Just when you think the word might be spreading….It was interesting that Barrons ran this great quote from a regular reader here at Pragcap last week:
We must be careful comparing the federal government with a household (or state or business) because Washington has no solvency constraint. The federal government can’t run out of money (unless Congress decides it should), as it can always call on the banks and the Federal Reserve to serve as agents of the government.
The constraint is inflation, not solvency. But given the weakness in our economy, along with high unemployment, I don’t see much risk of inflation anytime soon.”
And then just a week later runs a cover piece about how the USA is becoming Greece. Of course, the problem within Europe is that their central bank is entirely independent of the sovereigns rendering none of the European countries pure currency issuers. They are all strategic users of the Euro because of this lack of political and monetary union between Treasury, Central Bank and government. The USA, of course, doesn’t have this problem so it is virtually impossible (aside from political choice) for the USA to run out of money. The comparison Barrons makes is patently wrong. For a full discussion on this arrangement with a comparison of Greece and the USA please see the section called “Contingencies – The USA versus Europe” in the Contingent Institutional Approach.
Anyhow, the Barrons piece could be right about some things. Yes, government spending could cause big problems down the road and it might even cause high inflation. But what it isn’t going to causes is a Greek-like crisis where market participants literally worry that we are running out of money. It won’t happen in the USA where the true constraint is inflation, not solvency.
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.