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BY GERALD J. ROBINSON

NEWJERSEYNEWSROOM.COM

(Second in a series)

Not soon. And if we implement sound policies, we can defuse it.

Why not soon? A convincing collection of economic factors indicates we have some time before the ticking debt bomb explodes, battering our economy with hyperinflation.

The current 10 percent unemployment rate and the projection that it will take years to cure mean that the cost-push feature of rising wages, a frequent precursor of inflation, is not imminent.

The relatively low rate of industrial capacity utilization means that there's little prospect of production bottlenecks to drive prices upward and that capital expenditures for new plant and equipment will remain restrained. The relative tightness of credit for both business and consumers means that demand will not soon become overheated.

The Wall Street Journal estimates that almost one in four homes with mortgages is "underwater," meaning that the mortgage loan balance exceeds the value of the home. Absent a strong recovery soon, unlikely at this point, this suggests that the current high foreclosure rate will not soon ease, placing more homes on the market and continued downward pressure on home prices.

Part 1: When will the U.S. Debt Bomb explode?

Consumer spending is not robust, with many consumers paying down credit card debt rather than increasing it, while the credit card companies are imposing increasingly stringent limits on credit card spending.

This suggests that consumer driven inflation is unlikely in the near future. Stock market gains have been strong, but based on rising profits that have often resulted from cost cutting rather than revenue growth.

There's even a whiff of deflation. According to the U.S. Bureau of Labor Statistics, the Consumer Price Index has actually decreased 0.2 percent over the last year.

There is substantial evidence of gradual improvement in the economy, so that the need for increasing the deficit by stimulus spending is easing. Federal Reserve Chairman Ben Bernanke has announced the end of the recession, gross domestic product grew at a respectable 2.8 percent in the third quarter and the stock market as measured by the Dow Jones has raced over 50 percent from its low in March. Some green shoots have appeared in segments of the residential housing market.

Heightened concern about the threat of inflation suggests a growing willingness to undertake countermeasures. There is no shortage of influential inflation hawks giving dire warnings of its consequences and politicians from the President on down have taken notice.

It's clear that the most potentially powerful inflation fighter, Fed Chairman Bernanke, is both well aware of inflation's danger and is prepared to take steps to prevent it. He has indicated the Fed's willingness, when it will not adversely affect the nascent recovery, to take back the massive liquidity the Fed has pumped into the market and to nudge interest rates upward.

So hyperinflation will not hit soon.

But to defuse the debt bomb we have to reduce the Fed's lending programs and massive purchases of Treasury bonds and troubled securities that have more than doubled the assets on the Fed's balance sheet from under $1 trillion in 2008 to over $2 trillion now.

How do we get out from under this printing press problem?

There are several escape routes from the rising tide of red ink, but only one that is practical.

The remedy of Russia and Argentina, default, is completely unacceptable and won't happen. Another undesirable approach is to run the printing press faster to pay off creditors with cheaper dollars. But this would hurt both American consumers whose standard of living would fall and savers whose retirement funds would be decimated.

Moreover, it would compound the very inflation problem we seek to avoid, causing both foreign and domestic lenders to diminish making loans to the government repayable in less valuable dollars or charge much higher interest rates, or both, depressing the economy.

The simple, common sense approach to deficit reduction by raising taxes and cutting expenses has been proposed endlessly, and endlessly ignored. And it may well be that it is not the best approach because it may reduce the growth of personal and business income.

The best solution is a combination of capping the growth of expenditures and stimulating the growth of the economy. Growth of the economy will generate higher personal and business income and correspondingly higher taxes for the government. If linked with spending caps, it will allow the government to reduce annual deficits and eventually move toward paying down the national debt.

It's possible. We had surpluses in the late 1990s. But with the political gridlock of recent years, how can Congress be expected to adopt such a course?

There's hope.

In November it was announced that the White House is considering the formation of a bipartisan commission to develop proposals to reduce the nation's massive deficits and debt. The objective is to help neutralize partisan bickering by bringing Democrats and Republicans together to make the politically dangerous, tough decisions necessary about cutting expenditures and raising revenues, while not impairing growth.

Congress may buy into this approach. A similar commission was proposed by Senators Kent Conrad (D., N.D.) and Judd Greg (R., N.H.) that would be a bipartisan panel of lawmakers and administration officials. It would make the third rail decisions on issues like Social Security, Medicare, Medicaid and taxes and present these proposals to Congress. Congress would vote "yes" or "no" on each proposal, without the right to offer amendments.

Despite some objections, the proposal appears to be gaining congressional traction, in part because of favorable historical precedent. In1983 a special commission on Social Security cut through a failure to reach consensus in Congress and produced a program that assured the solvency of the program for many years.

If the rising public pressure for deficit and debt reduction continues rising, a deadlock cracking point can be reached, supporting the idea of a commission and congressional action bending down the deficit and debt curves.

♦♦♦

The next and last article in this series will discuss a relatively simple investment strategy — not based on gold -- that can help hedge against the possibility that we don't defuse the debt bomb.

Gerald J. Robinson, Esq., formerly tax counsel to the New York City law firm of Carb, Luria, Cook & Kufeld, is a member of the New York and Maryland bars. He received his B.A. degree from Cornell University, an LL.B. from the University of Maryland and an LL.M. in Taxation from New York University. Prior to entering private practice he served in the Office of Chief Counsel, Internal Revenue Service. He is the author of the treatise, Federal Income Taxation of Real Estate, now in its sixth edition, and wrote the monthly newsletter, Real Estate Tax Ideas, both published by Warren, Gorham & Lamont. He is also a frequent lecturer and contributor to various professional journals.