Europe is providing the U.S. with a serious warning; to cut your deficits as soon as possible or face skyrocketing debt service payments and insolvency. So I was hoping given this valuable lesson currently being taught us, that our government would now be making huge strides towards fixing America's fiscal imbalances.

However, this week we received further confirmation that it is impossible for our leaders in government to cut even one penny of our debt. Whether it is Simpson Bowles or the Gang of Six or the Super Committee; it just doesn't seem to matter the folks in D.C. are completely addicted to debt and inflation. The Super Committee failed to find $1.2 trillion to cut in cumulative deficits over the next 10 years. So let's break this down a bit and see how odious these people really are.

The cuts weren't going to even start until fiscal 2013; but still no agreement. The cuts were going to be backend loaded; but nobody could agree to make the cuts. The cuts aren't even really cuts at all because they are simply a reduction in the amount of debt we will accrue in the next decade; but that didn't seem to matter.

To be specific, the Super Committee was supposed to limit the accumulated deficits to be run up in the next decade to a staggering $8.8 trillion. So even if they were successful, we would still have added $8.8 trillion in deficits to our $15 trillion in debt that is already in the bag. So we are still light years away from reducing the nominal level of debt or even reducing the level of debt to GDP.

But of course, since the laws of economics don't apply to the U.S., we don't have to worry about debt. Isn't that what those in D.C. must truly believe? Well the U.S. needs to take a look at what happened in Germany this week. We just may have witnessed the nucleus of Europe split. Germany failed to get bids for 35% of the 10-year bonds offered for sale today, sending its borrowing costs higher. Not having bids for 35% of your action means that the auction has failed. With interest rates now rising in Germany, how will they also be able to stop rates in Spain and Italy form soaring? Higher interest rates in Germany may push the Bundesbank and the ECB over the inflation edge, causing Mario Draghi to rapidly ramp up the Euro printing presses. It is either assent to printing trillions of Euros or watch the Eurozone crumble into the dustbin of history. Given that horrific scenario, I expect the ECB to follow the pattern of all previous central banks and pursue an inflationary bailout with alacrity.

Michael Pento
President: Pento Portfolio Strategies
O (732) 203-1333
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