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.