“Sovereign Default” is an Oxymoron With Fiat Money

Again, there is no risk – none, zip, nada – of default by the US (or any other currency sovereign nation) on their government bonds.  This does not mean that these governments can run unlimited deficits of unlimited amounts without any consequences.  It means the consequences don’t include default on government bonds.  If the government spending were truly too much, the consequence would be an overstimulated economy where aggregate demand exceeds available real resources. It does mean that the national debt does not ever have to be “paid off”.  It also means that deficits now do not imply “higher taxes in the future”.

Today’s support comes from Bill Mitchell ‘s Billy Blog and  Steven Major of the Financial Times.

In his FT article – ‘True sovereigns’ immune from eurozone contagion – HSBC economist Steven Major opens with the following statement:

There are plenty of doomsayers who think it is only a matter of time before the sovereign risk crisis spreads from the eurozone to other countries, including the US, UK and Japan.

This is not going to happen in my view. That is because the obsession with public debt ratios fails to distinguish between different levels of sovereignty. The US, UK and others can maintain high public debt ratios for longer, especially given the amount of deleveraging being carried out by the private sector.

Not all sovereigns are the same. The US, UK, Japan and Canada are examples of what I call “true sovereigns”. For these countries there is zero default risk. Investors should not worry about credit fundamentals, as they will always receive their coupons and original investment on redemption.

This is so contrary to what is being peddled each day in the financial press that a medal for bravery should be awarded. I just did that Steve(!)

Steven Major chooses to term a government in the former category a “true sovereign” because it:

… can issue freely in its own currency, has full taxing power over the population and ultimately, if required, can create more of its own money. None of this means that true sovereigns can afford to be profligate, far from it, but it does mean there is no externally imposed timetable on fiscal retrenchment.

I am 100 per cent in agreement with this construction.

2 thoughts on ““Sovereign Default” is an Oxymoron With Fiat Money

  1. The moment that the United State went to a total fiat money system disconnected from any commodity (gold, silver, etc.), it was bankrupt.
    The current fiat money system precludes debt satisfaction. If every “dollar” printed was collected up and given back to the Fed (principal paid), the accrued interest would remain outstanding. As the sole source of “money” is the Fed, the interest owed would have to be borrowed from the Fed and then paid back as the interest payment.
    This new loan would then accrue interest. There would be no usefulness to the “money” as a medium of exchange as all of it would be in the vaults of the Fed (or shredded, or burnt, whatever).
    Handing over all the “money” back to the lender would also pull the rug out from under the current fractional reserve credit system. As the amount of credit in circulation/outstanding is a multiple of the amount of “money” held as the reserve basis of the credit, all that would vanish unless a totally reserve-free credit system supplanted the paper “money”-based credit system now in place. This would abolish all pretense of a physical “money’ system. “Money” (credit evidences, either physical cash or account balances) would be bank-issued rather than Fed (central bank) issued.
    The problem of “money” is in part that there is no possible way to have a fixed standard of value. Value is highly subjective. Value cannot be measured objectively like length, weight, or time. If gold was the standard (lawful tender) of exchange, there still would be no fixed standard of value. If I am not hungry, bread is of little (like NO) personal value to me except in anticipation of becoming hungry again soon. If I have no car or lawnmower, gasoline has no personal value to me; in fact, a negative value as it is noxious and a fire hazard.
    An ideal currency would be a fiat currency that was regulated to hold its value in exchange as nearly constant as possible. The volume of currency units would be increased (loaned out or spent into circulation) when the prices began to increase, and decreased (recalled or taxed out of circulation) when prices began to decrease. This would require constant sampling of all prices and systems placed into effect to prevent seasonal variations in prices, changes in demand, changes in supply, and many other factors to be taken into consideration. Unfortunately the temptation to loan out “money” to gain the interest, and the temptation for politicians to spend to buy votes is too strong for mere humans to resist.
    We are fundamentally a bunch of thieves, restrained only by fear of punishment, humiliation, ostracism, and perhaps an angry God. We all want as much of the things we desire as we can get for as little effort as possible, as long as we do not thereby begin to stink among the community.

    • That is only an issue if you attempted to pay the FED back all at once.

      The interest the FED collects goes back to the economy because they too must pay taxes, wages and utilities. If the market doesn’t have enough money for it, they simply increase prices until the FED is forced to pay them enough, or try to continue banking without water and electricity, or workers.

      And the whole point of the fiat currency is that it can be created and destroyed by paying the debt off – in order to control the amount of money as compared to just printing it or digging it up from the ground. When old debt is paid, new debt is continuously created to maintain the amount of money on the market.

      Money as debt is a guarantee that the party who made the money in the first place must also accept it back as payment, because they need to pay the debt. Otherwise you could just arbitrarily create money out of something and once you bought goods with it, you never have to accept it back. The selling party might as well consider themselves robbed once they figure out that you don’t actually need the money back.

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