24/7 Wall St.

Ben Bernanke has seen the future and it is filled with an American debt balloon the size of which the world has never seen. The federal government will run out of money for Social Security and Medicare.

The Wall Street Journal quoted the Fed Chairman as saying “Nothing prevents us from beginning now to develop a credible plan for meeting our long-run fiscal challenges. Indeed, a credible plan that demonstrated a commitment to achieving long-run fiscal sustainability could lead to lower interest rates and more rapid growth in the near term.”

The head of the Fed can never really speak his mind. If he is pessimistic about the future, that message could send the markets into a tailspin. A flash of optimism could cause irrational exuberance.

But , Bernanke’s warning was hardly veiled. He repeated what many economists and debt ratings agencies have said. The US will not be able to pay for every federal program that Congress wants to keep in place so members of Congress can keep their jobs. The same holds true for the President. No one in Washington is willing to be the bearer of bad tidings.

Bernanke may be an honest broker for the truth, but he is also knows what the balance sheets of American banks look like. Not every bank will continue the remarkable recovery that most large financial institutions have enjoyed. Some of them will be back in the capital markets in the next year or two. That is, if the capital markets will have them.

The line for institutions, sovereign or otherwise, that need money is getting longer by the month. Almost no one says that there is a limit to what the global capital markets will fund, although that limit is high. The crowding is also driven by the desperate needs of nations such as  Greece and other financially weak nations in Europe including Spain and Italy. The appetite for junk debt has also risen. Some of these bonds will default and, if the economy slows, they may default in great numbers. If so, the availability of money will shrink quickly.

Bernanke is worried, it seems, not just about American debt, but about whether the world has enough money to absorb it with all the other nations, companies, and consumers needing to borrow at the same time. The pool of capital looks infinite now, but history says that infinity is never more than temporary.

Douglas A. McIntyre