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Is the economy teetering on the edge of collapse?

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cliveandrews
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Since deciding to raise the debt limit is a choice (perhaps limited by the privately held, governmentally sanctioned 'legal monopoly', corporation known as the Federal Reserve), it is difficult to imagine not succeding to choose to raise the debt limit.

 

Every time paying the piper is kicked down the road, the interest accrues. The piper either gets paid, or plays the flute  in the other available context.

 

Considering the fact that China 'down-graded' U.S. debt instruments could be considered as a 'go F ourselves', the question may be better phrased as "How many more times can they raise it?" (before the SHTF).

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What would have happened if they had not suceeded at raising the debt limit?

If Congress had not acted, the President probably would have gone ahead and ignored it. Since U.S. debt is denominated in dollars, and the U.S. can create dollars, a long-time assumption has been that the U.S. will never have a serious problem paying its debts. If the U.S. debt rises much more, this might create a fear that printing is not pallatable. However, the U.S. is very far from the line that current market-thinking would draw. As evidence, see Japan's debt-to-GDP ratio, and the calm attitude the market takes toward it. Given this assumption, lots of aspects of the global financial system assume that U.S. debt will definitely be paid -- even if in future, inflated dollars. A credible threat of default will ripple through the financial system and cause serious problems. No President is going to let that happen. However, neither can I imagine a President paying interest "to the Chinese", but stopping Grandma's social-security check, or the unemployment check of some "hard working American". A President could simply ignore Congress, and there's a good chance the SCOTUS will agree. See this post for more explanation.

And how much worse are the long-term consequences going to be because they did do so?

Hard to answer, because a credible threat not to pay our debts would probably have been worse than the alternative.

How many more times can they raise it before the people lending us this money tell us to go F ourselves?

Well, it is important to understand that the people like the Chinese lending money to the U.S. aren't doing it for political reasons. Even though one of their agencies down-graded the U.S. debt (as dream_weaver mentioned), this is more about internal Chinese politics, just as the debt-ceiling debate is more about internal U.S. politics. Even while downgrading, it is a pretty good guess that the Chinese were buying more U.S. debt.

Some commentators like to frame the situation as if the U.S. and its politicians are profligate and dysfunctional, while those in China and Japan are the bright ones. Yes, the U.S. politicians have a budgetary tiger by the tail: and don't know how to move to a better place. But, so do the Chinese and the Japanese. Sometimes, U.S. politics pushes more short-term fiscal spending, doubling down on bad behavior. But, similarly, though the Chinese talk about "re-balancing" their economy, when push comes to shove, they double down on their brand of madness, which involves using credit (buying U.S. debt) on one side of the balance sheet, to balance additional exports.

There is no clear level at which people think the game is up. Japan and China are at the leading edge of the historical experiment. I think that watching these two, seeing how they manage the next decade, is crucial to seeing how the U.S. side of things evolves.

Meanwhile, if you strip away the finance and look below, the U.S. is actually narrowing some of Chinese competitive gaps.

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Buying US debt is an investment. As of now, it is still considered one of the safest investments one can make, and used to balance out more risky investments.

 

That doesn't speak to the absolute degree of safety in US debt, but it does to the relative one. Unfortunately, the world we live in is highly dependent on government economic mandates. It isn't just government issued bonds that are dependent on that, it's also stocks in private companies, commodities, real estate, even precious metals to some extent (they can be confiscated, for instance).

 

There's no escaping that. Within that world, US government mandates are more stable and level headed than most other ones. So, if you are going to make investments, making them directly into US government bonds is about as safe as you can get. If the US government falters, all your other investments will falter too, but that's not the case the other way around.

 

P.S. This doesn't make US debt a GOOD investment. Safe does not equal good. Good is a function of both safety and profit. US debt is safe, but not profitable, and, given the US ability to just inflate the dollar, it will never will be profitable. There are better ways to be relatively safe (through diversity) and also make a profit off of your investments.

 

If Congress had not acted, the President probably would have gone ahead and ignored it. Since U.S. debt is denominated in dollars, and the U.S. can create dollars, a long-time assumption has been that the U.S. will never have a serious problem paying its debts. If the U.S. debt rises much more, this might create a fear that printing is not pallatable. However, the U.S. is very far from the line that current market-thinking would draw. As evidence, see Japan's debt-to-GDP ratio, and the calm attitude the market takes toward it. Given this assumption, lots of aspects of the global financial system assume that U.S. debt will definitely be paid -- even if in future, inflated dollars. A credible threat of default will ripple through the financial system and cause serious problems. No President is going to let that happen. However, neither can I imagine a President paying interest "to the Chinese", but stopping Grandma's social-security check, or the unemployment check of some "hard working American". A President could simply ignore Congress, and there's a good chance the SCOTUS will agree. 

Just to clarify: there were two issues on the table this month, for Congress: raising the debt ceiling and a budget deal. Raising the debt ceiling was never a serious concern. Sure, Republicans have been using the issue to drum up support for limiting spending, but they've raised it before the deadline every single time. 

 

The government shutdown was caused by the absence of a budget deal, and that stalemate wasn't over whether the US should pay its obligations (to foreign lenders, grandma, or even welfare recipients for that matter), it was over taking on new ones. The President didn't need to go against Congress, just to meet current obligations: Republicans would've voted for whatever legislation is necessary to do that nearly unanimously. They don't have a problem with doing that.

 

I understand that you're talking about the possibility of Congress failing to raise the debt ceiling, but it's still important to understand the goals of House Republicans who are vocal about the issue: their goals are to limit taking on further obligations, not to default on existing ones. This means that Obama, by circumventing the Congressional power to set the debt ceiling, would accomplish nothing to further his own agenda, and would in fact be furthering the Republican agenda (honor current obligations, take on no new ones). Obama's agenda is to take on new obligations. He can pay current obligations without Congress, but he can't take on new ones. All ignoring Congress on the debt ceiling would do is turn it and public opinion against him, and make it less likely that he'll get his way on the issue he's really concerned about. These types of crisis and deadlines benefit his agenda, because they force Republicans to agree to new spending they wouldn't normally agree to.

 

On the other hand, a fiscally conservative President faced with a liberal Congress, would have the upper hand by acting the way you describe. In that scenario, Congress would presumably be using the debt ceiling to extort concessions towards greater spending, which the President can circumvent.

Edited by Nicky
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... that stalemate wasn't over whether the US should pay its obligations (to foreign lenders, grandma, or even welfare recipients for that matter), it was over taking on new ones.

You may be right, and my impression might be from not paying enough attention (and I might be in the top 75%+ of the population when it comes to , so imagine every else). Anyhow, to clarify, are you saying that the GOP would have raised the debt ceiling enough to accommodate the things like current commitments to welfare? Or, are you saying that the GOP would have asked for offsetting cuts? Without resorting to gimmicks, the only way to stop taking on new debt would be to stop the deficit and reach a balanced budget. That would ensure that debt stayed steady. I'm not clear if you're saying the GOP wanted a balanced budget, or if they wanted to let current-plans for welfare and taxation stand, and allow the deficit to continue. My impression is that it's the former (i.e. slash the planned deficits). Am I mistaken? Edited by softwareNerd
OOps!
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You may be right, and my impression might be from not paying enough attention (and I might be in the top 75%+ of the population when it comes to , so imagine every else). Anyhow, to clarify, are you saying that the GOP would have raised the debt ceiling enough to accommodate the things like current commitments to welfare?

Their demands, this time around, were very modest: a delay of one year to funding Obamacare (including a delay of new taxes), and some minor cuts to welfare. At least those were the most notable ones, I haven't heard mention of anything else in the media.

 

'm not clear if you're saying the GOP wanted a balanced budget, or if they wanted to let current-plans for welfare and taxation stand, and allow the deficit to continue. My impression is that it's the former (i.e. slash the planned deficits).

Well, some in the GOP do want a balanced budget eventually. But they haven't demanded it as a condition of approving this budget, or raising the debt limit. In other words, they haven't demanded that Obama agree to a balanced budget. They would like a balanced budget in principle (presumably, when there's a President who agrees with them).

Right now, their demands were very limited. Like I said, I only heard the two I mentined above. It's basically what was contained in the original budget the House passed (and Ted Cruz filibustered so that the Senate couldn't modify it by cutting out the delay to Obamacare). If the Senate and Obama would've just signed off on that bill, I'm pretty sure the debt ceiling would've been raised without much of a fuss too, afterwards. But Obama didn't sign off on it, becuase he knew he could get more. And he was right.

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  • 3 weeks later...

I suppose I should've migrated the posts over here, but we're having a discussion on this exact topic in this post.

 

And I think yes, it is definitely teetering between a recession and a great depression. If congress gets in the way and we default on debt, the world with lose faith in US credit (and the results would be disastrous)...which is the driving force of our economy right now. 

Edited by Ben Archer
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If Congress gets in the way of what?

 

I was mentioning what I'd talked about in another post, as to how disastrous it would be if the US defaults on their debt, which Congress could cause by refusing to lift the debt ceiling. Because if they force a default, we'll lose the precious "full faith and credit of the United States government", which is the only thing keeping us afloat and credible globally. 

Edited by Ben Archer
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And I think yes, it is definitely teetering between a recession and a great depression. If congress gets in the way and we default on debt, the world with lose faith in US credit (and the results would be disastrous)...which is the driving force of our economy right now.

The driving force of the US economy is faith in US credit? I'm afraid this is an example of a your problem with causality. Productive virtue is the source and driving force of all economy, not faith in the ability of a country to repay its debts. Your angst is misplaced. If the driving force of the economy ever becomes faith in the US to repay its debts, the we really are screwed (i.e., virtueless).

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I was mentioning what I'd talked about in another post, as to how disastrous it would be if the US defaults on their debt, which Congress could cause by refusing to lift the debt ceiling. Because if they force a default, we'll lose the precious "full faith and credit of the United States government", which is the only thing keeping us afloat and credible globally. 

 

Oh sure, the US is going to default on its credit.

 

If you loaned a thousand dollars to Bill Gates, and he said he might not want to pay because he is having some problems with his spouse--but you know you can make his life hell if he doesn't pay, despite his windbaggery to the contrary--would you feel your investment with the billionaire is threatened? No way. Bill can pay his bills if he feels like it. So can the USA. Nobody serious deems either of them a default risk. The biggest risk (and a real one) is with companies who might be hurt by funding disruption, but out and out default is off the table.

 

Also, you do know that most of the US fiscal debt is actually carried domestically, right? And that on balance (i.e. the debt of theirs we own vs. the debt of ours they own) it's even smaller?

Edited by CrowEpistemologist
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I was mentioning what I'd talked about in another post, as to how disastrous it would be if the US defaults on their debt, which Congress could cause by refusing to lift the debt ceiling.

Anyone with the ability to compare two large numbers, and decide which is bigger, can call BS on that. The numbers in question are:

The federal debt service for the fiscal year 2013: $396 billion

IRS revenues for a calendar year: $2.3 trillion+

It's this simple: if the federal government has $396 billion dollars in yearly revenue to pay its debt service, then it can do so without taking on further debt. So, is $2.3 trillion a bigger number than 396 billion or not? If it is, then refusing to raise the debt ceiling won't cause a default. Only the President refusing to pay that $396 billion, as a temper tantrum for Congress refusing to finance his unrelated spending extravaganza on welfare and entitlements, would cause a default.

That is what Congress would get in the way of, by refusing to raise the debt ceiling: welfare and entitlements. Nothing else. The US has plenty of revenue to pay its debt obligations, there's no need to borrow more to do that. Not only that, but there's plenty of revenue to also maintain the military and other essential services, without any compromise to the government's current ability to keep the country safe.

Edited by Nicky
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The driving force of the US economy is faith in US credit? I'm afraid this is an example of a your problem with causality. Productive virtue is the source and driving force of all economy, not faith in the ability of a country to repay its debts. 

 

My so–called "angst" has nothing to do with it. All we have to do is look at Janet Yellen's views on quantitative easing , because QE is the most important driver of our economy right now. The Fed's creating $85 billion a month to buy bonds, which increases bond prices, drops interest rates and ups property prices. It also pushes more money into equities, fueling the stock market. Asset prices go up, Americans spend more, the economy grows. This isn't an argument on causality...it's on how we've gone from a system fueled by accumulating capital and investing (capitalism) to one fueled by credit and consumption, where the US gov is spending 23% of GDP. 

 

And based on what they said at the end of their FOMC on Oct 30, (QE will continue until labor market improves), it's unlikely  they plan on stopping/tapering QE any time soon, especially since labor has steadily been getting worse. Whats somewhat encouraging is at least Yellen appears to have a real concern for unemployment. 

 

 

That is what Congress would get in the way of, by refusing to raise the debt ceiling: welfare and entitlements. Nothing else. The US has plenty of revenue to pay its debt obligations, there's no need to borrow more to do that. Not only that, but there's plenty of revenue to also maintain the military and other essential services, without any compromise to the government's current ability to keep the country safe.

 

 

There was never a question of whether we could pay our debts. I think an easier way to see this is just look at the 2.6% interest rate of 10 year government bonds. It's well below their cost of borrowing over the last 50 years, so obviously they're nowhere near having a genuine debt crisis. The point was only a few weeks ago Congress was poised to not raise the debt ceiling, and it was an actual consideration of people who apparently don't realize how disastrous that would be. 

Edited by Ben Archer
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... QE ... increases bond prices, drops interest rates and ups property prices. It also pushes more money into equities, fueling the stock market. Asset prices go up, Americans spend more, the economy grows.

The last part is really false theory. Data and studies have not shown up: most consumer spending is not impacted by the so called "wealth effect". Studies show that consumers do take a long-term approach to spending. Their best guess of their life-time income and wealth are important factors in deciding how much they will spend. Stock market wealth during a boom -- particularly one that is seen as engineered -- does not cause a big upward move in spending.

QE has been quite a failure in its limited ability to stimulate anything except the price of financial assets. And, what's the point of that, if it has little real impact? Yellen's concern for unemployment is not a good thing, because she has a faulty theory. As such, concern is good, but its like a doctor from 1800 who is concerned, and uses a leech to bleed his patient, weakening him further.

The Fed knows it has a tiger by the tail. They know the stock-market will protest tapering. That is why they backed off. Now, they're trying a new spin. They are going to try combining a suggestion that they will taper, with a suggestion that they will keep rates lower for longer than before.

Any time the Fed tightens, we're bound to have a shake-out. Greenspan was scared of a small downturn, and so he held out and we ended up with a huge one. Now, it looks like it is Yellen's turn to be lacking in long-term perspective, and political courage.

Consider, for instance, what advice you'd have given Volcker, when he raised rates to the moon. The economy definitely took a hit, but it came out stronger as a result. Artificially low interest rates kill an economy just as artificially high rates do.

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"The last part is really false theory. Data and studies have not shown up: most consumer spending is not impacted by the so called "wealth effect". Studies show that consumers do take a long-term approach to spending. "

 

Before I reply I'm going to do some homework and  try to find the data to backup what I'm saying (and see if I misinterpreted)...

 

I do love this comparison though, very true: 

 

 

QE has been quite a failure in its limited ability to stimulate anything except the price of financial assets. And, what's the point of that, if it has little real impact? Yellen's concern for unemployment is not a good thing, because she has a faulty theory. As such, concern is good, but its like a doctor from 1800 who is concerned, and uses a leech to bleed his patient, weakening him further.

 

Edited by Ben Archer
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"The last part is really false theory. Data and studies have not shown up: most consumer spending is not impacted by the so called "wealth effect". Studies show that consumers do take a long-term approach to spending. "

 

Before I reply I'm going to do some homework and  try to find the data to backup what I'm saying (and see if I misinterpreted)...

Schiller did a study in 2006, and updated it in 2011. He found that consumption goes up by 1% for a 10% increase in housing wealth, but between negligible to 0.4% for a 10% increase in stock-market wealth. However, the historical data also shows that there is a negative correlation some years out (i.e. between a S&P rise and consumption some years out). 

If we assume this is relationship holds (which seems unlikely), it implies that personal consumption would have been about 5% less than today if the S&P500 had got stuck at 900, instead of being almost double that level today. 

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I hesitate to respond to your post since it seems that our positions are getting closer. However, I do wish to point out that your original position was that the full faith and credit was the driver of our economy, and now you say:

 

 

My so–called "angst" has nothing to do with it. All we have to do is look at Janet Yellen's views on quantitative easing , because QE is the most important driver of our economy right now.

 

 

Now you are saying that QE is the driving force of our economy. Again, you are incorrect since the driver of an economy must always be productive virtue on the part of individuals. What you should say is that QE is the primary reason that there is not a radical devaluation of our currency. It is the corrupted currency that is being manipulated, not the economy--at least directly. Also, SoftwareNerd is right to point out that QE has not proven to stimulate consumer consumption. What is more, it is unclear that QE has done anything for unemployment. It seems that the current monetary and fiscal policies of this country have brought about stagnation. The only thing missing is inflation so that we may return to Jimmy Carter's stagflation. Yellen's "concern" for unemployment, while touching, is laughable. Again, causality raises its head. Her concern for unemployment ought to cause us some concern since she seems to think that she can actually do something about it. Her quest to fight dragons can do real harm.

 

What we need is an alternative currency that cannot be manipulated by these jokers and a market free of their manipulation. Then the government you are so proud of will become irrelevant. Nothing those jokers in Washington do will reach us. Let us exchange value for value based on real virtue while everyone else can exchange whatever it is that the dollar represents (a mixture of value and dis-value based on a mixture of virtues and vices). It is only a matter of time before this is a reality.

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There was never a question of whether we could pay our debts.

You said that Congress refusing to raise the debt ceiling could cause a default. How is that not questioning whether the US could pay its debts? Do you not know what the word default means? It means that an entity can't pay its debts.

So, let's try this again: do you wish to claim that Congress refusing to raise the debt ceiling would cause a default, or not? If not, then what other kind of "disaster" are you talking about?

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Now you are saying that QE is the driving force of our economy. Again, you are incorrect since the driver of an economy must always be productive virtue on the part of individuals. What you should say is that QE is the primary reason that there is not a radical devaluation of our currency. It is the corrupted currency that is being manipulated, not the economy--at least directly. Also, SoftwareNerd is right to point out that QE has not proven to stimulate consumer consumption

 

I think what I should have said QE is a necessary part of what fuels our economy, and it's not the typical savings/investing cycle typical of capitalism. The economy is driven by expanding credit and consumption. And that there's no way to simply reverse this transition, and go back the way we've come from the 60's when money became credit. 

 

As for consumption, when the government spends less money, far less people have jobs, so consumption goes down, thus business investment would go down. Despite the stimulus, globalization is causing huge deflationary forces, offsetting our domestic inflationary pressures (medium income is where it was in 1989, adjusted for inflation). So right now we're in this "nirvanah" moment which allows us to borrow at the magnitude we are. 

 

Gains in productivity do not flow through the workers...they get hijacked by financiers. Consider that 20%  of our income is generated by finance. (which is insane)

 

Our monetary stimulus isn't declining while our fiscal stimulus is...which is hugely significant. QE is now more than a trillion; we have more than enough to finance our debt. So we're now printing money, not to finance a treasury in crisis, but to keep up pace with consumption (which is well over our production). With income where it's at, the only way to make our economy grow is to drive up asset prices to give Americans more money to spend.

 

Proponents of austerity don't quite understand how dependant we are on credit expansion. So talks of cutting government spending should including the willingness to hunt squirrels for a living. 

 

A few charts to support this reliance on credit: 

 

K2nIS.jpg

Showing how in 43 years credit went up over 50 times to $57 trillion

 

 

B1iMc.jpg

↑ Went we switched to fiat and the start of the crisis indicated. You can see how we basically just put vietnam on a credit card, instead of raising taxes. And then you had Johnson's great society, where we started to really increase the social net. Both of these without substaintially increasing the tax burdens to go along with it. So the only way out was to increase credit available. 

 

 

Cp7GA.jpg

↑ Part of this trap we're in because of labor arbitrage, where we've dropped manufacturing costs, and keep costs in the US artificially low (cost of consumption items). So because of this, the goods and service per  labor unit have been falling, along with real disposable income, and we're stalled for not enough aggregate demand. Because in this system, wealth creation is being consumed by the massive debt that the private sector can't bear.

ze7Kg.jpg

 

Capitalism can't work under these conditions. Although we've prospered under this credit system (especially China), we're reaching a point where it can't work much longer. We've got an eroding industrial base, 70% consumption, no savings, no investment. The fact that Brazilian entrepreneurs bought Budweiser should tell you somethings out of whack. 

 

So no, Nicky, I suppose I don't think Congress would default, you're right.  In my other post I talked about some of the outcomes if it did. Either way though, it's unavoidable that this system will eventually collapse. When can you think of any case in history where a fiat system didn't? I talked about other things we could do with the money, but idealistic theories are generally regarded as bad table manners around here, heh. 

Edited by Ben Archer
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 The fact that Brazilian entrepreneurs bought Budweiser should tell you somethings out of whack. 
 
Americans sold Budwesier and bought Apple, Facebook, Google, Tesla, and every red hot high-margin biotech company not making the same shit they made five decades ago. The only thing out of whack is your interpretation of that transaction.
 

All that said, I've read through some of these posts and I still don't quite understand where you are going with all of this...

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Americans sold Budwesier and bought Apple, Facebook, Google, Tesla, and every red hot high-margin biotech company not making the same shit they made five decades ago. The only thing out of whack is your interpretation of that transaction.

 

All that said, I've read through some of these posts and I still don't quite understand where you are going with all of this...

 

You missed the significance of why I brought up Budweiser. Its purchase was only possible because of the policies of Bernanke. Negative interest rates allowed the mega–rich incredible loans. The deals on the 654 companies bought out in 2006 were 18 times bigger than any deals (private equity) in 2003. So after the bubble, his policies had gotten so out of control it was possible for Brazilian entrepreneurs to borrow huge amounts of money and buy out iconic US brands....right around the same time China started buying out our oil fields. This is what I meant by out of whack. 

 

Where I'm "going with all this" is to make the argument that you can't apply the old rules of money and capitalism to the economy we're in right now, and I think it's because that people do that they don't realize we are teetering  (and the question of teetering was in the OP). It's likely this can continue for maybe 5, 10 years...at most. I don't think we can sustain the debt to gdp ratio that Japan's at, partly because of their "inseki-jisatsu" culture of killing themselves before they accept failure.

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You missed the significance of why I brought up Budweiser. Its purchase was only possible because of the policies of Bernanke. [...]

 

Brazil is the 5th largest economy in the world. They have some large companies there. Why could a transaction like this (wherein a large conglomerate beer company bought yet another beer company) not have happened under normal circumstances? This kind of transaction happens all of the time.

 

For that matter, InBev is headquartered in Belgium along with Sao Paulo....

 

Anyhow, in similar vein, I'm still trying to figure out what you are selling. A "collapse"... what sort of collapse? What exactly happens when this event occurs? Can I make money off the collapse?

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Can I make money off the collapse?

 

You can always make money off of a collapse.  You just have to guess where the dislocations are and where they will play out.  You can do that now, and there are investors that do that (Casey comes to mind) but in a theoretical meltdown the proffit should be higher. 

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You can always make money off of a collapse.  You just have to guess where the dislocations are and where they will play out.  You can do that now, and there are investors that do that (Casey comes to mind) but in a theoretical meltdown the proffit should be higher. 

 

Yes, I know. I'm just trying to ask probing questions :-)...

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Brazil is the 5th largest economy in the world. They have some large companies there. Why could a transaction like this (wherein a large conglomerate beer company bought yet another beer company) not have happened under normal circumstances? This kind of transaction happens all of the time.

I didn't expect my post to be reduced to a debate on this small point, but I'd disagree that this kind of transaction happens all the time. The last thing the Busch family wanted in 2008 was to sell their iconic brand. Their final deal came as a shock. InBev's timing was right at the hight of the financial meltdown, but right before credit dried up, so they had little political resistance. Again this was just one example that personally bothered me. The US is still selling off its assets today. 

 

As for making money on it, the most to be made was during this crisis (buying companies, shorting stocks)...now the fed is doing everything it can to avoid the bubble popping, so you just have to look to their policy. Looks like Yellen is going to follow in Bernanke's footsteps. There's not much else she can do (again I think it should be invested in innovation, but that's another story). 

 

I'm not "selling" anything, other than my views on why, yes, we're "teetering", and what the fed will likely do about it. In another post, I already talked about my ideas of how we could use this credit to our advantage, and what will eventually happen when this system breaks down. 

 

apropos...the cover of the last week's economist struck me as the perfect visual:

 

The-Economist-09-November-2013.jpg

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