Glimpses of the End Game

Anyone not blinded by greed can plainly see the sick cycle we’re in:

First, the government helps create a great asset bubble.

Next, the government-created bubble bursts under a dark cloud of hardship for millions of Americans, and …

Last, the government responds by creating still ANOTHER bubble, often far more dangerous than the previous.

A rare sequence of events? Hardly.

Just in the past dozen years, we’ve already seen three — the tech bubble and wreck … the housing bubble and bust … and now the sovereign debt explosion and implosion.

So by this time, millions of investors already know the drill. What they don’t know is the answer to the biggest question of all:

What’s the End Game?

Will the world’s money printing presses inevitably run amuck, trashing any remaining value in paper currencies?

Will major governments ultimately default on their debts, destroying the global credit system?

Will our entire civilization crumble?

My answer: The threats are certainly real. But the final outcome could be very different indeed.

In fact, no matter how many tricks governments may play and no matter how wild this 21st century roller-coaster ride may get, there will also be another possible end game: Austerity.

Austerity can come in many forms: Governments may impose austerity strictly in reaction to market-driven forces … or by pro-actively taking the lead. Austerity may come with wild inflation … or without. It could trigger deep social upheaval … or merely sporadic protests.

But regardless of how austerity finally arrives, it cannot happen without across-the-board cutbacks in government payrolls, severe reductions in unemployment benefits, massive cuts in pensions, big hits to social welfare programs, and invariably, NO MORE ECONOMIC STIMULUS!

New Austerity Measures Sweep The Globe

Hard to believe? Then take a closer look at the sudden rush to austerity announced just in the past few weeks …

Greece has finally bowed to unrelenting attacks from global investors and is slashing 30 billion euros from its budget in three years.

Spain, also under massive pressure from investors, has announced spending cuts of 15 billion euros, plus a 5 percent reduction in public worker wages.

Portugal is getting ready to embark on a program to cut 2 billion euros this year alone.

Italy is slashing 25 billion euros from its budget over the next two years.

Germany, supposedly the most robust of all euro-zone countries, has no choice but to follow a similar path — cutbacks of 85 billion euros by 2014.

But this is just the beginning.

In the UK, newly elected Prime Minister David Cameron has wasted no time in confessing that Britain’s financial situation is “even worse than we thought.” He has blatantly declared how sharply he’s going to break with his predecessors on stimulus programs … how hard he’s going to slam down on the brakes, and … how quickly he’s going to prescribe a harsh regimen of spending cuts.

Expect cutbacks of at least 6.2 billion pounds this year alone.

In Japan — where newly installed leadership is also trying to make a clean break with the past — we see the same pattern: Late last week, Prime Minister Naoto Kan pulled no punches in declaring that …

Japan’s “outstanding public debt is huge” …

Its “public finances have become the worst of any developed country” …

And the entire country is at “risk of collapse.”

Even in Washington, voices advocating a second round of stimulus have suddenly gone silent. According to the New York Times,

“At a moment when many economists warn that the American economic recovery is likely to be imperiled by prolonged high unemployment and slow growth, President Obama is discovering that the tools available to him last year — a big economic stimulus and action by the Federal Reserve — are both now politically untenable.

“The mood in both parties of Congress has turned decidedly anti-deficit, meaning that the job-creation programs once favored by the White House and Democratic leaders in Congress have been cut back, then cut again.

“It is a measure of the mood that Mr. Obama on Tuesday hailed an initiative by his administration to cut the budgets of most major government agencies by 5 percent, at a time when conventional theory would call for more government spending to lift the economy.”

Will politicians in Washington, Tokyo, London, Berlin, Rome, Lisbon, Madrid, or Greece cut enough to restore fiscal balance? I doubt it.

But never forget:

These governments are the ones that injected the mega doses of stimulants into the bloodstream of their economies last year. And these governments are also the ones that everyone hoped would provide the NEXT big fix.

Now, even if they don’t cut their budgets by a penny — even if they simply fail to renew their stimulus programs — the impact could be severe.

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.

My recommendation:

Don’t wait. for the Biggest Shock of All.

Don’t delay while debt façades crack around the globe.

Heed our multiple warnings of the dangers ahead and follow our calls to action.

Good luck and God bless!

Martin

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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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