The debt spiral: The bond market could crash any time.
By Daniel at 11 January, 2010, 6:08 pm
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The feds spend money they don’t have trying to fight a correction. This creates huge budget deficits, but it makes it look like the economy is recovering. So they slack off. Then, they discover that their fiscal stimulus didn’t really create any genuine economic activity. Take away the fiscal stimulus and the economy collapses again…reducing tax receipts and widening the deficit. In effect, the cure became a disease of its own! Now they can’t cut government spending. The economy depends on it. Instead, they’re locked into a debt spiral…more and more deficits…higher and higher debt…down, down, down, until…..until the whole thing finally crashes.
The more the government increases spending, to offset the correction, the more the economy becomes addicted to it. It’s like trying to cure an alcoholic by introducing him to heroin. Take away the government spending - as Japan tried to do - and the economy collapses into a deeper depression. Not only that, but the budget deficit actually grows! Japan faced this problem in the ’90s. It eased off its stimulus program…and the economy collapsed. Now, it’s become hooked on government spending.
The bond market could crash any time. The US is borrowing more money than ever before - trillions more. With such a huge increase in supply, demand…and prices…it should crack, sooner or later. Higher bond yields would send the whole economy into a much deeper depression.
Even our gold holdings could lose 20%-30% of their value. And gold stocks? They could get killed in the next stock market downswing.
Despite a truly monumental (albeit imbecilic) effort to revive the economy…the latest figures show the weakest post-recession recovery ever. Jobs are missing. Consumer credit is shrinking. Inflation is going negative. There is no real recovery…it’s a mirage created by government spending.
Monetary policy is useless (banks won’t lend; consumers won’t borrow). And fiscal policy, while apparently more effective, destroys wealth; it doesn’t add to it.
“This is the year when Tokyo finds it can no longer borrow at 1pc from a captive bond market, and when it must foot the bill for all those fiscal packages that seemed such a good idea at the time…
“Once the dam breaks, debt service costs will tear the budget to pieces. The Bank of Japan will pull the emergency lever on QE [quantitative easing...aka 'printing money']. The country will flip from deflation to incipient hyperinflation…”
But we’re not worried. Somehow it will all work out. Americans are still trying to get even. They still believe that the stock market will recover - fully. They still think the Fed is in control…and that our economists know what they are doing. They are delusional, in other words.
The stock market has not been corrected. It could easily get cut in half in the next six months. (We’re leaving our ‘Crash Alert’ flying over the building with the gold balls…until stocks reach bargain prices.)
Stall, Stall, Stall and Flatline
- Prophecy
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