Monday, July 4, 2011

The Debt Ceiling Compromise

With the Greek bail out now in place, the focus of of the media and the average American can move back toward our own political clown show, also known as the debt ceiling.

We have been told if the budget debt ceiling is not raised by August 2nd, allowing the federal government to borrow additional debt, then we will see mass chaos greater than the fall of 2008.

This may be true. With a global financial system built on a house of cards, any small push could topple the giant ponzi scheme we live in today.

I don’t think we’ll get there and the show being put on by our political actors will have a conclusion before August 2nd.

The important question is what type of agreement will both sides compromise on?

Before we get to that answer you need to focus on the fact that we are only 16 months away from the next election. The most important job in America for a politician is his or her own. They understand that the economy is once again on the verge of rolling over, and they will do what they can to push back the reckoning day another 16 months.

I believe this will come in the form of a new stimulus program focused on jobs, housing, or both. It will have a name like “The Federal Job And Housing Stimulus Act.”



This spending will obviously add to the deficit in the short term. In exchange for this spending, politicians will promise massive cuts out in the future. This will allow them to present the total package as a reduction in spending.

Then the debt ceiling will be raised, and we are off to the races.

On the opposite side of the accounting ledger someone has to pay for this spending, and that is where our Federal Reserve comes in. There have already been discussions of implementing an old program called "Operation Twist." I will discuss how this program works in the future if and when it becomes the tool the Fed uses, but the important part to understand is that it is just the purchase of assets with printed money.

It is QE3, only with a different name, which is important for perception.

After the debt ceiling is raised, I see both these programs implemented the second half of the year:

“The Federal Job And Housing Stimulus Act” coming from the federal government and “Operation Twist 2” coming from the Federal Reserve.

Then our politicians can sit back and hope that we can make it through one more election before the collapse arrives. The day of reckoning that is on the way for the endless government spending and the printed money used to pay for it.

For every action there is an equal and opposite reaction. The second half of that equation is coming. Enjoy your 4th of July and appreciate the important things like your friends and family. 

Things are going to get a lot worse for America in the years ahead before they get better.  Our government is creating a disaster far greater than what we saw during the Great Depression.  This decade will be America's most difficult in its 235 year history.

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