If you think the debt war in Washington is over, take another look at two of the shocking forecasts I made in this column just two weeks ago.
Here they are verbatim …
Forecast #1: “At the 11th hour, the warring factions [will] reach a compromise and Congress [will] raise the debt limit to fund the government’s operations normally.”
“Based strictly on history,” I wrote, “this is the most likely result. It’s what has happened every single time in the past. …
“Despite the intense pain and embarrassment, born-in-Washington, garden-variety government shutdowns are temporary. They disappear just as soon as enough people on either side of the aisle come to their senses.”
End result: Despite all the chaos and cursing, forecast #1 is exactly what we got: At the 11th hour, the warring factions came together. They signed a temporary truce. And they’re back to business as usual.
Forecast #2. “Global bond investors [will] rise in rebellion and dump their U.S. bond holdings.”
THAT’s what will force the government to virtually shut down — not a crisis created in Washington.
Why will global bond investors rebel? For the same reasons we have been stressing all along:
Because none of the debt problems have been solved.
Because the war in Washington has barely begun.
Because the next battles are ALREADY on the calendar — in January and February!
And because those battles are bound to be far larger and more damaging than any we’ve seen before. Nothing has changed.
All we’ve witnessed in the past fortnight is the most expensive, most damaging and most frightening can-kicking operation since the founding of the Republic.
But as I explained two weeks ago, the bond investor rebellion we’re forecasting is not unprecedented. It has happened before — in 1980, under the Carter administration.
Back then, the federal budget deficit was huge, although not nearly as large as today’s.
Consumer inflation was taking off due to years of aggressive easy money by the Fed, although not nearly as aggressive as the Fed’s massive money printing and bond buying of the past five years.
There was fear of a hotter cold war, although not nearly as intense as today’s fears.
In response, bond buyers went on strike. It was virtually impossible for the United States government to sell its bonds at virtually any price.
Big U.S. government security dealers on Wall Street — such as Salomon Brothers and Merrill Lynch — found that they could not even sell small lots of bonds in the market. There were simply no buyers.
Other dealers, afraid of losses that would wipe out their capital, closed shop.
U.S. bond prices plunged uncontrollably — as much as five full points in one day. Interest rates skyrocketed — to nearly 17 percent for U.S. Treasury bills. The bond market virtually shut down, threatening to shut down the entire government — even the entire nation.
My forecast was — and is — that this will happen again.
When it does, you’d better be ready. It won’t be pretty.
Good luck and God bless!