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Can the U.S. Go Bankrupt?

POSTED BY Guest Post

Can the U.S. Go Bankrupt?

The following is the second guest article from professor Jeff Wiltzius, an economics professor and a long-time friend of mine. As I mentioned in July when I published his first article, Prof. Wiltzius has graciously offered to write a few articles for DepositAccounts.com to share his insights into the economy and the Fed.

Can the U.S. Go Bankrupt?

by Prof. Jeff Wiltzius

Many people dislike economists. The reason is that they never can get a straight answer. That is because in most cases with economics (which has been nicknamed the dismal science) the answer many times is: yes and no. So can the United States Government go bankrupt? Technically the answer is no? Why not? The U.S. Treasury owns the printing presses for money. So the Government can always print the money to pay its bills. This means the Government can never default on its debts. This does not mean the money the Government uses to pay its debts is worth anything.

Inflation, specifically hyper-inflation, (very high rates of inflation) is the one phenomenon that can bankrupt an economy. This has been an occurrence dating back to the Roman Empire when the Government shaved weight off of gold coins thinking people would not know better. Guess what? People are not stupid. They figured out that some coins weighed less than other coins and inflation was invented.

Governments have used inflation to pay debts for a long time. The question today for most Americans should be: is this the way the United States of America will pay the enormous burden of debt ($16.867 trillion and change, www.usdebtclock.org) by making the U.S. currency worth less? A scarier way of saying that is worthless. Germany, after World War I, was required to pay the Allied Nations war reparations, no problem, print more deutschmarks. Hyperinflation allowed Hitler to come of power. Russia, in 1998, defaulted on its debt. The crisis caused the ruble to become almost worthless in the international market. The Russian stock and bond markets crashed, and 100’s of thousands of people took to the streets protesting that they were not getting paid enough to cover the higher priced products.

As an economist, I always hope for the best because hope is a fine thing. A fellow economist and colleague of mine has been telling me for the last seven years that inflation is coming. I have disagreed with him for all of these years because of one reason, the slump in the housing market. Housing is about 40% of the Consumer Price Index (CPI). So as long as the housing market is down, then there is little pressure on the overall price level. This has changed this year and will continue to accelerate in the next few years as the housing market recovers. As housing prices continue to rise, it will push to CPI to higher levels.

So that leads back to the main question: can the U.S. go bankrupt? The other side of the answer is: yes. The only way a country can go bankrupt is by printing too much money. That is really over-simplifying it. Banks can actually create new money by making loans. Banks take deposits from people and are required to keep some of the money on deposit in the Federal Reserve Banking System. The remainder (excess reserves) can be loaned out to customers. Those loans then become deposits at other banks which create more excess reserves and wallah! Banks can create new money out of thin air. The excess reserves the FED has put into the system is beyond the control of the FED. According to the most recent data from the FED (Federal Release Date: July 18, 2013), the amount of excess reserves held by banks is almost one-third higher than a year ago. Banks are willing to hold excess reserves during downturns in the economy because of the risks of loan defaults. Banks are also holding on to reserves because the FED is paying .25% interest on reserves, an unprecedented practice.

As the economy continues to recover, the floodgates will open and banks will grant loans which will allow money to flow into the economy. Banks, facing less risk of default, will once again begin lending money. Those loans will become deposits in other banks, creating more excess reserves and making more money available for loans. The macroeconomic problem is this: the Federal Reserve Bank has limited control of the excess reserves of the banking system. It is experimenting by now offering interest on excess reserves. The idea is that if the economy begins to accelerate too fast, the FED can raise the interest rates paid on excess reserves, keeping banks from loaning money to businesses and consumers.

There are two major problems with that reasoning. First, taxpayers are stuck with the cost of the interest paid on banks reserves. The Federal Government is already running trillion dollar deficits. Can it really afford to have one of the few (if only) profit making government (quasi-public) entities turned into another source adding to the Federal debt level? Another scary scenario is that one way the Federal Government can reduce its debt problem is by paying it back with inflationary dollars. The biggest problem with inflation is that it arbitrarily redistributes wealth. Savers lose wealth as the purchasing power of the money they have saved erodes. Borrowers win by being able to pay back debts with inflated dollars. The United States of America is the biggest debtor in the world. It would win if it allows inflation to allow it to pay back its debts with inflated dollars.

Americans have a lot of misinformation about the FED. It is constantly streamed in news and commentary shows. There are movements to try to restrict the FED’s independence. Removing the FED’s independence could lead the U.S. economy into a bankruptcy situation. During times of financial crisis the FED can act quickly. The gridlock between Republicans and the Obama administration over the last several years is a great illustration of the inability of politicians to take quick action when facing a crisis. During the last financial crisis the markets could have had a complete meltdown had it not been for the actions of the FED to shore up the banking system. The FED took unprecedented actions after 9/11 to make sure there was enough liquidity in the financial system to keep the county’s banking system functioning (for details see: SF FED education video).

So although the likelihood that the U.S. government will go bankrupt is small, it is still possible. That is why economists are starting to sound the alarm about the current FED policies of quantitative easing. Once the economy begins to heat up, will inflation raise its ugly head and erode the value of U.S. citizens’ hard earned savings? Admittedly the FED has a hard job. It has two conflicting goals, controlling inflation and unemployment. So the question is: which is more important for the FED to focus on?

High inflation inevitably leads to higher interest rates. Dr. Bernanke’s speech where in eluded to even the possibility of slowing quantitative easing pushed mortgage interest rates up over one percentage point in a week. His adjustment in the FED’s position caused interest rates to level out. Higher inflation rates lead to higher interest rates because in order for banks to make a profit in real terms banks must charge a rate higher than the nominal price level. Otherwise banks get paid back in dollars that are worth less in terms of purchasing power than when the money was loaned out.

Higher inflation and interest rates can stagnate an economy. Take the Dominican Republic as an example. During a period of time of 25% inflation banks must charge an inflation premium and bank customers face 35% mortgage interest rates. People cannot afford to borrow money at that rate for a house so a visitor during that period might have thought there was a war going on with shells of houses prevalent. It wasn’t that the houses were being destroyed; it was the fact that with the inability to borrow money, people were building houses as they could afford to pay for it. In many cases one wall at a time. Fortunately the Dominican Republic has taken control of the inflation rate to help its economy expand.

Higher interest rates may sound good to savers, but that is true only if the returns are greater than the inflation rate. So savers need to focus on real, rather than nominal returns. Nominal returns are the returns in today’s dollars. Real rates of return are adjusted for inflation. So if a future search of the internet reveals an 8% savings account, that may sound good compared to what banks have been paying over the last few years. It wouldn't have been so good in 1981 when there was double digit inflation. The real return would be: 8% - 10% = -2%, a negative real return. So as inflation lurks in the shadows of the U.S. economy’s future, focus on real returns when comparing savings options. One cannot control the inflation rate in the economy, but savings options can be explored.

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Anonymous   |     |   Comment #1
USA will go the way of Detroit with Obama as president.........Obamacare now costs 3 times what was promised.....3 trillion??? That alone will destroy USA. No wonder so many are giving up their citizenship and getting out.
Shorebreak   |     |   Comment #2
"Perhaps more than anyone, economists understand that money is a fiction, and that the entire financial system rests on the head of this socially constructed pin. Scary as that may be, it also means money can be anything we want it to be. Print "1 basketball" on a dollar, and it actually can be a basketball, as long as we all play along."
- David Wolman "The End of Money"
Shorebreak   |     |   Comment #3
Re: Anonymous - #1,Friday, August 16, 2013 - 9:08 AM

It's not the Affordable Care Act (Obamacare) that is causing an increase in those that are renouncing their citizenship. It's the result of enforcement of the Foreign Account Tax Compliance Act (FATCA):

"Overall, the number is tiny -- just 1,131 in the three months through June versus 189 in the year-earlier period -- but it highlights the unease many expatriates are feeling about the Foreign Account Tax Compliance Act (FATCA), which requires them to disclose foreign assets in excess of $50,000 to the IRS. Financial institutions abroad must now provide the IRS with information about accounts held by U.S. taxpayers and foreign entities in which U.S. taxpayers hold a substantial ownership interest."

Anonymous   |     |   Comment #4
It's very nice that Prof. Wiltzius agreed to share his information with us but what is more important, is he and his economic friends sharing it with our government?  Someone has to make them face the reality of their actions and what "can" happen if they don't take precautions "now".  We, savers, have bitten the bullet for years trying to survive on dismal interest rates and from the professor's article, it doesn't seem like we have any hope in sight.  If we get higher rates, our country is doomed, if the rates stay this low on savings for much longer, many of "us" are doomed!   We just can't win no matter how we throw the dice.
Anonymous   |     |   Comment #6
Sorry folks.......But the massive debt means that interest rates can never(NEVER) go up again. Don't think so? Take a look at the math. If they go up.......the world as we know it ends. The government will not allow it. Sure.....they may tyrick you with little highlights about "long term interest rates are rising" but it's all fake. Have you seen any of your rates go up during this supposed "rising period"? Nope.......You have not. And will not.  It's over.
Anonymous   |     |   Comment #7
Hope and Change!!!!!   Yes we can!!!!!!

Anonymous   |     |   Comment #8
USA is already Bankrupt, it is just a matter of time when will publicly admit that.
Anonymous   |     |   Comment #9
Has anyone bothered to look at the other side of this horrendous picture?  If interest rates for savers stay on the bottom, and those coming behind us have no incentive to save or even worse put their money in risky investments out of desperation and lose it, think of all the people who will be on the Welfare System! If our government is toddling over the cliff now, can we imagine what is going to happen if millions of citizens need to turn to the government for support and for their healthcare.  At least we, seniors, had a chance to save in the "good ole days" with great interest rates, but what about the young people?  We are handing them one big rotten apple!
Anonymous   |     |   Comment #10
Last sentence - ...."savings options can be explored"....

An excellent article but it ended just when it was getting good. Maybe a follow-up in the next article?
Anonymous   |     |   Comment #11
To #9- That is the whole point of obamacare & every other obama policy......getting as many as possible dependent on the government for everything....especially their health care. When they are dependent......the government controls them.....and the people lose their freedom.  As for savings......obama needs low rates to feed his debt. Plus he cant have people earning high rates because that gives them more money and thus more power. He wants the power for himelf and his government. Hope and Change!!!
Anonymous   |     |   Comment #12
If there is a lawyer in the forum, I would suggest a class action lawsuit by CD and US Govt Bond holders against the Fed, it is the only way to get their attention, even though it will probably go nowhere.  At least it might show the average person who is really paying for the greed of others (real estate brokers, mortgage brokers, banks, investment firms, unqualified buyers, home builders, media, etc), all of whom contributed to the financial debacle that revealed itself in 2008. 
Anonymous   |     |   Comment #13
#12:  I hope you are joking because if you are serious, this is my biggest laugh of the day.  Do you realize which group you are posting to?  Think about or read some posts from last year.
Anonymous   |     |   Comment #14
The problem with economist is that they often have no real world/life experience. They reach conclusions based on theories or interpretations of data that they concocted. When the data or theory is proven wrong, they come up with another theory or set of data to explain it. We noneconomists parrot what they say: debt is excessive/not excessive;inflation is _____ (fill in the blank) or the U.S is bankrupt (is not) (both). Ecomomic theory consistently parroted creates a sense of factual reality.

Of course the ever ready fall back position of a number of you is to blame President Obama and Obamacare for everything present and future. President Obama and Obamacare did not bring this country to its current financial state and most people (even economists) who can get over the fact that Obama won reelection,agree that is the case.
Anonymous   |     |   Comment #17
#14 is a ward of the state........One of the people you have "redistributed" your wealth to.
Anonymous   |     |   Comment #15
What the professor says is often experienced by the little guy in this way: Inflation and interest rates are correlated but not in immediate real time. First you get inflation where everything begins to cost more and you spend more on a daily basis. Much much later interest rates begin to catch up to the inflation process that actually started long ago. It is this period between increasing inflation and lagging low rates that hurts savers the most.
lou   |     |   Comment #16
Agree with last comment (#15) savers will get killed during the time when interest rates lag the inflation rate. #14 is an Obama apologist. Don't confuse partisan politics with sound economic theory. I like how he throws around terms like "most people" which just shows he is making it up as he goes along.
rosie43 (anonymous)   |     |   Comment #18
I don't want to go back to the 80's with 13% mtg's, 21% commercial loans, and 17% unemployment in our state. Taxes were raised, and the national debt tripled. I know that during this time we were able to pay off our home with the inflated dollars of the 80's and that gave most of us retirees a start to the retirement accounts we have now. Now that so many people have lost their jobs and homes because of the near complete financial meltdown what will happen to them if inflation is allowed to happen? Becareful what you wish for when we want higher interest paid on our savings. In my opinion the 80's was just a stepping stone to the mess we are in now. Greed and power are 2 of the elements for a disaster. Remember Dick Cheney in the 80's saying REAGAN PROVED "DEFICITS DON'T MATTER."  Well that was proven wrong. Let us not go back to the way of the 80's. 
RichReg   |     |   Comment #19
I'm appalled to hear comments believing that printing money can keep the U.S. from tanking. The only reason...ONLY reason ...printing money can keep the U.S. afloat is because the dollar is the U.S. reserve currency. Other countries have to buy our currency FIRST before they buy anything else. What happens when they don't want to do that anymore?

We're in trillions of dollars of debt, and its only because other countries loan us money that we don't succumb to bankruptcy. But they are wising up...they don't have to keep loaning us money forever. China is already taking steps to move away from our currency....Germany recently asked for THEIR gold back from the Federal Reserve (we didn't give it to them, ..why?)


When other countries decide to trade directly with each other and skip the U.S. dollar, all of our 'Deposit Accounts' will become worthless. There'll be hyperinflation because the dollar will tank, then the stock market will get a real powerwash, and God knows what other troubles we'll be faced with. 

RichReg   |     |   Comment #20
Edit : the dollar is the WORLD reserve currency. (oops)
Anonymous   |     |   Comment #21
Rosie-another ward of the state.......another "victim" of evil capitalism that you are supporting with food stamps and welfare.
Anonymous   |     |   Comment #22
You people keep electing democrats in congress and then complain about the life style they bring on to you. You know what they stand, no limit on borrowing and printing money, no limit on benefits for the laziest, no job creations, full control of your health care and so on.
If you want to change, vote for the patriots, responsible and accountable people with high morals and experience.
Avoid voting for the politicians and the liars and the problem will solve itself.
Anonymous   |     |   Comment #23
Yes #13, you are obviously correct, as shown by all the votes that your uninformed response has attracted.
Anonymous   |     |   Comment #24
Professor Jeff Wiltzius wrote:

"Higher interest rates may sound good to savers, but that is true only if the returns are greater than the inflation rate."

As a saver, I can add that lower interest rates can be good, provided there is a positive delta between interest rates and inflation.  In a world of 8% interest rates and 6% inflation, some savers are destroyed by America's progressive Federal Income Tax system.

As an older, retired, saver I was just getting along OK, even in the current difficult times.  Then, unexpectedly, I "came into money".  It was not an inheritance.  Natural gas was discovered beneath my land and I received a large (but one time) bonus payment.  I'm also receiving ongoing (much smaller) royalty payments, which at this point are dwindling.  The bonus payment especially was a windfall I never had seen coming.  Little did I realize the taxes that awaited me for suddenly becoming "rich".  My Medicare went WAY up, along with Part D.  My Federal Income Tax rate rocketed into the stratosphere!

Sound like complaints?  It probably does.  You're likely thinking how happy you'd be to change places and how fortunate I am.  I understand.  But for me the experience has been an education.  Until the windfall my yearly income from my CDs was adequate, but modest.  With today's low interest rates my nestegg, alone, does not throw off enough interest income to where I'm exposed to such taxes as I now have come to realize exist for the "rich".  But if interest rates spike I'll have income from savings (alone) I've not seen aside from my windfall.  Sure, it'll all be inflato-dollars.  The extra money won't buy any more than I can buy today.  But now I know the taxes that await should inflation ensue.  It's a bit scary!

try to be reasonable
try to be reasonable (anonymous)   |     |   Comment #25
As the article stated, only the treasury can print money. The Fed can only inflate  or deflate the money supply. 16 trillion seems like a lot of debt but if you do the math and compare it to other times in our history as a comparison to GDP its not that bad. If one divides 16 trillion dollars by 120 million workers you get aprox. $133,000. That seems like a lot but if divided by ten years its only $13,300 per year. Now, considering taxes collected from businesses, hidden taxes in products and transportation, overseas taxes, etc., its much less per person than that. As the economy slowly recovers, employment will increase, more products are produced, there will be much more tax revenues. Also, if inflation increases to 4%, that will also decrease the debt burden without hyperinflation. 

Many people on this site including myself, depend on income CD's and safe MM. I would love to see interest rates above the inflation rate, but I don't believe that has happened many times in our history. If during the 1980's one happened to by a high yielding 10 year CD, then you made out, or if you bought a 10 year 4% treasury bill just a few years ago, you  are a winner. But how may people can time the market correctly? 
Try to be reasonable
Try to be reasonable (anonymous)   |     |   Comment #26
Sorry for a couple of spelling error, for some reason this site does not allow editing after posting.
RichReg   |     |   Comment #28
Or more honest with unemployment statistics... which tell the real story about the shape our economy is in.  You are all dreaming if you think our savings rates are going up anytime soon.

Not gonna happen for awhile.
Anonymous   |     |   Comment #29
I know exactly where you are coming from, anomymus #24.

Apparantly we have been walking in the same shoes.  Accept my royalties have yet to materialize.  Also paid the much higher Medicare premiums and taxes on the onetime signing bonus windfall. 
Try to be reasonable
Try to be reasonable (anonymous)   |     |   Comment #30
It doesn't matter whether you like or dislike Obama, the new health care law, medicare, the FED, etc. If you believe that the government is misrepresenting economic data, that doesn't matter either. The market today reflects the current economic situation and what it believes will happen in the short term. So complaining about the political leaders is of no consequence. The fact is over that last 5 years the economy has been steadily growing from a terrible wound. The injury to the markets effected everyone except a very few who were on the right side of the market. The important point is how do you keep your hard earned money safe and possibly growing? 
Anonymous   |     |   Comment #32
My understanding is that corporations are making record profits, and the stock market is making record highs. One problem we have is that many Americans do not have the skill set for the jobs that are in demand. If you are an engineer, computer programmer, health care worker for instance, you can easily find work in many cities throughout the US. Industries have come and gone through out our history and it takes time for the economy to adjust. Why do you think so many Asian are able to immigrate to the US? Unfortunately,  many kids in school today are not learning the skills that are important to get a good job.
Anonymous   |     |   Comment #33
It always seems that certain readers are stuck on the 2012 campaign rhetoric and attacks. #14 and rosie 43(#18) made perfectly reasonable and true statements(Obama and Obamacare did not bring this country to its current financial state and dangers of inflation), but #16,#17,#21 and #22 started spewing out partisan name calling and rhetoric(obama apologist;ward of state: vote for patriots;welfare,etc.).

I here this same type of rhetoric from many members of the house of representatives who know that they can never lose their seat in their gerrymandered congressional districts. No solutions;only we borrow and spend too much and we need to cut spending(but not in my district or state or on the projects my major donors support). They are democrats, republicans and (oh yes) "patriots", but as The Economist magazine has stated ,"they all live in the cloud-cuckoo-land of thinking you can improve the economy entirely through spending cuts".
Wanderer (anonymous)   |     |   Comment #34
Here is the problem with seeking bank deposit accounts that do not lose money as a result of inflation. It is impossible to do. ALL bank accounts, regardless of an agreement to a long term of years and frozen money, are going to lose money for you, year after year, because ALL current interest rates, offered within the USA, are well below the rate of inflation.

But, we have not considered taxation. Dividends from stocks get 15% tax treatment for persons who have double digit (but not triple-digit) incomes. But, interest is taxed at "earned income" rates. Which means that if your marginal rate is 39%, you will pay 39% of your measly little interest rate to the government... a government, I might add that is already stealing your money using financial repression techniques, year after year, by keeping the real rate of interest negative. So, your real rate is more deeply negative the higher your income backet may be.

But, it gets worse. The government is clearly not telling the truth about the level of inflation. Since 1982, they have progressively added tricks and gimmicks to the formerly honest method of simply comparing a basket of goods one year, to the same basket the next. Now, they revalue things using "hedonics", which means the price of a 2013 Impala can be arbitrarily reduced from the real price if the government statistician, in his infinite wisdom, decides that there is something about the car that can be said to be "improved". Thus, even if the MSRP for the Impala goes from 21,500 to $24,000, the Bureau of Labor Statistics may claim that the price actually decreased because, statistically speaking, the subjective "quality" of the car went up more than the price. Then, there is "product substitution", and the government statistician can substitute hamburger meat for sirloin steak, in the basket of goods, if the price of sirloin goes up very fast. The claim is that, if sirloin goes up, people will start eating more chopped beef. But, it is a lie. People will only eat the chopped beef because inflation robs them of the ability to choose the cut they want. That inflation is intentionally removed and not reported to artificially lower the official rate.

So, when you look for bank accounts that pay a positive real rate of return, you need to look past the government rate and get to the real CPI. This is provided by a guy who runs a website called shadowstats.com. He plugs in the current base data into the pre-1982 formula, and has concluded that, right now, the real inflation rate is between 8 and 9%. Yet, even locking up your money in a 10 year CD pays only 2.7% or so, if you are lucky. So, savers are facing deliberate financial repression everywhere they turn, with the value of their life savings being steadily taken from them, and redistributed to the government, itself, and the mega casino banks in NYC who get first dibs at the newly printed funny money excreted from the NY Fed.

Because of the dismal situation for savers, I no longer open CDs, because rather than being "safety insurance" they actually insure that you will experience a steady and inexorable diminishment of your wealth, over time. The true inflation rate, moreover, is likely to get much worse, in the coming years, as described by the economist who wrote this article.

That's why I buy gold, silver and platinum. I don't buy them once they run up into unsustainable levels, like the $1,900 gold price we saw in summer of 2011. There is a lot of manipulation going on, both on the upside and the downside, in those metals. But, because precious metals challenge the continued viability of the current fiat money system, government currency issuers and the mega banks that court the politicians, periodically collapse prices. That allows smart people to buy, which I recently did, when gold was in the $1,200 range.

Gold, silver and platinum can go down from where they are now. No doubt about that. But, in the long term, with the inevitable continued growth in China, Russia, Turkey, India etc. (where most of the demand is) and the growth in buying both in Europe and the USA (as a result of the negative interest rates/financial repression), gold and platinum will both far exceed $1,900 and silver will go far beyond $50 per ounce.

Some folks who read these pages are retired, and short on cash. They need access to their cash, so I cannot recommend a huge allocation to precious metals for them. Maybe, 5%. But, if you are like me, and are making more and more money, rather than saving in the form of soft easily debased fiat currencies like the dollar, pound or Euro, consider choosing to save in hard currencies, which are the metals. That means you keep your cash piling up in liquid accounts, that pay the highest interest rates, like Barclays and a few others right now. Then, when the metals prices are crashed (which is still the case, though prices are no longer at the bottom) you buy.

I keep enough wealth in cash to cover 12 months of my expenses. The rest I put into metal. When the stock market collapses, the crash is going to come from 10 year treasury rates rising at something near to current speed. That means both stocks and bonds will be collapsing, and, since there is no other outlet for escaping liquidity, the metals will soar. At that time, I intend to sell part of my metal inventory, for the first time in years, at a big profit, and buy blue chip stocks. I'll also use whatever liquid cash I've built up by that time, to do the same.

What I have described, I think, is the only rational method of dealing with financial repression, and the fact that real interest rates will be deeply negative for a long time to come.
Wanderer (anonymous)   |     |   Comment #35
"Try to be reasonable", the economy has NOT been "recovering" from a terrible wound. It has yet again, been placed inside the Federal Reserve bubble machine for a last great bubble. Money printing at a rate of $85 billion per month is taking place, and the printing with continue, to the tune of near that rate, even after the much feared "taper". If and when the flow of counterfeited cash stops, the merry-go-round will stop along with it. The printing of this money has simply pulled economic activity from the future into the present, and it means that we will have to pay a terrible price when this is over, either by defaulting in the form of overt bankruptcy (unlikely since they can print money ad infinitum) or defaulting due to very high rates of inflation.
Anonymous   |     |   Comment #36
Bernanke and the next FED's chair will have no choice but to print forwver, behind closed door, without anyone ever knowing about it. Tapering of the FEDs printing is just for the eyes of the world and the FEDs will go undergtound and deny anything wrong without ever disclosing what is doing.
Wanderer (anonymous)   |     |   Comment #37
Anonymous #36, you are both right and wrong. Initially, the Fed will claim to taper, even while switching from overt (POMOs) to covert money printing (TOMOs). The money will still be flowing in, keeping bank deposit rates down. But, they cannot have it both ways, in terms of manipulating the psychology of the market. The psychology of the market is now such that even the fake "taper" is and will continue to cause bond interest rates to rise. Indeed, even if the amount of printing remained at $85 billion per month, bond yields would rise, though slower. The bigger the absolute amount of counterfeited cash is sitting in the system, the more new counterfeits are needed to maintain low rates, because it is the percentage of "flow" that matters, in keeping rates capped.

The Fed can probably get away with printing, maybe, another $1 trillion in residual POMOs, and another $1 trillion in ever-renewable but supposedly "temporary" TOMOs, because of the attention that is now focused on Europe, and, later, will be focusing on the collapse of the Japanese economy. But, after the Euro-crisis is resolved one way or the other, probably by the return to national European currencies, the current money flows that are supporting the dollar will reverse direction. Liquidity will travel out of US banks and financial markets back to Europe. The collapse of Japan is not big enough to take the full attention of world markets, as the collapse of the Euro has done, so attention will return to America's financial irresponsibility. The Fed will be forced to stop printing, or it will face a complete collapse of the US dollar. The cessation of money printing will collapse the value of American blue chip stocks, along with most other equities.
Wanderer (anonymous)   |     |   Comment #38
I should note that the full scale collapse of US equity prices should begin to happen by mid to late 2015, all other things remaining equal.
Bankrupt (anonymous)   |     |   Comment #40
Probably no, because the US is the center of the capital of the entire world, many business man are investing in US. Its hard for the US to experience that thing.

Bankrupt (anonymous)   |     |   Comment #41
I don't thing so. US is the largest and growing country in the world.
Bankrupt (anonymous)   |     |   Comment #42
U.S is not going into bankrupt because of the investment of other country that could help to the US government to pay their taxes.
Bankrupt (anonymous)   |     |   Comment #43
I agree with the other comment. There are lots of possibilities that US avoid into bankrupt.