Well, it's been a busy day.
Greece is now junk and has finally come clean about its debt: €135bn over the next three years is what they need to just service their debts, especially after interest rates went up 16%.
Spain was downgraded by S&P from AA+ to AA.
Watch for a shorts on Italy next.
This is something everyone should see. Peter Schiff has been pretty damn spot-on, but few have listened.
Why is this all of concern?
Because, at the end of the day, the US is in the exact same situation as Greece, as is the rest of Europe and Japan (for different reasons). This means that sovereign debt is the new bad boy, the 500-lb gorilla that will dominate financial markets.
Here's the problem: while the US can print all the money it wants - unlike Greece - this doesn't solve the problem, it is the same as digging the hole deeper. While this isn't the end of the dollar, it does mean that the dollar must go down: given that interest rate increases are out of the question for the Fed (because then the sovereign debt hole becomes the bottom of a mining shaft with no ladder headed up) and the Fed will keep inflation down, then the only thing left is to devalue the dollar.
You might think the economy is doing better, but it really isn't: debts of all kind continue to increase faster than economic growth. This is, to repeat a theme, a catastrophe brewing that is unprecedented.
What went wrong?
Simple (hah!): intervening in markets to postpone a reckoning (Greenspan's Folly, to coin a phrase) doesn't mean that the necessary corrections won't happen, but rather that they then accumulate. You see, markets go up and down according to supply and demand (and the Good Lord knows that I've mentioned how ruthless and disinterested markets are here enough times), and when supply and demand shift such that a negative correction is due, then it is always best to take the pain in small steps, rather than postponing it as long as possible. That latter choice is what policy choices have been, however, since Greenspan was head of the Fed, and Bernanke is no different.
The day of reckoning is coming: at some point you have to start paying back what you've borrowed, meaning that you can't consume. Given the western obsession with consumption, this means that there will be little growth.
What can you expect? Imagine the US economy with consumers saving at a rate like the Japanese or, even better, like the Chinese. Not the 2-5% of income, but rather 20% and more of income "saved," which in this case really means reducing consumption until the debt is paid.
Thank your Congress critter for the masses of US sovereign debt and the inability of politicians of all kinds to actually listen to economists who actually know what they are talking about.
Let me repeat what Kipling said:
As I pass through my incarnations in every age and race,
I make my proper protestations to the Gods of the Market-Place.
Peering through reverent fingers I watch them flourish and fall.
And the Gods of the Copybook Headings, I notice, outlast them all.
We were living in trees when they met us. They showed us each in turn.
That water would certainly wet us, as Fire would certainly burn:
But we found them lacking in Uplift, Vision, and Breadth of Mind,
So we left them to teach the Gorillas while we followed the March of Mankind.
We moved as the Spirit listed. They never altered their pace,
Being neither clued nor wind-borne like the Gods of the Market-Place;
But they always caught up with our progress, and presently word would come
That a tribe had been wiped off its ice field, or the lights had gone out in Rome.
With the Hopes that our World is built on they were utterly out of touch.
They denied that the Moon was Stilton; they denied she was even Dutch.
They denied that Wishes were Horses; they denied that a Pig had Wings.
So we worshiped the Gods of the Market Who promised these beautiful things.
When the Cambrian measures were forming, They promised perpetual peace.
They swore, if we gave them our weapons, that the wars of the tribes would cease.
But when we disarmed They sold us and delivered us bound to our foe,
And the Gods of the Copybook Headings said: 'Stick to the Devil you know.'
On the first Feminian Sandstones we were promised the Fuller Life
(Which started by loving our neighbor and ended by loving his wife)
Till our women had no more children and the men lost reason and faith,
And the Gods of the Copybook Headings said: 'The Wages of Sin is Death/'
In the Carboniferous Epoch we were promised abundance for all,
By robbing selective Peter to pay for collective Paul;
But, though we had plenty of money, there was nothing our money could buy,
And the Gods of the Copybook Headings said: 'If you don't work you die.'
The the Gods of the Market tumbled, and their smooth-tounged wizards withdrew,
And the hearts of the meanest were humbled and began to believe it was true
That All is not Gold that Glitters, and Two and Two make Four---
And the Gods of the Copybook Headings limped up to explain it once more
As it will be in the future, it was at the birth of Man---
There are only four things certain since Social Progress began:---
That the Dog returns to his Vomit and the Sow returns to her mire,
And the burnt Fool's bandaged finger goes wabbling back to the Fire;
And that after this is accomplished, and the brave new world begins.
When all men are paid for existing and no man must pay for his sins,
As surely as Water will wet us, as surely as Fire will burn,
The Gods of the Copybook Headings with terror and slaughter return!
Jesus have sweet mercy. We will need it.