Alan Greenspan. Economic wonderboy. Market maestro. Former Federal Reserve Board Chairman. Past disciple of Ayn Rand. Someone who once thought gold was the only proper standard for money and a protector of property rights...

Oh! Almost forgot - he's the lead guy who said he didn't cause (or did he?) and didn't see (or did he?) the housing bubble, which wrecked havoc on us. Well, maybe it's not his fault. After all, Paul Krugman advised him to create the bubble.

In response to S&P's recent downgrade of the US government, Greenspan recently asserted that "The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default."

OMFG! Do you realize what he just suggested?

Perhaps a little history and background are in order...

Between 1921 and 1923, the Weimar Republic (the German republic established after World War I that Hitler's Third Reich eventually took over) had what's called hyperinflation. Hyperinflation is price inflation (as opposed to monetary inflation) that is "out of control." It occurs when a government prints "too much" money and circulates it in the economy. Printing money causes a vicious circle where you have to print more money (e.g., QE1, QE2, QE3?). Sounding familiar yet?

Price inflation is bad because it reduces the purchasing power of your savings so you aren't able to buy as much. In other words, your standard of living goes down. And it's not like you can just increase everyone's income in the economy and avoid the negative consequences of price inflation. For example, if you had $100 in the bank and the price of gas goes up from $2.00 per gallon to $4.00 per gallon, you can now only buy 25 gallons of gas (about one tank) instead of the 50 (two tanks) you could buy before the inflation. Sounding familiar yet?

Why do governments print more money that causes hyperinflation? There are a few reasons. In the Weimar Republic's case, they did it to reduce the cost of the war reparations they were responsible to pay (even though the Treaty of Versailles required them to pay in multiple forms to try to prevent hyperinflation). In other words, if you owe someone a lot of money - i.e., you have a lot of debt - you just print more money to pay it back. The Weimar Republic printed so much money that people had to go shopping with wheelbarrows and huge pieces of luggage full of money. "Practically every economic good and service was costing trillions of marks." It destroyed the German middle class. Sounding familiar yet?

Lest you think this is a story of ancient history, the same thing recently happened in Zimbabwe - from 2004 - 2009. No, they don't use wheelbarrows to carry around all their money. To pay for their bottle of beer that cost half a billion dollars, they use oversized baskets on their heads. Eventually, they just abandoned their currency and are now using currencies from other countries. What were the causes of Zimbabwe's hyperinflation? One of the biggest was printing money to finance the military. Sounding familiar yet?

S&P (along with the rest of the rating agencies) lost their reputation from ignoring the factors that led to the housing crisis. The rating agencies "were key enablers of the financial meltdown." Even Paul Krugman knows that. (Yet, and without a trace of irony, Krugman is blasting S&P's credibility with an argument that says S&P waited too long to downgrade organizations and their "toxic waste" bonds. Well Paul, let's spell this out for you: if they have a history of waiting too long to downgrade organizations and giving AAA ratings to "toxic waste," could it be that, once again, they waited too long?) So perhaps Donald Trump is right that their moves to downgrade the US government, Fannie Mae/Freddie Mac, and US municipalities is really nothing more than a publicity stunt. After all, the US government's finances have been beyond stupid for ages - an extra $400 - $900 billion dollars at this point, most of which was used in the first day, doesn't make a difference. And people don't really expect the US government to payoff its debt anyway. The downgrade is clearly too little, too late, and anyone who thinks otherwise just hasn't been paying attention.

As the Weimar Republic destruction proves, economic collapses can lead to serious geopolitical complications. There are some that suggest World War III might not be such a far-fetched idea to serious people. Considering how much money the Federal Reserve has already added to the economy, why aren't we seeing hyperinflation like in Germany and Zimbabwe? There's an argument that claims markets don't care anymore. However, the real explanation is more likely that the banks aren't lending all of the money.

Ron Paul has been attacking the Fed, Alan Greenspan, and Paul Krugman for years over just this kind of ideology. (And he has been so dead-on accurate on his other predictions.) Kind of makes you wonder: who would make a better Fed Chairman - Alan Greenspan, Paul Krugman, or Ron Paul? What would Paul Krugman do if he was Fed Chairman? If you were head of the Fed, what would you do? Does it seem ridiculous for US Treasury Secretary Tim Geithner to judge, on the one hand, that S&P showed "terrible judgment" and, on the other, that European governments need to get their "fiscal house in order?" (You really can't make this stuff up.) Do you think it's a credible argument that the rating agencies wait too long to downgrade creditworthiness? Do you think the US will experience hyperinflation? Do you agree with Greenspan that the US was doing "relatively well" until Italy showed signs of weakness? Do you agree with Michael Moore that Obama should arrest the head of S&P? Is having to print money effectively a default? Is another recession, or even depression, imminent? Do you think the Fed should do a QE3? Are you doing any preparation for a dollar collapse? How concerned are you about all this?

Former Federal Reserve Chairman Alan Greenspan on Sunday ruled out the chance of a US default following S&P's decision to downgrade America's credit rating.

"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default" said Greenspan on NBC's Meet the Press

"What I think the S&P thing did was to hit a nerve that there's something basically bad going on, and it's hit the self-esteem of the United States, the psyche" said Greenspan..

'The United States was actually doing relatively well, sluggish but going forward until Italy ran into trouble," he said.

No Chance of Default, US Can Print Money: Greenspan

DISCUSS!

Original posting by Braincrave Second Life staff on Aug 10, 2011 at http://www.braincrave.com/viewblog.php?id=617