The greatest issue facing us in the short pull is the very real potential of our Federal government having a failed bond auction. They may have to buy up large amounts of existing Federal debt when rates are climbing. If the Federal deficit spending continues upward at $1.7 to $2.0 trillion a year, we chance losing another rating notch or two. The equity markets and pension funds, both national and foreign, are mandated to accept only AAA bonds. They will not only be unable to buy our debt they may ultimately be forced to divest as the near-junk bond status of our debt violates their investment charter.
If this happens the Fed and Treasury are very likely to pull out the nuclear option. They will raid our private pension funds, just like Spain. They may even take foreign pensions invested in domestic funds. That’s also on the table.
This $6-8 trillion pool of private IRAs and 401Ks is the only large source of funds left outside the MMAs multi trillion dollar pools. The removal of pension funds is now established policy in Europe. This Spanish ‘theft’ of funds, done with little to no chance of repayment, is not going unnoticed in the top levels of our government and the Federal Reserve Bank. These people know that sooner than later there will be a failed bond auction or rating drop that forces their hand- and that hand will move into the pockets of the American tax payer and their private pensions. It’s big money; it’s the only money and these people know it. Call it the Failsafe option if you want. Bernanke knows this well. The vast majority of the American population is completely unaware.