No, We Can’t Run Out of Money: The St. Louis Fed Edition

I often argue that, because the U.S. federal government is a currency issuer, not a currency user, concerns over insolvency are ludicrous (and you’re going to need a big ass tow-truck for the repossession….). But if you don’t believe me, how about the St. Louis Federal Reserve (h/t Mike Norman; boldface mine):

One fair charge is that, in the current situation, we cannot rely on GDP growth to magically wipe away the debt. In particular, the assertion that a causal link exists between high debt and low growth is particularly worrisome, as it would imply a reinforcing cycle between low growth and rising debt.5 But this is where it is important to remember that the government differs critically from businesses and individuals.

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.6 In this sense, the government is not dependent on credit markets to remain operational. Moreover, there will always be a market for U.S. government debt at home because the U.S. government has the only means of creating risk-free dollar-denominated assets (by virtue of never facing insolvency and paying interest rates over the inflation rate, e.g., TIPS—Treasury Inflation-Protected Securities). Together with the unusually high, but manageable, level of the current debt, these facts imply that the current U.S. government can wait out any short-term economic developments until long-run growth is restored.7 Further, without an immediate need to drastically reduce the debt, the mechanism between high debt and slow growth loses most of its credibility.

For the scientists who worry about funding budgets (are there any who don’t?), this seems somewhat relevant.

An aside: I disagree with the authors about the reasons for reducing long-term deficits. Crowding out in terms of investment capital (as opposed to limitations in real resources, human resources, or infrastructure) rarely happens as James Livingstone describes in Against Thrift. The evidence seems that accumulations of capital typically lead to inflationary or speculative bubbles.

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