Grand Compromise or Great Conspiracy?

When Americans went to the polls last month, many thought they were voting for a return of fiscal sanity in Washington. And with fiscal sanity, we’d have far better assurance of bond-market stability.

Instead, three houses of ill repute — two on Capitol Hill and one on Pennsylvania Avenue — are joining to deliver one of the most wanton, deficit-busting, bond-wrecking bills of all time.

What most people seem to overlook is that there are actually two bills in the works. There’s the bill Congress will pass this year. And there’s the bill you and I will have to pay next year, the year after, and perhaps till the day we die.

President Obama and the Republican leadership are calling it a “grand compromise to stimulate the economy.”

In reality, it’s little more than a great conspiracy to slaughter our nation’s finances.

The sad irony is that nearly all key decision-makers in Washington — including some you and I may have voted for — are feasting on the spoils:

• The Republican leadership is getting the biggest prize — the extension of all Bush-era tax cuts.
• The White House is walking away with its own choice morsels — a 13-month extension of unemployment benefits, a major cut in payroll taxes, and more.
• And even rebellious Democrats are rebelling with a goal: To get a few leftovers for themselves as well.

Nearly every leader in Washington has blood-red ink on his hands!

None of the deal-makers have assumed responsibility for our future or our children’s future!

The Biggest Self-Deceptions of All Time

Let’s step back for a moment and review how we got here.

Shortly after the failure of Lehman Brothers in 2008, I participated in a Washington forum of decision-makers and opinion leaders, including Treasury Secretary Tim Geithner, former Fed Chairman Paul Volcker, financier George Soros, and a long list of others of similar distinction.

As you may recall, that was a time of peak tension and fear — when the world’s largest financial institutions were going bankrupt, when the government was scrambling to bail them out, and when the Fed was pumping trillions of dollars of hard money and guarantees into collapsing credit markets.

Plus, it was also a time when many people spoke more openly about their concerns and fears:

During dinner, Tim Geithner admitted to the group that the government’s measures were among the most extreme in history.

After dinner, George Soros told me that the government’s intervention was so massive, it risked hyperinflation.

Between workshops, Paul Volcker told me that he never dreamed the U.S. government would have to take all the steps it had taken to prevent a collapse.

Yet no matter how risky and how radical, everyone at the conference justified the government’s actions as “a necessary evil.”

Their rationale: The debt crisis required a two-step response …

First, they said, we had to save the system. Then, only later could we start fixing the system.

First, they argued, we had to accept trillion-dollar deficits. Then, only later could we figure out how to reduce the deficits.

I was the lone dissenter. I repeatedly declared — both in open forums and in private conversations — that …

“The distinction you are making between the present emergency and a future solution is a fiction, an illusion. The only time to do the right thing is right now. You cannot honestly promise to make all the right choices tomorrow, while consistently deciding to make all the wrong choices today.”

In principle, no one disagreed. But in practice, no one else dissented.

In fact, every forum participant was asked to vote by choosing among various new proposals to resolve the crisis. But all of the proposals assumed that the government’s role to bail out the system was indisputable. None of the proposals recognized the fiction I had articulated.

So in the final vote tally, there was only one abstention — mine.

And, unfortunately, this forum was merely a microcosm of what we’ve witnessed since the first day of this crisis …

Rampant, Blatant Discrepancies
Between Their Actions and Words

We see the same pattern in the White House and at the Office of Management and Budget (OMB) … in Congress and at Congressional Budget Office (CBO) … among Democrats and Republicans … among deficit apologists and, often, even so-called “deficit hawks.”

For the current or upcoming fiscal years, the red ink is undeniable. So their budget estimates have routinely admitted the enormity of the deficits.

But as soon as they look beyond the immediate horizon, they have invariably projected deficits that conveniently dwindle over time.

And the underlying message has always been the same:

“Yes, we know we’re trashing the budget this year. But don’t worry. We promise to fix it in future years.”

History, however, proves that such promises are literally emptier than a banker’s heart.

For example, in its Baseline Budget Projections of September 2008 …

• The CBO estimated that the federal deficit for fiscal 2009 would be $438 billion. The actual deficit for 2009 was $1.4 trillion, or over TRIPLE the estimate made just one year prior.
• At the same time, for 2010, the CBO estimated that the deficit would be $431 billion. In reality, it’s coming in at $1.5 trillion, or 3.6 times estimates.
• The government’s unbridled optimism regarding nearby years was exceeded only by its fantasies regarding future years: The CBO estimated that, by 2012, the deficit would be down to just $126 billion. Today, the official estimate is $828 billion, or over SIX times more!

What’s most frightening is that history is now repeating itself:

Today’s official government estimates of future deficits are based on the same kind of false, optimistic assumptions as the grossly understated estimates made in 2008!

They assume that the unemployment rate will decline sharply. In reality, it’s rising.

They assume that borrowing costs will stay low. In reality, they are also rising.

And most egregious of all, they have the gall to assume that someone will start doing something about the deficits very soon when, in actual practice, no one in power has any such intention.

The latest events are a classic example of this hypocrisy:

Even while the president’s bipartisan commission was testifying before Congress on the urgency of taking drastic steps to cut the deficit immediately … that same president and that same Congress were agreeing on equally drastic steps to enlarge the deficit — also immediately.

Result: The administration’s latest budget estimates are already grossly outdated! The OMB’s own data, currently still up on its website, shows that the deficit is expected to shrink from its all-time record of $1.55 trillion this year to $1.27 trillion next year.

But now, because of the new deal that Mr. Obama and Congress have just cut, the deficit is likely to balloon again next year to an estimated $1.6 trillion. And that’s STILL assuming a significant decline in unemployment!

This means that, even in the best of scenarios, our leaders are now actually planning to give us the biggest federal deficit of all time, surpassing last year’s record-smashing deficit. And they’re doing so while still giving lip service to “fiscal discipline.”

So here we go again! More budget-busting tactics … more promises of future fixes … and STILL more budget busting!

Ignoring the Grim Reaper

Don’t our leaders hear the cries of urgency and outrage from the leaders of the president’s bipartisan commission?

Don’t they even bother to read the CBO’s just-released report, Economic Impacts of Waiting to Resolve the Long-Term Budget Imbalance?

Don’t they see what’s happening to budget-busting states like California, Illinois, New Jersey, and New York?

Don’t they realize that the whole world is watching? That China, which holds the lion’s share of our Treasuries, is turning increasingly sour on the U.S. and far more willing to dump U.S. Treasuries?

Don’t they understand the shocking events in our bond market of recent days — where bond yields are now surging even as the Fed spends $600 billion to push them down?

Certainly they could not have missed the Grim Reaper who has already knocked on the doors of Greece, Ireland, Portugal, and Spain! Certainly, they must know that our nation’s finances and economy are equally vulnerable to attacks by global bond investors.

Mark my words: Because of our ballooning deficits … because of Washington’s deliberate neglect … global investors are on the verge of major bond-market selling in the days ahead.

Result: We now have all the ingredients for the worst U.S. bond and U.S. dollar disaster in recent memory.

With This Danger Hanging Over Markets,
Your Action Plan Should Be Clear …

First, get out of long-term bonds of all shapes and colors — government, corporate, or municipal … high rated or low rated.

Second, although the higher yields on U.S. Treasuries could help support the U.S. dollar for a short while, don’t expect that to last. When global investors sell, they sell both Treasuries AND dollars at the same time.

Third, any decline in the dollar is bound to be very closely correlated with rising trends in precious metals, agricultural commodities, and emerging markets. Just don’t count on any market going up in a straight line. Wait for corrections.

Good luck and God bless!

Martin