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“The Time for Action is Now”

Posted by Larry Doyle on March 25, 2011 4:34 AM |

Having spent the better part of the last two weeks in Europe, I have gained an even greater perspective for the need to address our massive fiscal deficit here at home. While selected analysts would discount the global impact of the debt strapped peripheral nations of Europe, we do so at our peril. Why so? Have you looked at some of the European peripheral bond markets lately?

Investors in these markets are getting increasingly nervous that they will be compelled to suffer principal losses if and when the debts of these nations are inevitably restructured. Do not discount the possibility that a similar reality may come ashore here in the United States. Prudent risk management warrants that we gain a greater appreciation for that potential outcome. John Lipsky of the International Monetary Fund addressed these issues in a recent speech delivered at the China Development Forum.

Bloomberg Businessweek highlighted Lipsky’s insightful remarks in writing,

The mounting debt burden of the world’s most developed nations, set for a post-World War II record this year, is unsustainable and risks a future fiscal crisis, the International Monetary Fund’s John Lipsky said.

The average public debt ratio of advanced countries will exceed 100 percent of their gross domestic product this year for the first time since the war, Lipsky, the IMF’s first deputy managing director, said in a speech at a forum in Beijing today.

“The fiscal fallout of the recent crisis must be addressed before it begins to impede the recovery and create new risks,” said Lipsky. “The central challenge is to avert a potential future fiscal crisis, while at the same time creating jobs and supporting social cohesion.”

While Ben Bernanke and his minions at the Federal Reserve may care to delude our nation by propping markets the simple fact is without significantly credible and long term focus on our deficit, we run the risk of our interest rates here ratcheting higher in similar fashion to other debt strapped nations.

The belief that we can address the deficit later because we need to address the economy now is similarly delusional. ‘Later’ is knocking at our front door. If you would like to gain a greater appreciation for the size of our debt problems, check out the debt monitor in the right hand sidebar right below the Comments here at Sense on Cents. Those figures are real. Although Bernanke may care to debase the value of our dollar to repay these debts, the accompanying cost is inevitably higher interest rates, even if core inflation remains in check.

Our national addiction of continually kicking the can down the road has failed us yet we continue to allow our politicians and bankers to play that charade. The ticking of the clock is getting louder and the hands are moving toward midnight. As Lipsky concludes,

…to move toward a future of strong, sustainable, and balanced growth, these fiscal challenges need to be addressed urgently. The time for action is now.

Navigate accordingly.

Larry Doyle

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I have no affiliation or business interest with any entity referenced in this commentary. The opinions expressed are my own. I am a proponent of real transparency within our markets so that investor confidence and investor protection can be achieved.

  • LM

    From the FT the other day, Ireland’s Bond Yields Leap on Default Fears,

    Ireland saw a leap in its cost of borrowing on Wednesday as peripheral eurozone economies came under pressure because of worries over the risk of sovereign bond defaults.

    Dublin has come under pressure because of fears Germany will refuse to back down over its demands that Ireland must increase corporation tax rates in return for lower interest rate costs for bail-out loans.

    Irish two-year bond yields, which have an inverse relationship with prices, leapt nearly 1 percentage point to 10.7 per cent at one stage as European Union heads of state gather in Brussels for a summit on Thursday and Friday.

    Enda Kenny, Ireland’s prime minister, said that Ireland will be “constructive” in negotiations on the reduction of interest rates for Ireland from the rescue facilities. However, he highlighted that the 12.5 per cent corporate tax rate would be “non-negotiable”.

    Investors were also fretting on reports that Germany is not happy with the proposed terms of the European Stability Mechanism, the permanent crisis mechanism that has created concerns over who will pay in the event of default.

    EU heads of government are, however, expected to rubber-stamp plans to launch the ESM in mid-2013 to take responsibility from the temporary European Financial Stability Facility. The ESM will make investors share the burden of sovereign defaults.

    Portuguese bonds were also in the spotlight as fears rose that the minority government could collapse. Portuguese two-year bond yields jumped to 6.62 per cent at one stage, a quarter of a percentage point rise.

    Investors have hardened views that Lisbon will be forced to accept bail-out loans because of political risks and doubts that Lisbon has enough money to meet bond redemptions next month and in June. Italian and Spanish bond markets were also under pressure, sparking some concerns that any failure to agree to plans on the ESM could spark contagion.

    One strategist said: “It has been a day when the periphery have been sold and safer bonds such as Bunds have been bought. The next two days should prove interesting. If there are any disputes, it could send peripheral yields even higher.”

    An investor said: “There seems to be heightened risk aversion and people are nervous about Portugal and Ireland. These countries don’t seem like they will be able to get through without restructuring.”

  • Pete

    In regard to having had enough of Ben Bernanke’s debasement of the dollar, check out the FT’s commentary, Utah Raises Standard in anti-Fed Campaign,

    Shops in Salt Lake City will soon be able to accept gold Buffalo and Eagle coins (no foreign minted Napoleons or Krugerrands allowed), after a bill to make gold and silver legal tender passed Utah’s House and Senate.

    The state does not trust the US Federal Reserve.

  • wsm

    “Investors in these markets are getting increasingly nervous that they will be compelled to suffer principal losses if and when the debts of these nations are inevitably restructured. Do not discount the possibility that a similar reality may come ashore here in the United States.”

    In a floating exchange rate reserve currency system with no limits on how many dollars can be printed, please explain how principal losses are even a remote possibility. This ‘warning’ seems to display ignorance, at best, and propagandized fear-mongering, at worst.

    • LD

      Welcome to Sense on Cents. Thanks for the comment. In a manner of speaking what do you think is happening right now? Do you have your wheelbarrow well oiled for carrying all your dollars? Would that reality be considered a loss of principal?

      • wsm

        I’m not sure I even understand your questions – “What do you think is happening right now?” With regards to what..?

        Until/unless you credibly demonstrate an understanding of the actual mechanics of Fed transactions, and can debunk the following inconvenient truth , I refuse to buy into the myth that an ‘exploding money supply’ will cause rampant inflation in the U.S. The facts simply dictate otherwise.

        • fred


          Forget the hyper inflation argument for a moment. When a foreign entity invests in US debt, they are also assuming currency risk. If the $US declines in value during the US debt investment period, this is considered “loss of principle” risk to a foreign investor.

          One might argue that fear of this particular form of “loss of principle” may have been behind the global mortgage-backed security mess (higher required return of US Gov’t guaranteed debt than offered on “plain vanilla” tbonds) that is still being played out in our financial markets via the historic expansion of the Feds balance sheet.

          • wsm


            I think your arguments are much more nuanced and thoughtfully considered than those of the blog’s author. Hence why he could not refute the point I made. I think it makes sense to “forget the hyper inflation argument” because that argument ignores reality.

            Rather, the U.S. actually has massive debt-deflationary forces that are being obscured(somewhat, although without much success) by the fiscal expansion. Eventually these deflationary forces fully manifest themselves, as the market always prevails in the end.

            I would contend that the “MBS mess” you describe is a product of the investors coming to realize what garbage was backing those MBS, more so than foreign investors’ wariness of the dollar. Though I go agree with your nuanced argument that dollar weakness constitutes a type of ‘principal loss’ to foreign investors.

            I think that the folly in Washington has and will continue to lead to a falling dollar. But I also think that the hyper-inflationist fear mongers are idiots. While we will see some resulting inflation in things like energy and food (which by the way would show inflation anyway due to global population growth), we have exponentially larger deflationary forces overtaking the inflationary dynamics, due to the idiotic levels of debt (public and private) that has accumulated and has zero chance of being repaid. The only answer is restructuring the debt – i.e. massive haircuts – i.e. deflation.

          • LD


            Thanks for your continued comments. Here is an article from October 2009 which addresses some of your thoughts. Enjoy.

            Can We Add Some Inflation to Some Deflation and Claim Overall Prices Are Stable?

          • fred


            My reference to the economics of the gov’t guaranteed “MBS mess” addressed demand (by foreign investors), your reference to the quality of these securities, the supply. Which came first the chicken or the egg?

      • mg

        Then, you just print more. Don’t you get it? Why do you hata Amerika?

      • mg

        Then you just print more. Don’t you get it? Why do you hate Amerika?

        • wsm

          @ mg:

          What is ‘Amerika’?

          Also, what do you mean by ‘Then, you just print more.’ ?

          The comment does not seem to have any coherence and needs some context.

  • Warren

    From Bloomberg,

    Warren Buffett, the billionaire who urged Congress in 2009 to guard against inflation, said investors should avoid long-term fixed-income bets in U.S. dollars as the currency’s purchasing power will decline.

    “I would recommend against buying long-term fixed-dollar investments,” Buffett, chairman and chief executive officer of Berkshire Hathaway Inc. (BRK/A), said today in New Delhi. “If you ask me if the U.S. dollar is going to hold its purchasing power fully at the level of 2011, 5 years, 10 years or 20 years from now, I would tell you it will not.”

  • Sean

    LD, ZH recently reported that 2 large macro funds in Europe recently went “super-long” on the S&P around the time you were over there, do you know anything about this? This would seem to imply that Chairman Bernanke is preparing QE3 for June and that there is hedge-fund/institutional knowledge about this? Do you know anything about this? What are your thoughts regarding potential QE3 in June? Will we have QE3 in June and if-so how large will it be? We all need our fix, man.

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