Taylor Rule Founder Warns US Debt Could "Explode"

Tyler Durden's picture

The other other John Taylor (not the FX trader, nor the guitar player, but the "Taylor Rule" discoverer, which is at the base of all Fed monetary decisions), spoke on Bloomberg TV, and his message was certainly a far less optimistic one than that conveyed by the man charged with putting his rule into practice. "We could get into a situation like Greece, quite frankly. People have to realize it is a precarious situation. The debt is going to explode if we don't make some changes." What changes does Taylor recommend? Why the same that Bill Gross warned about yesterday - that ZIRP4EVA means a liquidity trap pure and simple, and the Fed needs to start rising rates: "the Fed has bought so much of the debt that people don't know how they're going to undo that. They pledged to have interest rates at zero until 2014, but people are saying how can they possibly do that when the economy picks up. This uncertainty had lead people to sit on all this cash. I think if the Fed gets back to the policy that worked pretty well in the '80s and '90s, we would be in much better shape." Ah yes, but the one thing, and only one thing that matters, and that is not mentioned at all, is what happens to the stock market when the Fed officially sets off on a tightening path. Actually make that question even simpler - will the drop in the S&P will be 30%, 40%, or any other greater mulitple of 10% thereof, considering that as we noted previously, the Fed and the other two central banks alone have injected over $2 trillion in just over a year. And about $10 trillion in the past 5. Calculate what the removal of this liquifity would do to stocks...

Taylor interview:

And extracts:

Taylor on the U.S. economy:

"We have to get away from all these temporary things--rebates, monetary policy, quantitative easings, we have to get back to a strategy like we had in the 1980s--monetary policy and fiscal policy. I believe that will get the strong growth. The growth in the early 80s was 5.9% compared to 2.4% we've had in this recovery. There is a lot of evidence that that kind of policy works. Steady as you go, getting the tax rates down and keeping it there, not doing all of these temporary stimulations.

"We could get into a situation like Greece, quite frankly. People have to realize it is a precarious situation. The debt is going to explode if we don't make some changes. What seems to be more important is that people can get back on track, the country can get back on track, with just some sensible adjustments. I argue just bring spending back to where it was in 2007. That's not so long ago. We've had an enormous spending binge in the last few years. If we undo that binge, shouldn't be that hard, we can get back to some sensible pro-growth policies.

On whether the Fed's zero interest rate policy is helping to contribute to the deficit:

"I think it's contributing to the slow recovery because the Fed has bought so much of the debt that people don't know how they're going to undo that. They pledged to have interest rates at zero until 2014, but people are saying how can they possibly do that when the economy picks up. This uncertainty had lead people to sit on all this cash. I think if the Fed gets back to the policy that worked pretty well in the '80s and '90s, we would be in much better shape.

On Greece:

"A walk away would be a default. Nobody wants to do it at this point. The best thing is for the creditors to do as much as they can in conjunction with the Germans and the IMF is there too - to get a deal for Greece so that Greece can grow. Some of these GNP ideas are good, and that way, we get this behind us. They have been kicking the can down the road for years. That's a problem.

On whether credit holders are being unrealistic:

"It's a bargaining. Each side will try to get the best they can. The creditors are arguing that there is going to be contagion. If they don't do a better deal, the Greeks will argue and say hey, we're flat on our back, we have to get some growth. I think the Greeks have an issue here - if they can put in some good economic growth plans that get the economy moving and write down the debt even further. I think that that is the answer to this. It's really how Europe can get back on a growth track."

On U.S. entitlement programs:

"Right now, the entitlement spending is expected to grow way beyond something that anybody expects to be realistic. We just have to contain that growth. In other words, keep the spending from growing even further as a share to GDP. We do that in a way where we use the markets, the rule of law and incentives, it will be a better system. Some proposals out there to reform Medicare, Medicaid and keep spending down will lead to better health care. That is what we should be striving to do.

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taniquetil's picture

Paul Krugman is rolling in his oak-paneled office right now.

Clueless Economist's picture

No I am not rolling around.  Where is this clown's Nobel Prize?

Until he wins one, he should shut his piehole and defer to his intellectual superior. (me)

"The only solution to the debt problem, is more debt"

P Krugman

Nobel Winner


New York Times Writer

Ivy Leaguer


All-Around Douchebag

derek_vineyard's picture

Does he tap foot in airport bathroom stalls?

JW n FL's picture



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JW n FL's picture




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JW n FL's picture







- LEWAN MATS: 'Cold fusion may provide one megawatt in Athens' INTERNET CITATION, [Online] 02 February 2011, XP003027505 Retrieved from the Internet:


- See also references of WO 2009125444A1






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JW n FL's picture



Save the Job Creators!!!

or Gods Work will go un-done on Wall Street!

Tax Breaks!

Tax Credits! (that can be monetized with other Tax Dollars Collected) Like General Electric paid NO! Taxes and then got back another $3 Billion in Cash thru monetizing the Tax Credits that had been given to them!


.25% Federal Window to Draw down from that is a net gain come tax time! Paid to barrow money!

POMO / SOMOM / STOMO.. any Open Market Operation in which the FED buys stock to PUMP UP! the market! the FED is not buying stock to force the market lower!

No Criminal Laws Apply to Wall Street!

Just Civil Laws!


and the White House standing between Wall Street and the Pitch Forks!


help the executives on Wall Street!! they are struggling!!



taniquetil's picture

Look, not to nitpick here, but I think Paul Krugman prefers to go by "Blogger" nowadays.

The Big Ching-aso's picture



Frankie Blue Eyes would've said to send in the clowns not the entire circus.


battle axe's picture

Wait, we have a debt problem that could get way out of hand? I didn't see the memo on this.

JW n FL's picture



We need Tax Cuts for the Job Creators!

That will help the debt load!

We need austerity! (for the poor, becuase they dont do anything anyway!)

We need the Planet to have a Population of WAYYYYYYYYYYYYYYYYYYYY Less than we do now!

Bill Gates http://www.youtube.com/watch?v=6WQtRI7A064

I dont want to post the Rockefellers or Rothchilds as the Sheep have been trained to tune out anything that has to do with thier names.




 wake up sheep!


Flakmeister's picture

Check out the links I posted below re: lobbyists and CEOs

JW n FL's picture




You might want to consider the little factoid that companies pay more for lobbyists than their tax bill


or that a number of companies pay their CEO more than what they pay in taxes....



Some things need to be posted a few times to get people to really pay attention.. this is one of those things!

Thanks Flakmeister !!

Signed, Christian Constitutionalist 


P.S. Don't forget!! “See Something? Say Something!” and here is the link for you ---- > http://www.dhs.gov/files/reportincidents/see-something-say-something.shtm

smb12321's picture

What nobody has yet answered is HOW we can afford the rise in debt payments if interest rates rise.  Adding another 200 or 300 billion will not be offset by cuts and the only alternative is to.,.print more money.  It's like the proverbial hamster in the wheel.  Without cuts, the higher the deficit, the more we print. It's like Illinois (the US Greece)  hawking bonds to pay the interest on current bonds.

carguym14's picture

Hey Krugman-Why don't you head over to Greece and show us how it's done?

Silver Bug's picture

The debt is literally a ticking time bomb. I can't believe it hasn't gone off yet.



XitSam's picture

Do you know what the word "literally" means?

5880's picture


he does not

Calmyourself's picture

Thanks Grammar Nazi you saved us..

"Since some people take sense 2 to be the opposite of sense 1, it has been frequently criticized as a misuse. Instead, the use is pure hyperbole intended to gain emphasis, but it often appears in contexts where no additional emphasis is necessary."

XitSam's picture

Words don't mean anything? Or are you saying any word can mean anything?

Calmyourself's picture

I am saying thank you, please explore the epistimological origins of all the words in common usage that you feel are used improperly so we may be enlightened.  When you have time feel free to leave a comment on the subject at hand; finance, worldwide ponzinomics, the nascent police state, you get the gist, right..

XitSam's picture

In common usage, literally means literally, not virtually or figuratively. But since you want to be the ZH Nazi ...

akak's picture

I agree XitSam.

Having corrected many ignorant misuses of words and common grammatical mistakes here on ZH, and elsewhere, I never fail to be amazed at the sheer and consistent, extreme level of violent vitriol and outright hate that is directed towards those who politely point out the grammatical mistakes of others.  What is responsible for this sort of unjustified and extreme response?  Could it be that some 30- and 40-somethings here are embarrassed to be making language mistakes that they should have learned to avoid by the age of ten?

But since we're on the subject, here are some of my grammatical pet peeves:


1) Saying or writing "I could care less", when what is really meant is "I could NOT care less".  I mean come on, just THINK about it!

2) they're/there/their --- knowing the differences here is fourth-grade stuff, people.

3) "could of" instead of "could've"

4) your/you're  (this "should of" been learned by third grade)

5) Using the word "issue" to mean "problem"

6) Dangling past participles: "it needs fixed" for "it needs TO BE fixed", for example

7) Misused apostrophe's'  (hint: use for possessives and contractions, NOT plurals)

8) And for all you clueless Brits out there, please for God's sake learn the difference between "round" and "around" already --- "round" is an adjective, "around" is a preposition, and the two are NOT synonomous.

9) Speaking of Brits (Aussies are equally guilty on this), I am sorry to inform you that there are no such places as "Chinar" or "Indiar". 
Why DO you guys add "r"s onto the ends of words that end in vowels when followed by a word beginning with a vowel, anyway?  I'll never forget hearing my English step-aunt introduce her two children, Rhea and Kevin, for the first time as "Rear and Kevin".  She simply could not understand our amusement.


carguym14's picture

You keep using that word.I do not think it means what you think it means............



Sunshine n Lollipops's picture

Quickly! Someone get me a paper clip and Junior Mint!

NotApplicable's picture

Hopefully you mean stuffed in a whiskey barrel and rolled down a mountain toward a cliff.

DosZap's picture

They pledged to have interest rates at zero until 2014, but people are saying how can they possibly do that when the economy picks up.

He IS kidding right?

roccman's picture

the end of cheap unlimited fuel has put a full stop on "recovery"


the new up is level (at best)


interest rates are not going up - ever

Brent is the new FFR

hedgeless_horseman's picture



...what happens to the stock market when the Fed officially sets off on a tightening path.

That is a rhetorical question, right?

NotApplicable's picture

Along with the idea that they can ever unwind their balance sheet.


derek_vineyard's picture

Bernanke orders's for end game:  suck up 50%+ of the net worth of the 99% to keep the ship afloat.

NotApplicable's picture

More like 150% once you count all of the fedgov backed mortgages blowing up.

SheepDog-One's picture

50%? Theyre going for every last dime.

Spastica Rex's picture

At first I was going to answer you, but that wasn't what you wanted, was it?

GeneMarchbanks's picture

The debt exploded some time ago. It'll take only one auction and the entire game will change.

DosZap's picture

Bernankey & Co, need to take one of his remedial learning classes in mathematics.

Silver Dreamer's picture

When you own both sides of the equation, the answer to the problem doesn't matter.  It's all still yours.

unrulian's picture

why? the fed will buy endlessly...and no one cares

Calmyourself's picture

What are you talking about Gene?  One auction is a game changer?  Is that the auction the laser printer cartridge fails??   Seriously, we have all learned there are no longer any rules we are just here to document the death of the rule of law..

Hondo's picture

How much of that growth in the '80's was generated by the debt we still carry, and are paying for, today???

Alea Iactaest's picture

Uh, less than we've seen in the last 3 years? Just going out on a limb here...

kridkrid's picture

You're both right... but it's mathematical, not political.  People want to point towards the Reagan administration to make our debt problem SEEM political instead of simply a part of the monetary system.  I see this over and over.  But really the D's should point towards Nixon who closed the gold window and forever disassociated money with something of value.  Not that the American version of the gold standard represented true value.. but at least it was somewhere in the same zip code.  What we have since that fateful day is a grand experiment of pure fiat/fractional reserve/ponziness backed by an agreement by OPEC to sell oil in dollars.  Why do the D's never mention Nixon?  Because this ISN'T political.  It is just math.  Money that is loaned into existence with interest that begins to accumulate at it's creation (our monetary system) REQUIRES more debt to be generated forever.  

Gov't debt is a bit of a red herring.  It's just one piece of the global debt ponzi scheme... but for some reason... it's the part we are fixated on.  The people collecting interest don't care who owns the debt... and the system doesn't care either... only that it continues to expand.

Flakmeister's picture

Is it a coincidence that US oil production peaked around the time Nixon closed the window??

Nixon had no other choice... (at least one that was palatable to the American people)

kridkrid's picture

well... that may or may not be true... we'll never know and it doesn't really matter, because that is the choice that was made.  What we do know is that almost everything after that moment has been a version of a lie and collapse that is upon us now has been enivitable all along.

Flakmeister's picture

Well... my evidence is the reception Carter got for being honest about oil....