Credibility of the nation’s ability to pay its bills will be tarnished (Michael Pento)

Euro Pacific Capital
Tuesday, July 26, 2011

By: Michael Pento

 

The U.S. economy may suffer an abrupt blow of austerity come August 2^nd. Indeed, that is what we truly need to bring lasting prosperity to this great country. But even if the republicans and democrats find a way to hold hands in the next few days, it won’t mean clear sailing is in store. A credit rating downgrade seems unavoidable at this juncture because a grand deal to cut over $4 trillion in spending is impossible to achieve by the deadline.

 

Therefore, whether it is a small deal or no deal, the credibility of the nation’s ability to pay its bills will be tarnished.

 

So no matter what happens after the deadline passes the economy will still be mired in trillions of dollars in debt that has to be serviced and rolled over. And since higher interest rates are virtually guaranteed to manifest because of inexorable debt issuance and inflation, the solvency of the U.S. is sadly, just ephemeral.

 

An increased cost of borrowing won’t help our comatose housing market either. But even before that inevitable increase occurs, data on New Home sales released today showed a declined for a second month in a row. Purchases dropped 1% to a 312,000 annual pace, which is a three-month low. And while the S&P/Case-Shiller index rose 1.1% and 1.0% for the 10 and 20 city index respectively, the YOY decline in home prices was still 3.6% and 4.5% for the 10 and 20 city index.

 

Mr. Case of the famous Case-Shiller Home Price Index explained the reason for weak sales data was the fact that household formation is negative. I’ve said over and over again that the cheerleaders and shills were wrong when saying the increasing U.S. population would solve our real estate problem. That’s because Population growth doesn’t equate to household formation. You need a job, savings and access to credit to afford a house.

 

I think most markets are far too complacent about the prospect of higher interest rates and the damage they will wrought. The Gold market has it correct and investors shouldn’t take solace in quiescent bond prices. The two biggest mistakes in the history of global financial markets are that the U.S. dollar will always be the world’s reserve currency and that U.S. sovereign debt is the ultimate safe haven.

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.