Wednesday, November 17, 2010

The Bond Market won't wait much longer

A Race Against Time To Balance the Budget
[...] Even as Greece, Spain and Ireland raise the specter of sovereign debt crises, even as France and Britain take bold action to bring their excessive spending under control (at the price of major street violence in their capital cities) American politicians focus on the general unacceptability of a proposal that includes anything that doesn't quite fit their ideological predilections. If they can't have it exactly their way, then they don't want it at all. They are prepared to just coast forward at multi-trillion dollar yearly deficits, leaving only a string of condemnatory press releases in their wake.

But there are Cassandras out there warning against such delays. This spring, Fed Chairman Bernanke warned Congress that the United States could soon face a debt crisis like the one in Greece.

"It's not something that is 10 years away. It affects the markets currently," he told the House Financial Services Committee. "It is possible that bond markets will become worried about the sustainability (of yearly deficits over $1 trillion), and we may find ourselves facing higher interest rates even today."

Just last weekend, the former Fed Chairman Alan Greenspan spoke on NBC's "Meet the Press," saying he believed "something equivalent to what Bowles and Simpson put out is going to be approved by Congress. But the only question is whether it is before or after a crisis in the bond market."

He said the risk is that the deficit, which hit $1.3 trillion this year, could spook the bond market. That would result in long-term interest rates moving up rapidly and could lead to a double-dip recession.

The Fed chairs are not alone. According to Bloomberg News, earlier this year, New York University professor Nouriel Roubini, who predicted that last crash, said that "the U.S. may fall victim to bond "vigilantes" targeting indebted nations from the U.K. to Japan in a potential second stage of the financial crisis."

"The chances are, they are going to wake up in the United States in the next three years and say, 'this is unsustainable.'"

Roubini suggested that "the public debt burden incurred after the 2008 bank panic may now cause the financial crisis to metamorphose.

"There is now a massive re-leveraging of the public sector, with budget deficits on the order of 10 percent" of gross domestic product "in a number of countries," Roubini said. "History would suggest that maybe this crisis is not really over. We just finished the first stage and there's a risk of ending up in the second stage of this financial crisis."

Of course, we may get lucky. But the sad thing is that we don't even have to fully implement a ten-year deficit reduction plan to vastly reduce the risk of a bond crisis. If we were to enact a serious, credible plan -- even if it didn't begin to bite for a few years, that would probably assure the bond market that we are taking care of the problem.

By immediate action, I mean that Congress and the president go into intense negotiations this coming January and keep at it until we have a plan that brings us back to fiscal probity and is reflected in a budget resolution and the early appropriation and authorization bills. It will take about six months of intense, good faith work. [...]

Clearly it can be done, but how much longer are we going to procrastinate? Timing matters. We must keep pressure on the GOP to hold the course on fiscal responsibility, and to do what is necessary. Too little, too late, could have extremely dire consequences. It's fixable, but we have to act NOW.

Also see:

Has US Currency already "collapsed"?

The book "When Money Dies" is back in print

What happens when Tax Cuts Expire in 2011?

Our true national debt: $130,000,000,000,000.

Argentina's Example: Are we heading there?


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