Getting back to the low “would be consistent with over $5.0 trillion of debt elimination,” says Rosenberg. This is too much for even the U.S. government to absorb, he declares: “A goodly chunk of this excess debt — bringing credit into realignment with the permanently new and lower level of household net worth — is going to have to be paid down (or defaulted on).” Hence, Rosenberg’s bullish stance on government bonds and bearish stance on stocks.

No doubt some of the debt will be extinguished, as it should be. But there is also a denominator in the debt-to-asset ratio. It can move up and take the ratio lower too. Indeed, the previous declines and cyclical lows in the series may mostly reflect, it seems to me, periods of asset inflation brought on by Fed monetary expansion. Something similar could happen again this time around.

Just as I’m not sold on the view we are heading for a raging inflation problem, neither am I personally sold on the debt-deflation thesis. Never underestimate the power of policymakers to pull rabbits out of the air or do whatever it takes to save the system. The bears are right about the system being in need of a great purge but the government is the “house” in this great casino.

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If you’re interested in following me on Twitter, I’m @amlynek2

Yes, the price of our most precious commodity,  the source of 32% of our total energy consumption,  has plunged. And that has caused mainstream opinion makers to assume that Peak Oil was just a flash in the pan as a concept. But many in the oil industry are actually moving to a new and higher level of concern around the issue of peaking oil through this period, especially now that we’re seeing a slowdown in investment in new oil projects as a result of lower prices.

Ongoing depletion in current oil production projects  continues to take production off line. But this is happening at the same time we’re failing to replace that production, and that’s going to lead to a plunge in total production in the years ahead.  This past Friday Cambridge Energy Research Associates (CERA), the energy stats organization that most mainstream fund managers follow, suggested the world might be facing a sharp decline in daily global production of seven million barrels a day over the next five years as a result of the current low prices.  That is, according to many in the industry we’re winding the system up for a huge price spike as soon as the economy recovers, or tries to.

Think about that for a moment. Seven million barrels a day in production coming out of a our current daily production of 86 mbpd? That will be a severe shock to the system and will virtually ensure a price spike if the economy recovers. Remember, it was only a slowing of the rate of growth that caused the Great Energy Spike of 2008. Real declines (which some suggest could begin next year) will take prices to a new level. For those who are assuming we’ll see a quick recovery from this recession, you might want to rethink those assumptions. Look at the price of oil right now. With every bit of good news the price trebles, seemingly ready to break out into a new oil bull market. That will be good for the speculators buying into the spike. But it also means that whatever recovery we get is going to run right into a huge wall of high oil prices, and that’s going to kill any recovery.

No doubt we’ll see another huge round of “shoot the speculator” if we see oil prices rise. But sit back for  a moment and think about the bigger picture here and what this all means. What is really happening is that free markets are working just as they are supposed to. Markets are registering the new ceiling on oil production (and the specter of possible declines). And in that they are sending the right message to us: There is no more room for growth in the total supply of oil. It will be constrained. After 150 years of constant expansion we’re near the upper limit of that expansion, and there is nothing we can do about. Heed the signal people, we need to change.

Hopefully higher prices will arrive soon enough to get enough new (and more expensive) unconventional oil supply online to avoid real chaos in oil supply. But what we should also take from this is the idea that the only way out of this mess is to move  to alternative energies and nuclear. These other sources of energy are all far less efficient than hydrocarbons (oil and natural gas). Hydrocarbons provide by far the highest “energy return on energy invested” and so any move away from them will require more of out total societal capital to be put toward energy production, which will take growth from every other sector of the economy. But we no longer have a choice. The path to growth can no longer go through oil. America is going to be in a permanent recession until it begins to grow (albeit more slowly) through other energy means.

This is all old hat to the peakists, of course. But it seems to be slowly dawning across the rest of the society. The CBC is interviewing Hirsch. That long-time cheerleader of Chimerica (read: more American consumption) Thomas Friedman is changing his tune (shamelessly so). And in Alberta and Texas they’re just watching everyone else catch up to this kind of thinking. (How many people know that the Greater Houston Partnership, and the Houston Chamber of Commerce has already put this stuff together and is now engaged in an effort to develop the city along more “alternative energy” lines? It’s true.)

I’m headed to Alberta this evening to attend a CFA-sponsored “Investing in Energy” conference, which will feature both the CEO of Suncor, Rick George, but also Kenneth Deffeyes, an emeritus professor of geology at Princeton University, and someone who worked with M. King Hubbert, the patron Saint of Peak Oil. I’m very interested in hearing what he has to say. His take is that we’re at peak, basically. Our current low prices will lock in this level of production since so much new production is going to be delayed. Once prices pick up again and flood oil companies with enough money to get the projects back online, depletion will have already moved ahead far enough to ensure that we never increase out total daily production that far above 90 or 100 mbpd. We’re there.

It is telling that Deffeyes has been invited to this conference. He has been warning about the dangers of peak for years, and he’s finally getting some attention. Tune in here over the next couple of days for some live blogging from the conference.

Also at the conference will be an analyst from Simmons & Co., the energy investment bank run by Mathew Simmons, another well-known voice among the peakists. Through this period of low oil prices he has also been busy. In a recent speech he gave in Australia, Simmons suggested that free markets in oil may really be, basically, screwing us over right now. What we need is a guaranteed price for oil (a carbon tax!) to guarantee the money in the energy sector necessary to get us through this period. That is an astonishing comment from someone who made a life out of working in free markets, and it’s a warning not to be taken lightly.

Free markets are great when the underlying commodity is expanding in its supply. But now that this is no longer the case for the most important base input into the economy, the volatility that is going to result from a shift from expansion to contraction of oil supply could crash our economies more seriously than we’ve experienced to this point. If we get a massive oil price spike—if we lose, say, 7 mbpd in total production in the next five years as CERA maintains—you will know exactly what I’m talking about.

The world is at a weird place right now. When America peaked in production of domestic oil production in 1970, the U.S., which in the early parts of last century had been the biggest net exporter of oil (and therefore the biggest recipient of the world’s energy dollars),  had to rely more and more on foreign imports of oil. And that reversed a basic flow. No longer was America selling oil to the rest of the world and collecting huge sums of private and tax money on that. It was now sending money offshore. And so now other countries are now collecting the rents on energy provision, not America.

Nevertheless, America went ahead consuming energy at the level it always had. To cover the gap that began to widen between the money coming in and that going out we saw the personal savings rate decline, and we saw a large bubble in paper assets created by over-leveraged banks. This worked through the late ’80s and ’90s when the price of oil was low. The country was able to literally paper over this financial hollowing out by de-regulating lending to increase the amount of debt outstanding. But the Day of Reckoning has arrived. The supply of oil stopped growing back in 2005 and that caused the price of this base commodity to rise to the point it pushed the banking industry over the edge.

Germany and Japan were already in recession as a result of the rise in the price of oil through this decade even before we heard of sub-prime mortgages (which are a symptom, not the cause of our current crisis). But the price spike in 2008 knocked the by then fragile U.S. banking system into the ditch as people put more money into their gas tank and less toward their mortgages. The banking industry fell over. The easy credit dried up and the auto industry went shortly after. And that gets us to where we are today.

Now America is printing money to keep it all going. But that can only work for so long. America can no longer pay for its energy consumption and its economy has hit the wall. Let’s hope the centre holds (the U.S. dollar doesn’t crash) before Obama’s new energy initiative works. Because that is the only way out of this thing. And while the shift away from oil to a more sustainable future will mean permanently lower growth and checked markets for years to come, we no longer have a choice. This is where we are.

As reported in the New York Times, Peter Orszag, the president’s budget director, said annual deficits of 4% to 5% of the GDP (which were numbers his office came up with when they released the budget),  are “ultimately not sustainable.”

This report comes just a few days after a Canadian economist said our country’s federal debt will increase by $81.5 billion, or $18 billion more that what Harper is predicting.

If only everyone bought the same calculator…

Meanwhile, as the Financial Times of London reports, jewelry demand, comprising about 70% of gold end use, is tumbling. High prices and slowing economies are causing jewelry buyers to cut back. Also, scrap supplies are surging in response to higher prices.

Gold bugs anticipate galloping inflation from monetarization of the government’s debt load, which is to be substantially increased by the requirement to rescue the financial sector. Admittedly, it’s possible the Fed may resort to the printing press but the forces of de-leveraging are way out front now, spreading ever stronger deflationary impulses. Expansion in the money supply won’t accelerate inflation when the economy is moving away from full employment.

Gold bugs anticipate a tumble in the U.S. dollar. Yet, government borrowing is destined to escalate because, as mentioned, of the imperative to rescue the financial sector; the higher borrowing in turn creates upward pressures on interest rates and, in turn, draws capital into the U.S. Besides, other currencies are not looking all that attractive either as the world economy sinks further into recession.

What’s a bit surprising is the number. There were 124 “systemic banking crises” spread across dozens of countries between 1970 and 2007 (see appendix).

A downer is the average fiscal cost (cost of government bailouts) of the crises. “Fiscal costs, net of recoveries, associated with crisis management can be substantial, averaging about 13.3 percent of GDP, and can be as high as 55.1 percent of GDP,” note the authors. The $1 trillion (U.S.) estimate bandied about for the U.S. financial crisis seems gargantuan but is still far below 13.3 per cent of U.S. GDP. Could the final cost end up being even more monumental?

Also on the depressing side are the output losses due to systemic banking crises. The IMF document says they have “averaged about 20 per cent of GDP during the first four years of the crisis, and range from zero per cent to a high of 98 per cent of GDP.”

Interestingly, “there appears to be a negative correlation between output losses and fiscal costs, suggesting that the cost of a crisis is paid either through fiscal costs or larger output losses. Furthermore … even in the absence of significant government intervention, fiscal losses may be large due to tax revenues forgone because of higher output losses.”

Appendix: Canada was one of the few countries not to appear on the IMF list. An oligopolistic industry does have its advantages, it seems. Could lower levels of competition mean less pressure to lower credit standards?

It could be a warning not to expect a sustained rally in stocks if and when policymakers stabilize the financial crisis. There may be no need to rush back into equities, just yet.

The silver lining might be that a weaker world economy could considerably reduce the odds of the tumble in the U.S. dollar, upward spike in interest rates, and/or galloping inflation that many fear will be the consequence of the U.S. government taking on an estimated $1 trillion (U.S.) in debt to rescue the U.S. financial sector.

As the Chinese economy ratchets down, the authorities will likely want to keep the yuan from rising even more so than before — so they should remain willing buyers of U.S. dollars and treasuries. They won’t want to flee U.S. assets when it will cause the U.S. dollar to fall against the yuan and undermine their export-led, industrial development strategy. A preliminary signal of their willingness to continue supporting the U.S. dollar was the recent decision to cut interest rates.

Commodity-based economies like Canada and Australia will see weakness in their currencies against the U.S. dollar as the commodity boom fades further. And Europe’s regional differences are likely to be exacerbated, raising political conflicts that could undermine the euro – on top of the region’s more restrictive monetary policy that seems destined to produce a greater and/or longer lasting economic slump in the region.

And don’t forget, the U.S. dollar’s status is not just about economics. For many countries, political considerations are paramount. Countries like Japan, South Korea, Taiwan and Saudi Arabia would not want to dump the U.S dollar and assets because of their security relationships with the U.S.

During recessions, lower risk appetite and flight to safety favors government bonds. Although the supply of treasuries will be rising in the U.S., so will portfolio demand – especially considering how underweight many investors are. A Merrill Lynch study noted households currently have less than 0.7% of their financial assets in government bonds, about $1 trillion (U.S.) less than the peak of 4% in 1993. Public pension bond holdings are close to two-decade lows. Bond yields are low right now, even negative after adjusting for inflation, but as the economy winds down, inflation should be subsiding.

Admittedly, the debt obligations arising from the financial crisis — along with ongoing debt requirements for other government programs — are substantial and there should be upward pressures on interest rates. However, like in the 1980s, higher rates should be bullish for the U.S. dollar as foreign capital flows in, attracted by the higher yields. And slack in the U.S. economy may also allow the Federal Reserve to buy some of the debt without inflationary consequences, which offers some assurance the rise in bond rates should not be extensive.

History is an imperfect guide, but when the Resolution Trust Corporation began to buy bad assets during the savings and loan crisis in 1989, U.S. economic growth, house prices and equity markets did not bottom out for another 12 to 18 months. The dollar, however, traded sideways during the period