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There is just far too much attention being paid to the
so called Fiscal Cliff occurring at the end of this year. The expiration of
the "Bush era" tax cuts and forced spending reductions taking place
because of the Sequestration, really doesn't amount to much more than a
fiscal speed bump. In fact, less government spending is one of the pathways
to prosperity; rather than becoming some make-believe economic catastrophe.
And although raising tax rates isn't an optimal solution, there could still
be a small benefit if there was a resulting increase in revenue, which then
served to reduce annual deficits and began to address our long-term fiscal
imbalances.
However, there is indeed a real fiscal cliff that the
United States is racing towards. It's the very same cliff that Europe has
already dived over. That cliff is based on the collapse of our debt and
dollar markets, resulting from the lost faith on the part of international
investors. And that loss of faith is being greatly facilitated by our Federal
Reserve.
The Fed has been on an avowed inflation quest since
2008. They have sought inflation by systematically seeking to destroy the
value of the dollar. By already printing trillions of dollars and now threatening
to print even more, Mr. Bernanke has not only crumbled our currency but has
also ruined the purchasing power of the middle class. But the worst part of
the central banks' assault on our nation is the fact that Bernanke has been a
tremendous enabler of the U.S. government's fiscal irresponsibility. He has
duped our leaders into believing they can borrow an unlimited amount of money
at nearly zero cost indefinitely.
I wrote this ominous warning back in May of 2010:
However, a temporary reprieve from significantly higher
yields has been given courtesy of Europe. Investors are fleeing Greek debt
and the Euro currency in favor of the U.S. dollar and our bond market. But
this is a temporary phenomenon and in no way bails out America from its own
fiscal transgressions. In just a few years our publically traded debt will
reach nearly $15 trillion. If interest rates just rise to their historic
averages, the interest on our debt (depending on the level of economic growth
and tax receipts) will absorb anywhere from 30-50% of total Federal revenue.
If we indeed reach that point, massive monetization of the debt may be
deployed by the Fed in a vain effort to keep rates from spiraling out of
control.
Back in 2010 I calculated that U.S. publicly traded
debt would become unmanageable by 2015. We are moving ever closer to
fulfilling that prediction, as our publicly trade debt has just soared past
$11 trillion. In fact, since the recession began in December 2007, the amount
of publicly traded U.S. debt has increased by 117%! Since the Fed has managed
to temporarily and artificially manipulate interest rates lower throughout
that increase of debt, the government believes there is no rush to change its
borrowing and spending addiction. However, there is a limit to how much a
country can borrow with impunity. If you debate that point just ask the
Greeks, Spanish, Portuguese, Irish and Italians.
But now Boston Fed president, Eric Rosengren,
has just
predicted our central bank will not only cease paying interest on excess
reserves, but will also commit to an open-ended form of counterfeiting. He
believes QE III should be results orientated in that the Fed should obligate
itself to continue to print money until the unemployment rate and nominal GDP
hit their--yet to be named--specified targets.
The only problem with that is boosting nominal GDP
requires boosting inflation; and rising inflation serves to raise the unemployment
rate, not bring it down. So there is a conflict that the Fed is completely
unaware of or refuses to acknowledge.
History has proven that no matter where it is tried,
massive central bank intervention to control interest rates and rescue the
economy increases the number of those who are unemployed. That tactic is
failing miserably now in Europe and has utterly failed here in the U.S.
With central banks now acting in unison to garner
complete control of interest rates, the only mechanism available that will
eventually force them to stop piling on more debt is the repudiation of fiat
currencies that back those bonds on the part of the free market.
Central banks across the globe are about to launch a
coordinated effort to boost inflation. And Pento
Portfolio Strategies has now nearly fully prepared our clients for a global
and unprecedented attack against deflation. You would be wise to prepare
accordingly.
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