Debt Ceiling Debate exposes critical myth

by David Gerlitz on August 2, 2011

The debt ceiling debate is hot news. At this point, it is everywhere. Will they get a deal? Will they not get a deal? Will the President Veto? Will he invoke the 14th Amendment? Will we default or won’t we?

Debt Ceiling Debate exposes critical mythAnd…”we’re out of money” “We are spending too much.” “We can’t pay our bills.” But if you look closely, you will see that defaulting on our national debt is always a political decision. This whole debate is not occurring because the US government cannot pay its bills; it is happening because it is choosing not to.

There is no question of capital markets funding the bonds with dollars if the Treasury offers them for sale. In fact, Treasury bonds have almost never in history been in more demand than they are right now. The Fed controls interest rates and the markets respond. That is how it works.

“But,” you say, “if we keep spending certainly the markets will not want our debt and interest rates will rise.” Certainly not. Bond markets want and demand our debt. They will buy it at whatever price it is offered and as much as if offered, because they know it can always be paid.

Consider, as a counter example, the situation in Europe. Similar talk of default is happening with Greece, Portugal, Spain, etc. But there is a critical difference: The Euro-“nations” are really more akin to US “states” than sovereign nations. They cannot print their own currency because they are part of the Euro-zone, bond markets know it, and so they reject the government bonds.

The US is more akin to Japan, who has high government debt from years of deflation and near-deflation. Japan has the highest government debt of all the advanced nations, and yet has the lowest bond rates. How does the media and our politicians explain this? They don’t. Why is it? Because Japan, like the US, cannot run out of money and can always operationally pay its bills.

This is critical, and yet everywhere I look it seems people think we are bankrupt. It is simply not true.

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