What Is “A Government Sovereign In Its Own Currency”? Can the US "go broke"?

[Hannah Bell]

Deficit hawks in the United States envision a day when the United States Government will go broke, unless we curb government spending on entitlements. Well, governments can go broke in the sense that they can run out of money they need to pay their debts. But not all governments. Only governments whose monetary systems are commodity-based, such as those on the gold standard; those using fiat money, whose official fiat currency is issued by supra-ordinate authorities, and those who owe debts in a fiat currency issued by another governmental authority, can go broke.

But governments issuing their own fiat currency, subordinate to no higher authority, and owing no debt to anyone else in a currency other than its own can never go broke, or put another way, become insolvent. Because all they need to do to spend money is to issue credits to non-governmental sector accounts in banks, and all they need to do to pay back other Governments who have lent them their own currency, is to credit the accounts of the lender Governments in that currency, an action which they have full authority to do, absent any political constraint they have placed on themselves. We call such Governments “sovereign” in their own currency. And because they have this kind of sovereignty, they also have flexibility to facilitate economic activity to accomplish public purposes that Governments without that kind of sovereignty don’t have. But with that fiscal flexibility also comes fiscal responsibility – the responsibility to use the operationally unlimited spending power of an economically sovereign government to use that spending power for public purpose and not for private gain.

One of the Governments that fit these criteria and so can never go broke is the US Federal Government. Other common examples are Japan, Australia, New Zealand, Canada, Brazil, Argentina (though it was not always so), and the UK. Governments that don’t fit these criteria and that can go broke include the nations of the EU, such as Greece, Portugal, Spain, and Italy. Even France and Germany can go broke, since they no longer issue their own currency. Other examples include all those developing nations with loans from the IMF, the World Bank, and other international authorities that must be paid back in US Dollars, a currency they cannot issue; as well as state, local, provincial, and other governments subordinate to a super-ordinate currency-issuing authority such as California...

In systems where governments are economically sovereign like the United States, it is a big mistake to measure how the nation is doing by using deficit, the national debt, or debt-to-GDP ratios. Those measures, in fact, are the wrong things to measure, since the government is a scorekeeper that can always credit accounts when it needs to spend or pay what it owes or even set interest rates by flooding the market with reserves and driving short-term interest rates down to zero. In such systems, the money is always there for the non-governmental sector, not in the sense that the government has accumulated some physical stock of it, but in the sense that the Government can always spend or pay back by crediting accounts, regardless of any physical stock it may have. In such systems, fiscal responsibility is not about what the Government has accumulated either in debt or in surpluses, what it is about, however, is the Government’s success in spending on worthwhile things that produce actual value, rather than spending on worthless outcomes...


Issues about governments sovereign in their own currencies, as well as many others will be addressed, and answered at the Fiscal Sustainability Teach-In Counter-Conference.

It will be the answer to the Administration’s latest attempt to orchestrate a political process that will result in transferring more wealth from the middle class and the poor to the very well-off and the corporations.

Bloggers are picking this event up all over the netroots as are PR services. There’s also quite a twitter buzz about this. Search on "fiscal sustainability" and you’ll see it.

On Sunday night or Monday, perhaps before, a front page post at The Huffington Post by Lynn Parramore, will contain brief common sense statements by 8 economists, 7 of whom are speakers at the Conference on the primary myths in fiscal sustainability. Don’t miss that post. Don’t miss the Teach-In Counter-Conference. Help if you can. Follow-up afterwards by watching the youtubes and the documentary therealnews.com will be making about the event.

Carry the anti-deficit hawk message of the event. Since the United States Government is sovereign in its own currency: We. Are. Not. Running. Out. Of. Money. The. Money. Was. There. All. Along. The. Money. Is. There. Now. The. Money. Will. Be. There. Tomorrow.

Let’s make this the start of a movement that sweeps The Peterson Foundation, and the deficit hawks aside, and that forces this Administration to end this recession and rebuild our nation. Here’s the event web site with all kinds of information about it, our speakers, the issues being addressed, press releases, schedules, location, associated blogs and so on.



http://seminal.firedoglake.com/diary/43320


Who is "sovereign" & who owes who = who's got the power.

Who's telling you lies about our deficit = who's going to gain from cutting social spending.

[Hannah Bell]

1. k

[whyverne]

2. I get the feeling that a lot of people don't want to hear this.

Money is very "real" to them and they like to hear how the government's budget is just like their household budget and crap like that. It's nothing like that.

[Hannah Bell]

3. yep. it's a powerful, deep religion.

[blindpig]

4. They'll lose their religion

when their household economy becomes that of Greece, many are already there and yes, the denial is deep. But when a critical mass is reached and it become obvious that having such numbers in the soup cannot simply reflect personal excess but rather systemic exploitation that religion will pop like roadkill in the sun.

k&r

[Statistical]

5. Nobody is responding because the post is utterly silly. Ever heard of hyperinflation.

If you spend more than you have you got 2 choices
a) sell debt
b) print more money

Selling debt works but eventually supply exceeds demand and then interest rates start going up putting you in a trap where ever year (even with balanced budget) interest on debt takes up more and more of the budget.

Printing money well that is far worse. Technically Zimbabwe didn't go bankrupt but they anhiliated any form of wealth/prosperity in the country. So the US may never run out of money but it may reach a situation where a gallon of milk costs $22.50 a car cost $300,000 and a small entry level home is $4.5 million. Even if you wages go up 500% if inflation causes prices of goods to go up 1000% then you are worse off. Say you make $50K today. Under the 500%/1000% scenario your wages in nominal terms would be $250K sound rich right? Well the problem is the $250K only has buying power of $25K so your wages in real terms (adjusted for inflation) have been cut in half. Even worse any non-inflation paper wealth you own got equally destroyed. Imagine holding Treasury bonds when value of dollar falls 90%. Ouch.

By your "logic" we can spend unlimited money without consequence because we can never go "broke".
Technically Zimbabwe didn't go broke either.

Exchange rate between US$ and Z$



All these notes have same buying power at the time they were printed. The $Z 10 note and $Z 100 billion note bought the same amount of good (about $14 USD worth) at the time they were printed.

Yup no problems as long as the money is sovereign. Tell that to big Z and the $10 trillion banknote. Near the end inflation hit about 10,500% annually. That is prices going up by about 50% per month compounded monthly.

To put that into a metric most people can visualize. Gallon of milk at your grocery store:
Jan: $2.50
Feb: $3.75
Mar: $5.63
Apr: $8.43
May: $12.65
Jun: $18.98
Jul: $28.47
Aug: $42.71
Sep: $64.07
Oct: $96.11
Nov: $144.16
Dec: $216.24

[BzaDem]

7. I believe the OP is of the opinion that printing money to monetize debt doesn't cause inflation.

So while your argument is entirely correct, it is not going to convince the OP (though hopefully it will convince everyone else).

[Hannah Bell]

11. it does -- under some conditions. which don't happen to obtain at this particular moment in time.

[Hannah Bell]

10. "statistical" trots out the zimbabwe card. inflation is addressed in the OP.

you may not have understood it.

[Statistical]

12. Inflation isn't addressed in the OP actually the word "inflation" appear nowhere in the OP.

The risk of inflation right now is virtually nil. To much demand destruction has occurred for inflation to happen.

As such right NOW worrying about deficit is counter productive. To have inflation you must have demand growth and to do that you need the economy to grow and to do that requires effectively and quickly requires government intervention.

So deficit hawks are getting the horse before the cart. Sure we could cut the deficit to 0 tomorrow however that would likely tank the economy and destroy the very potential for inflation they were worried about.

However saying inflation isn't a risk right now is a lot different than claiming deficits are never a problem because the US can't go "broke"

Sure us can never go "broke" however increasing the money supply faster than the overall growth rate of the economy is inflationary. Inflation will happen eventually. Lastly if history is any guide inflation can appear suddenly and rapidly and once it gets away from you it can be very punitive to get back under control.

Anyone remember 15% mortgages and 30 year t-bonds in the early 80s?

[Hannah Bell]

13. my error, i posted several articles on the same topic, thought this was the one which

included comments re inflation.

and i agree with you on current deficit reduction = tanking the economy

& i see you concede that the US can't go broke. increasing the money supply faster than production is a different issue, but (when a country controls its own money) not really the problem. in that case, the problem would *really* be that production isn't keeping up with demand, for whatever reason.


ps: zimbabwe's problem is the underlying conflict between two international power nexuses, not printing money. printing money = response to that conflict, not the cause. there's a systematic attack going on, in case you didn't notice. it's not just some mad dictator off by his lonesome printing up money.

[Statistical]

14. True but big Z is just the most visual example of how problems can't be solved by printing money

There are dozens of examples of bad inflation and hyper inflation throughout history.

Yes US can't go broke.
Yes economic growth and govt spending is more important in short term than deficits.

However that doesn't mean deficits don't have consequences.



The fed had to jack fed funds rate to a staggering 18% in 1981 to bring inflation under control or we could have seen hyperinflation in this country and in our lifetimes. Yeah some luck bastards even locked in 30 year t-bonds in 1981 at 15% yield (they will finally be paid off by taxpayers next year).

Is the Fed today independent enough to make such a drastic call as jacking cost of money that high to bring inflation under control. I hope so but I am not totally convinced. They could delay and that be slow to respond and the consequences could be huge. Deficits are a necessary evil in bad economic times. The problem is the federal govt has gotten use to massive deficits even in the BEST OF TIMES and that is simply not sustainable.

You can't have spending outstrip revenue infinitely without consequence.
If you could everyone nobody would ever issue debt the simply would run up 10%, 20%, 30% deficits years after year for centuries without consequence.

[Hannah Bell]

15. You can't have spending outstrip revenue infinitely without consequence."

gee, the us has been doing just that for over 100 years.

investment = spending more than you take in.

spending no more than what you take in = stable state economy.

spending less = shrinking economy.


"The fed had to jack fed funds rate to a staggering 18% in 1981 to bring inflation under control or we could have seen hyperinflation"

a great caricature.

[Hannah Bell]

16. k

[Hannah Bell]

17. k

[ultracase24]

19. can you explain how one sells debt?

Im in debt. How do I sell my credit card debt? Seriously, Id like to know how our government does it so I can do it.

[Statistical]

31. The govt sells debts very easily (probably too easily).

The treasury looks at balance of receipts (money coming in) and outlays (going out) and projects how much the govt will be short for the next month that is the monthly deficit. It then also looks at what bonds are coming due (govt only pays interest on debt until due) and adds that in. This gives Treasury a number of how much debt it will need to issue to balance the books.

It holds an auction and offers debt at a set interest rate. If demand exceeds supply the interest rate gets bid down. For example we just had an auction today:
http://www.businessweek.com/news/2010-05-12/u-s-treasury-10-year-notes-yield-3-548-at-auction.html

The US govt sells debt almost every single week as bonds are constantly coming due and need to be paid off.
http://www.ustreas.gov/offices/domestic-finance/debt-management/auctions/auctions.pdf


Now applying that to you. Well your credit rating isn't as good as the govt and you don't have as much debt to offer so it would be difficult to attract a large number of creditors. Say you got $5000 in debt you sell it at auction and hopefully net better terms than your credit card terms. You use the cash to pay off CC and now you indebted to a new creditor. A real world example of this would be http://www.prosper.com (not endorsing the service just providing it as an example). You could list an auction for a 3 year loan and if successful use the cash you receive to payoff your credit card today and then make payment to your new creditors over next 3 years.

This illustrates a good point though. Selling new debt to pay off old debt doesn't make the debt go away it simply changes the terms of repayment. Instead of govt having to pay $2 billion this year they have to pay $2 billion in 2, 5, 10, 20, 30 years from now.

[BzaDem]

6. Of course we can go broke. This article is ridiculous.

Yes, the method of going broke is slightly different. But that doesn't mean there are no limits.

"to credit the accounts of the lender Governments in that currency" = printing money.

Of course we can print money. But it is not like printing money happens without consequences. If we print money, AND the money we print and give to the creditors gets spent on goods and services, it will eventually cause inflation.

Once creditors expect inflation, they will charge a higher interest rate to lend to us (by the percentage of inflation they expect). We could of course print more money to fund this higher interest rate, but that would just cause creditors to expect MORE inflation and to raise their interest rate MORE.

The end result is still a death spiral (resulting in ever-increasing prices and interest rates). If the speed of this continues to grow, people will eventually just stopped lending. Who in their right mind would lend to the US if they knew the purchasing power of what they would get back would be exponentially less? Would you lend to the US under these circumstances?

While I understand that you are of the belief that money can be printed and spent without limit without causing inflation, this is a point of view so ridiculous that it should not be taken seriously (and hopefully others will see it for what it is).

[orwell]

8. Of course this is true...

..."printing money" is not inflationary in and of itself. It is inflationary if it can not be met instantaneously by increased supply (through slack capacity either foreign or domestic.)

There is no magic in the "gold standard" or any other commodity standard. They have only ever acted as proxies for a productive capacity. In other words, they artificially constrained demand in relation to production. But this can also be achieved through other means, most notably taxation policy.

It will likely take decades for these economic truths to be realized as we are still wed to notions linked to the agrarian and industrial ages.

[asksam]

9. True...

... but eventually, it may come to the point where our creditors will simply not want to accept US dollars for loans. What do you do when they say "sure, we'll lend you the money, but we want to be paid back in Euros (or Yuan, pounds, etc.)?"

Because if we devalue our currency (see the Zimbabwe example above), then no one is going to want to accept dollars.

[kgnu_fan]

18. US has been broke for long time -borrowing money from the entire world

As soon as the US cut the military budget and stop sending jobs oversea, we may be able to have our own democratic "economy"....

[Hannah Bell]

20. compared to who?

http://en.wikipedia.org/wiki/List_of_countries_by_external_debt

[kgnu_fan]

21. We need to know our own military budget - they are not included in the equation right now

[Hannah Bell]

22. you're confused. "External debt" = all external borrowings, for military or anything else. If the

state borrows, it's there.

As of 12/09, it = about 13 trillion dollars, or about 89% of 2008 US GDP.

http://www.ustreas.gov/tic/debtad09.html

http://www.google.com/#hl=en&source=hp&q=us+gdp&aq=f&aqi=i1g10&aql=&oq=&gs_rfai=&fp=bd61394807512b3c


The US is not "broke". Unless you figure you're "broke" when you make $100K a year & owe $89K on your house.

[kgnu_fan]

24. Credit card is not working now...

You may make $100K a year and owe $89K on your house plus credit card debt $??? that your daughter charged without your knowledge - you have not received the statement YET.

[Hannah Bell]

25. even if the us owed double, it would still not be "broke," anymore than you would

if you made $100K & owed $200K.

The Treasury numbers I linked are up to date as of 5 months ago. There's no secret US borrowing going on that Treasury isn't reporting.

The US debt crisis is being hyped to benefit finance capital, & you fell for the con, that's all. fess up & move on.

Furthermore, there's no reason why the US has to finance its debt externally. It could easily finance it internally (by issuing sovereign credit, or from the savings in US institutions) -- as Japan has.

Japan's massively in debt, but most of it's financed internally, so you never hear Japan mentioned as one of these "spendthrift" nations "living beyond its means" -- even though its debt actually dwarfs a lot of other countries'.

BECAUSE IT CONTROLS ITS OWN CURRENCY & DOESN'T BORROW MUCH FROM FOREIGN BANKS.

"fREE TRADE" IS AN INVITATION TO SPECULATORS TO PUT YOUR COUNTRY & ITS PEOPLE INTO THE CASINO & MAKE BETS ON IT.

[BzaDem]

26. If our deficit doubled from what it is today, NO ONE would lend to us at single digit interest rates

The fact that we can print money doesn't solve this problem. Printing money to finance such an interest rate would cause inflation (whether you acknowledge it or not), and people would demand a correspondingly higher interest rate. We could of course print money to finance that higher interest rate, but then creditors would just demand even higher interest rates due to inflationary expectations.

This is really basic stuff. Sure, when there's an output gap (like we have now), printing money does not immediately cause inflation, because it is not spent right away. But when the gap closes and the money is spent, printing money (and the money previously printed that now gets spent) definately causes inflation, and other than you, this really isn't disputed.

[Hannah Bell]

27. 1) we don't NEED them to lend to us. that's a CHOICE made because it benefits

certain financial interests.

2) The NYT told us that: "While the immediate causes for worry are Greece’s ballooning budget deficit and the risk that other fragile countries like Spain and Portugal might default, the turmoil also exposed deeper fears that government borrowing in bigger nations like Britain, Germany and even the United States is unsustainable."

Fears that government borrowing in the United States is unsustainable should manifest themselves in higher interest rates on long-term government bonds. Unfortunately for this story, the interest rate on long-term government bonds fell last week. So, the NYT wants us to believe that investors are more fearful about the status of U.S. debt, but they were willing to hold it at lower interest rates?

Umm, no, this is a "night is day" line. The NYT is telling us something that it 180 degrees at odds with what we see in the world. There are large numbers of wealthy and politically powerful people who want to scare the public about the U.S. debt in order to advance their agenda of cutting Social Security and Medicare, but the events of last week point in the opposite direction. Investors still have great confidence in the ability of the U.S. government to pay its bills.

http://www.cepr.net/index.php/beat-the-press/


3) Sorry, you were wrong about the amount of debt the US holds, wrong about whether military-related borrowing is included in that figure, & you're wrong on the printing money issue. There are conditions under which printing money would be detrimental, but they don't currently obtain. There is no cause-effect relationship between "printing money" & inflation or bankruptcy. It all depends on what other conditions hold at the same time.

[BzaDem]

30. Sorry, you are wrong and no one (here or otherwise) agrees with you.

"we don't NEED them to lend to us. that's a CHOICE made because it benefits certain financial interests"

Wow. I guess you are advocating that instead of just building up debt and monetizing it (allowing us to pay down the debt and the fed to contract later), we simply print money and spend it without taking on debt. Have you ever considered what might happen to interest rates of loans between people? Inflationary expectations would be so high that there wouldn't be any PRIVATE loans between people at reasonable interest rates. Why would I loan you or anyone else money at a reasonable interest rate when I expected the purchasing power of my money to be worthless when I got it back? I don't think you standing on a street corner saying "but but but printing money doesn't affect inflation" will convince anyone to loan money to anyone else at reasonable interest rates under this scenario.

Your perscription would keep America permanently in a deep recession with high interest rates.

"Unfortunately for this story, the interest rate on long-term government bonds fell last week."

The idea that because at this particular moment, interest rates aren't high, somehow implies that if we DOUBLE our deficit, interest rates won't THEN be high, is so transparently silly on its face that it does not deserve further mention.

"There is no cause-effect relationship between "printing money" & inflation or bankruptcy."

:rofl:

Everyone knows you are wrong, and even you probably know that you are wrong. It is somewhat telling that no one is defending you.

[Hannah Bell]

32. sorry, plenty of people agree with me, & it's you who's wrong. \

[BzaDem]

34. If you say so.

After all, my goal is really not to convince you of anything, since I believe you secretly know you are wrong. My goal is just to provide information so people who see your "money grows on trees without consequence" BS have something else to read as well.

[William Z. Foster]

37. the assumption there

You assume that there is a somebody upon who we are dependent for money. You also assume that without some lender, there would be no money, no wealth, and that we must therefore submit to this "reality."

In other words, you just revealed that you see the financiers as properly superior and transcendent to the government and to the working people, and see both the working people and the government as rightfully dependent upon the financiers, since all depends upon getting money, you imply, and since the financiers must be seen as the source, the only source, of that money.

But without the state the financiers would be out of business, and without the working people they would be broke. Yet still you argue that we must do their bidding - that this logical and inevitable, inescapable.

You are defending oligarchy and rule by the few. You are arguing against the working people and against cooperative and sustainable communities. You are therefore arguing against the very things upon which the survival of the human race depends.

So how do we get the money we need? How, for example do the Greek working people get money? Simple. The working people organize and form an association - otherwise know as a "government" - that will fight for the working people and that will go and take back the money that the working people produced and that the financiers stole.

How do ya like them apples?

[hansberrym]

28. Does the Federal government bring in 14 trillion a year? No, the Federal governemnt takes in only

a fraction of total GDP by way of taxes. Your math is way off. It is more like owning a business that brings in $100,000 gross, of which you net $20,000, while having a debt of $100,000. The annual interest payment on the debt is something like $4,000 and rising fast because the bank doesn't see you as a good risk, plus each year you are adding to the principal rather than paying it down.

Also while it is true we could simply print our way out of the $13 trillion debt, that would set off inflation and make it even more of a long shot that we could pay the unfunded mandates that the government owes to federal and state pensioners and other retirees receiving benefits adjusted to inflation.

Unless you want to screw over the pensioners by freezing inflation adjustments while running the printing presses overtime, you would need to rethink this plan. And if you run the printing presses w/o freezing inflation adjustments, you are simply chasing your tail.

[Hannah Bell]

29. You don't spend your entire income on your mortgage, either.

The US enterprise produces 14 trillion in monetized "value". That's what makes the tax collection possible. Cut back on social spending = cut back on economic activity = cut back on the amount of taxes you can collect.

The rest of your post is packed with too many hidden assumptions to untangle with the small amount of energy I have tonight.

[hansberrym]

33. That is correct, you don't spend your whole income on the mortage, however

that fact cuts against your argument that there is no need to worry about the debt being only slightly less than GDP.

[Hannah Bell]

35. if i make $50K/yr I can borrow for more than $50K in house. doesn't undercut anything.

let me put it bluntly: this deficit panic is a con job.

[hansberrym]

36. Gov can collect in taxes only a fraction of GDP. The debt is alread far more than the Gov takes in.

if i make $50K/yr I can borrow for more than $50K in house.

Your above statement is not analogous to the situation of gov debt approaching GDP since GDP is not what the government makes.
Nor is the Gov debt a mortgage on an assest that could be sold to settle the debt.

And the unfunded mandates which are many times larger than the debt are due to mismanagement over decades.

[RB TexLa]

23. Using the IMF's SDR as a global currency with member nations deposits due on demand

would change a lot of deficit spending on the part of member states.