A quick primer on the unsustainable Bernanke math:

“If you normalize interest rates, I’m not talking about a spike, just normalize where they were before QE and took them to 5.7% federal funding costs of the debt, that’s $500 billion a year in interest expense that goes out door. We’re having a heart attack over an $85 billion sequester when we can lose $500 billion just if you normalize. The way markets work if and when that were to happen, you don’t normalize, you keep going because the market figures out that you now have a credit problem which is exactly what’s happened in the foreign nations.”

A reminder on the irrationality of bond markets and the speed at which things can change:

“The bond market is a funny thing. In Greece the bond market was perfectly fine until February of 2010. Not moving, not doing anything, and then in two weeks it was over.”

The topic of the free Fed money’s diminishing returns is well-known:

“The market is fine because you’ve got all the free money in the federal reserve. But that can only last so long. Eventually the hamster can’t move on the wheel anymore and the free money has less and less impact.”

His solution: means testing:

“Means-test people like me on social security. You realize I’ve done all right in life, okay? I’m going to start getting social security checks in five years. It’s absurd. And I’ll get the same social security checks that some people who have not done so well are. And the same thing with medicare. Raise the ages, as I pointed out earlier. When all this stuff was started, life expectancy was way below where it was now, and frankly probably the guesses on life expectancy where they are are too low. It’s not that hard.”

(Note: In Canada we already means test with Old Age Security)

Finally, on political incentives to act, or rather not:

“Congress is not getting the market signal we talked about in the article so you can scream all you want about Congress and the President being clowns, I can’t think of any political system anywhere where they acted without interest rates going up. When did Greece act? When the bond market blew up. When did Spain act? When the bond market blew up. What was Clinton’s response to Rubin, “you mean the f’ing bond market is in control.” Doing what they are doing the politicians have no incentive, but the market is a very fickle and violent thing. I don’t think it’s today, but we’ve got 3-year-old kids we’ve promised we’ll get them through college and once college is done we’ll get them a job. It’s going to happen before those kids.”