Pragmatic Capitalism

Practical Views on Money & Finance

Why the USA Isn’t Going Bankrupt….

The first question on the new Q&A page was:

“Can you explain why you don’t think the USA is going to have a Greek style debt crisis?”

Good question! This is one of those things that really confuse people because they understand how their own lives and businesses work as revenue constrained entities. But the currency issuer to household or business analogy doesn’t hold true. The reasoning is actually quite simple.

The USA has an institutional arrangement in which it is a contingent currency issuer. That is, while the Treasury is an operational currency user (meaning it must always have funds in its account at the Fed before it can spend those funds) it has the extraordinary power to tax and issue risk free bonds that the public will always desire to hold so long as inflation is not extraordinarily high. In addition, even in a worst case scenario, the US Treasury can always rely on the Federal Reserve to supply the funds necessary to fund its spending.  Therefore, the US government can be thought of as a contingent currency issuer who can issue the funds to spend.  This makes it very different from a household.

The US Treasury is a currency user, but the government as a whole can be seen as a contingent currency issuer by institutional design because of this implicit funding guarantee.  So the key here is that there’s no solvency constraint as in, “running out of money”. Greece doesn’t have this arrangement. In fact, since the ECB is essentially a foreign central bank there is a real solvency constraint. So banks and private investors have become hesitant to buy Greek bonds because of this flawed institutional arrangement and the lack of an implicit guarantee. It’s apples and oranges compared to the USA.

Of course, this means the constraint for the government is different from that of a household or business who can really “run out of money”.  The US government’s constraint is not that it will run out of funds, but that it could supply too much liquidity to the private sector thereby causing inflation.  So the US government’s real constraint is inflation and not solvency.  This is a vastly different issue than the one the US media usually harps on with regards to the budget deficit and the US government’s ability to “afford” its spending.

I would highly recommend reading the links at this page for more info.

Understanding the Modern Monetary System

Monetary Realism’s recommended reading page.

Can a Sovereign Currency Issuer Default?


Got a comment or question? Feel free to contact Cullen via email here or on Twitter here.
Cullen Roche

Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering asset management, private advisory, institutional consulting and educational services. He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance and Understanding the Modern Monetary System.

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