Austerity — like it or not!

Last week in this space, I told you about the dire consequences of the sequester, and I wrote:

“Precisely BECAUSE the warnings are falling on deaf ears, the real wolf is now prowling. And not only is she likely to strike on March 1, but she’s also likely to continue striking for months to come.”(See The REAL Fiscal Cliff.)

Today, March 2, that’s precisely what has happened.

On Thursday, Congress virtually shut down as senators and congressmen went home.

Yesterday, the first spending cuts went into effect.

And in the weeks ahead, they will continue, digging more deeply into the economy.

Will Washington finally reach some sort of deal that makes the cuts less arbitrary and a bit more rational? Yes, probably.

But no matter what’s agreed upon or when, there are four important lessons to take away from this episode.

Lesson #1. Austerity is here no matter what—just as Mike Larson warned his Safe Money subscribers last year.

No matter what finally comes out of Washington — agreements or no agreements, automatic cuts or targeted cuts, cuts to defense or cuts to entitlements, more taxes or reformed taxes — the result for the economy has one BIG PICTURE aspect in common:

The government is taking money out of the economy! And that, #field2#, means only one thing: Austerity — like it or not.

Lesson #2. Our government’s a mess — not just financially, but also in terms of its ability to function.

To understand how grave this is, put yourself in the shoes of global investors in U.S. bonds. You say …

“Isn’t it bad enough that you owe me all this darn money?! Isn’t it bad enough that you keep borrowing MORE — at the rate of $1 trillion each year?!

“Now, on top of that, you can’t even run the government?! You don’t even TALK any more about blatant problems staring you in the face?! All you can do is throw bricks at each other?!”

That’s a pretty damning message! It means you’re going to be far less anxious to buy U.S. bonds and a lot more anxious to dump them.

Lesson #3. Complacency breeds catastrophe.

When folks fear a coming event, they take action to prevent it, avoid it, or at least protect themselves from the fall-out.

But when they ignore it, pooh-pooh it, or just roll their eyes at the boy who cries wolf — that’s when YOU need to be ready for the worst!

That’s what happened in Washington and Wall Street this week. So beware!

Lesson #4. Markets will have the last say!

Washington never was the true driver of markets and the economy, and that’s more true today than ever before. What will determine our nation’s future is millions of investors making their own independent decisions in their own interest — especially in the bond markets.

For a sneak preview of what could happen, see The REAL Fiscal Cliff. And for advice on what to do now, be sure to read this week’s Money and Markets features …

 

---

 

EDITOR’S PICKS How to pinpoint favorable buy and sell points for sector ETFs by Mike Burnick Stocks suffered a bearish reversal last week with back-to-back days of sharp declines. In fact, last Wednesday’s 108-point plunge in the Dow Jones Industrials wiped out nearly two-week’s worth of gains in just a single session. If you didn’t make 10% last month … by Nilus Mattive A lot of former bears are suddenly turning bullish on the stock market now that it has continued to run up in the beginning of 2013. And frankly, this massive shift in sentiment concerns me because so many people get bullish at short-term tops and then sell into pullbacks. What Warren Buffett is Signaling about the Economy by Tom Essaye Two weeks ago, Warren Buffett made big news when he announced his company, Berkshire Hathaway, was purchasing Heinz (HNZ), the famous ketchup and food producer. The deal was announced during a busy week for mergers: That same week the American Airlines/U.S. Air merger was announced, as well as Dell being acquired by a private group of investors.

THIS WEEK’S TOP STORIES Busted! by Larry Edelson No, I haven’t been arrested! I’m simply referring to all the market myths that are about to be busted, by the markets themselves, and how so many analysts and investors are going to get caught with their pants down! Credit markets back in the minestrone! How to protect yourself and profit by Mike Larson Here we are again: Back in the soup! Or in this case, the minestrone! I say that because just when the markets appeared on track to keep heading higher, Italian voters threw everyone for a loop. Regulators Close Covenant Bank, Chicago by Weiss Ratings On Friday, regulators closed Covenant Bank, Chicago, Illinois. This marks the third failure for 2013 following a total of 51 failures for all of 2012, a sharp decline of 45% and 68% compared to 2011 and 2010. Liberty Bank and Trust Company, New Orleans, Louisiana acquired Covenant Bank, its third acquisition of a failed bank since 2007.

 

---