The gathering storm

Commentary: US may be alone in capacity to tackle debt and budget gap

"It’s quiet out there — too quiet."

That line appeared again and again in 1950s horse operas, and we Western kids practiced daily the eye-squinted and growled delivery. We also worked at whistling the call of the meadowlark, the way the Native Americans in those oaters signaled each other before their attacks. In our games, the short straws were the cowboys; our Sioux and Cheyenne always won in thrilling slaughter.

It is August, traditionally void of news, but this is really quiet. Eerie quiet.

Europe has fallen silent. Even the European Union no-content boys in Brussels have paused posturing. Monti, Rajoy, Hollande … so quiet you could hear a euro drop in the Rhine.

Mario Draghi at the European Central Bank, after his excursion into bluster, has corked himself altogether. Today German Chancellor Angela Merkel broke her speaking fast to announce foursquare support for Greece and how much she wants it to stay on the euro (she may be a master of Europe on the order of Metternich and Bismarck, or an all-time blockhead, the power of her purse pushing her forward beyond talent — and I can’t find anyone who knows which).

The still-sealed tomb of a Chinese emperor is noisier than China’s current leadership. Japan is an exercise in origami in which paper is folded until it disappears altogether. And here a presidential campaign that would be improved by silence.

If you hear a meadowlark out there, wherever you are, best keep your head down.

Formal governments are paralyzed, and markets and the "leaders" themselves all turn now for rescue to hybrid, unelected star chambers: the central banks. The Fed, the European Central Bank, the People’s Bank of China, and the Bank of Japan. When one speaks, even without doing a thing, markets shake.

The shock is still rippling from Wednesday’s release of month-old Fed meeting minutes. They sound as though they’ll ease again in some form, but no one knows how, or when, or to what effect.

Stocks and other "risk assets" usually take off on new presumption of Fed easing, but not this time. Ten-year Treasury yields did fall back to the center of their May-August range, but hardly an exuberant response.

Suspicion is building that any new Fed operation will just buy time until fiscal and economic reckoning. Meanwhile, federal tax revenue in 2012 is running 15.7 percent of GDP versus 24 percent spending, and versus 2007 revenue at 18.5 percent.

Everyone assumes the European Central Bank is collecting final political approval for its own "quantitative easing" (QE), trying to suppress borrowing costs for the euro-wrecks. However, neither the European Central Bank nor any European authority has a solution to the stimulus-austerity conundrum, so long as all are bolted to the euro.

In the best-by-far English language China blog, www.mpettis.com, Michael Pettis asserts that a new round of Chinese stimulus will signal panic, more credit and investment making things worse, and marking aversion to desperately needed re-balancing of China’s economy away from state industries and toward consumers.

Many expect the Bank of Japan to print Japan out of deflation. That would make 23 years of expecting, still counting.

Those who meditate find clarity in silence, and so this August we have it. The convergence of expectations of all four major central banks — results beyond their means — says with considerable clarity what comes next.

In varying ways and times, in all four regions — U.S., Europe, China, Japan — economic deterioration will force dealing with their actual headwinds. The toughest part: to sort those who can support their debt from those who cannot, and to proceed with their assisted default. One or more may temporarily embark on the last mirage of the central bank, to print enough to induce inflation, but the ensuing catastrophe would caution the others.

Here in the U.S. we enjoy the improbable position of having the best chance to act of the four. Either now or soon, we will be the only one with positive GDP. We may be the only one still with the capacity to deal with our existing debt and budget gap. How we do it will be disorderly beyond imagining, but that’s how we do things.         

Lou Barnes is a mortgage broker and nationally syndicated columnist based in Boulder, Colo. He can be reached at lbarnes@pmglending.com.

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