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No, The United States Will Not Go Into A Debt Crisis, Not Now, Not Ever

By Pascal-Emmanuel Gobry

October 19 (Forbes) — If there’s one article of faith in Washington (and elsewhere), it’s the idea that the United States might get into a debt crisis if it doesn’t get its fiscal house in order.

This is not true.

The reason why it’s not true is because we live in a fiat currency system, where the United States government can create an infinite number of dollars at no cost to meet its obligations. A Treasury bill is a promise that the government will give you US dollars– something that the United States government can produce infinitely and at no cost.

That’s the reason why interest rates on United States debt have only gone down even as the debt has ballooned. That’s the reason why Great Britain has very low rates on its debt despite having very high debt-to-GDP. That’s the reason why Japan has an astounding debt-to-GDP ratio and still enjoys some of the lowest rates ever. Investors have bet for so long that there would be a run on Japanese debt and have ended up so ruined that in financial circles that trade is called “the Widowmaker”. (Here’s a more detailed analysis by my former colleague Joe Weisenthal at Business Insider.)

Well, what about Argentina? Argentina had to default on its debt because it had pegged its currency to the US dollar. It wasn’t sovereign with regard to its currency since it had to maintain its currency’s peg. It wasn’t Argentina’s debt that caused it to default, it was its currency peg.

What about Greece? Same thing. Greece hasn’t used its own currency for ten years. Of course it’s going bankrupt.

Does it seem that strange that governments can’t run out of money?

You don’t have to take my word for it. How about Alan Greenspan? He said (PDF): ”[A] government cannot become insolvent with respect to obligations in its own currency. A fiat money system, like the ones we have today, can produce such claims without limit.”

But waaaaaaait, you shout, what about inflation? If the government prints money like crazy, won’t that create inflation?

Well, in theory, yes. But probably not. Why is that? Because the US has an even bigger advantage than just being sovereign in its own currency (hi Greece), it also holds the reserve currency. The US dollar is the main currency that is used in most international transactions, it is held by all of the world’s central banks, and so forth.

Why is this important? Well, another way to define inflation is to say that the supply of a currency gets out of whack with its demand: too much currency chasing too few people who want to hold it, and so its value drops. Well, when you have the reserve currency, the demand for your currency is always going to be extremely strong. There’s always going to be tons of people, all around the world, who want to use US dollars, because their transactions are conducted in US dollars. (And it’s highly unlikely that this will change soon–being the reserve currency has a network effect, meaning everyone uses the dollar as the reserve currency because everyone else uses it, creating a self-reinforcing cycle that’s extremely hard to break.)

In other words, while in theory printing tons of money could create inflation, in practice demand for the dollar is so high–and for structural reasons that have very little to do with how the US economy is doing at a particular point in time–that it’s hard to imagine a circumstance under which the US government would have to print so much that it would cause significant inflation.

And even if it did–well, for all the bad memories we have about it, the Stagflation of the 1970s was many things, but it was not Greece. Life in the 1970s was still relatively okay, despite the stagflation. That is to say, even in the extremely unlikely event that the government had to print so much money to get out of its debt that it caused moderate inflation, it still would not be a debt crisis of the kind that Greece and Spain are under right now. (Hyperinflation, meanwhile, is even less of a danger, since in recorded history it only happens in cases of not just reckless money printing, but also extremely serious exogenous shocks such as war, regime change, etc.)

Why am I writing this?

After all it’s already common knowledge among economists, Fed officials, and an increasing number of sophisticated investors.

Maybe so, but it’s still not common knowledge among politicians and among the general public. A lot of people still think that the US is under some risk of one day becoming like Greece, and it’s distorting our public debate.

It’s especially distorting it on the Right, where hysteria about deficits, and debt, and becoming like Greece has reached a fever pitch. Paul Ryan, especially, has framed his entire message on entitlement-cutting on the flawed premise that the US needs to cut its entitlement or it will suffer a debt crisis. This message, in turn, has infected broad swathes of the conservative movement (including very smart people in it), a movement that I consider myself a member of and want to see in strong intellectual health. But very few liberals–certainly no Democratic elected officials that I’m aware of, certainly not the President and the Vice President–are disputing the premise that the US is in any danger of a debt crisis.

In future posts, I will try to look at what the conservative movement can do to move past the idea of the debt crisis, and what it means.

40 Responses

  1. The consequences arising from the continual accumulation of public debts in other countries ought to admonish us to be careful to prevent their growth in our own.” John Adams first address to congress, November 23, 1797.

  2. “There’s always going to be tons of people, all around the world, who want to use US dollars, because their transactions are conducted in US dollars.” (emphasis added)

    An unfortunate explanation, along with the parenthetical comment which followes, because it implicitly confuses cause and effect.

    People use dollars for two reasons: 1) the US is a powerful, stable country with strong legal protections for private property; and 2) the US does not put obstacles (at least relative to what most countries do) in the way of foreigners trying to accumulate dollar financial assets.

    The primary reason the Euro has not become a “reserve” currency to the extent that the dollar has is that the Eurozone has not run significant current account deficits with the rest of the world.

    1. @ESM,
      I fully agree.

      What I would add are secondary historic factors – the still existing artefacts of the Bretton Woods system such as IMF and the undisputed American economic and military leadership of the Western world during the Cold War (which was won).

    1. @y,
      I would imagine Adams was referring to the French, who did indeed get themselves in a pickle, to our advantage it turned out.

    2. @y, Everything that has happened or been said, even one minute ago, is historical. Just because Adams made his statement only 215 years ago doesn’t make it invalid. Paul Krugman probably made a statement today that makes no sense in economic terms.

    1. @JBH, A figment of the imagination can not suffer. A dollar can no more suffer than the letter A. It’s a symbol, an aide memoire, a visible and tangible representation of value, just as the letters of the alphabet are representations of sound. Why do we have banks? Good question. If I remember correctly, in Germany after the war the Post Office stored and passed out money. I think the P.O. still handles money orders, which personalize money, as do bank checks.

  3. The true cause of the 1970’s stagflation was the
    loss of monopoly control of the price oil, which
    increased 10x from 1970 to 1980.

    It meant that the economy became less efficient.
    If we use a bathtub analogy (govt spending from
    the faucet and taxation from the drain), the sides
    of the tub were squeezed and the overflow appeared as inflation.

    The only recourse was less govt spending, more taxation,
    more efficient utilization of less oil resources, or
    reduction in the oil price (which is what happened
    from 1980 to 1998).

    1. @TofuNFiatRGood4U,

      “The only recourse was less govt spending, more taxation, more efficient utilization of less oil resources, or reduction in the oil price (which is what happened from 1980 to 1998).”

      It must have pure accident then that the U.S. economy recovered so robustly after Reagan cut taxes? Going back to your bathtub analogy which I like, the MMT interpretation is to drain the tub via higher taxes or spending cuts. However from a Supply Side perspective, lower marginal tax rates increased incentives to work, save and invest which increased the demand for money and brought greater supply to the market.

      Spending was not cut during the Reagan years because there was a big boost in military spending. Nevertheless, deficits came down in absolute terms and as a percent of GDP because tax revenue was expanding so quickly with the economic boom of the 1980s.

      Regarding the drop in oil prices during the 1980s, was it because of deregulation, greater physical oil supply or the very strong dollar? Or was it some combination of these factors?

      1. @Ed Rombach,
        Cullen Roche was the 1st person to use it in my reading;
        not sure if it’s his idea or he got it from someone else.
        (I’m not plugging Modern Monetary Realism, BTW.)

        Warren Mosler has written in the past about natural gas deregulation (1978) and my recollection from gregor.us
        (Gregor MacDonald) is that the last wave of ‘easy-to-find-and-extract’ oil deposits were discovered in the late 70s – mid 80s, which caused OPEC to end up drowning in oil. He makes an excellent point that increasing energy density (oil > coal >wood) is what drives living standards/prosperity. So I like to think of cheap energy relaxing the sides of the tub (allowing more economic activity), rather than it being a ‘tax break’. (Gregor MacDonald otherwise appears to have an Austrian viewpoint, BTW). So Regan, Bush I and Clinton all benefited from this, while Nixon, Ford and Carter all suffered. (What Regan’s budgets favored is just a political decision.)

        The different sectors are like partitions in the tub–if the govt sector evolves towards a surplus from a deficit (which implies less spending or more taxation), the private sector must decline (assuming the export sector stays the same).

        Demand leakages (Warren Mosler’s ‘800 lb gorilla’) are chambers in the sides of the tub where demand associated with 401(k) funds, unspent income, etc, etc, is temporarily sequestered.

      2. @TofuNFiatRGood4U, Sorry – one more important thing: the “output gap” (the under-utilization of the economy’s resources) is the distance from the ‘water level’ (current economic activity) and the top of the tub.

        A government should be able to spend into most/all this gap and not generate inflation.

      3. @TofuNFiatRGood4U,

        “(Gregor MacDonald) is that the last wave of ‘easy-to-find-and-extract’ oil deposits were discovered in the late 70s – mid 80s, which caused OPEC to end up drowning in oil. He makes an excellent point that increasing energy density (oil > coal >wood) is what drives living standards/prosperity.”

        I see energy as part of the overall technological stage of evolution in economic development in any given society… and by extension to the world economy as a whole. So, to your energy density model I would add the following…. (thermonuclear fusion energy > current fission nuclear energy > oil > coal > wood… not sure if solar and wind power should go before or after wood. That said, easy-to-find-and-extract oil deposits of the 1970s is a lot different than today owing to the technological advances in extraction technology. Reports indicate that domestic U.S. oil production is on track to increase 7% this year to an average of 10.9 million barrels a day. If this continues, since so much of our trade deficit is due to imported oil I reckon that the federal budget deficit such as it is will increasingly provide less stimulus to our trading partners and more to the U.S. domestic economy.

      4. @TofuNFiatRGood4U, Not to turn it into a physics discussion, but I think better is:

        Uranium = Thorium >>>>>> oil > coal > wood.

        Fusion is really irrelevant. It is not needed, U and Th can power civilization for millenia. It isn’t high energy density either, check the size and potential power output of a tokamak (if it can ever be made to work) if you don’t believe it.

        We have the answer now, just not pursuing it enough. More irrational human behavior. The country most likely to lead the way is China.

      1. @MRW, thanks very much for this–had not yet watched this presentation. This was when Volker was targeting the quantity of money (if I recall rightly–please correct me if I’m wrong) before he gave up and switched to targeting just the interest rate. Nice to hear a more specific description of what was happening. Would be interesting to read more about those events.

        Ed Rombach: concerning fission, http://energyfromthorium.com/ looks very promising.

  4. “That is to say, even in the extremely unlikely event that the government had to print so much money to get out of its debt….”

    Looks to me he still does not understand the system is a loop.
    Debt relative to gdp may decrease, but in absolute sense it almost never decreases.

  5. Warren,
    Another sign that there is more and more “comfort” for politicians to come out with MMT policies?
    Looks to me their “We cannot say that” is disappearing as snow for the sun.

  6. It will be interesting to see where Mr. Gobry’s intellectual journey takes him and at what idealogical barrier his journey stops. As noted above it is not clear at all that he understands macro fundamentals, and his discussion of inflation is simplistic. Not knowing anything about him, my own guess would be he will get hung up at the taxes/aggregate demand/unemployment concept.

  7. The Congress, which is the designated manager of the currency, has an interest in pretending that money is a scarce resource. Otherwise, congress critters would not be able to dole out punishments and rewards to obstreperous voters and supporters. While the threat of administering punishments to a non-compliant electorate cannot be too blatant, incumbents have gotten away with the argument that their constituents will be protected and only some “other” is to be punished. For a long time, the “other” was either foreigners or some undeserving group. More recently, as various “protected classes” were created, the groups upon whom punishment was to be visited assumed a religious taint. Female sinners were a logical next step. There’s no question that lots of American females have not been behaving and deserve some punishment. That they are a majority of the voting population somehow got forgotten. Or maybe the difference lies in the fact that punishments which are impossible to carry out (forcing a woman to carry a fetus to term) weren’t considered serious until women were to be deprived of a real benefit — i.e. contraception. The Congress critters ran up against the same problem they encountered when the payments to the elderly and inform were threatened with elimination.
    All the more reason for Congress critters to get rid of benefits. If they can’t be used to threaten, what good are they? If Congress critters can’t threaten to punish the non-compliant, how are they to stay in power? The tradition cupboard of property rights they used to distribute (water, logging, fishing, etc rights) is getting bare. Not to mention that environmentalists have forced significant set asides.
    Why do Congress critters lust for power? Because that’s what they’ve always had. Despite the Constitution assigning them duties and obligations, mostly the Congress was focused on making rules and regulations and doling out resources to keep themselves in office. The Tea Party had their number, but they didn’t know it. Occupy identified the banksters, but not that they’re only henchmen.

    So, why is Barack Obama making nice with the banksters? I suspect it’s an effort to co-opt them, to get them on his side. Because in a contest with the Congress the Executive is at a disadvantage because they do have the bucks.

    The 2010 was a disaster for Congress. The combination of the Tea Party and the corporate barons brought 85 freshmen to the House, the second largest turn-over ever. Nobody’s talking about the advantages of incumbency this time around. Besides, the anti-earmark mania made it hard to promise rewards. So, all they are left with is threats of punishment for …..whom? Iran, Syria, women, old people, hispanics, students, gays????? Some people are buying it out of habit. Some habits die hard.

    1. Money is a scarce resource to almost all people. So it must be —perhaps naturally— to a government of the people, for the people, by the people. The chances are, for many people, saying otherwise is tantamount to conceding monarchical powers to Washington. That makes me wonder what the NRA’s take on MMT might be.

    2. @Monica Smith, Female sinners? What planet are you observing? The US government is PAYING women to leave their men. Never before in world history has a state had the audacity to pay women to break up their families and then confiscate, without judicial process, the income of the men involved. Divorce judges in the US award half of the wealth of men to women, regardless of what their contribution, if any, has been to its accumulation. Golfer Fred Couples was ordered to pay support for his wife’s polo ponies!

    3. @Monica Smith,

      “Or maybe the difference lies in the fact that punishments which are impossible to carry out (forcing a woman to carry a fetus to term) weren’t considered serious until women were to be deprived of a real benefit — i.e. contraception.”

      Monica – Why do say that women are being deprived of contraception? No one is talking about depriving women (or men) of contraceptive rights. The real issue is about who shall pay for it, which is a big difference.

  8. First, the Yen is not the reserve currency yet it has been the world’s strongest among major industrialized countries. While the author understands that we will not go broke, he’s confusing the reserve currency issue.

    Second, while the Tea Party Republicans are indeed paranoid about the deficit, their solution (at least Paul Ryan’s) is a 20% across the board tax cut that will allow the economy to grow. The democrats only concern is allowing taxes to go up on the wealthy and remain the same on the middle class. Even if the Republicans are right for the wrong reason, I prefer that to being wrong for the right reason…assuming it is actually right!

    1. @Ivan,

      Agreed. I think Romney is the closest thing we’ve got to an MMT candidate in this cycle. I expect him to follow in Reagan’s and W’s footsteps on tax cuts and deficits, which is to cut taxes first and not worry about the deficits.

      Also, if Warren changes the backronym of MMT to Mormon Monetary Theory, Mitt is more likely to adopt it. Mormons are actually quite flexible when it comes to new revelations.

  9. Just read this on your home page: The funds to pay taxes and buy government securities come from government spending.

    How about “by definition, deficits are self funded”?

      1. @walter, The most surprising thing is the uncanny ability of the Japanese in the 80’s and the Chinese now to keep finding those dollars to lend to us so we can spend!

      2. Is this sarcasm or what? They apparently and simply save/invest in dollars, they don’t lend us, we don’t need to borrow from them.

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