Shutting Down the Government Debt Machine

First, stocks rose yesterday, with the Dow up 124 points.

Gold fell $7 from a record high set on Monday. Here was the headline from Tuesday’s Financial Times:

“Gold surges to record high as investors search for haven.”

A haven from what? Ah…a haven from central bankers’ errors. A haven from inflation. A haven from revolutions and civil wars. A haven from defaults and bankruptcies.

Gold is an all-purpose, evergreen haven. Got a personal problem? Have a drink. Relax. Talk to your priest or your bartender. Got a financial problem? Buy gold.

And here’s Bill Gross of PIMCO, commenting on one of the things gold is a haven from. Reported on Yahoo! Finance:

“No Way Out” of Debt Trap, Gross Says: US Living Standards Doomed to Fall

In the US, states across the country face a collective $125 billion shortfall for fiscal 2012, while Congress is facing a budget gap nearly 10 times that size.

PIMCO founder Bill Gross – one of the world’s largest mutual funds managers, who focuses mostly on bonds – has previously said that if the United States were a corporation, no one in their right mind would lend us money. For the last decade, we’ve been “relying on the kindness of strangers” to help cover our debts…

By “strangers” he is referring to our foreign counterparts, like China for example. Basically, for years Americans have spent their hard-earned dollars on less-expensive Chinese made goods. With great gratitude, China turned around and used all those dollars to buy up US Treasuries and other dollar-denominated assets.

But now after years of reckless spending, America’s debt level is nearing a breaking point and can no longer rely on foreign capital as a last resort. “When a country reaches a certain debt level, confidence in that country’s ability to repay that debt becomes jeopardized,” says Gross, citing the work of Ken Rogoff and Carmen Reinhart in This Time Is Different.

“There is really no way out of this trap and this conundrum at this point,” says Gross. From an investment perspective his advice is to stay clear of “bonds in dollar denominated terms” and to be “wary of higher interest rates going forward.”

Meanwhile, the debt trap hole gets deeper and deeper. Here’s The Washington Times with the latest:

The federal government posted its largest monthly deficit in history in February, a $223 billion shortfall that put a sharp point on the current fight on Capitol Hill about how deeply to cut this year’s spending.

That one-month figure, which came in a preliminary report from the Congressional Budget Office, dwarfs even the most robust cuts being talked about on the Hill, and underscores just how much work lawmakers have to do to get the government’s finances in balance again.

The Senate plans to vote Tuesday on competing proposals to cut spending, but Democrats have rejected GOP-backed cuts of more than $50 billion, and Republicans have ruled out Democrats’ cuts of less than $10 billion, meaning neither plan will draw the 60 votes needed to overcome a filibuster and pass.

The two sides are facing a March 18 deadline, which is when the current stopgap funding bill expires. Without a new spending agreement by then, the government would shut down.

Let’s see. A shut down? Yes, seems like a good idea. Close the doors. Turn out the lights. Send the zombies home.

But wait… The FBI and Homeland Security would shut down too. And the IRS.

Well, great… What an opportunity! Want to cheat on your taxes, murder someone, rob a bank, or blow up a federal building? Get ready… The coast will be clear.

But why bother? The feds are going to cause enough mayhem on their own. The feds spent $223 billion more than they took in last month. Multiply by 12. Hey wait. We don’t even need a calculator. That’s more than $2 trillion. Come to think of it, a shut down may be the only way to save us.

Bill Bonner
for The Daily Reckoning

The Daily Reckoning