The Most Predictable Economic Crisis in History

I don’t watch Glenn Beck, don’t listen to him. He’s too flakey, too emotional, too much of a drama queen for my taste. He’s also too depressing. Partly because he always seems to assume the worst-possible scenario is the most likely one (and then laughs about it like his drugs have just kicked in). But he’s also depressing because, in many cases… he’s absolutely right.

I really don’t get the sense that many people understand exactly how close to the edge we are living right now. I try to push it out of my mind most days — Hey, what can I do about it? Might as well finish planning our family vacation and pray everything works out — but I’m jolted back to reality every so often. And today is one of those days.

Why so glum? Oh, no reason:

“The most predictable economic crisis in history.” That is what we face, in the words of former Clinton chief of staff Erskine Bowles and former senator Alan Simpson (R., Wyo.) — co-chairs of the presidential commission on deficit reduction — and we are running out of time to take the necessary steps to prevent it.

“This problem is going to happen. . . . we’re going to have to face up to, in maybe two years, maybe a little less, maybe a little more,” Bowles said in testimony before the Senate Budget Committee earlier this week.

“I think it will come before two years,” Simpson countered. “I think within a year, at the end of the year, if [the people who hold our debt] just thought you’re playing with fluff — 5, 6, 7 percent of this hole — they’re going to say, ‘I want some money for my paper.’ And if there’s anything money guys love, it’s money. And money guys, when they start losing money, panic. And let me tell you they will. It won’t matter what the government does, they’ll say ‘I want my money, I’ve got a better place for it . . . ’ Just saying for me, it won’t be a year.”

And the money guys are already voting with their wallets:   

One of those “money guys” Simpson was referring to is Bill Gross, who runs the world’s biggest mutual fund at Pacific Investment Management Co. ($237 billion in holdings). Gross announced today that he has purged that fund of all United States Treasury notes. Apparently he doesn’t think buying any more U.S. debt — $15 trillion and counting — is such a great investment, and has found more reliable places to put his money:

“We’ve moved into Brazil and Mexico and moved money, yes, at the margin into Spain, which has a better balance sheet than the United States,” Gross told CNBC. [emphasis added]

Yes, Spain. The same country that even Paul Krugman admits is “on the edge of a debt crisis.”

Even Warren Buffett — Obama’s favorite rich guy — doesn’t have enough confidence in the president’s economic stewardship to invest in long-term U.S. bonds any more.

Need more good news? Try this bit of reality:

As Sen. Tom Coburn (R., Okla.), who served on the deficit commission and supported its recommendations, pointed out at a press conference this week, the United States has, historically, paid an average of 6 percent interest on its debt. It currently pays about 2 percent. If rates were to return simply to that historical average, it would involve an increase to our overall interest bill of $640 billion — to be paid immediately. “An impossible situation,” in Coburn’s words.

As Les Jones notes:

And that’s why the Federal Reserve is buying U.S. Treasuries. If they didn’t, the U.S. would have to pay higher interest rates on its debt, and we can’t afford to.

Since last November, the Fed has been pumping $4 billion per day into the market, both to keep interest rates down and to artificially inflate the market. It has worked so far on both fronts, which is why Marc Faber and others are predicting the Fed will keep printing money for the foreseeable future. The media is crowing about a nascent economic turnaround, and white-collar workers are looking with renewed confidence at their 401(k) balances these days. But something that cannot go on, won’t. And this can’t go on much longer.

At some point, this house of cards will have to collapse, and our window of options to control how that happens narrows with each passing week, each additional dollar printed, and each additional dollar borrowed. The only question is whether it will be a controlled implosion, or if it will be a catastrophic one. I’m not going to channel Beck and proclaim the latter is inevitable, but without a major course correction, it soon will be.

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