The REAL Fiscal Cliff

Complacency in Washington has now reached such an extreme that even the warnings of our highest officials are mocked, ripped apart, or simply ignored.

Some of the Fed’s most senior governors warn that their $85-billion-per-month bond buying frenzy is creating a new speculative bubble. But Fed Chairman Bernanke and his allies turn a deaf ear, vowing to plow ahead till kingdom come.

The Congressional Budget Office (CBO), the Government Accountability Office (GAO), the International Monetary Fund (IMF), and virtually every respected private research think-tank produce study after study of fiscal doom — all relegated to the junkyard of history.

The president warns of the sequester catastrophe beginning on March 1, just six days from now. But after so many apparent false alarms — about the looming debt ceiling shutdown in 2011 and the fiscal cliff of 2013 — he gets more shaking of heads and more rolling of eyes than the boy who cried “wolf.”

What’s ironic is that THIS time, 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.

According to The New York Times …

“Despite new calls from the White House … to enact a combination of tax increases and cuts to postpone the so-called sequester, the House is moving forward on a legislative agenda that assumes deep and arbitrary cuts to defense and domestic programs — once considered unthinkable — will remain in place through the end of the year.

“In the last showdowns won by the president, inaction was seen as intolerable. Had Republicans done nothing in 2011, a temporary payroll tax would have lapsed without offsetting tax cuts to ease the blow. On Jan. 1, every tax cut of the Bush administration would have expired at once had the Republicans not relented and let some taxes rise. This time, Republicans need not do anything and deep spending cuts they have demanded for years will go into force automatically.”

All that seems to matter is an escalation in the blame game.

This means that neither side is motivated to solve the problem simply because BOTH sides consider themselves politically immune to the fallout — as long as they can win the blame game.

What’s even more ironic is that even IF, as the president warns, 700,000 jobs are sacrificed … our military readiness is compromised … TSA employees are laid off … and economic growth is scrapped …

Barely a dent will be made in the federal deficit. Washington will STILL be running yearly red ink of close to $1 trillion dollars.

And here’s the most ironic aspect of all …

What no one seems to understand — whether among those issuing the warnings or among those ignoring them — is that the real fiscal cliffs, the real debt limits, and the real budget sequesters are not the ones artificially crafted in Washington by officials with a particular political agenda.

They are the fiscal cliffs, debt limits, and sequesters that are now threatening to emerge in the world’s BOND MARKETS!

These markets are the ONLY mechanism on the planet with the true power to bring an end to the spend-borrow-and-print epidemic that has swept the globe.

These bond markets — along with related debt markets — are far larger than all the stock markets of the world.

They are largely beyond the control of any central banker, minister of finance, or head of state.

And they are careening toward a real cliff even as we speak.

Surprised? You shouldn’t be because:

* It has happened before. For a blow-by-blow account of exactly how the U.S. government bond market fell off a cliff and forced a past president to deliberately smash the economy and effectively forfeit his second term, see “Bubble Bursting NOW!”

* It is happening now. For a clear description of how far and fast bond markets have already plunged — and why — see Mike Larson’s “Bond Forecasts Coming True — in Aces and Spades!”

* It’s only logical that it will continue to happen for months to come:

We have trillion-dollar deficits in the U.S. and similar deficits overseas.

We see absolutely nothing done to control them. So it’s only logical that bigger and bigger supplies of newly issued government bonds are hitting the market.

At the same time, we have bond investors who are fed up with weak-kneed politicians and afraid of big losses. So it’s only logical that the demand for those bonds continues to sink.

We have increasing bond supplies and diminishing bond demand. So what do you get?

Falling bond prices, of course — the real fiscal cliff!

Four Things That Happen

When Bond Prices Fall

First, interest rates go up. It’s automatic, built into the way bonds were created. The lower the price, the higher the interest rate.

Second, the cost of financing the deficit goes through the roof. The government must pay higher interest costs. They must borrow additional money to cover those costs. And then they must pay still more interest on the additional borrowings — a debt trap that strangles any institution or individual caught in its grip.

Third, the huge burden of interest costs siphons off funds — from defense, national security, and every other budget item. (This is the real sequester.)

Fourth, the supply of capital to keep the government running begins to dry up. The government finds it hard to borrow at ANY cost. (This is the real debt limit.)

I repeat: This is what happened before. And this is what’s on the way to happening again.

Skeptics Say:

“But the Fed Will Never Let That Happen.”

Poppycock! The Fed stepped up its bond buying to support the bond market last fall. It’s been buying $85 billion in bonds per month ever since.

But even as the Fed has been buying, global investors have been selling!

And in the battle between one central bank (no matter how powerful) and countless inflation-fearing investors in the open markets, who do you think wins?

The investors, of course!

That’s why bond prices have been going down ever since the Fed introduced its new round of bond buying last year. And that’s why they will continue to go down.

All this is with Fed Chairman Bernanke still standing firm against bond buying critics inside the Fed itself, still plowing ahead with his program!

Imagine what will happen if those critics gain influence and power … if the Fed begins to back off from its money printing binge … and ultimately, if it abandons its massive support for the bond market!

Bonds will collapse.

Fortunately, there are simple steps you can take to protect yourself — and profit.

Income Superstars editor Nilus Mattive gives you specific steps to take to avoid the inevitable impact on the nation’s Social Security Trust.

Safe Money editor Mike Larson shows you how to identify and neutralize your risk in bonds and other fixed instruments.

Weiss Research senior analyst Mike Burnick points to opportunities in the Great American Energy Boom.

And you can find additional very valuable tips on our home page at www.moneyandmarkets.com.

Good luck and God bless!

Martin

 

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EDITOR’S PICKS Please don’t count on bigger Social Security checks by Nilus Mattive Lately, I’ve been very aggressive in sounding the alarm on Social Security’s problems. How to Find Big Profits — in Your Pantry! by Mike Larson I cringe at the thought of investing in most bonds, and I hope you’ve been paring down your exposure like I recommended. Just this week, the yield on the 30-year Treasury bond shot up to 3.23 percent. What asteroids and meteors can teach us about insurance by Weiss Ratings Friday’s meteor explosion over the city of Chelyabinsk in Russia’s Ural Mountains occurred on the same day scientists watched Asteroid 2012 DA14 make its closest pass by Earth. With new weekend meteor sightings being reported in California and Florida, many are wondering if the sky is indeed falling.

THIS WEEK’S TOP STORIES Worldwide Recession Can’t Stop Stocks … but Here’s What It Could Mean for Currencies! by Mike Burnick Global stocks continue to perform exceptionally well in 2013 … but you would never know it from the sad state of global economic growth. 2 events this week could answer the question: Will the rally continue? by Tom Essaye Markets have seen a strong rally to start the year with the S&P 500 closing higher seven weeks in a row. Now the million-dollar question on investors’ minds is: Will the market continue its strong run, or has all the “good news” been priced in, and we’re due for a correction? Very Serious Stuff: War Cycles Hit This Year! Prepare Now … by Larry Edelson First, a of couple notes: As you know, my publisher has moved my column to Monday mornings in the Money and Markets Division, to give my work the widest possible investment audience.

 

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