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We Will Have a Balanced Budget in 10 Years

Wednesday, 07 Nov 2012 09:16 AM

By Robert Wiedemer

With all the talk about the fiscal cliff and raising the debt ceiling, I thought it was worthwhile to make this point: We will have a balanced budget in 10 years. Why? Certainly not because Congress has agreed on how to balance the budget.

The fiscal cliff and debt ceiling political nonsense we are about to witness will prove that. Congress most assuredly will find a way to borrow more money. That will work fine to boost the economy temporarily and to get politicians re-elected, but it won’t balance the budget. Shockingly I don’t expect Congress to change next year or even in 10 years.

Then why will we balance the budget in 10 years? Because we will be forced to do so.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

That’s right. It’s not under our control long term, only short term. Interestingly Jamie Dimon, CEO of JPMorgan Chase, recently made a similar comment to the Senate when asked whether bond markets would turn against the United States. “I can’t honestly tell you I know it’s going to be two years or five years, but it will happen,” Dimon said. “It is a matter of time and the United States can’t borrow indefinitely.”

Dimon is right. We really can’t borrow massively forever. The bond markets will revolt. Eventually they will freeze up, just as the massive markets for mortgage debt froze up when it was increasingly obvious that mortgage bonds were fundamentally bad loans and, hence, losing investments. Yes, the government saved the mortgage bond market by completely taking it over. But, when the government bond market freezes up, there is no one to take it over.

Well, you say, “Of course there is. The Fed can save us by buying our debt.” That’s true, but they can only do it using printed money. They have no authority or ability to tax or borrow money.

Once the government bond markets freeze up and the Fed has to buy all of our bonds instead of just part of our bonds, inflation will be enormous and the outcry from voters at the devastation to their investments and livelihoods will force Congress to stop borrowing and balance the budget. Since tax receipts (not tax rates) will be much lower then than they are today, it will be a far harder task. Nonetheless, they will do it. The voters will force them because the pain of continued massive inflation in a modern, highly developed economy is so great.

It might sound dumb, but it actually makes a lot of sense. Right now, massive borrowing and massive money printing produces nothing but positive benefits for the economy and investments. There is almost no current downside and a huge upside. So, most people support borrowing and money printing, as do most politicians.

When that changes and there is enormous devastation to the economy and investments from the massive money printing and borrowing, people and Congress will change. They will want a better economic environment, just as they do today. But today, a better economic environment means more money printing and borrowing.

Editor's Note: See the Disturbing Charts: 50% Unemployment, 90% Stock Market Crash, 100% Inflation

In 10 years, a better economic and investment environment will mean no borrowing and very little money printing. In short, a balanced budget.

This is not as radical as it sounds. I am simply saying that people react to economic pressure in very predictable ways.

It would be best if people could foresee such problems and change to prevent them, but that is a very difficult choice. For most people, the much easier choice is to react to the current environment, not to predict the future.

If taking an action now helps the economy and their investments, they will do it. If taking the opposite action helps the economy and their investments in the future, they will do it.

It couldn’t be simpler or more predictable.

About the Author: Robert Wiedemer
Robert Wiedemer is a managing director of Absolute Investment Management, an investment-advisory firm for individuals with more than $200 million under management. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here to read more of his articles. Discover more about his latest book, "Aftershock," by Clicking Here Now.

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