Inefficient & Energy Intensive, Not Worth Cost

Perhaps you've heard of the Keystone XL pipeline. It's been in the news a lot lately. The pipeline was intended to carry tar sands oil across the Canadian border to the U.S.

There was a big hullabaloo in Congress over the pipeline, which was finally voted down by the Senate this week. Notably, 45 Republicans voted in favor, while the other two abstained.

The obvious question is, what is the value of tar sands?

The story currently being promoted by some suggests that Canadian tar sands (also known as oil sands) are the solution to America's energy needs and a way to relieve us of our reliance on Middle Eastern oil.

Somehow, this story ignores the fact that tar sands are still a form of imported oil, and that most of America's imported oil already comes from Canada and Mexico, not the Middle East.

But that's not the heart of the matter.

Here's the key question: What is the net energy returned after utilizing oil or natural gas to obtain more oil? In the oil business, this is referred to as Energy Return On Energy Investment (EROEI).

EROEI is defined in the following way: Energy Produced / Energy Used = EROEI

For example, if oil is selling for $100 per barrel and it costs $10 in energy to produce a barrel, the EROEI is 10. Traditional oil development is currently estimated to have an EROEI of about 15. Obviously, the higher the number (i.e., the higher the EROEI), the better.

If it requires a barrel of oil to retrieve a barrel of oil, then what's the point? Energy producers have to take into account the market price of oil or natural gas, versus how much it will cost to extract and refine them.

The light, sweet crude is the good stuff that sits at the top, where it's relatively easy to extract. The lower quality oil — like tar sands — just happens to be the most expensive oil because it is the most difficult to extract.

With tar sands, the cost to produce a unit of energy is much higher than with traditional oil. Simply put, tar sands do not come cheaply.

Just how energy-intensive are tar sands? Professor Kjell Aleklett of Uppsala University in Sweden, a recognized expert on tar sands, puts it this way: "The supply of natural gas in North America is not adequate to support a future Canadian oil sands industry with today's dependence on natural gas."

The problems begin right at the start of the operation. Tar sands are typically mined, which means a large amount of energy is required just to get the process started.

Tar sands are a mixture of roughly 90 percent sand, clay and water, plus 10 percent bitumen, a thick hydrocarbon liquid. After extracting that 10 percent of bitumen from the tar sand mixture, the bitumen can be purified and refined into synthetic crude oil.

Bitumen is one of the world's most expensive and heaviest hydrocarbons. And it is very energy intensive. In fact, bitumen production requires so much natural gas for processing and enrichment that it now accounts for one-fifth of Canada's natural gas demand.

That's the problem Professor Aleklett was referring to above.

Since bitumen is a highly viscous “heavy” oil that doesn’t flow as easily as lighter crude, it requires more processing to facilitate its flow through oil pipelines.

In fact, bitumen is so heavy and viscous that it will not flow unless it is heated or diluted with lighter hydrocarbons, such as natural gas. Typically, tar sands are produced using natural gas to heat the steam that drives the oil out of the sands. And it takes a lot of gas to do this.

Finally, bitumen has to be upgraded so that it can be refined. This can be done by adding methane or hydrogen — from even more natural gas — to the bitumen to create lighter oil.

Even if electricity is used to extract the tar sands and natural gas, this ultimately comes from a coal-fired power plant. It doesn't change the equation; you're still exchanging one form of energy for another.

Perhaps you now get a sense of just how inefficient tar sands really are. In fact, tar sands are so inefficient that just 75% of the bitumen can be recovered from sand.

At the turn of the 20th Century, it took just one barrel of oil to find and liquidate 100 barrels. That amounted to an extraordinary Energy Return on Energy Investment.

However, according to Peter Tertzakian, the chief energy economist at ARC Financial Corporation, the EROEI for tar sands amounts to 7:1 for extraction and drops to 3:1 after it has been upgraded and refined into something useful, such as gasoline.

The process of making liquid fuels from oil sands requires abundant energy from beginning to end, extraction to refining. The entire process generates two to four times the amount of greenhouse gases per barrel of final product as the production of conventional oil.

Ultimately, squeezing oil out of tar sand is an extremely wasteful process, requiring between two and four tons of tar sand and two to four barrels of water to produce a single barrel of oil. The current level of water consumption is enough to sustain a city of two million people every year, according to an analysis by Energy & Capital. And after the water has gone through the entire process, it is so toxic with contaminants that it cannot be released into the environment.

When you look at the big picture, tar sands clearly aren't the answer to our energy needs. They're not even part of the answer. They are too energy intensive, release far too much carbon into the atmosphere and are far too dirty, polluting precious water supplies.

Until some renewable, synthetic fuel is developed that can reduce our reliance on fossil fuels, conservation will be our best bet. Oil prices are in a long term upward trend, and tar sands present more problems than solutions.