America Cannot Go the Way of Greece

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.

Comments

[blueline]

Mr. Roche,
If your theory on the US monetary system is correct then why hasn't it worked. Why hasn't the policy of "adding zeros in the computer" created a robust economy? How many more zeros will we need to add?

[doar]

Cullen obviously your republican views have not had the chance to be tested by a trip to your local supper market or gas station. Inflation is evident I all aspects of daily life for the real average working American and his family. The flooding of the money supply by the bernank has just about gauranteed inflation (and yes Cullen future hyperinflation) wil be the norm as the U.S keeps printing fiat currency in an attempt to inflate it's way out of the debt default that seems inevitable. Perhaps one way to avoid the problem would be for the republicans to allow the debt ceiling to be raised so that the congress could get on with the business of actually fixing the diminishing U.S economy....guess that would take some empathic
for the average blue collar worker over

[Lawrence J. Kramer]

"‘Ah! Finally I think I get it. I get what Quantitative Easing means. I understand now… what I no longer understand is the meaning of the word money.’"

The letter-writer was witty, but I doubt his premise that he ever understood what money is. What he should have realized is that he never understood what money was.

QE is not about "debasement, at least not with the negative connotation the word carries. It is about preventing its opposite. It is about keeping the money supply commensurate with the dollar price of things on offer. In a balance sheet recession, in a world of unprecedentedly burgeoning productive capacity, expansion of the money supply is as big a challenge as it was in the days of the Cross of Gold. In 1896, money issued without gold backing could not win consensus confidence, or at least so argued those who opposed bimetalism. Today, when the ability to spend money is the only thing to which we can look for confidence in it, we have no benchmarks like the gold supply to give us the confidence that we have not printed, or promised to print, too much money. We have only statistical superstitions, like the ratio of public debt to GDP cited by Rhinehart and Rogoff. They have only inductive value, which is not terribly impressive to some but overwhelmingly so to others.

Absolutely, the aim of QE is to keep inflation happening at a modest rate to draw money into investment and spending. I am not saying that it is working domestically: if you encourage me to spend, I buy a TV from a company established here to import from China. How many jobs that creates here is problematic. But the word "debasement" adds only emotion to what I believe should be less passionate analysis.

[TIPSTER]

Mr Kramer,

Far be it for me to wish to go off topic from the Greece vs America debate but I think its worth distinguishing between the admirable intentions of QE and its unintended consequences.

My point is that some (even the stewards of our economy) seem not to understand/properly communicate the concept of money and have a tendency to measure fiat monies (and thus their debasement) primarily against the rate of exchange between other fiat monies.

[TIPSTER]

On that point... just listen to Bernanke's response to Ron Paul today with respect to Gold... RP can be heard laughing out loud! I'm glad I was not the only one laughing at Bernanke's (rather bashful) response...

www.youtube.com/watch?...

[extremebanker]

The real decline of America over the last ten years has been the decline in the productive power or manufacturing base of the U.S. The transfer of Hong Kong back to China has allowed China to access the U.S. and other world markets. American business (Walmart) has done every thing they can to exploit these differentials. The U.S. can print all the money it needs and payoff debt if need be but the purchasing power of the dollar has declined due to less maufacturing.This is what is reducing living standards and purchasing power of those who live in America. The Euro was .84 in late 2000. It is now 1.45. Quite a decline in U.S purchasing power. Same for the Yen. The risk that most Americans don't even see is their investments are almost all denominated in dollars. This is the concentration risk American investors need to identify and manage.

[Dave Wrixon]

Well, somebody gets it!

[TIPSTER]

Interesting that, despite the Euro "crisis" over the past 12 months, this fiat trash is still up 15% against the Dollar - what does that say for American economic policies?

Of course, there are the hallucinogenic gas-bags who think that this will help re-kindle America's exporting manufacture-base so that they may sell cheap goods to a region with a billion people working for less than $10 a day. Hmmm...

Even GREENSPAN (with whom I rarely agree with) effectively said on the Charlie Rose interview last month... sure we refuse to tackle deficits and ignore the debt and we may indeed escape severe calamity in the bond markets, but who would be stupid enough to take the risk!?!

As far as print and spend justification goes, Jim Grant said it perfectly when he said:

"… the clarifying insight into Quantitative Easing came in the form of a letter to the editor of the financial times about a year ago. The writer says:

‘Ah! Finally I think I get it. I get what Quantitative Easing means. I understand now… what I no longer understand is the meaning of the word money.’

That is the definitive insight into what the enterprise of QE is all about…. Debasement."

[Cullen Roche]

America's been printing money for 200+ years. We've been in fiscal deficit for nearly our entire existence.....So, if you want to be very technical, then America has been "printing" its way to prosperity for is entire existence.

But this misses the whole point. Printing is only destructive when done in excess of productive capacity. Obviously, America has been printing money for centuries. But its output over that time has far offset the money "printing". In other words, we have not printed in excess of productive capacity....

[13mogul]

Printing money when you have the gold to back it up is fine. What we are doing today is fiscal insanity. Spending your life's salary and the salaries of your children and grandchildren to "fix" our societies problems is not ensuring prosperity. And printing more money merely devalues what we produce.

[Dave Wrixon]

But that is pricelessly the point and what differentiates its from say China. In recent times there has been no meaning expansion of output because much of the growth in GDP has been nothing more than a statistical illusion. Indeed GDP itself is not a meaningful way of measuring national wealth generation. It was never little more than a political construct.

[Dave Wrixon]

Gold is not money or wealth so backing a currency with Gold whilst austensibly tangible is meaningless. But at least it shows some aspiration towards to goal of fiscal constraint. Currency is backed by wealth generation. Wealth generation in the US has been largely absent for over a decade.

[CBReynolds]

Are there any examples in history of empires, kingdoms or nations 'printing' their way out of debt trouble?

[bob adamson]

CBR -

Offhand I highly doubt that there is an example of such 'printing' being the basic successful tool for resolving the national debt of a nation. However, there have been cases where a nation has used this tool to good effect by using it within limits along with other tools appropriate to the particular circumstances.

A case in point is the experience of the US during the seven or so years immediately following WW II when moderate inflation was used to reduce the burden of US war debts while the US economy converted back to peacetime status.

[CBReynolds]

Bob,
That is a pretty good example! Thanks for sharing.

Just to press a little farther, how similar is our economic situation now to that of the post-WWII era when money supply expansion was used to reduce national debt burdens?

You mentioned "within limits" alongside the use of these tools. I agree, this is essential. Is this the environment we have today, reflective of this need for constraint? Can the FED (might as well throw Treasury and Congress into the pot) exercise restraint? That is, can they actually adhere to limits?

[Dave Wrixon]

Yes, Britain did it.

[bob adamson]

Cullen Roche is essentially correct in the thesis of this article. However, there are a couple of significant caveats that need to be flagged.

First, as several others have noted several very important US States (ones that are much larger as economic and fiscal entities than Greece or any of the other EU peripheral States under discussion) face severe fiscal difficulties. Second, the US Federal Government faces a self imposed limit on the total amount of sovereign debt it can incur at any one time – a limit it is fast approaching and about which political deadlock is currently rife. Third, there are significant questions
(a) whether a necessary consensus can be formed and implemented in a timely fashion to prevent at least partial defaults of short duration, and
(b) what the domino effect of such defaults.

In other words, there is the technical capacity (and probability) for the US to prevent default and its possible ensuing financial disaster but a not sufficiently remote possibility that matters could unwind in unpredicted and disastrous ways through political paralysis masquerading as partisan political maneuvering.

[Cullen Roche]

BIG difference between operational constrained and political constraint.

[bob adamson]

Agreed that operational and political constraints differ in important ways. However, the fact that political constraints can be resolved is not that same thing as an assumption that they always will be so resolved. That said, I too assume that clearer heads will prevail within sufficient time in the end preventing too much damage from occurring.

On the other hand, remembering the difficulty in having the TARP legislation passed in time to prevent a true implosion of the US and global economies in the fall of 2008, I cannot fully dismiss the possibility that
(a) matters will remain unresolved over the next few weeks until at least a token US sovereign debt default occurs, and
(b) such a token default, because of the ensuing uncertainty, will lead to unanticipated difficulties which will not be resolved until after much fiscal, monetary and US and global damage has occurred.

[constantnormal]

While I applaud Mr Roche's dedication to his intellectual frameworks, I have to ask: Have their ever been any other "currency issuers" who have opted for the path of default?

And is not one of the choices that Greece and the EU are being pushed toward, i.e., ejecting Greece from the EU, so that it reverts to having the drachma as its own currency once more (becoming a "currency issuer" once more), going to have as the end result, yet another "currency issuer" defaulting?

When cast against the backdrop of millennia of economic history, MMT sure looks like just so much economic claptrap to me.

I should add that, barring a Repooblican effort to force us into an immediate default -- accidentally or otherwise -- I think that we are presently a long way away from a default situation. But I don't discount the efforts of Congressional loons ...

[Cullen Roche]

Removing Greece from the EU and having them issue drachma does not change the cause of their disease....

[TIPSTER]

Mr Roche, I have to say I am perplexed with your argument and I'm more intuitively aligned with constantnormal here...

You've gone to great lengths to chastise those who misreport the facts and yet, by your own admission, your own factual thesis is based upon two highly fallible, non-factual assumptions...

a) that the USD will remain the World's reserve currency forever
b) "currency issuers" facing hyperinflation will always choose hyperinflation over default workout

[Cullen Roche]

Reserve currency status has NOTHING to do with this. Japan isn't bankrupt despite far worse debt levels and they don't enjoy this reserve status.

As I've written about in great detail, there is nothing consistent with the USA and past hyperinflations.

papers.ssrn.com/sol3/p...

[13mogul]

The dog has been chasing its tail and is now eating it. Our economy will continue to falter, despite the witch doctoring at the Fed and faux concern of the Administration. Greece is Greece, Portugal is Portugal, Ireland is Ireland and the USA is the USA. We're still all following the failed socialist financial policies of the latter half of the 20th century, which will eventually come to a head.
I find it incomprehensible that well educated human beings cannot grasp basic free market principles. This article is a fine example of the bunk we have been fed by our governments and educational institutions since who knows when. We have to start recognising the simplicity of the problems and their solutions, and not keep grasping for the next credit card or other enronesque menu of failed policy.

[doar]

The U.S is going into the pockets of it's citizens in new and diabolical ways as it silently proceeds to force it's own people to become debt slaves to the corptocracy that really runs the federal government ( both side of the house). With each new printing of fiat virtual monies the fed inflates ( there is that word Cullen dislikes so much) the money supply thus causing anyone with savings pension or owned realistate to lose their equity. Now even the billions set aside for social security ect have been borrowed to finance some of the deficit imbalance.....artifici... supported markets love this system as it allows profits for a few at the fiscal and social expense of many....when and if interest rates rise then this whole house of cards will collapse as America is forced to realize it cn no longer borrow it's way to achieve prosperity....?!

[blueline]

PonzI scams are successful as long as only the originators of the ponzi scam know that it's a ponzi scam.
As long as only a few federal reserve bankers and a few elected officials knew our economy was based on " THEY SIMPLY CHANGE NUMBERS IN A COMPUTER SYSTEM (OFTEN REFERRED TO AS “MONEY PRINTING” BY THE MAINSTREAM MEDIA”) it could be perpetuated for ever.
I am sorry but that train has left the station!

[WEHEW]

Mr Roche

You are essentially correct as far as you go, but you do not reconcile with the fallacy of "borrowing your way to prosperity," which is not an infinite concept. Many investors (some would say traders) rebut this thesis in markets through acquisitions of precious metals, mainly gold bullion and its derivative securities. These so-called gold bugs (a slanderous term) are highly suspicious of fiat currencies and their irresponsible issuing governments, who squander their sovereignty to foreign governments and their implicit cultures along with avaricious traders on foreign trading desks. The USA Administration is far too pretentious about confidence in its currency, as many do not hold it for love, but only for relative, but eroding value. Look at sovereign GDP and international trade data to see the growing strength of other nations, which have currencies rapidly growing in acceptance. Chinese, as a second language looks better every day.

One could also say many USA state governments and many of the large USA banks are already de facto insolvent, but "keeping up appearances” of being solvent, but this is another huge topic for helicopter Ben to cope with. The issue is more of vulnerability to shocks, or further shocks and is not simply a gracious defense of a reserve currency, which has a declining acceptance on world capital markets, albeit banks and dealer trading desks price it relative to many other benchmarks every day, obviously for financial gains, both as principals and agents. I will leave alone the scandalous reporting practices of USA financial institutions, which have declared their own form of generally accepted accounting principles and hope to be inflated onside with their real property loan portfolios. But, I will say, this is just another form of credibility erosion akin to that on confidence in the greenback.

As they say. Ouch, pas it on......

WEHEW

[Cullen Roche]

Your argument is the classic inflation leading to hyperinflation argument. Where is this highly destructive inflation or hyperinflation? I am the last person on the planet to argue that the US economy is booming, but the inflationists have been so wrong in their analysis in recent years that it's amazing that so many of the readers here are still drooling over their inaccurate calls...

[Dave Wrixon]

If the easy way out actually worked it would have been tried before.

Wait, it has been hundreds of times before.

Did it work?

Well, of course not, but don't let that discourage you.

[CautiousInvestor]

America will not go the way or follow the path of Greece but the final outcome could be strikingly similar.

With national debt of $14.5 trillion, $50.0 trillion of unfunded liabilities and gaping deficits as far as the eye can see, we are solvent only because we have control over our currency (no constraints) and continue to enjoy access to capital markets. Otherwise, we would be broke.

Proponents MMT, which enjoys a distinctly liberal bias, would argue that we can create money indefinitely. They argue that a sovereign currency nation that issues two government liabilities—government bonds and central bank reserves—can always issue such liabilities and convert one into the other ad infinitum. The Weimar Republic of Germany and Zimbabwe are dismissed as extreme outliers.

The problem, though, is unrestrained expansion of notes or reserves leads to currency depreciation which in turn ignites the kindling underlying inflation. The dollar, as measured by the DXY, has been in a decline for decades and, after a brief bounce, accelerated its decline in 2002. But inflation has remained subdued.

This likely to change, however, as developing countries expand and widen their claims on natural resources, oil and agricultural commodities. In parallel expect the dollar to continue to depreciate, yielding higher prices in basic goods notwithstanding surplus capacity and labor which has spared us from inflation in the past.

How far this goes depends entirely upon how much we abuse our currency; given the inclination of politicians to avoid problems and kick the can down the road, I suspect currency abuse to continue indefinitely.

The final outcome is likely to be some type of exaggerated stagflation characterized by conditions that describe Greece: social unrest, serious political divisions, chronic unemployment and sharply reduced standards of living.

[dybydx]

wow.... why haven't we seen Cautious around more often?

i agree with your analysis. while USA can print its own money, so can Greece go back to Drachma. but the result will be the same. if US keep up this reckless spending, no one will accept the USD as money.

others have pointed out. one reason why the world still buys USD is due to their reliance on oil. and OPEC only accept USD (except for Iraq and Libya but then USA taught them a lesson the hard way).

[Lawrence J. Kramer]

Excellent analysis. I would add that it is perhaps misleading to call the U.S. "solvent" just because it cannot be "insolvent." The MMTers have to be met on their own turf. "Solvency" is a non-concept for them as regards a currency issuer, so we are neither "solvent" nor "insovlent."

I would replace "solvent," therefore, with "able to buy imports." It's not access to the capital markets so much as access to the import markets that determines the health of the dollar. Anyone who sells to us must eventually lend to us. What else can they do with the money? Leaving it in our banks IS lending it to us at zero interest rates. Buying our real estate and other equities will be unproductive, too, and the volume just isn't there. But when lending to us seems like buring money, sellers will have to decide whether they wish to continue to sell to us. The real sign of trouble will come, then, not when the loans dry up, but sooner, when the prices rise as other users of foreign goods - including the emerging consumers of the producer states - start to compete with us for goods on the basis of their having a currency the sellers would rather own.

Considering the shape the world's consumers are in, we may be a long way from that day of reckoning, and MMT may be a useful tool for focusing on the real nature of the problem. But it does seem a mistake to act as if we don't HAVE a problem just because Fareed Zakaria doesn't quite grasp it. A rebuttal of Mr. Z. should, I think, include an exposition of what too much government spending can do to our currency so as not to give the impression that we cannot overspend, or that, if hyperinflation is the only fear, Weimar and Zimbabwe are a source of comfort. I suspect that there is probably another route to hyperinflation that pases through our empty ports of entry.

[CautiousInvestor]

Thanks dybydx and Lawrence and your added insight is appreciated. Were Greece to withdraw from the EZ, a possibility Greece fears as much as the leaders of the EZ and EMU, and forced to return to the Drachma they would begin to understand what austerity looks like; everything they import could easily double in price. At first exports of olives and goat cheese would surge (along with increased tourism) but the new central bank of Greece would eventually have to train its sights on tackling that pesky little problem of inflation with whatever tightening measures deemed appropriate. A brief respite and then back to austerity; life is a bitch. And the scenario of Greece returning to Drachma does provide a legitimate opportunity to draw parallels between Greece and the US and what life is like in a nation with a highly depreciated currency in a resource constrained world amid yawning deficits and piles of debt.

[apberusdisvet]

The US as a whole may not be Greece, but California and Illinois sure look similar. Profligate spending, self-serving and corrupt politicians, and spending out of control with the true deficit situation obfuscated and hidden by accounting gimmicks.

Should the losses in these 2 states be socialized on a national basis, there will be pushback by the American people; enough is enough; especially in these economic times.

[Cullen Roche]

Doesn't matter. You can't compare the Federal govt of the USA to a US state or a Euro nation. The analogy doesn't fit.

[Ian R. Campbell]

Cullen: Please better explain your statement "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." I don't understand what you have written in this paragraph.

Thank you.

[Cullen Roche]

Ian,

I would suggest you start here:

pragcap.com/resources/...

Feel free to email me with questions.

Best. CR

[Dennis954]

The USA is definitely not Greece. It is going more the way of the Weimar Republic or Zimbabwe. I wonder how long it will be before the Treasury starts issuing $1,000,000 bills to replace the $1 bill ???

[Cullen Roche]

A very long time. There is absolutely nothing analogous between the USA and Weimer. NOTHING. papers.ssrn.com/sol3/p...

[Dave Wrixon]

No but every State with the US is in exactly the same place as Greece, therefor you argument is about as fatuous as it gets. It really doesn't matter how many units of vacuous ether Bernanke is able to create. The idea that more you create the more each individual one has to be worth must ultimately be flawed. The truth is that US is losing its status as the issuer of the World Reserve Currency to the Euro and much of the whohaa is about try to dislocate the migration from the Dollar to the Euro. It won't work of course and the FED is doomed to become the buyer of first and last resort of all US Treasury debt. It is not going to be long before the populous see it for the Ponzi scheme it is and start rejecting the Buck as the means of exchange. Beans will soon become the defacto currency.

[Cullen Roche]

The same "fatuous" argument has been made about Japan for 20 straight years and they don't have the luxury of reserve currency status.

David, with the greatest respect, you simply do not understand my position. You have not grasped the idea of a currency issuer vs a currency user. Again, see here. Pour over it for hours....You won't regret it. pragcap.com/resources/...

[Asbytec]

"You won't regret it." That's the understatement of the year. It's the most significant economic paradigm shift in our lifetime. To make rational sense of today's issues, you gotta understand fiat theory. Period. And it does take hours, weeks, and even months of study and emotional control. Yea, it can anger some, it did me...threw my classical training right out the window. So, be forewarned.

[Matthew Reardon]

So your saying we wont go the way of Greece because we have the ability to print our way out of a debt crisis. Yet, you conclude by saying inflation, at least "hyper", doesnt look to be a major issue. Do you suppose a different path to get out of debt? Because to me, it doesnt look like any substantial pending cuts are in the future. At least none that would make any significant reductions to the debt problem.

[Cullen Roche]

There's no such thing as a currency issuer getting "out of debt". I suggest you start here. pragcap.com/resources/...