The U.S. is NOT Bankrupt – It’s Impossible

I’ll try to make this point again: the U.S. government can NOT go bankrupt.  It’s impossible for it to default on U.S. government bonds.  Just like it’s impossible for Japan, Australia, Canada, the U.K., or any of the other nations that: have a non-convertible, floating exchange-rate currency and that borrow funds in their own currency.  I’m far from the only one saying this. I know Bill Mitchell at Billy Blog and the folks at New Economic Perspectives have to be nearing exhaustion from  explain it over-and-over-and-over again.  But this time, let’s try the high apostle and saint of monetary policy, none other than the former 17-year chair of the Federal Reserve, Alan Greenspan (the bold emphasis is mine):

Central banks can issue currency, a noninterest-bearing claim on the government, effectively without limit. They can discount loans and other assets of banks or other private depository institutions, thereby converting potentially illiquid private assets into riskless claims on the government in the form of deposits at the central bank.

That all of these claims on government are readily accepted reflects the fact that 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. To be sure, if a central bank produces too many, inflation will inexorably rise as will interest rates, and economic activity will inevitably be constrained by the misallocation of resources induced by inflation. If it produces too few, the economy’s expansion also will presumably be constrained by a shortage of the necessary lubricant for transactions. Authorities must struggle continuously to find the proper balance.

It was not always thus. For most of the period prior to the early 1930s, obligations of governments in major countries were payable in gold. This meant the whole outstanding debt of government was subject to redemption in a medium, the quantity of which could not be altered at the will of government. Hence, debt issuance and budget deficits were delimited by the potential market response to an inflated economy. It was even possible in such a monetary regime for a government to become insolvent. Indeed, the United States skirted on the edges of bankruptcy in 1895 when our government gold stock shrank ominously and was bailed out by a last minute gold loan, underwritten by a Wall Street syndicate.

There. Any questions?   Lest you think I have played some sort of out-of-context trick with this quote, you can read the whole speech here. BTW, you’ll also find out that, yes, a gold standard is dumb and destructive.