At the beginning of the first Clinton administration, the President's tax and spending proposals drew an extremely negative reaction from the bond market. Mr. Clinton revised his budget and one of his principal political advisers, James Carville, was moved to say:
"I used to think that if there was reincarnation, I wanted to come back as the President or the Pope or as a .400 baseball hitter. But now I would like to come back as the bond market. You can intimidate everybody."
After a long period of somnolence, the bond markets are awake and have turned on Greece. Regardless of the proposed EU and IMF bailout, the Greek government will, within the next three years, likely default on some, if not all, of its debts. Naturally, such a default is being described as a restructuring but that merely attempts to disguise what is really going to happen.
Many banks, governments, hedge funds, bond funds and individuals are going to lose a lot of money.
Next to suffer will be the other so-called members of the PIIGS group: Portugal, Ireland, Italy and Spain. Only Ireland has taken significant actions to address its debt problem but it remains to be seen if those will be sufficient.
So far the USA has escaped the bond market's ire. That this should be so is something of a mystery. Specially as there currently seems to be exactly zero political will to address deficits that stretch from here to eternity.
Those who believe that we can continue to live beyond our means are living in an hallucination that will - sooner rather than later - become a nightmare. When the bond market turns on us, there will be three alternatives and all are equally unacceptable. We can raise taxes and cut spending to such an extent that we endure a severe recession - possibly even a repeat of the Great Depression, we can default on our debts, or we can print so much money that the resulting inflation will reduce the debt to a pittance in real terms. Countries that have defaulted have seen serious reductions in living standards while Weimar Germany and Zimbabwe both followed the path of hyper-inflation with even uglier consequences.
If we wait until the crisis, we will suffer a greatly reduced standard of living while watching China become the leading political and military power in the world.
There is still time to act but delay will only, and inevitably, lead to disaster.
As election season approaches, we must express our willingness to accept the hard policy changes that will be required. That includes voting against weak kneed politicians who pander to our very understandable desires to put off - for just a little longer, please - the foul tasting medicine that we must take to cure our current economic problems.
The use of this phrase, frequently written by Winston Churchill, is appropriate: "action this day."