America Cannot Go the Way of Greece

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 |  Includes: IEF, SHY, TLT
by: Cullen Roche

The headline piece on CNN yesterday was an opinion piece by Fareed Zakaria asking whether or not the USA will suffer the same fate as Greece. He writes:

Will America face the same financial disaster that the Greek government faces, with a soaring deficit and debt, markets that have lost faith in it and a downward spiral of budget cuts that then further depress the economy?

It might, but let us understand something really important: America stands in a fundamentally different place than does Greece.

At this point my ears perked up because it seemed like a major mainstream media pundit might be on the verge of a major breakthrough in understanding the US monetary system and how it differs from Europe. But then Zakaria goes into all the reasons that we are not Greece without ever mentioning the absolute most important point.

(Please pardon me while I scream this because it is a message that desperately needs to be heard more loudly than I have previously said it): GREECE IS A CURRENCY USER. THE USA IS A CURRENCY ISSUER. LIKE A HOUSEHOLD, BUSINESS OR STATE GOVERNMENT IN THE USA, THE SPENDING OF GREECE IS ALWAYS CONSTRAINED. THAT MEANS GREECE MUST ALWAYS ACQUIRE FUNDS BEFORE THEY CAN SPEND MONEY. THE USA DOES NO SUCH THING. IN FACT, IN ORDER FOR US CITIZENS TO PAY THEIR TAXES OR BUY US GOVERNMENT BONDS THE US GOVERNMENT MUST FIRST SPEND MONEY INTO EXISTENCE. MORE IMPORTANTLY THOUGH, WHEN THE US GOVERNMENT WANTS TO SPEND MONEY THEY SIMPLY CHANGE NUMBERS IN A COMPUTER SYSTEM (OFTEN REFERRED TO AS “MONEY PRINTING” BY THE MAINSTREAM MEDIA”). THEY DO NOT CALL CHINA AND ASK FOR A LOAN FIRST. THEY DO NOT COUNT TAX RECEIPTS FIRST. THEY SIMPLY CHANGE NUMBERS IN THE COMPUTER SYSTEM. GREECE CAN DO NO SUCH THING.

Now, Zakaria comes close to getting this point right, when he says that the USA has no solvency issue, however, he doesn’t connect the dots accurately. He later goes on to say:

America could face a liquidity problem – that is, it could have difficulty financing its debts and deficits if markets lose faith in it. But, again, let’s be clear: This has not happened yet. In fact, right now the world is lending to America more cheaply than ever before.

THIS IS ABSOLUTELY NOT TRUE. THERE IS NO SUCH THING AS THE US GOVERNMENT NOT BEING ABLE TO “FINANCE” ITS SPENDING. AND THERE IS NO SUCH THING AS MARKETS DECIDING NOT TO “FINANCE” THE SPENDING OF THE USA. BOND MARKETS AND TAX COLLECTION SERVE NO FUNDING FUNCTION IN A NATION IN WHICH THAT CURRENCY ISSUER IS COMPLETELY AUTONOMOUS WITHIN A FLOATING EXCHANGE RATE SYSTEM. THE IDEA THAT THEY ARE FINANCING OPERATIONS ARE MYTHS THAT REMAIN FROM THE DAYS WHEN THE USA WAS ON THE GOLD STANDARD AND TRULY CONSTRAINED IN ITS SPENDING. THAT ERA IS LONG GONE.

Zakaria goes on to conclude with one salient (though misguided point):

If we do end up losing the trust of markets, and it can happen, it will not be because they lost faith in America, in our economy and our society, but because they despaired at the country’s selfish and self-defeating politicians.

On July Fourth weekend, that’s a pretty depressing thought.

Yes, markets could lose faith in America, but not in the way that Zakaria is describing and certainly not in the way they have lost faith in Greece. The only form of insolvency that America could suffer is via hyperinflation and as I have described in detail, there is very little about the current state of the US economy that is consistent with past cases of hyperinflation. Regarding our politicians – well, they’re as much to blame as pundits like Zakaria who push inaccurate messages based on misconceptions about the way our monetary system actually functions.

While the message Zakaria is trying to portray is accurate (that we are different from Greece), the argument is filled with holes that leave the American public doubting whether the USA really is different than Greece. This sort of misconception needs to end as it is leading to misguided policy responses and a destructive widespread sentiment throughout the nation. The fact that this sort of misconception and misunderstanding persists on such a mass level is the truly “depressing thought” this weekend.