Debt-Ceiling Madness

The debt ceiling is like that monster hiding under your bed—it only has power if you believe in it. The nation needs to turn on the light and crouch down and have a quick look under the mattress—there’s nothing there.

Why? Because it is absolutely impossible for the United States to be forced to default on debt in our own currency. This is not an opinion or a theory, it’s a fact. Nor do you have to take my word for it. Even the small sampling below shows widespread support from financial investors, academics, and government policy makers:

• “In the case of governments boasting monetary sovereignty and debt denominated in its own currency, like the United States (but also Japan and the UK), it is technically impossible to fall into debt default.” Erwan Mahe, European asset allocation and options strategies adviser
• “There is never a risk of default for a sovereign nation that issues its own free-floating currency and where its debts are denominated in that currency.” Mike Norman, Chief Economist for John Thomas Financial
• “There is no inherent limit on federal expenses and therefore on federal spending…When the U.S. government decides to spend fiat money, it adds to its banking reserve system and when it taxes or borrows (issues Treasury securities) it drains reserves from its banking system. These reserve operations are done solely to maintain the target Federal Funds rate.” Monty Agarwal , managing partner and chief investment officer of MA Managed Futures Fund
• “As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational.” Federal Reserve Bank of St. Louis
• “A sovereign government can always make payments as they come due by crediting bank accounts — something recognized by Chairman Ben Bernanke when he said the Fed spends by marking up the size of the reserve accounts of banks.” L. Randall Wray, Professor of Economics at the University of Missouri-Kansas City and a Senior Scholar at the Levy Economics Institute
• “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.” Alan Greenspan
• “In the case of United States, default is absolutely impossible. All U.S. government debt is denominated in U.S. dollar assets.” Peter Zeihan, Vice President of Analysis for STRATFOR

It can’t happen—can’t, that is, unless we believe in it.

In addition, government deficits must be, by definition, private sector surpluses (and government debt = private sector wealth). While that doesn’t mean that there are no consequences to deficit spending—indeed, that during World War Two caused inflation—it does mean that any current arguments based on the idea that deficits are inherently bad or that the US could be forced to default are completely without merit.

What will be the outcome of the current battle playing out in Washington? Who knows. The only thing we can count on for sure is the fact that the true casualties will be those the government is supposed to be serving in the first place.