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John Allison of BB&T: Bankruptcy of U.S. is ‘Mathematical Certainty,’ Says Former CEO of Nation's 10th Largest Bank

“If you run the numbers, on all those numbers that you just talked about, which I think are accurate, very accurate, in 20 or 25 years, the United States goes bankrupt,” said Allison. “It’s a mathematical certainty."

http://www.cnsnews.com/news/article/former-bbt-ceo-bankruptcy-us-mathematica

Of course, he reminds us, that the government may not actually go bankrupt, as historically governments have just turned to inflation.

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Is it now too late to turn back?

Seriously.

We'll see inflation for sure, no question. But will it be 20% and then a recovery? Or is this the end?

By end, I mean, there is no hope to pay off this debt even with 100% austerity, Laffer-optimal taxation?

What next?

How long?

Theories, go:

We are not going to see 20% inflation as a result of this. At the moment US inflation is at 1.1% after $1.75 trillion was pumped in during QE1. Remember the size of the US economy. It's worth over 14 trillion dollars. 600 billion is not going to make much difference at all. What the Fed is trying to do is make sure that inflation doesn't drop below 0% which causes all kinds of problems for a mixed economy.

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At the moment US inflation is at 1.1% after $1.75 trillion was pumped in during QE1.

You're going to need to understand this a *bit* more deeply than simply looking at two factoids. Just a bit.

First, CPI is not a good predictor of inflation. The algorithms place greater weight on items with lower inflation than on items with higher inflation. A better predictor is to look at commodities prices - the prices companies are having to pay for the goods that make up their products. These prices have been skyrocketing at least as much as gold has increased over the last year. Eventually companies are going to start passing the cost on to consumers, as consumers continue to spend less.

Second, the money from QE1 has not really trickled into the economy yet, because interest rates are so low. Banks have no incentive to lend out the money that the Fed poofed into existence, so they are just keeping the money on their books. When interest rates go up, banks will start lending out that money, and inflation will occur. Also, because banks are highly leveraged (e.g. lending out the same $1,000 to 100 different people), the inflationary effect will occur much faster.

600 billion is not going to make much difference at all.

600 billion does not represent all of the Fed and govt's actions in this crisis. "At year-end 2008, about $6.8 trillion in new federal government loans, liability guarantees or asset guarantees to financial services firms was outstanding that had not existed a year earlier (see Table 1 on page 4). By the end of the first quarter of 2009, the total maximum capacity of new programs in place or announced exceeded $13 trillion." (source)

Inflation is one thing, hyperinflation is another. Hyperinflation is not simply "lots of inflation" - it is a total loss of faith in a currency as a store of value. Hyperinflation doesn't require endless printing of money. It only requires people to recognize that the currency is hurting, not helping them, and move on to another form of currency. Unfortunately, people usually don't come to such a conclusion until they've already had their savings devalued or destroyed by lots of inflation.

There is also the fact that the govt. has propped up a monopoly on the US$ as money in the US, by actively shutting down and seizing the assets of folks who attempt to create alternative currencies that store value better over time.

Edited by brian0918
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The QE2 flavor of QE is the monetizing of government debt. The government is reducing its "external debt" since one wing (the Fed) is buying that debt from non-governmental entities. The net result is that government bonds in the hands of outside parties is replaced by newly "printed" dollars (M1). Left to themselves, people in the U.S. (in aggregate) want to "de-lever", saving a little more and being a little more careful about taking on debt. This means that businesses have to change, to match this new "time-preference". The process of adjustment is not pretty because it means laying off people, shutting marginal stores, closing marginal offices and factories. It also means bankruptcies and (usually) falling stock prices and higher interest rates.

Fortunately, the process of liquidation (or "deflationary spiral") also has a silver lining. For instance, it is quite common for "labor productivity" to rise during such times, since people are being laid off, but production is reducing less than the layoffs. While absolute profits may drop, profit margins can actually rise after the initial adjustments. These cuts allow companies to reduce prices of outputs (and some companies are also reducing such prices out of desperation). So, a machine might be available at a discount. High vacancy rates allow companies to have lower rent costs. There are also always a lot of people and companies who have very safe balance sheets. At some point of a downward spiral, these entities will take advantage of low prices and will invest. I think a metaphor of a spring, used by economist George Reisman, is very appropriate: the downward spiral is not a typical free-fall, it is pressing on a spring, and the further it falls, the more the spring builds up the ability to push it back up.

If the process of adjustment was short enough, governments would probably have learnt by now to leave well enough alone. Unfortunately, it isn't. The standard government reaction is to work against the pain that is being felt in various parts of the economy. Problem is: the lesser the pain, the slower the adjustment. Governments try to keep wages up, give money to the unemployed, help delay foreclosures and bankruptcies. It is like giving a patient some type of pain killer that fools the patient's body into thinking there is no problem. To some extent the government can actually be successful in keeping certain key measures of aggregate economic health from deteriorating as much as they would normally do. For instance, if the unemployment rate would have been 15%, it might be possible to keep it at 13% by dragging things out. However, if one looks at the individuals who are employed, one sees that what this means is this: the government allowed one person to be unemployed for a longer duration so that another person who was a somewhat marginal worker could keep his job. It is a form of redistribution of wealth.

Redistribution of wealth can "help" some people at the cost of others, and the victims may not see it as redistribution. For instance, suppose the government were to take a few thousands of dollars from home-owners who were more conservative about their purchases or who otherwise have savings that make them secure despite their negative home-equity. And, suppose the government were to give this money to home owners on the margin of foreclosure: who would use the money to avoid foreclosure and not be in dire straits again. Such a redistribution process would "clean up" the balance sheet of the person at the margin of foreclosure and also help clean up the balance sheet of the lender. Of course it is morally wrong to achieve this by cleaning -out the guy who saved. It also means that the conservative guy, who would have invested that money or spent it on something cannot do so. Someone else down the chain of economic transactions also shares the pain. Furthermore, it also sets up the wrong long-term incentives ("moral hazard") which creates more problems in the future. While such a blatant redistribution would be not be politically viable, something like "raise taxes on those who make more than $500,000" may go down well with a population in the middle of a recession. And then there is grandma who is also paying for it because the rate on her CDs just plummeted.

The experience in Japan suggest that the government can drag things out for decades as long as people keep faith in the long-term viability of the economy. The key is whether the fiscal and monetary stimulus merely assuages the de-levering or if it actually sparks credit growth in some broad area of the economy. The essential fact is that expanding "high powered money" (as in M1) need not cause price-rises for day to day goods and services. The key is whether credit booms again. If it does, it could simply set us up for a bigger fall. For instance, if Greenspan had allowed the U.S. economy to take some more pain after the dot.net bubble burst, we would not be where we are today.

Since the 1980's people moved to the notion that monetary policy is more important than fiscal policy. In the situation we're in now, I think it is fiscal policy that is more important. It is not QE1 alone that kept the economy from falling as much as it would have. The key was the fiscal stimulus with QE1 to support it. In other words: it was not just the printing of money, but the spending of that money. If the new Congress does anything to seriously curb the deficit , then QE2 will probably work differently from QE1. While QE1 flowed to unemployment checks, and public payrolls, etc., that was because of the high fiscal deficits. If those are reigned in, QE2 flow elsewhere: possibly inflating some other type of asset bubble that will disappoint in the end.

Of course, through all this, scientists and businessmen are constantly figuring out how to be more productive. Innovation might slow, but it does not cease. The resulting improvements mean this: the government can work against the economy to some extent and the damage can be masked because other agents are improving things at the same time. Other than monetary and fiscal policy, the third important governmental factor is: structural policy -- privatization, regulations, climate-change nonsense, etc. Improvements in such policies can also help mask the negatives resulting from the other two.

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A better predictor is to look at commodities prices - the prices companies are having to pay for the goods that make up their products. These prices have been skyrocketing at least as much as gold has increased over the last year. Eventually companies are going to start passing the cost on to consumers, as consumers continue to spend less.

Here is a link to why we should not focus on commodity prices when looking at inflation:

http://krugman.blogs.nytimes.com/2010/11/05/wages-and-the-slide-toward-deflation/

(I know Paul Krugman does not gain much currency in this forum but if we focus on his arguments and not the man himself.)

Banks have no incentive to lend out the money that the Fed poofed into existence, so they are just keeping the money on their books.

I agree that this is what is happening.

The essential fact is that expanding "high powered money" (as in M1) need not cause price-rises for day to day goods and services. The key is whether credit booms again.

I agree with this. I think high inflation is a long way off since credit is not going to boom anytime within the next 5 years at least. At that point we may get moderate inflation but nowhere near 20%. As sNerd says, innovation does not cease, and this will cause economic growth which will soak up some of the QE2 money.

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Here is a link to why we should not focus on commodity prices when looking at inflation:

http://krugman.blogs.nytimes.com/2010/11/05/wages-and-the-slide-toward-deflation/

Where's the argument? He asserts that prices on food, energy, and physical commodities are "volatile", and shouldn't be a factor in determining inflation. But what is the purpose of determining inflation in the first place? I'm assuming we're trying to see how much stability/instability there is in the price of things we rely on everyday. What goods are we purchasing the most? What goods are the most important for humans? Food, energy, commodities.

I know Paul Krugman does not gain much currency in this forum

Certainly he shouldn't, since in the early 2000s he was out appealing to the govt to inflate a housing bubble to replace the burst stock bubble. And now we have this mess as a result.

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Where's the argument?

He goes into more detail here:

http://krugman.blogs.nytimes.com/2010/02/26/core-logic/

Certainly he shouldn't, since in the early 2000s he was out appealing to the govt to inflate a housing bubble to replace the burst stock bubble. And now we have this mess as a result.

Krugman was one of the first to warn of the housing bubble - http://www.nytimes.com/2005/08/08/opinion/08krugman.html?_r=1

In contrast, conservatives, libertarians, and Objectivists were amoung the most prominent bubble deniers -

http://economicsofcontempt.blogspot.com/2008/07/official-list-of-punditsexperts-who.html

http://www.capitalismmagazine.com/index.php?news=4243

There is a strong correlation between advocating fiscal austerity now (ie being economically conservative) and denying that a housing bubble existed.

And the worst are people like Peter Schiff. Austrians like him will predict disaster always and at every point in time. A stopped clock is right twice a day and Schiff will be right on average once a decade with his recession predictions. Here he is predicting doom on the current situation - http://www.capitalismmagazine.com/markets/6105-the-hail-mary.html

By the way, I'm totally open to being proven wrong on this, if someone can show me a fiscal conservative who 1) Predicted the bubble 2) Doesn't predict bubbles at every point in time, then I will change my mind.

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There's an excellent book for anyone who wants to understand Japan's long recession. It is "The Holy grail of Macro-Economics" by Richard Koo.

Be warned that this book is not for anyone who is turned of by modified Keynesian policy suggestions. The author takes for granted that government's ought to do whatever is needed to alleviate current anemic economic growth, even if it means leaving a mountain of debt to the next generation. Luckily, the author has a very clean style -- and does not try to smuggle things in -- which makes the book an easy read. More importantly, he raises some important objections to mainstream economics (which is a mish-mash of Classicalism, Keynesianism and Monetarism). These objections have been made by others, but the author presents them using Japan's recent history as a demonstration for his argument. Not a starter book for sure; but I think anyone who is into economics and also into reading about business-cycles ought to read this book.

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It looks like Krugman actually recommended that a new bubble be inflated in 2002 - http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html

The basic point is that the recession of 2001 wasn't a typical postwar slump, brought on when an inflation-fighting Fed raises interest rates and easily ended by a snapback in housing and consumer spending when the Fed brings rates back down again. This was a prewar-style recession, a morning after brought on by irrational exuberance. To fight this recession the Fed needs more than a snapback; it needs soaring household spending to offset moribund business investment. And to do that, as Paul McCulley of Pimco put it, Alan Greenspan needs to create a housing bubble to replace the Nasdaq bubble.

He does seem to be able to predict what is happening and when better than anyone else. Whether you love him or hate him, you have to listen to Krugman to know what is happening in the economy whether you agree with it or not.

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It looks like Krugman actually recommended that a new bubble be inflated in 2002 - http://www.nytimes.com/2002/08/02/opinion/dubya-s-double-dip.html

Yes. That is exactly the article I was referring to when I said "he was out appealing to the govt to inflate a housing bubble."

Edited by brian0918
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He goes into more detail here:

http://krugman.blogs.nytimes.com/2010/02/26/core-logic/

Krugman was one of the first to warn of the housing bubble - http://www.nytimes.com/2005/08/08/opinion/08krugman.html?_r=1

In contrast, conservatives, libertarians, and Objectivists were amoung the most prominent bubble deniers -

http://economicsofcontempt.blogspot.com/2008/07/official-list-of-punditsexperts-who.html

http://www.capitalismmagazine.com/index.php?news=4243

There is a strong correlation between advocating fiscal austerity now (ie being economically conservative) and denying that a housing bubble existed.

And the worst are people like Peter Schiff. Austrians like him will predict disaster always and at every point in time. A stopped clock is right twice a day and Schiff will be right on average once a decade with his recession predictions. Here he is predicting doom on the current situation - http://www.capitalismmagazine.com/markets/6105-the-hail-mary.html

By the way, I'm totally open to being proven wrong on this, if someone can show me a fiscal conservative who 1) Predicted the bubble 2) Doesn't predict bubbles at every point in time, then I will change my mind.

Krugman, the guy who claimed September 11th was good for the economy, was the first to "warn" of a housing bubble: LOL. Here is a guy that was persistently agitating for a housing bubble as necessary for not having a recession as we are supposed to believe he "warned" us about the impending dangers of the latest business cycle?

Objectivists, conservatives, and libertarians were the most prominent bubble deniers: Nice package-deal you've got there. Where are these Objectivists that are bubble deniers? Unless you're trying to claim these people like Larry Kudlow and Ben Stein is an Objectivist, or "conservatives" and "libertarians" have the same economic theories as Objectivists, or because an article appeared on Capitalism Magazine expressing some guy's point of view that = "most prominent deniers"? The most prominent? Really, now. The first link you posted was full of a bunch of mainstream hacks, the second link you posted does not show any "prominent deniers" or Objectivists period. There is a strong correlation between conservatives and denying the bubble existed because the conservatives were in power, and, like Krugman, actively encouraged a housing bubble.

When people you don't like actually predicted the crash, you just say "a stopped clock..." and "but they always predict bubbles" despite the fact that Schiff put on the record, in a book, the actual evidence and reasoning behind his prediction, and despite the fact that Austrians have put, in many books for many years, the exact reasons why there is a regularly occurring series of bubbles and why they constantly happen. For someone crying about how we just "don't like people" and refuse listen to the actual reasoning employed, then to turn around and say "but they always predict bubbles," your posts are textbook examples of doublethink.

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http://economicsofcontempt.blogspot.com/2008/07/official-list-of-punditsexperts-who.html

http://www.capitalismmagazine.com/index.php?news=4243

There is a strong correlation between advocating fiscal austerity now (ie being economically conservative) and denying that a housing bubble existed.

And this is what caught Greenspan by such surprise he admitted to making a mistake in his theories of economics. He trusted these people and other money types to have a clear eyed view of their own long term self interest, but the short term gains of a rising market are a powerful distraction to a country raised through elementary school to be pragmatist. It is not automatic that people are fully informed, rational or do the right thing even on average.

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And this is what caught Greenspan by such surprise he admitted to making a mistake in his theories of economics. He trusted these people and other money types to have a clear eyed view of their own long term self interest, but the short term gains of a rising market are a powerful distraction to a country raised through elementary school to be pragmatist. It is not automatic that people are fully informed, rational or do the right thing even on average.

I agree with you there, but his theory didn't fail. If we had allowed the collapse to happen without intervention, the horrific pain of collapse, mass bankruptcies, unemployment, investment losses, would have caused a dramatic shift in priorities for companies on Wall Street. The bonuses so big that they don't care what happens to their companies, and the extreme short-term viewpoint, woud both have died a well deserved death. By intervening, we set ourselves up for another bigger fall.

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