March 04, 2013 1747 VIEWS
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Saturday, March 02, 2013 / Money and Markets

 

Last week in this space, I told you about the dire consequences of the sequester, and I wrote: "Precisely BECAUSE the warnings are falling on deaf ears, the real wolf is now prowling. And not only is she likely to strike on March 1, but she's also likely to continue striking for months to come."(See The REAL Fiscal Cliff.)

 

On March 2, that's precisely what happened. On Thursday, Congress virtually shut down as senators and congressmen went home. On Friday, the first spending cuts went into effect.

And in the weeks ahead, they will continue, digging more deeply into the economy.

 

Will Washington finally reach some sort of deal that makes the cuts less arbitrary and a bit more rational? Yes, probably.

 

But no matter what's agreed upon or when, there are four important lessons to take away from this episode.

 

Lesson #1. Austerity is here no matter what just as Mike Larson warned his Safe Money subscribers last year. No matter what finally comes out of Washington — agreements or no agreements, automatic cuts or targeted cuts, cuts to defense or cuts to entitlements, more taxes or reformed taxes — the result for the economy has one BIG PICTURE aspect in common: The government is taking money out of the economy! And that means only one thing: Austerity — like it or not. 

 

Lesson #2. US government's a mess — not just financially, but also in terms of its ability to function.  To understand how grave this is, put yourself in the shoes of global investors in U.S. bonds. You say ..."Isn't it bad enough that you owe me all this darn money?! Isn't it bad enough that you keep borrowing MORE — at the rate of $1 trillion each year?!  "Now, on top of that, you can't even run the government?! You don't even TALK any more about blatant problems staring you in the face?! All you can do is throw bricks at each other?!" That's a pretty damning message! It means you're going to be far less anxious to buy U.S. bonds and a lot more anxious to dump them.

 

Lesson #3. Complacency breeds catastrophe - When folks fear a coming event, they take action to prevent it, avoid it, or at least protect themselves from the fall-out.  But when they ignore it, pooh-pooh it, or just roll their eyes at the boy who cries wolf — that's when YOU need to be ready for the worst! That's what happened in Washington and Wall Street this week. So beware!

 

Lesson #4. Markets will have the last say!  - Washington never was the true driver of markets and the economy, and that's more true today than ever before. What will determine our nation's future is millions of investors making their own independent decisions in their own interest — especially in the bond markets.   

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