Tuesday, March 9, 2010

Decade of Debt Reckoning

When all is said and done, I believe historians will look back at this time and call it the decade of debt reckoning.

The unfolding financial crisis is one that began with bad bets on securities backed by subprime mortgages, lead to a tightening of credit between big banks and then spawned one of the biggest orgies of government aid that has ever been seen... all of it borrowed.

The lexicon of the day has moved from 'subprime' to 'sovereign debt'.

And it's not just America and the UK that is deeply in doo-doo. Throughout the western world the notion of government debt as salvation and the road to prosperity has reigned supreme.

Issue debt, and you will prosper.

It is as if they have all been blind to recent history when, for an entire decade, many nations of Latin America demonstrated clearly that debt as a road to prosperity was a delusion.

Now the world is poised to forcibly relearn that lesson.

The Greeks are in the process of dealing with those consequences and joining them are Iceland, Ireland, Portugal, Spain, Italy, California, New Jersey, and Illinois... all now paying the price for their debt binges.

And yet, in the face of looming disaster, the United States continues down the merry road to the same financial Armageddon. The Congressional Budget Office now estimates the Obama Deficit will be more than $9.7 trillion over the next ten years, rather than $8.5 trillion.

Truth be told, I don't think (in the long run) that the European Union will collapse over the financial mismanagement of individual states nor will the U.S. crumble from the financial disasters in California, New Jersey, and Illinois.

But deficit spending, nationalization of the health care system and increasing taxation will create business killing regulations in the United States; moves which will crush any possibility of economic growth.

Either bond vigilanties will punish America or the reality of a highly damaged economy will force the Federal Reserve - regardless of Ben Bernanke's current claims to the contrary - into serious and overt monetization of the Obama Deficit. Personally I belive the looming tough times for America virtually guarantees the latter.

And that will cause inflation to again be a problem.

Either way, interest rates will soar and Time will be proven to be 10 years too early with the magazine cover pictured above.


Email: village_whisperer@live.ca
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