I’ve been watching a number of the Republican National Convention speeches and while I like a lot of what I’ve heard I have to say that there seems to be one overarching and rather disturbing trend in the rhetoric. There is an endless discussion about the USA going bankrupt. Even worse, there have been endless comparisons to Greece and other European nations. This is an egregious misunderstanding of the way our monetary system works. I won’t regurgitate all of what I just recently wrote in this piece, but this is really rather simple so I’ll pull a snippet:
“The USA has an institutional arrangement in which it is a 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 is always able to harness the banks to procure funds. This is achieved through bond auctions in which the dealers are required to bid. The NY Fed explains:
Primary dealers are also required to participate in all auctions of U.S. government debt and to make reasonable markets for the New York Fed when it transacts on behalf of its foreign official account-holders.
So there’s never a concern about auctions failing in the USA. That is, the Treasury is a currency user, but the government as a whole can be seen as a currency issuer by institutional design because of this implicit funding guarantee. “
The USA has Europe’s fix in place. We have a unified political entity with a Treasury and central bank that can always procure funding by harnessing private banks. The threat is never insolvency in this regard. Ie, the USA is NOTHING like Greece, a household or a business. There is no such thing as the USA “running out of money”. Our only constraint is inflation and that’s a very different constraint than solvency….
If the politicians understood how the modern monetary system actually worked they wouldn’t make such silly comparisons and waste so much breath focusing on the wrong constraint. Sadly, I don’t think the Democrats are any better on these issues….
Mr. Roche is the Founder and Chief Investment Officer of Discipline Funds.Discipline Funds is a low fee financial advisory firm with a focus on helping people be more disciplined with their finances.
He is also the author of Pragmatic Capitalism: What Every Investor Needs to Understand About Money and Finance, Understanding the Modern Monetary System and Understanding Modern Portfolio Construction.