This is from an Economic Times article over the weekend:
“Eugene Fama, who shares this year’s 8 million crown ($1.2 million) prize with Robert Shiller and Lars Peter Hansen, said on Saturday that highly indebted governments in the United States and Europe posed a constant threat to the global economy.
“There may come a point where the financial markets say none of their debt is credible anymore and they can’t finance themselves,” he told Reuters in the snow-covered Swedish capital, where he will receive his prize on Tuesday.”
That Eugene Fama. What a prankster! Let’s straighten this out. The USA is what MR refers to as an autonomous contingent currency issuer. This means that the US government has the ability to create the currency that its debt is denominated in. In effect, it cannot run out of money to meet its debt obligations. This shouldn’t be a controversial point. So, saying that it can’t “finance” its debts is silly.
Now, could the markets become concerned about US government debt and currency? Sure, but not because of an inability to pay. There’s simply no such thing in a system like the USA. It’s true that high inflation could cause interest rates to surge and even cause a currency crisis, but an inflation crisis is not a solvency crisis.
Of course, there are degrees of autonomous contingent currency issuers, and the USA experiences a certain level of “exorbitant privilege” here, but that doesn’t change the conclusion with regards to this specific monetary system. Europe’s countries, on the other hand, are not autonomous contingent currency issuers. They are effectively currency users much like the states in the USA are. So Fama’s comments on Europe are right, but he is not correct to be worried about a potential solvency crisis in the USA in 2014. Unless of course, Congress decides to default like a bunch of boneheads….