In the investing world, specialization is the rule. You don’t see too many people who take a worldwide or multi-disciplinary approach.

Nowhere is this point more clear than when you listen to an energy analyst back to back with a bond analyst.

*****Energy analysts like the well-respected >Pimco’s website:

Without the Federal Reserve lending its prodigious printing press to the effort, Treasury yields will necessarily rise. And that’s a terrible situation for our Federal Government and its debt.

*****And while analysts are experts in their field, at the tops of their respective games, neither has discussed the ramifications of the combination of Peak Oil along with massive deficits.

Here’s what we know, right now: the United States produces far less oil than it consumes. So every drop of oil we have to purchase outside of our own production goes somewhere else – outside of our economy. The New York Times recently published a storyhttp://listapp1.bfpnewsletters.com/track?type=click&mailingid=1028100&messageid=523801&databaseid=38800&serial=1211238902&emailid=abstacey@i-zoom.net&userid=11364&extra=&&&2005&&&http://www.nytimes.com/2011/02/24/business/energy-environment/24oil.htm"> about the disruption in Libya’s oil production that sheds some light on how much GDP we lose to oil price increases:

“As a general rule of thumb, every $10 increase in the price of a barrel of oil reduces the growth of the gross domestic product by half a percentage point within two years.”

At the same time, our official deficit is on track to equal 100% of our $14 trillion GDP any minute now. So every increase in the yields on US Treasuries is a commensurate dip into the GDP.

In 2010, oil averaged about $80 a barrel, and 30-year Treasuries averaged about 4%.

As a thought experiment, let’s assume that oil averages $100 over the next year, and that bond yields spike 1% after the QE2 expires in June.

In this scenario, GDP will effectively shrink 2%. For every $20 increase in the price of oil and every 1% 30 year Treasury increase, we lose 2% of GDP. The United States economy is shrinking at the same time that the Federal Reserve is increasing money supply. More dollars are chasing fewer resources.

Oil prices and loan servicing will hollow out the United States economy like a bloated corpse in a tank full of piranhas, and there is no one in a significant position of power who has the temperament or ability to fix either problem.

Here’s to knowing the inevitable,

Kevin McElroy
Editor
Resource Prospector