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The Piper is calling.

|Includes: ProShares UltraShort Financials ETF (SKF), TWM

The theme in the world has changed, although the theme on Capitol Hill prefers that it not.  The world is not willing to risk a Greek-like collapse from a major economy; the G-20 was a stepping-stone in the direction of fiscal responsibility.  Finally, the excessive debt burdens of the world are being addressed, at least in words.  The next step is action.

Unfortunately, for the United States, its ability to protect itself from the third major down period in US History according to the Investment Rate, ended with Clinton.  Amazingly, a Democrat was paying down the US debt, and Bush, a Republican, escalated it out of control.  That divergence marked the turning point from a less bad down period, towards a Greater Depression.

Reasonably, Obama had to spend to bail out the nation from an immediate collapse.  No one is arguing that.  However, because debt has been piled on in years past, he does not have the cushion he otherwise would to ride out the storm.  Therein lays the difference between less bad and a Greater Depression.  Thinking ahead was required to protect the economy, but no one listened to me when I introduced the Investment Rate in 2002.  Now it is too late to shelter the economy.  Some have started to listen to me since.

The picture I paint is not a pretty one.  Eventually, I have said, we will need to tackle our debt burdens.  The government’s assessment of debt is far less than mine, or anyone’s, but there may be a reason for that.  The world considers Social Security and Medicare expendable.  Put another way, Social Security and Medicare benefits could be put on the negotiating table as a means of reducing future expenses, but US citizens do not believe that ever would happen. 

Denial is all I am hearing in most parts of the world.  Greece is the most confident in its denial, as Greek Citizens believe the set backs will not last for more than a year or two, and then everything will be back to normal.  What has not hit home is that the culture will materially change because of this economic collapse, which was due to its heavy debt burden.  The retirement age has been moved up considerably.   People will be forced to work about eight more years in Greece before they can receive benefits. 

Unfortunately, most Greeks are not looking ahead, because this is not an immediate concern.  Those changes will not take place for a few years, but they will happen.  Aside from rioters, Greeks believe this will work itself out, and everything will be back to normal again soon.  I wonder how things will change when a few years come and go.

Other countries, including the United States, think the same way.  The US, for example, seems to believe that piling on debt will never be a problem, because the dollar is a world currency.  In actuality, the opposite is true.  The world is more demanding of the US because it is a world currency, and because Greece has set the example for what could happen if a larger economy falls.

Global demand has clearly shifted from stimulus to austerity.  Fiscal responsibility is the focal point, and the typical left wing Democrat, Obama, is being forced to amend his agenda.  Debt spending and Big Government will be curbed.  His new agenda is to determine how.

Therein lays our major headwind.  There are only two ways of doing this, and I believe both will play a role.  First, taxes will go up.  Second, government spending will go down.  I have said this time and time again, in my book, “Buy and Hold is Dead”, in interviews, and many times in my Newsletters.  Because the US was not fiscally responsible during a Republican’s tenure, which is surprising on many accounts, it is unable to spend its way out of the third major down period in US History.

Economists agree that the best way of tackling this problem is to pour money at it.  However, those economists all are operating on the basis that everything must grow all the time.  That is idyllic at worst and hopeful at best.  Economies do not grow all the time, but they should grow over time.  Major setbacks occur from time to time, and we are in one now. 

Ghastly as it sounds, even the Government needs to accept the weakness in the economy, and it needs to find some other way of addressing the Global demand for deficit reduction other than sacrificing Social Security and Medicare.  Some economists are starting to believe that cuts to these programs are inevitable, and many believe the recent healthcare package aims at transferring some responsibilities to the private sector immediately.  At least, they think, it is a beginning.

As I continue to write this piece, realism is beginning to become known.  The ability to choose has been limited.  The United States cannot afford to remain on its existing path.  It also cannot simply talk about austerity.  The world wants action, even if that action is only a small step in the right direction. 

The Investment Rate proves that the economy will not be getting better anytime soon, for many years, so the hopeful Government will not be able to rely on more tax revenues from a growing economy.  Instead, it will have to raise taxes in a weak environment, cut spending , that means fewer Government Jobs, and quite possibly, slashing the unfunded liabilities that reside yet denied on the internal balance sheet of the United States today.

The Global Economy has spoken, and everyone must listen.  The focus is no longer on stimulus.  The debate has become Political, and Governments do not want to risk their country’s future on the fiscal irresponsibilities of a small nation like Greece, much less a powerhouse like the US.  The piper is calling.

SKF and TWN have been recommended.

Disclosure: skf and twm have been called.