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A former emperor with no clothes is finally telling the naked truth.
His name: Alan Greenspan.
His primary role in history: Chief architect of the boom-and-bust cycle that caused the fiscal madness he now condemns.
His most recent act: To issue four warnings in Friday’s Wall Street Journal that are precisely the same as those we issued here in Money and Markets months earlier …
Greenspan Warning #1
Greece is a wake-up call for the U.S.
and most of the developed world.
Greenspan says that Greece should drive U.S. authorities to make “a tectonic shift in fiscal policy.”
Agreed.
Starting 16 months ago, our editors not only saw the sovereign debt crisis coming, but explained precisely how it would unfold …
In our Money and Markets of February 25, 2009, Sean Brodrick wrote:
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“Collapse of credit bubbles in Ireland, Spain, Greece, and Portugal could lead to those countries defaulting. … So I expect at least one European country to go bankrupt in the next 12 months, and that will strike fear into the hearts of the central banks.” Sure enough, Greece is bankrupt and others are now on the way, saved only by a bailout that could, in turn bankrupt Europe.
To follow up, on December 11, 2009 — also long before most others were concerned about the sovereign debt crisis — Mike Larson wrote:
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“Sovereign debt defaults are the next shoe to drop. … Greece is rapidly sliding down the slope toward default. … Spain is in trouble because it experienced its own gigantic housing bubble, one that has long-since popped. … Then there’s the U.K. Its budget deficit is running at 12 percent of GDP, the highest in the Group of 20 community of nations. … And what about us? The fiscal 2009 budget deficit here soared to $1.4 trillion, the worst ever.”
We further explained the implications in “The Next Contagion” (February 1, 2010), “Armageddon” (February 22), “Bernanke Running Amuck” (March 22), and many times since.
Our conclusion: The next big victim could be the one country for which no bailout is possible — the United States.
Greenspan Warning #2
The contagion is ALREADY
reaching the United States.
How do you know if the sovereign debt crisis has hit the United States, or not?
To the lay observer, it’s often murky. But to an interest-rate analyst, the clues are straightforward: When the federal government has to pay a higher rate for its borrowings than a supposedly riskier private corporation, you know the sovereign debt crisis is here.
That’s precisely the situation Greenspan describes for the U.S. credit markets today: Based on one key measure, the U.S. government was recently paying 0.13 percent MORE for 10-year loans than private borrowers!
And it’s also what Mike Larson warned you about three months earlier in “Bond Market Verdict: Treasuries Riskier Than Toilet Paper” …
“[The U.S. Treasury is paying more to borrow money than] Procter & Gamble, the company behind brands like Tide detergent and Charmin toilet paper; Lowe’s, the home improvement retailer; and Johnson & Johnson, the firm that makes Band-Aids, medical devices, and baby shampoo.
“The message from the markets [to Washington] is loud and clear: Get your financial house in order … or we’ll FORCE you to do it!”
Greenspan Warning #3
Interest rates could skyrocket
like they did in the 1980s.
Greenspan’s exact words: “Long-term rate increases can emerge with unexpected suddenness. Between early October 1979 and late February 1980, for example, the yield on the 10-year note rose almost four percentage points.”
Yes. Plus, in the same year, 30-year Treasury bond yields rose five percentage points; Treasury bill rates catapulted from 6 percent to 16 percent in six months; and the prime rate hit 21.5 percent.
We don’t expect to see interest-rate surges of that magnitude and speed, but even if rates rise by only a small fraction of their 1980s explosion, the consequences can be catastrophic.
And here again, Money and Markets editors have been ahead of the curve. (See Mike Larson’s “Surging Interest Rates Ahead” and “Why I Worry So Much about Bonds.”)
Greenspan Warning #4
Surging gold prices are the harbinger
of future fiat money collapses.
Greenspan writes: “It is little comfort that the dollar is still the least worst of the major fiat currencies. But the inexorable rise in the price of gold indicates a large number of investors are seeking a safe haven beyond fiat currencies.”
Yes, of course. This is why Larry Edelson, Sean Brodrick, Claus Vogt and others on our team have long made it clear that what was truly going to drive gold higher was not merely the sinking dollar. It was the decline in nearly all major fiat currencies, especially the euro.
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And few in the world of currencies have been more vocal about the euro’s coming demise than Weiss Research’s Bryan Rich.
It was 15 months ago that he posted his landmark column “Why It Could Be Curtains for the Euro” (March 7, 2009) … 14 months ago that he wrote “More Pain Ahead, Especially for Europe” (April 25, 2009) … and five months ago that he asked, presciently, “Will the Euro Become the Most Hated Currency for 2010?” (January 2, 2010).
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Plus, it was Claus Vogt’s “The Euro Is Washed Up — But the Dollar Is No Better” that recently brought the point home for some of the most die-hard optimists: If you include each government’s future obligations, he argued, Germany and France now have total debts of 255 percent of GDP … the U.K. has 530 percent … and the U.S. is up to 580 percent!
Day of Reckoning Near
Thank you, Mr. Greenspan, for making very much the same arguments as our team. But alas, there is one argument you make that we feel is unrealistic in the extreme — that budget contraction will not induce renewed economic decline.
The reality: The economy is addicted to stimulus. And as I explained here one week ago in “Glimpses of the End Game,”
“This isn’t rocket science. The U.S., Europe and Japan are addicted to stimulus. But instead of more injections, governments are now prescribing cold turkey. Even if they don’t cut very much, instead of more economic recovery, we will inevitably see severe withdrawal pains and another major slump.”
Now here’s the clincher for investors: As long as the Obama administration and Congress had the political capital — and the sheer gall — to spend and stimulate endlessly, they were able to persuade the world that the crisis was over and the recovery was for real.
They not only manipulated the economy but also investor psychology.
But now, proponents of more stimulus and bailouts are discredited. Apologists for massive deficits have been silenced. And even establishment economists like Greenspan are writing about the same dire consequences we’ve been warning you about here in Money and Markets.
This about-face in perception and policy could be constructive in the long term. But right now, it’s likely to be the straw that breaks the back of the Washington-engineered recovery. Without more stimulus, subsidies and bailouts, the modest improvements we’ve seen in housing, jobs, and corporate earnings will soon come to an abrupt end … the stock market rally that began in March of last year is in its final stages … and the widely feared double-dip recession is on its way.
Still not convinced? Then seriously consider …
- “Economy Stalling as Easy Money Effect Wears Off!”
- “The Biggest Shock of All”
- “The ‘Snowball’ Scenario Sinks Sovereigns”
- “Two Consequences of the Stimulus Programs Washington Wants You to Ignore”
- “Debt Façade Cracking in U.K. as Sovereign Contagion Spreads”
Next, take action, following the instructions in “Our SIXTH Warning: Dow in Danger!”
When the chief architect of the prior boom himself sees dire consequences dead ahead, it’s time to stand up and listen.
Good luck and God bless!
Martin
About Money and Markets
For more information and archived issues, visit http://www.moneyandmarkets.com
Money and Markets (MaM) is published by Weiss Research, Inc. and written by Martin D. Weiss along with Nilus Mattive, Claus Vogt, Ron Rowland, Michael Larson and Bryan Rich. To avoid conflicts of interest, Weiss Research and its staff do not hold positions in companies recommended in MaM, nor do we accept any compensation for such recommendations. The comments, graphs, forecasts, and indices published in MaM are based upon data whose accuracy is deemed reliable but not guaranteed. Performance returns cited are derived from our best estimates but must be considered hypothetical in as much as we do not track the actual prices investors pay or receive. Regular contributors and staff include Andrea Baumwald, John Burke, Marci Campbell, Selene Ceballo, Amber Dakar, Roberto McGrath, Maryellen Murphy, Jennifer Newman-Amos, Adam Shafer, Marty Sleva, Julie Trudeau, Jill Umiker, Leslie Underwood and Michelle Zausnig.
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