(Article on Forbes.com.)
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.
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.
Austrian perspectives anyone?
Seems he's right about a Greece-style crash being basically impossible, based on the reasoning. But if the US ever inflated enough, and the central-banks of the world ditched the dollar in a reserve-currency coup that China would love to make happen to take its place with the Renminbi, or Europe with the Euro for that matter, that might be equal to or even worse than a Greece-style crash.
Reserve-currency status carries with it certain responsibilities not to inflate that other currencies don't have. Ever inflation damages the reason those other banks are holding dollars--as reserves. Piss them off enough, they could make a coordinated move.
Isn't China also printing money at an alarming rate? Why would people ditch the dollar for something going down the same path?
Well that's the thing, no one really trusts the Chinese, and why would you. They're economic newbs, barely industrialized. Their only plus factor is having a billion people.
But if having more people was the key to creating wealth then they should've been the richest country on earth all along, them and India. So clearly there's another important factor.
That other factor is investment and productive capital. You can't make up for centuries of capital investment overnight.
China's probably trying to inflate to keep up with our inflation so their prices to us don't rise and choke off our imports of their goods, since they've been trying to keep the renminbi close to the dollar.
Wow this dude is psycho.
Keep printing money and watch people flock into another currency. Not to mention that the problem is not just "paying back the debt" but the opportunity cost associated with Socialism.
Not sure about "the official" perspective, but from human action point of view - are the creditors dummies? Are they perfectly happy to receive profit in nominal terms, while suffering losses in real terms? In other words, the real interest rate is a combination of the nominal one and the price inflation rate (or rather expectation of it). Inflate fast enough, and witness the nominal interest rates rising (that's assuming the government's creditors are actually lending money for profit, and that they do not receive it from the printing process themselves).
The salient question then is how likely are other central banks to switch to another reserve currecy?
The author seems to have faith that it's such a remote possibility as to not even be worth mention as a possibility. But is it?
While the US is the world's premiere military power it would seem to be the safest currency to invest in. So perhaps one could make an argument that as America's military supremacy goes, so goes its currency. Which would seem to indicate that the dollar's reserve status is secure for at least decades to come.
Alternately, central banks could simply begin diversifying and do a soft reserve-replacement over time.
But even if we couldn't pay our bills one day, a small printing would do it, at the cost of some inflation. Could be death by a thousand cuts at that point.
The US does not have the most stable economy, there are various other fiat currencies with comparable or better track records.
I guess we'll start to slowly lose our reserve currency status, just like our credit rating was slowly but surely lost.
I suspect one of my dogs could have written something more in depth and less simplistic than that Forbes article.
The problem is much, much, much more complicated than "No worry, your bonds are safe because Uncle Sam has the authority to print money to pay you with". If so why did Argentina default on her debt leaving a wake of economic devastation felt to this day? After all they had to do to keep up their commitments was to print more money. As easy as that.
The first "problem" is what economic history tells you. When you get to the point of having problems servicing your debt (which nowadays means something as pitiful as having to pay 4-7% of the budget in interests, we'll get to that later) it means you have already bled the country dry. It means the "wealth consumers" have won the battle with the "wealth producers" and have effectively siphoned money from the most productive part of the society into improductive ventures where capital is destroyed. Greece is a perfect case: people with capital couldn't invest them productively at home. They had to either send it abroad or hide it underground (where it cannot be effectively used) to avoid seeing it destroyed. To make up for this shortcoming of domestic capital, governments usually turn to foreign investors. Problem is foreign investors don't go into countries like Greece or Italy, well known for the rapacity of their governments, out of a whim or because the prime minister sent them a nice letter. They want precise, written guarantees about their investments. Problem is governments and their cronies (mostly unions) are very prone to breaking these guarantees. When it happens, foreign investors just use breach of contract to get their capitals (legally) out of the country and other potential investors just stay clear.
The second problem is what inflation does to capital and consumption. Modern bureaucrats have devised all sorts of trickery to keep CPI and IPI nominally low, mostly to wow the economic illitterate and their banking pals with their skills at "keeping prices stable". However reality is completely different. In periods of economic instability, inflation always goes up because governments cannot resist the temptation of using the printing press. This goes from the highly sophisticated, like Japan "exporting" inflation through the yen carry trade to the blunt, like the Iranian government handing people wands of cash to "boost consumption", but it's always the same. Rothbard had this covered very well. Usually salaries and incomes fail to keep up with this hidden inflation: most contracts are written around official CPI and IPI figures. Capital and consumption get eroded: it's only a matter of time. Propaganda and trickery only get you so far.
The third problem is how currencies are linked one to another. In the years between the abolition of the Bretton Woods treaty and the birth of the euro there were three main currencies the others were linked to directly or indirectly : the US dollar, the German mark and the Japanese yen. Except for the Voelcker years, the dollar has always been a very inflation-prone currency. The same applies to the yen, though the pace of money creation somewhat slowed down after the Bubble Economy burst in 1988 because of serious inflationary concerns. The mark, however, was an oasis of relative monetary stability. Once the mark was taken care of (like a Mafia don takes care of his enemies), the last restraint was removed. Moreover central banks are linked between them by a long list of treaties and agreements. When the Fed started QEI, it didn't act alone. When the ECB started enacting its own version of QE last year (still ongoing), it didn't act alone. When the yen experienced wild fluctuations in the aftermath of the Fukushima disaster, other central banks intervened to quell the instability. The end result is always the same: more inflation whatever the currency. If you want definitive proof, there's only one currency to look at: gold.
The fourth problem (I could go on but I'll stop here) is how government budgets are strained nowadays. Budget surpluses are almost unheard of in developed countries. If governments were private entities they would be always flirting with insolvency or be downright bankrupt. Expenses are non-negotiable, meaning they cannot be cut. In this situation the 4-7% I quoted early as the maximum for debt servicing is perhaps excessive, especially with countries with very strained budgets and which have bled the productive sector dry already (Italy, Greece, Spain etc).
The reason that no one can know this is because he is affectively saying "I can get in the minds of everyone who is involved with money and know what they will do". He can't. He's assuming everyone else thinks like he does and will continue to no matter what. Support of the fiat currency is based on faith. Bank runs and bond sell-offs are based on emotion and if there is one thing I know, it's that humans are emotional.
So, basically, his reading relies on central banks around the world acting against their own interest in the long term by continuing to hold dollars. This relies on a combination of factors which makes the dollar, for now, the most reliable currency, but should that change the risk would be palpable of major inflation as banks began, slowly, dumping the dollar and diversifying.
He assumes the dollar will always be minorly inflated. But small inflations lead to large ones. If the dollar were in double or triple digit inflation, there's no way his reading would hold true, at some point anyone would dump the dollar, because inflation really does devalue wealth held in dollars.
Lastly there's a new crisis on the horizon: uninflateable currencies like bitcoin which no one controls and which could begin to allow agorist networks of uncontrollable side-markets.
The more valuable agorist side-markets become, the less valuable the dollar may become. The harder the US tries to crack down on certain valuable transactions, like free-market healthcare and drug purchases, the larger and more influential agorist marketplaces become.
At some point, such marketplaces gain legitimacy, much in the way that, say, PirateBay has legitimacy in Sweden.
Which means that socialized healthcare in the US will actually accelerate confidence away from the dollar as it pushes citizens into black-market transactions with healthcare providers. It has the dual effect of delegitimizing laws against free-market healthcare by the obvious unjustice of them, and legitimizing both healthcare-agorism and alternate currencies used to pay into these side-markets, such as bitcoin.
h.k.:Keep printing money and watch people flock into another currency.
Not if the government declares it illegal for people to own other currencies.
h.k:Not to mention that the problem is not just "paying back the debt" but the opportunity cost associated with Socialism.
What definition of "socialism" are you using here?
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Autolykos: h.k.:Keep printing money and watch people flock into another currency. Not if the government declares it illegal for people to own other currencies. h.k:Not to mention that the problem is not just "paying back the debt" but the opportunity cost associated with Socialism. What definition of "socialism" are you using here?
Disagree, rich people can easily move in such a scenario.
To me socialism is pretty much anything not considered Austrian. Since we are the most disciplined school of thought in Economics.
Anenome:Seems he's right about a Greece-style crash being basically impossible, based on the reasoning. But if the US ever inflated enough, and the central-banks of the world ditched the dollar in a reserve-currency coup that China would love to make happen to take its place with the Renminbi, or Europe with the Euro for that matter, that might be equal to or even worse than a Greece-style crash.
As Gary North has pointed out recently, hyperinflating the US dollar will do nothing to allay the current unfunded liabilities of the US federal government, as those are ongoing. To allay those, the US federal government will have to reduce or eliminate current entitlement programs, which de facto constitutes a (majorly) partial default.
Anenome:Reserve-currency status carries with it certain responsibilities not to inflate that other currencies don't have. Ever inflation damages the reason those other banks are holding dollars--as reserves. Piss them off enough, they could make a coordinated move.
The real point behind a currency enjoying global reserve status is arbitrage, plain and simple:
A reserve currency, or anchor currency, is a currency that is held in significant quantities by many governments and institutions as part of their foreign exchange reserves. It also tends to be the international pricing currency for products traded on a global market, and commodities such as oil, gold, etc.[citation needed] This permits the issuing country to purchase [commodities traded on global markets] at a marginally lower rate than other nations, which must exchange their currencies with each purchase and pay a transaction cost. For major currencies, this transaction cost is negligible with respect to the price of the commodity. It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others.
This permits the issuing country to purchase [commodities traded on global markets] at a marginally lower rate than other nations, which must exchange their currencies with each purchase and pay a transaction cost. For major currencies, this transaction cost is negligible with respect to the price of the commodity. It also permits the government issuing the currency to borrow money at a better rate, as there will always be a larger market for that currency than others.
Actually I think it's about more than just arbitrage. I think it's also about power relations. With the US dollar enjoying global reserve status, it's easier for the US government to impose its will on the rest of the world. Privileges for US and allied corporations is apparently a major part of its will. So the global reserve status of the US dollar is a (if not the) major lynchpin of the US military-industrial complex and so forth.
With this in mind, I think a lot of the foreign-policy moves by the US in recent years make a lot more sense. Saddam Hussein and Muammar Qaddafi both wanted to withdraw from the so-called "petrodollar" (essentially a term that refers to the global reserve status of the US dollar). The Iranian government has also indicated that it wishes to do this, plus it seeks nuclear power-generation capability, which would give it the means to build nuclear weapons in the future. All of these things have been correctly perceived by the people running the US and its empire as a threat to their power. They can't tolerate even one meaningful/lasting challenge to the global reserve status of the US dollar. Think of it like a financial domino effect. Should any major foreign government rebel against the "petrodollar", others may follow suit, and so on. Every government which does so chips away at the ability of the US government to project its power and thus enforce its interests.
To me, the big question is how the US government will respond once it perceives itself as starting to lose these abilities. My worry is that it won't go quietly into the night. If it decides that it's better to burn out than to fade away, it might bring the rest of the world down with it.
h.k.:Disagree, rich people can easily move in such a scenario.
Not if the government declares it illegal for people to leave. (Yes, I think it could all too easily come to that.)
h.k.:To me socialism is pretty much anything not considered Austrian. Since we are the most disciplined school of thought in Economics.
I've never seen that definition of "socialism" before. Just so you know, that's not the Austrian-school (or at least the Misesian) definition of "socialism".
Autolykos: h.k.:Disagree, rich people can easily move in such a scenario. Not if the government declares it illegal for people to leave. (Yes, I think it could all too easily come to that.) h.k.:To me socialism is pretty much anything not considered Austrian. Since we are the most disciplined school of thought in Economics. I've never seen that definition of "socialism" before. Just so you know, that's not the Austrian-school (or at least the Misesian) definition of "socialism".
Do you really maintain that making something illegal actually prevents it from taking place? What of the Black Market, then? Do you really believe people will stop using alternative currencies simply because it is illegal? I could also ask, do you really believe that people stopped drinking alcohol during prohibition?
As for socialism, in its most basic definition, it is government-owned or government-controlled business. Perhaps Dr. Ron Paul's definition can better serve our purposes here: "Socialism is a system where the government directly owns and manages businesses."
thetabularasa:Do you really maintain that making something illegal actually prevents it from taking place? What of the Black Market, then? Do you really believe people will stop using alternative currencies simply because it is illegal? I could also ask, do you really believe that people stopped drinking alcohol during prohibition?
... No, I don't maintain that making something illegal actually prevents it from taking place. However, when the government declares something to be illegal, that typically means its enforcement agents will then go out and coerce people against doing it and punish them if caught or even merely believed to be doing it. Of course, that doesn't make it physically impossible to engage in the activity in question - but it does tend to make it (much) more difficult to engage in it.
Autolykos: h.k.:Keep printing money and watch people flock into another currency. Not if the government declares it illegal for people to own other currencies.
They'd move into Bitcoin then, and other blackmarket currencies and ways of circumventing such a law.
I'd imagine that the government would declare Bitcoin to be a kind of foreign currency. Yes, I'd expect black markets to form, but I think those would become increasingly difficult under an increasingly panopticon-like surveillance state.
Auto: Interesting point on arbitrage and transaction costs. I can't imagine though that it's a big enough factor to drive entire wars.
The US may be making political moves out of defense of the dollar's reserve currency status because it realizes now what a threat it would be to lose that status.
Which is to say that the pain of losing that status probably figures much higher in politician's minds than the marginal benefits of the status currently, which don't directly accrue to politicians, whereas loss of reserve currency status would be blamed on politicians.
I hope that we can replace middle-eastern oil production in the next 20-50 years with biodiesel and that would make things calm a bit perhaps.
Anenome:Auto: Interesting point on arbitrage and transaction costs. I can't imagine though that it's a big enough factor to drive entire wars.
Alone, no. That's why I added "Actually it isn't just about arbitrage per se. [...]"
Anenome:The US may be making political moves out of defense of the dollar's reserve currency status because it realizes now what a threat it would be to lose that status. Which is to say that the pain of losing that status probably figures much higher in politician's minds than the marginal benefits of the status currently, which don't directly accrue to politicians, whereas loss of reserve currency status would be blamed on politicians.
I think the military-industrial complex is a much bigger factor than the politicians, although many (if not most) of the politicians are allied with it.
Just to clarify I was refering to government monopolies, sorry if I wasn't clear. Mises is not perfect Autolykos, so if that isn't the definition of Socialism then it should be.
Various "Libertarians" (George Mason Austrians for example) are just socialists in the long-run. Also the government is too incompetent from keeping most rich people from moving. And also other governments will use other currencies eventually.
h.k.:Just to clarify I was refering to government monopolies, sorry if I wasn't clear. Mises is not perfect Autolykos, so if that isn't the definition of Socialism then it should be.
No problem. I wasn't trying to argue or even insinuate that Mises was perfect, though. Also, it's fine with me if you use a different definition of "socialism", as long as I know what it is if/when we discuss things. There are no right or wrong definitions, only different ones.