Greenspan Says Greece Default Likely; May Push US Back Into Recession

Former Fed Chairman Alan Greenspan said that a Greece debt default is "almost certain," something that very well could push the stumbling US economy back into recession.

In an interview with Charlie Rose, Greenspan said: "The problem you have is that it’s extremely unlikely the political system will work...The chances of Greece not defaulting are very small." Yields on Greek government bonds rose above 30% for the first time as the Greek government is in chaos. He continued to say that a Greek default could push the U.S. back into a recession by stressing already wounded banks.

Greece finds itself in a pickle. In order for Europe to provide more bailout money, they are asking for Greece to make deep austerity cuts. The cuts have sparked riots in the street and the socialist government has become increasinly anxious about dismantling a system that has provided generous benefits for the last ten years. It's a lesson that should resonate in the United States - it's easy to give; much, much harder to take back.

So, what does this have to with rates? The state of banks and rates are really dependent on the general economy. If the economy goes back into a double dip, look for rates to stay at rock bottom levels through 2013. The problem that the U.S. now faces though is that at some point, without an agreement on the budget, long term rates will begin to move up. As we saw with Greece, rates were low (around 5% in 2009) until they weren't anymore. So, we could be in a recession with long-term rates skyrocketing. This is the nightmare scenario envisioned by Bernanke and other policy makers and it's why investors have flocked to gold in the past couple of years.

I can't think of a time when so many economic factors are in play at once - massive deficits, anemic economy, a damaged banking system, shifting economic power to China and the BRICs, an aging population, a stressed Euro, etc. The bumpy economic ride we are on is not getting any smoother.