Sunday, August 07, 2011

Probability of U.S. Default

"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" said Greenspan on NBC's Meet the Press.
 The first sentence is true. The second is not.

Suppose that avoiding default requires money creation on a scale that would set off an inflation rate of fifty or a hundred percent a year. The U.S. could--but would it? That would be a de facto default although not a de jure one, since creditors would be being paid back in inflated dollars. And it would have all the added costs of inflation.

Would Greenspan advise doing it? Unlikely.

21 Comments:

At 2:03 PM, August 07, 2011, Anonymous Eli said...

Agreed. Furthermore, there are markets in credit default swaps from which one can calculate the market's estimate of the likelihood of a US default. According to this data, the cumulative probability of default for the next five years is in the 4-5 percent range, which is substantially higher than zero.

 
At 2:27 PM, August 07, 2011, Anonymous Anonymous said...

Default is not really an appropriate cure for inflation - the problem is it would work far too well, instantly replacing inflation with deflation. Plus you would have to nationalize the banks since they would be made insolvent.

In any case, this has nothing to do with the fiscal conservative argument that the U.S. can become the next Greece. That is simply false. Since the government is not revenue constrained, it can always spend its way out of a depression. That's a great feature of the fiat money system - or would be, if it were understood by more people.

 
At 3:15 PM, August 07, 2011, Blogger Mattheus von Guttenberg said...

" the problem is it would work far too well, instantly replacing inflation with deflation. "

And this is a problem because?

"Since the government is not revenue constrained, it can always spend its way out of a depression."

We're not revenue constrained? The US govt is not constrained by its real - as opposed to nominal - revenue?

Spend our way out of a depression? You must be an apostle of that monetary crank Keynes.

" That's a great feature of the fiat money system - or would be, if it were understood by more people."

The ability to counterfeit legal tender currency and rob everyone blind is not a benefit, and I'm so glad it's not "understood" by more people.

 
At 3:52 PM, August 07, 2011, Anonymous Patrick R. Sullivan said...

If we raised the age of eligibility for Medicare to 70, would that be 'default'?

 
At 4:57 PM, August 07, 2011, Blogger John David Galt said...

Suppose that avoiding default requires money creation on a scale that would set off an inflation rate of fifty or a hundred percent a year. The U.S. could--but would it?

Isn't that mostly true already? The Federal Reserve has been buying a large fraction of the Treasury bonds issued since Obama took office (by pulling "money" from where the sun don't shine) -- about $2.5T worth already. That's about a 33% inflation (by the monetary definition) in two years, even though it hasn't all shown up in prices yet.

Now China says they won't buy any more of them, so we can expect the Fed to have to "monetize" all US deficits from now until dollar-doomsday.

Greenspan would certainly know better. But Bernanke doesn't, and if he did, Obama would fire him and replace him with some new fool.

 
At 8:28 PM, August 07, 2011, Blogger Mark Horning said...

That's about a 33% inflation (by the monetary definition) in two years, even though it hasn't all shown up in prices yet.

Purchased Gas or Groceries lately? Gas was under $2/gallon when Obama took office. Meat and dairy are up at least 20%, precious metals...

About the only thing that inflation has not hit is housing prices, but that is because it is still recovering from the market manipulation by the Fed and Fanny Mae.

 
At 8:54 PM, August 07, 2011, Anonymous Anonymous said...

Re: "monetization", perhaps this article can cut through some of the confusion:

http://neweconomicperspectives.blogspot.com/2011/08/coin-seignorage-and-inflation.html

Summary: "monetization", even 100% monetization would not be in any way inflationary. It would simply transfer the the government's liabilities from the treasury to the Fed. A change in appearances but not substance.

 
At 9:37 PM, August 07, 2011, Blogger Jehu said...

Re: monetization
Doesn't Ron Paul have a bill up to cancel the US debt held by the Fed? That would change matters, would it not---making that trillion or two effectively just printed and spent.

 
At 10:28 PM, August 07, 2011, Anonymous Anonymous said...

Jehu, that's correct. So Ron Paul recognizes (at least implicitly) that monetization is not inflationary. It's just a matter of accounting.

Note that the supply of PAPER money is 100% endogenous. The government has zero control over it.

 
At 11:20 PM, August 07, 2011, Anonymous Anonymous said...

Mattheus, not being revenue constrained means that the government can always counteract, as opposed to reinforce, a depression. It does not need to "save up" money beforehand. The darkly amusing thing is how conservatives think that austerity is virtuous. But austerity is government-mandated laziness. It forces people against their will to not work. What's conservative about that?

 
At 12:30 AM, August 08, 2011, Anonymous js290 said...

Austerity is virtuous a priori. On the blog of an anarcho-capitalist, I'm not sure the term conservative has much meaning. Unfortunately, those who believe (so called conservatives and liberals) in the goodness of government intervention are not burdened with proving such assertions in any meaningful way. They just need enough voters to buy into the fallacy. The rest of us are unwillingly on for the ensuing ride. Political voting seems a bit immoral. The government counter measures against a depression effectively robs from the people behaving responsibly and morally.

 
At 1:46 AM, August 08, 2011, Blogger GARETH said...

was here... kindly visit back. thanks.

 
At 10:35 AM, August 08, 2011, Blogger Milhouse said...

Patrick R Sullivan asks: If we raised the age of eligibility for Medicare to 70, would that be 'default'?

Um, default on what? The USA has no obligation to pay anybody's medical costs. Congress could end Medicare tomorrow if it wished. So no, it would not be a default.

Mattheus von Guttenberg wrote: The ability to counterfeit legal tender currency

Huh? Who said anything about counterfeit? The government can print as much money as it likes; that money would be genuine USA currency, legal tender, just like the money you have now; it might not be wise to do so, but it's certainly within the government's power. How do you imagine it would be counterfeit?

 
At 11:07 AM, August 08, 2011, Anonymous Anonymous said...

If the U.S. government ceased to exist, dollars would be worthless. The government is propping up the value of those inherently worthless pieces of paper...

 
At 1:07 PM, August 08, 2011, Blogger Mattheus von Guttenberg said...

"Huh? Who said anything about counterfeit?"

What does a counterfeiter do? He prints money in order to spend it; he prints money because he cannot earn as much as he likes by making a product for his fellows. This has the effect of increasing the supply of money and diluting the purchasing power of already existing money units at the time. The counterfeiter spends his money and receives a product, essentially for free. He receives favors from his fellows without contributing any product for others to use. It's fraud, essentially.

How does this differ from the printing of money by a central bank?

 
At 2:02 AM, August 09, 2011, Blogger David Friedman said...

"Since the government is not revenue constrained, it can always spend its way out of a depression."

Do you have any evidence to support this claim? It sounds like 1960's Keynesianism--and if Macro were really that simple, isn't it a little surprising that, between then and now, there have been quite a lot of countries which had high unemployment rates for substantial periods of time?

You might consider that the Obama administration has been trying to spend itself out of unemployment, with deficit spending at almost forty cents in the dollar. It has made various predictions about the results of that policy, and so far they have turned out to be false.

Do you regard the fact that a theory makes false predictions as a reason to reconsider it?

 
At 6:35 AM, August 09, 2011, Anonymous Anonymous said...

Just because there are sometimes painless solutions to macroeconomic problems doesn't mean that they will be implemented. Maybe you noticed that treasury bonds rallied in response to S&P's downgrade. This should be troubling to people who believe that the U.S. is like Greece and is (as Obama puts it) "out of money". You couldn't ask for a more perfect refutation of the political consensus, but will anyone change their mind?

 
At 8:40 AM, August 09, 2011, Anonymous Anonymous said...

Another thing - you seem to think the deficit represents some kind of large effort on the part of the government. In fact, it's mostly an automatic consequence of falling tax revenue and increased demands on social programs, not discretionary policy. Is the deficit large? Not in relation to anything that matters - unemployment and inflation. It is only large in the minds of conservatives who fear that their taxes will go up to "pay back" the debt (something that has never happened in all history), or that the government will default (also not going to happen), or that high inflation will ensue (possible but a remote prospect). Addressing these irrational conservative fears is a higher priority for Washington than the unemployment rate.

 
At 1:31 AM, August 12, 2011, Anonymous Andrew said...

Currently inflation is still very low (certainly you can cherry pick some stuff that has gone up more, but that's just dumb).

However, the country would benefit greatly from higher inflation. The housing market is what's holding back the economy and keeping people in poor job environments. Increasing inflation will bail out folks underwater on their fixed rate mortgages, and help other responsible borrowers with large fixed rate mortgages. This will allow people to sell their houses and move to where there are more jobs.

America would benefit from a few years of >5% inflation.

 
At 5:48 PM, August 18, 2011, Blogger Eric Rasmusen said...

Greenspan is right, because what everybody's talking about is de jure default. Default is, after all, a legal term. Worse still, what S+P purports to measure is the likelihood of the on-off event, not how much the default hurts investors.

So there will be no default simply because the US can achieve the same goal without defaulting.

 
At 1:45 AM, August 21, 2011, Blogger John T. Kennedy said...

Taking into account Greenspan's preceeding 8 words makes it much worse: "This is not an issue of credit rating, 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."

From this it follows that Zimbabwe is equally credit worthy since they also have a printing press.

It's stunning that Greenspan would say that printing money should have no bearing on the credit rating. Does anyone think Standard & Poors was unaware of the printing press? Or were they perhaps saying you might want to lend less money to people who were likely to pay you back with devalued paper?

 

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