The Triad of Gap dynamics (Part 2)

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(I did these first four images just for fun, as part of a fantasy USA in which socialism is not an evil word. They are not relevant to this post.)

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Alan Greenspan said, “The United States can pay any debt it has, because we can always print money to do that. So there is zero probability of default.”

In other words the U.S. government can never run out of dollars, since the government can “print” infinite dollars out of thin air.

Hence the government can pay any debt or obligation, including the government’s Medicare and Social Security programs. Therefore federal social programs can never become “insolvent” or “unsustainable.”

Some pundits admit the truth. Forbes admits it, CNBC admits it, Business Insider admits it, — but some holdouts try to “logically” deny facts and reality.

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In their desperation, they…

  1. Falsely equate Monetarily Sovereign USA with monetarily non-sovereign Europe. (The U.S. government can create its money out of thin air, while euro-zone nations cannot.)
  2. Falsely equate foreign debt with domestic debt. Foreign debt is owed in foreign currency. Domestic debt is owed in a nation’s own currency. The difference is irrelevant to the USA, which conducts all its foreign and domestic business in dollars.
  3. Falsely equate the USA of today with nations in past history that were devastated by war or other catastrophes. (If a meteor destroyed the USA, then yes, the U.S. government would have trouble creating money out of thin air, since the U.S. government would not exist.)

Here’s an example:

Is there something in the words “sovereign currency issuer” that renders the U.S. immune? I highly doubt it. It must be my fertile imagination which found the following currency-issuing nations that have defaulted in past few decades:

Mexico, 1982 — “In the wake of Mexico’s default, most commercial banks reduced significantly or halted new lending to Latin America.”

Nice try (incidentally that’s a bad link), but Mexico defaulted on its external debt.  It defaulted on the debt that Mexico had to pay back in foreign currencies, including U.S. dollars. The Mexican government can only create pesos out of thin air. Not dollars or euros or whatever.

By mid-1981, Mexico was beset by falling oil prices, higher world interest rates, rising inflation, a chronically overvalued peso, and a deteriorating balance of payments that spurred massive capital flight.

If Mexican pesos had been accepted throughout the world like the U.S. dollar was, then Mexico could simply have “printed” more pesos to cover these contingencies. But since Mexican pesos are not widely accepted outside Mexico, the country must obtain foreign currencies in order to buy imports. Mexico obtains foreign currencies by selling exports such as oil. When the price of oil is down, and the price of money is up (i.e. the interest rate of loans in foreign currency from foreign lenders), Mexico has difficulty getting foreign currency. (In fact, Mexico’s foreign currency reserves became totally depleted in 1982.) As a result, Mexico’s “balance of payments” (i.e. its trade deficit) worsened. As imports fell, consumer goods became scarce, causing price inflation inside Mexico.

The point is that Mexico has full Monetary Sovereignty over the peso, but not over foreign currencies. This is not a problem for the USA, since the USA does all its business (foreign and domestic) in U.S. dollars. Of all the national governments in the entire world (nearly 200 of them) the U.S. government is the least likely to default in any kind of debt, since it can create dollars out of thin air, and dollars are accepted worldwide.

By the way, since oil prices are down again, why isn’t Mexico in the same trouble as before? Because massive drug trafficking sustains a strong demand for dollars, and the U.S. government helps the drug lords by protecting their assets in the Cayman Islands and so on. But that is a topic for a different blog post.

On August 17, 1998, the Russian government devalues the ruble, defaults on domestic debt, and declares a moratorium on payment to foreign creditors.”

It is absurd to try and compare the USA of today with Russia of 1998. Under then-President Boris Yeltsin, Russia was in great turmoil. There was mass privatization. Power was held by oligarchs and Russian Mafiosi. The IMF and World Bank moved in with predatory loans (in U.S. dollars), $5 billion of which was immediately stolen by the oligarchs. All was chaos.

The Russian government was very unstable, and when a government is unstable, the monetary system becomes unstable. On 23 March 1998, Yeltsin suddenly dismissed Prime Minister Viktor Chernomyrdin and his entire cabinet. A year and a half later, Vladimir Putin became Prime Minister and began restoring order to Russia’s government and monetary system.

As far as defaulting on domestic debt, the Russian government briefly stopped paying interest on its sovereign bonds (i.e. its Treasury securities) as part of an effort to get inflation under control.

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Indeed it can, especially since U.S. dollars are accepted worldwide. The only time there could ever be a problem is if the entire U.S. government became unstable like Russia’s government was in 1998. Until then, Greenspan is 100% correct.

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Argentina defaulted on part of its external debt at the beginning of 2002.”

You’re back again to external debt, which is irrelevant to this topic. If the US government’s debt and obligations are denominated in dollars, then the US government can create infinite dollars. So what’s the problem? Argentina’s foreign debt and obligations were not denominated in Argentine pesos.

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Then there are nations which have repudiated their debts. As seen here (go to the second page of the document), “Mexico (1914), Russia (1917), China (1949), Czechoslovakia (1952), and Cuba (1960) repudiated their debts after revolutions or communist takeovers. Some countries, such as Austria (1802, 1868) and Russia (1839), defaulted after losing wars; others, such as Spain (1831) and China (1921), defaulted after enduring major civil wars.”

Your comparisons are pathetic. Those situations are nothing like the USA today.

Repudiation, of course, is a form of default. Believe it or not, there are rumblings from certain quarters that the U.S. government should consider doing the same.

Nonsense. U.S. government obligations are in US dollars. No further discussion is warranted. I’m cutting you off.

Then there’s Ellen Brown, who agrees with Greenspan that the U.S. government can create infinite dollars. She even quotes Greenspan.

And yet she still insists that the U.S. government borrows all its dollars from bankers, and the “national debt” is what we all owe to the bankers!

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Ellen Brown says the U.S. government can retire the “national debt” by printing “greenbacks” as a form of quantitative easing. But why do that? It’s silly.

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The vast majority of the money supply today is created by banks when they make loans, as the Bank of England recently acknowledged.

The Bank of England is a liar. It says “The amount of money created in the economy ultimately depends on the monetary policy of the central bank. “

Wrong! What about the government’s fiscal policy? What about government spending?

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Bank of England again:

In the modern economy, most money takes the form of bank deposits.

Actually all money takes the form of bank deposits. Currency notes are merely claims on aggregate bank deposits.

Anyway the point is that Ellen Brown falsely believes that the “national debt” is some kind of burden that must be “paid off.” She thinks that most money consists of bank loans, including the $3.7 trillion that the U.S. government will create (not borrow) in FY 2016.

She is wrong. Greenspan was right.

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