The European sovereign debt crisis is now over, Japan is 100% back on-line and as QEII returns to port; it’s clear sailing ahead for the U.S. economy. Investors seem to share the same view as Don Luskin, who said last night on the Kudlow Report that, “We’ve solved all the fundamental problems in this country.” The main evidence for the notion that all of our problems are behind us is the fact that the S&P 500 is up 62 points in 16 days, which is an increase of 4.9%.
I wish I could be so naïve. The truth is that Greece has decided to force down a few more drinks in order to delay their hangover. Greek GDP is still contracting and debt as a percentage of their economy continues to rise. Another IMF loan solves nothing. Interest payments are still near total federal revenue and their 2 year note costs Greece 26.66% as of this writing. For a country with a Debt to GDP ratio of 160%, how can that ever be considered sustainable? Meanwhile, Portuguese 2 year bonds are still yielding 13.07%. I’m sorry to say that the European debt crisis is just beginning.
Forgive me for being a realist but the U.S. is mired in a record amount of debt that is increasing $1.5 trillion dollars this fiscal year alone. Compare that level of debt to the $500 billion total outstanding Greek debt. I realize our artificial economy is bigger than Greece but our annual deficit this year alone will be 3 times what they owe in entirety. That’s not such a problem when the Fed was able to manipulate the yield curve to a record low. But now we are being told that Bernanke is willing to take a peek at what reality might have in store for our economy. On June 24th the yield on the 10 year note was 2.88%. And now that the Fed has allowed market forces to take the wheel, the yield has climbed all the way up to 3.2% —that’s a 32 basis point move in a week!
The Fed still has to unwind a couple of trillion dollars worth of underwater assets. Interest rates must rise several hundred basis points just to be back to a normal level. The National debt is $14.4 trillion and growing at 10% per annum. Inflation is destroying the purchasing power of our currency and sending consumer prices up over 5% at an annual pace. And the U.S. faces austerity that will make Greece’s version look like a picnic. The sad fact is that unlike what Mr. Luskin contends, the problems facing the U.S. are, unfortunately, mostly ahead of us.
Michael Pento, Senior Economist at Euro Pacific Capital is a well-established specialist in the “Austrian School” of economics. He is a regular guest on CNBC, Bloomberg, Fox Business, and other national media outlets and his market analysis can be read in most major financial publications, including the Wall Street Journal. Prior to joining Euro Pacific, Michael worked for a boutique investment advisory firm to create ETFs and UITs that were sold throughout Wall Street. Earlier in his career, he worked on the floor of the NYSE.
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