When You are at Peak, Which Way is Next?

To appreciate the amount of oil that we consume I have added a video (two years old, but not much changed) that illustrates the amount. I have also  added a thoughtful analysis on the current demand for housing in the US. Gasoline at the pump is rapidly increasing to the $4 per gallon mark. Oil price reachesd to a new 30-month high of $108 per barrel. Where is this going? Where do you think?

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US peak profits warning from Chris Mayer
Posted on 02 April 2011 Arabian Money

Rising star of the US financial newsletter world Chris Mayer has a stark warning for readers in his latest issue of Capital & Crisis. Profit margins in the US have reached unprecedented levels and can now only fall as commodity price inflation hits home.

‘One of the vulnerabilities in today’s market is that profit margins are near peaks’, he says. ‘Investors tend to like companies with fat profit margins, but high profit margins are like honey pots that attract competitors. They are rarely sustainable for long’.

Top ten crisis

If you take a list of the top 10 technology stocks in the US Nasdaq market then the average net profit margin is around 25 per cent, and similar high profit margins are also seen across the S&P 500 stocks. The boost to profit margins has come from cost cutting in the downturn, mainly in the form of job cuts that do nothing to boost domestic consumer demand.

‘Today, though, I doubt many of these firms have much more to cut,’ suggests Mayer. ‘Instead, the focus is now growing sales and taking business from competitors or defending an existing business. The focus, too, is how to deal with rising raw material costs. All of these put enormous pressure on margins. We should expect to see them fall.’

That of course is the contrarian view. It is not what the bulls of Wall Street are saying. They see a recovery in the US economy that is raising all boats.

If the Wall Street consensus is again wrong then the reverse will be true and all boats will sink. Mr Meyer is stock picking to locate the boats that will stay afloat, so at least he is thinking in the right direction. But the tendency always is for the good to get cast down with the bad, particularly if the numbers are overwhelming.

Naturally this situation is most dangerous when company profits have recovered sharply and the domestic economy is still in the dumps. And what do US auto and house sales figures quite clearly show us?  The domestic US economy is still in a depression with activity well down on the boom years.

Domestic depression


(US auto sales down 19% last year and that’s for smaller cars)
(US disposable incomes drop for the first time since September)

Now if domestic demand is not rising, and indeed consumer personal disposable income is falling  then what prospects are there for pushing up company revenues to keep profits surging ahead? You have to look to exports and repatriation of multinational income.

Yes but does the world not have a few worries of its own right now? To briefly summize: Japan just had its worst earthquake in history and nuclear reactors are leaking plutonium; the UK is facing three years of austerity; the eurozone has a massive debt crisis; and the Middle East and North Africa is in a state of revolution, civil war and protest that has pushed oil prices to a two-year high.

Will Asian sales hold up under these circumstances? Or will stocks sell-off and the dollar rally, making US exports uncompetitive again? This peak profits warning is very well timed.

Obama's economic policies have failed

Barack Obama is locked in a lose-lose situation
The president seems incapable of tackling either unemployment or the deficit, says Jeremy Warner.

By Jeremy Warner
Published: 6:27PM BST 03 Sep 2010
Telegraph

Barack Obama promised a new beginning when he became president in 2008. After the ideologically driven incompetence of the Bush years, we were mainly prepared to believe him. Yet politicians that promise root and branch change will nearly always disappoint and, with Mr Obama, disillusionment has been swift to arrive.
Judged by his legislative output, the new president has been extraordinarily successful. From healthcare reform to financial services, he's already up there with Lyndon Johnson and Franklin D Roosevelt. And, of course, this week, he's managed to deliver on his campaign pledge to end the war in Iraq; believe it if you will.

Yet on the most important issue facing ordinary Americans – the economy – Mr Obama is shaping up to be one almighty let down. As mid-term elections loom, there is visible panic among Democrats at the administration's failure to get to grips with deep-seated economic problems.

Tony Blair, who came to power on a similarly intoxicating wave of public euphoria, at least had the following wind of "The Great Moderation" – a virtually unprecedented period of economic stability and growth – to disguise the disappointments and repeated policy mistakes of his premiership. There was no such golden windfall to act as a prop for Mr Obama: the economy he inherited was toxic from top to bottom. The country was on the brink of a potentially severe depression; it was fighting two, essentially unaffordable wars; the budget deficit was spiralling out of control; jobs were being shed at the rate of nearly one million a month; public debt was on a catastrophically unsustainable trajectory.

Nobody could have expected Mr Obama to fix all these problems in the 20 months he has been in the job, but they might by now reasonably have expected at least a glimpse of the promised sunlit uplands.

There is no such vision on the horizon. Joblessness remains stubbornly high and, far from becoming self-sustaining, the recovery shows signs of stalling. In short, Mr Obama's economic policies have failed, or at least that is the growing public perception.

For me, it is still too early to make that judgment; as it happens there was modest encouragement from yesterday's US employment data. But many investors have made up their minds. Rightly or wrongly, yields on Treasury bonds are at levels that discount a depression.

Rarely have Americans felt so down in the dumps; collectively, they seem to have lost their innate sense of self-belief and optimism. Not since the 1930s has the American dream looked so forlorn. What's gone wrong, and why has the patient proved so unwilling to respond to the extraordinary fiscal and monetary medicine applied?

To supporters of deficit spending, it's not that the fiscal stimulus isn't working, but that it was always insufficient to do the trick. To them, Mr Obama should have done much more in his early months when he still had the political credit to take bold steps.

Most of us have something of a problem with this argument. The near $1 trillion fiscal stimulus Mr Obama applied could hardly be described as underwhelming. Indeed, it was without precedent in terms of size; very probably it was the most that was politically feasible at the time, too.

How much good it has done is anyone's guess. Supportive economists claim it averted a depression, but it doesn't seem to have done much for jobs. Beyond the ever widening deficit, there has been little discernible effect.
You can argue until the cows come home on the merits of further deficit spending, but even if Mr Obama were to take the view that he has to do more – as the White House's departing chief economist, Christina Romer, said he should this week – he almost certainly won't get that chance. Mr Obama is not just down in the polls; on present voting intentions, the Democrats will lose the House in the coming mid-terms, and possibly the Senate, too. Even if he wanted to spend more, he's not going to be allowed to. Anxiety about the deficit is stymieing the White House's jobs agenda.

Even Democrats shrink from overt support for more spending, and beyond some targeted measures which would carry no net costs, the president seems to have accepted there's virtually no room for manoeuvre. Already evident political stalemate will turn into gridlock after the mid-terms. Mr Obama won't be allowed more fiscal stimulus, and nor, despite their demands for deficit reduction, will his Republican opponents allow him to raise taxes to put public debt on a sustainable footing.

Now it may well be that the severity of the economic headwinds renders almost any further policy response ineffective, but politicians are not forgiven for impotence. On the main challenges facing his administration, Mr Obama falls between two stalls – he seems incapable of tackling either unemployment or the deficit.

Whatever his other achievements, Mr Obama will go down in history as the worst president since Jimmy Carter if he cannot make headway on either of these issues. It's hard to be optimistic. Mr Obama looks like a beached whale. As Tony Blair observes in his new autobiography, there is nothing quite so painful as high expectations dashed by harsh political and economic realities.

"The Fed is largely out of bullets"

The mistake being made should be obvious. The focus on consumer demand is not working. Neither is the deficit spending to save government jobs.

Every government job saved or created takes away from the private sector in the form of taxes or federal borrowing. Creating consumer demand is a good policy if we are trying to stimulate China. China exports more to the US and the spending is created by borrowing more money from China.

Policy should be job creation in the private sector. That can be done by doing less: less regulation, less taxes and less government meddling.

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Aug. 8, 2010, 7:00 p.m. EDT
Fed may resist market pressure for bond buys
Will seek to jawbone market that it is alert to downside risks

By Greg Robb, MarketWatch
WASHINGTON (MarketWatch)

Confronted with a U.S. economy that appears to be decelerating, the Federal Reserve may ratchet up cautionary language but many expect the central bank will refrain from buying more bonds to bolster growth.

"I am sure they are going to do nothing," said Bill Cheney, chief economist at John Hancock in Boston.

"The whole question" will surround the language of the statement, he said, where the central bank will want to stress it is "on the job and aware of downside potential," Cheney said.

The Federal Reserve is due to announce its decision from its one-day meeting on Tuesday at 2:15 p.m. Eastern.

The pace of the recovery has been slowing, putting pressure on the Fed to act to ward off a double-dip recession and falling consumer prices known as deflation.

Gross domestic product grew at a 2.4% annual rate in the second quarter, down from a 3.7% rate in the first three months of the year. The labor market seems stuck in second gear with the private sector adding fewer than 100,000 jobs per month since May. See full story.

After the weak job report for July on Friday, pressure for the Fed to take action mounted in financial markets, said John Canally, economist at LPL Financial Corp. in Boston. Economists at Goldman Sachs said Friday they expect the central bank to reinvest the income from mortgage-backed securities it holds back into the bond market - a "baby step," in their words, in the direction of unconventional easing.

But many Fed watchers believe the Fed is still forecasting a slower expansion rather than new danger emerging.

"I don't know they are really prepared to panic about this," said James Glassman, economist at J.P. Morgan Chase.

Many analysts said the July job data did not seal the deal for an easing.

Last month, Federal Reserve Board Chairman Ben Bernanke stressed the central bank was "ready" to take further steps to stimulate the U.S. economy if growth turns out to be weaker than expected.

"We are ready and we will act if the economy does not continue to improve -- if we don't see the kind of improvements in the labor market that we are hoping for and expecting," Bernanke told Congress.

Bernanke listed the options he said that the Fed is open to considering.

• The first option would be to signal to markets that rates are on hold for a very-long "extended period."
• The second would be to reduce the interest rate on excess reserves.
• And the final option would be adjusting the balance sheet by not letting maturing housing-related securities run off.

"That may sound good but the Fed is largely out of bullets," said Joel Naroff, president of Naroff Economic Advisers.

Many analysts are not impressed with these options and argue the Fed is about out of ammunition, with interest rates barely above zero and having bought $1.7 trillion in housing-related assets.

"It does feel the Fed is at point of pushing on a string. They can pump out more money but all that does is pump up bank reserves," Cheney said.

"If low interest rates were going to get the economy humming it would be humming already," Cheney said.

Some economists said the Fed will not reach a consensus on Tuesday.

"I would be surprised if they make up their mind what to do yet," said Glassman.

"Many of the lost jobs – in construction, finance, and outsourced manufacturing and services – are gone forever"

Certainly and emphatically no less qualified than Barrack Hussein Obama

A Tale of Two American Economies

Nouriel Roubini
From Wednesday's Globe and Mail
Published on Tuesday, Nov. 17, 2009 6:32PM EST
Last updated on Wednesday, Nov. 18, 2009 5:35PM EST

While the United States recently reported 3.5 per cent GDP growth in the third quarter, suggesting that the most severe recession since the Great Depression is over, the American economy is actually much weaker than official data suggest. In fact, official measures of GDP may grossly overstate growth in the economy, as they don't capture the fact that business sentiment among small firms is abysmal and their output is still falling sharply. Properly corrected for this, third-quarter GDP may have been 2 per cent rather than 3.5 per cent.

The story of the U.S. is, indeed, one of two economies. There is a smaller one that is slowly recovering and a larger one that is still in a deep and persistent downturn.

Consider the following facts. While America's official unemployment rate is already 10.2 per cent, the figure jumps to a whopping 17.5 per cent when discouraged workers and partially employed workers are included. And, while data from firms suggest that job losses in the past three months were about 600,000, household surveys, which include self-employed workers and small entrepreneurs, suggest a number above two million.

Moreover, the total effect on labour income – the product of jobs times hours worked times average hourly wages – has been more severe than that implied by the job losses alone, because many firms are cutting their workers' hours, placing them on furlough or lowering their wages as a way to share the pain.

Many of the lost jobs – in construction, finance, and outsourced manufacturing and services – are gone forever, and recent studies suggest that a quarter of U.S. jobs can be fully outsourced over time to other countries. Thus, a growing proportion of the work force – often below the radar screen of official statistics – is losing hope of finding gainful employment, while the unemployment rate (especially for poor, unskilled workers) will remain high for a much longer period of time than in previous recessions.

Consider also the credit markets. Prime borrowers with good credit scores and investment-grade firms are not experiencing a credit crunch at this point, as the former have access to mortgages and consumer credit while the latter have access to bond and equity markets.

But non-prime borrowers – about one-third of U.S. households – do not have much access to mortgages and credit cards. They live from paycheque to paycheque – often a shrinking paycheque, owing to the decline in hourly wages and hours worked. And the credit crunch for non-investment-grade firms and smaller firms, which rely mostly on access to bank loans rather than capital markets, is still severe.

Or consider bankruptcies and defaults by households and firms. Larger firms – even those with large debt problems – can refinance their excessive liabilities in or out of court, but an unprecedented number of small businesses are going bankrupt. The same holds for households, with millions of weaker and poorer borrowers defaulting on mortgages, credit cards, auto loans, student loans and other consumer credit.

Did the Chinese scare Obama with some hard cold facts?

Consider also what is happening to private consumption and retail sales. Recent monthly figures suggest a rise in retail sales. But, because the official statistics capture mostly sales by larger retailers and exclude the fall by hundreds of thousands of smaller stores and businesses that have failed, consumption looks better than it really is.

And, while higher-income and wealthier households have a buffer of savings to smooth consumption and avoid having to increase savings, most lower-income households must save more, as banks and other lenders cut back on home-equity loans and lower limits on credit cards. As a result, the household savings rate has risen from zero to 4 per cent of disposable income. But it must rise further, to 8 per cent, in order to reduce the high leverage of the household sector.

To be sure, the U.S. government is increasing its budget deficits to put a floor under demand. But most state and local governments that have experienced a collapse in tax revenues must sharply retrench spending by firing policemen, teachers and firefighters while also cutting welfare benefits and social services for the poor. Many state and local governments in poorer regions are at risk of bankruptcy without a massive federal bailout.

Moreover, income and wealth inequality is rising again. Poorer households are at greater risk of unemployment, falling wages or reductions in hours worked, all leading to lower labour income, whereas on Wall Street, outrageous bonuses have returned with a vengeance. With the stock market rising and home prices still falling, the wealthy are becoming richer, while the middle class and the poor – whose main wealth is a house rather than equities – are becoming poorer and being saddled with an unsustainable debt burden.

So, while the United States may technically be close to the end of a severe recession, most of America is facing a near-depression. Little wonder, then, that few Americans believe that what walks like a duck and quacks like a duck is actually the phoenix of recovery.

Obama's Katrina and an America that can't get anything done.

The entire Empire State Building was constructed in one year and 45 days. The Empire State Building came in on time and under budget. It was work for 3300 men during the Great Depression. It cost $40,948,900.

The builders Starrett Bros. & Eken told the owner, Raskob that they could get the job done in eighteen months. When asked during the interview how much equipment they had on hand, Paul Starrett replied, "Not a not a god damned thing. Not even a pick and shovel." Starrett told Raskob: "Gentlemen, this building of yours is going to represent unusual problems. Ordinary building equipment won't be worth a damn on it. We'll buy new stuff, fitted for the job, and at the end sell it and credit you with the difference. That's what we do on every big project. It costs less than renting secondhand stuff, and it's more efficient."

They got the job.

The Empire State Building officially opened on May 1, 1931

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James Pinkerton - FOXNews.com - July 06, 2009
Obama's Katrina
Make no mistake, the economic crisis and Obama's failure to create real jobs with his stimulus package means we're looking at this president's Katrina.

The economy is shaping up to be Barack Obama's Katrina. If President George W. Bush was blamed for his slow response to Hurricane Katrina in 2005 -- there was plenty of blame to go around, of course, but the disaster was on Bush's watch--then Obama will get the blame for his slow response to the current recession. The difference, of course, is that Katrina afflicted a city and a few states, while the recession afflicts the whole country.

Unemployment is 9.5 percent and rising fast, certain to go higher than 10 percent. And what is the federal government doing about it? Not much. And so House Republican Leader John Boehner makes a good point when he asks, "Where are the jobs?"

On Sunday, Vice President Joe Biden said that the Obama administration had "misread" the economic indicators. So what are they likely to do about it? More of the same--which is to say, not much.

The problem the Democrats have--and come to think of it, the country has it, too--is that even if you want to build something, you can't do it. That is, you can't do it without plowing through years' worth of lawyers and environmental-impact-statement-writers, nor without enduring endless hearings and lawsuits where every last NIMBY gets a whack at the project. And so even before this terrible recession, America's capacity actually to build anything--build a highway, build a bullet train, build a power plant -- had been crippled.

So piling on new money does no good, because the old money hasn't been getting spent. Getting spent, that is, on bricks and mortar and technology, as opposed to lawyers and consultants. In the past, "stimulus" was a way to put blue collars and hardhats back to work. Yet now, the only people being stimulated are white-collar lobbyists and litigators.

To be sure, Obama's federal government will spend a lot of money. The feds are asking for $3.5 trillion for fiscal year 2010, and that's not counting the $787 billion "stimulus" package, as well as trillions in funny-money income transfers to big banks--including such improbable "banks" as General Electric, parent company to NBC, MSNBC, and CNBC--through shadowy organizations, such as the Federal Reserve Bank and the Federal Deposit Insurance Corporation.

But all that money is pushing the wettest of wet noodles--because governments, surrounded as they are by Greens and NIMBYs, can't do anything.

On May 27, more than three months after President Obama signed the American Recovery and Reinvestment Act of 2009 into law, USA Today reported that a grand total of $2 million of stimulus money had spent in Michigan, the hard-hit state with the nation's highest unemployment rate. That works out to 21 cents per Michigander. How much stimulus is that?

And just this morning, The Big Money reports that only $55 billion of the $400 billion in non-tax-break stimulus money has been spent. Jobless Americans might ask: What are you waiting for? Indeed, every American might ask the same question. Because all Americans would benefit from new roads, new train tracks, new windmills--anything at all.

Democrats are starting to notice that the fiscal contraption of government leaks more fuel than it burns. "We're disappointed," House Majority Leader Steny Hoyer on "FOX News Sunday." We're looking at ways to get the money out more quickly.

Well yes, that would be a good idea. And so Democrats might learn from their own past. Confronted with 25 percent unemployment in March 1933, here's the agenda that Franklin D. Roosevelt set for the country in his first inaugural address:

"Our greatest primary task is to put people to work . . . treating the task as we would treat the emergency of war, but at the same time, through this employment, accomplishing greatly needed projects to stimulate and reorganize the use of our national resources."

But of course, it's deeds, not words, that matter, and FDR and the New Deal delivered. In his 1990 book, "Our Country: The Shaping of America From Roosevelt to Reagan" Michael Barone offers one of the best overviews of five decades of recent U.S. history. Barone recounted the effectiveness of the New Deal in combatting unemployment. By January 1934, less than a year after Roosevelt took office, the Civil Works Administration employed 4.25 million people, fully eight percent of the national labor force. In fact, over the entire course of the the Depression, unemployment peaked in the month that Roosevelt came into office.

Was there waste, or fraud, or abuse in all this New Deal spending? Sure. But there was also a huge renaissance in public works around the country, from the Triborough Bridge in New York to the Golden Gate Bridge in California. And New Deal programs such as the Rural Electrification Administration and the Tennessee Valley Authority literally lit up (as well as cooled) life for tens of millions of Americans.

Conservatives were horrified, of course, but most Americans cheered. Not only was Roosevelt re-elected three times, but the Democrats kept control of both houses of Congress all during the 30s and well into the 40s. And by the way, during the 30s and 40s, America built up the industries that not only won World War II and the Cold War, but also created the consumer abundance that we enjoyed for decades thereafter.

So something must have gone right for New Deal Democrats.

By contrast, today's Democrats are not really interested in building things. They are demonstrably more interested in bailing out banks, and keeping environmentalists happy. Bankers, of course, deal in intangibles; they make money without regard to where physical goods are manufactured--although bankers know that goods are likely to be cheaper in China, so that's their preference. And the environmentalists, of course, oppose just about everything. Thus we have the "green-green alliance" -- green as in the color of money, and green as in Greenpeace. Together, these allies are working to pastoralize the United States. We can create meadows and forests, but not jobs.

And if that's the goal, so what if unemployment rises? So what if the real economy contracts? That's a small price to pay for elite Democrats, who hold those other, non-productive green objectives closer to their hearts.

Thus the "cap-and-trade" legislation, which passed two weeks ago in the House of Representatives, is a perfect exemplar of the modern Democratic mindset: The green environmentalists are happy, because carbon-based energy production is restricted, and greenback-minded Wall Streeters are happy, too, because traders will make billions trading trillions' worth of funny-money carbon contracts.

But there is a catch: People don't have jobs now, and they won't get them in the future if Obama spends money that doesn't stimulate--and then seeks to choke what remains of the productive economy through environmental regulation.

And that, surely, is that a misreading of what the American people will vote for in 2010 and 2012.

This is Obama's Katrina. You heard it here first.

The Obama response has been confused, inadequate, unfocused and inept.

May 26, 2009, 12:02 a.m. EST
Show me the money
Commentary: Little of the federal stimulus funds are making it into the economy
Irwin Kellner, MarketWatch

PORT WASHINGTON, N.Y. (MarketWatch) -- Three months after the passage of a much ballyhooed stimulus package aimed at resuscitating the economy and creating jobs, precious little federal money has actually been paid out.

Recently, the Congressional Budget Office estimated that only 15% of the $787 billion bill that President Obama signed into law in February would reach the economy this year.

In and of itself, this is too little money to handle the massive job of turning the economy around this year, as Washington had hoped. But it looks as though the amount of federal cash actually reaching state and local governments and the private sector this year may well be even smaller than this measly sum.

Something less than 6%, or $50 billion, in federal funds has hit the economy so far. It appears to be mainly in the form of assistance to states to cover the cost of Medicaid, as well as the one-time checks for $250 that were sent this month to recipients of Social Security benefits.

Even less can be said about the administration's efforts to help troubled homeowners.

February's stimulus package called for the government to spend enough in incentives for mortgage lenders to spare as many as four million homeowners from foreclosure. But the Treasury admits that so far this year, fewer than 55,000 home loans have been modified.

The Obama administration says it will spend 70% of the stimulus money, or $550 billion, not more than two years after passage of the law. But, hopefully, the economy won't need these funds by early 2011 the way it does now.

Although politicians agreed that the intent of the stimulus program was to pump money into the economy as fast as possible, the way this package was constructed makes it virtually impossible to achieve this objective.

This is because the stimulus package as conceived and passed tried to do too many things at the same time.

For example, it relied on states and local governments to use these funds to upgrade the nation's infrastructure, while both the public and the private sectors tried to develop alternate sources of energy that are "clean." And let's not forget fixing the country's health-care system.

As you can imagine, the amount of paperwork at the federal level alone is daunting. Add in the documents needed from state and local governments, as well as from the private sector, and you can see why little federal money has gone out the door at a time when it is really needed.

And while many locales say that they have "shovel ready" projects that they can implement once they get federal funds, the fact remains that you can't spend what you don't have -- even if the federal checks are in the mail.

A better solution would have been my idea of sending everyone over the age of 16 a federal gift card loaded with $3,000. It would have gone to 235 million people, putting the cost at $705 billion, which had to be spent, not saved or used to pay off debt. ( See my Jan. 19 column.)

Had this been implemented, lots more federal money would be in circulation by now, buying goods and services that the private sector needs, without endless paperwork and layers of bureaucrats telling people what to do.

And the end of the recession would be more than a hope.

Irwin Kellner is chief economist for MarketWatch, and is Distinguished Scholar of Economics at Dowling College in Oakdale, N.Y.

The best of all possible worlds.

If you believe in windmills, smart cars, elevated trains, election financing reform, cap and trade, balanced budgets, tort reform and Santa Claus, you will love the idea that health care reform will pay for more deficit spending. It is too absurd to waste time stating what should be obvious. It will not happen.

I have come to the conclusion that General Motors is the model for the US government. The government, as is GM, simply cannot reform itself. As GM will need to be dismantled with large parts of it liquidated, the same will be true for the government. It will take longer, be more painful and come with many unexpected consequences. The corrupted system has proven itself incapable of sensible and planned reform. Too many lobbyists. Too many lawyers. Too many alliances. Two many voters that do not pay federal taxes. All in all, too bad.

Obama inherited a $1.2 trillion deficit and pushed it up to $1.8 trillion. The best is yet to come.

______________________

May 15, 2009

Fiscal Suicide Ahead

By DAVID BROOKS NY Times

Barack Obama came to office with a theory. He believed that the country was in desperate need of new investments in education, energy and many other areas. He also saw that the nation faced a long-term fiscal crisis caused by rising health care and entitlement costs. His theory was that he could spend now and save later. He could fund his agenda with debt now and then solve the long-term fiscal crisis by controlling health care and entitlement costs later on.

In essence, health care became the bank out of which he could fund the bulk of his agenda. By squeezing inefficiencies out of the health care system, he could have his New New Deal and also restore the nation to long-term fiscal balance.

This theory justified the tremendous ramp-up of spending we’ve seen over the last several months. Obama inherited a $1.2 trillion deficit and has quickly pushed it up to $1.8 trillion, a whopping 13 percent of G.D.P. The new debt will continue to mount after the economy recovers. The national debt will nearly double over the next decade. Annual deficits will still hover around 5 percent or 6 percent of G.D.P. in 2019. By that year, interest payments alone on the debt are projected to be $806 billion annually, according to the Congressional Budget Office.

Obama believes these deficit levels are tolerable if he can fix the long-term fiscal situation, but he hasn’t been happy about them. He’s been prowling around the White House prodding his staff to find budget cuts. Some of the ideas they have produced have been significant (Medicare reforms), some have been purely political (asking cabinet secretaries to cut $100 million in waste, fraud and abuse), and many have been gutted on Capitol Hill (cap and trade, proposed changes in charitable deductions, proposed changes to the estate tax).

In any case, these stabs at fiscal discipline haven’t come close to keeping up with the explosion in spending. The government now borrows $1 for every $2 it spends. A Treasury bond auction earlier this month went poorly, suggesting the world’s hunger for U.S. debt is not limitless. President Obama has been thrown back on his original theory. If he is going to sustain his agenda, if he is going to prevent national insolvency, he has to control health care costs. Health care costs are now the crucial issue of his whole presidency.

Obama and his aides seem to understand this. They have gone out of their way to emphasize the importance of restraining costs. The president has held headline-grabbing summits with business and union leaders. Unlike just about every other Democrat on the planet, he emphasizes cost control as much as expanding health coverage.

So what exactly is the president proposing to help him realize hundreds of billions of dollars a year in savings?

Obama aides talk about “game-changers.” These include improving health information technology, expanding wellness programs, expanding preventive medicine, changing reimbursement policies so hospitals are penalized for poor outcomes and instituting comparative effectiveness measures.

Nearly everybody believes these are good ideas. The first problem is that most experts, with a notable exception of David Cutler of Harvard, don’t believe they will produce much in the way of cost savings over the next 10 years. They are expensive to set up and even if they work, it would take a long time for cumulative efficiencies to have much effect. That means that from today until the time President Obama is, say, 60, the U.S. will get no fiscal relief.

The second problem is that nobody is sure that they will ever produce significant savings. The Congressional Budget Office can’t really project savings because there’s no hard evidence they will produce any and no way to measure how much. Some experts believe they will work, but John Sheils of the Lewin Group, a health care policy research company, speaks for many others. He likes the ideas but adds, “There’s nothing that does much to control costs.”

If you read the C.B.O. testimony and talk to enough experts, you come away with a stark conclusion: There are deep structural forces, both in Medicare and the private insurance market, that have driven the explosion in health costs. It is nearly impossible to put together a majority coalition for a bill that challenges those essential structures. Therefore, the leading proposals on Capitol Hill do not directly address the structural problems. They are a collection of worthy but speculative ideas designed to possibly mitigate their effects.

The likely outcome of this year’s health care push is that we will get a medium-size bill that expands coverage to some groups but does relatively little to control costs. In normal conditions, that would be a legislative achievement.

But Obama needs those cuts for his whole strategy to work. Right now, his spending plans are concrete and certain. But his health care savings, which make those spending plans affordable, are distant, amorphous and uncertain. Without serious health cost cuts, this burst of activism will hasten fiscal suicide.