We have said before that we think the government will likely have to hit the wall before they decide to cut spending and reduce our debt.
It is a lot like General Motors, which had high expenses, declining revenues and too much debt. Once the world’s greatest company, GM instead chose to hit the wall instead of changing its ways — and we seem to be following the same path.
That wall is when the government hits its credit limit and can no longer easily borrow all the money it wants to spend. Of course, we also predict that the government will try to extend its credit limit by printing money — something General Motors couldn’t do. Printing money will help extend our credit limit by making the market for our bonds more receptive in the short term. We print money by buying bonds so that helps the bond market.
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Well, the last few weeks seems to bear that out. The bi-partisan deficit-commission report recommended ways to cut the deficit. The committee report didn’t even get enough votes to be formally presented before Congress. So much for any interest in deficit reduction.
In addition, Ben Bernanke started printing more money in November, which will extend our credit limit in the short term. And, last Sunday on "60 Minutes," he announced that he might even print more than $600 billion if he thought the economy was growing too slowly.
Only a few days after Mr. Bernanke’s announcement on TV, President Barack Obama and Republican Congressional leaders agreed to a package of spending increases and tax cuts that lets both sides add to the debt as each would like. So much for bi-partisan interest in cutting the debt. But plenty of bi-partisan interest in adding to the debt.
Congress felt they really needed to borrow a lot more money to deal with current economic problems. But what if we have economic problems in 2011 or 2012? Are we just going to borrow more money then? As long as the government can borrow and print, it’s the easy way out.
Congress seems to view our ability to borrow and print money as simply “Money from Heaven.”
What they and many voters don’t realize is that when the government hits its credit limit, it doesn’t mean it can’t borrow more; it means the government’s entire debt comes due. The entire $20 trillion or $25 trillion — whatever number it is when you finally can’t borrow more — will be due because we can’t re-finance our debt any longer.
And we are constantly re-financing our debt because we can’t pay off even a little bit of it. The catch is when you can’t re-finance it, no one will lend you any more money. Your loan has been called due. Game over.
The Fed can print lots more money to make up for the loss of our lenders, but at that point it creates so much inflation that it not only destroys all asset values, it could virtually destroy the economy, which is why it would be better to default on the debt.
In the end all the “Money from Heaven” gets very real and every bit of it will be “paid back” almost entirely from a massive loss of value in all our assets, along with much of the world’s assets, caused by massive inflation and ultimately, a U.S. government debt default.
In this way, “Money from Heaven” is creating the path to Hell.
About the Author: Robert Wiedemer
Robert Wiedemer is president of the Foresight Group, a macroeconomic forecasting firm that customizes its forecasts for specific businesses and investment funds. He is a regular contributor to Financial Intelligence Report, the flagship investment newsletter of Newsmax Media. Click Here
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