Reader “SG” sends along this horrifying quote from the Chairman of the House Finance Committee, Barney Frank at yesterday’s hearing:

Barney Frank:

“Do you think there is any realistic prospect of America defaulting on its debt in the foreseeable future?”


“Not unless Congress decides not to pay which I don’t anticipate….”

Let’s get this straight.  The United States government CANNOT default on its obligations without some sort of mental lapse from Congress (the trade here, short sovereign US CDS every time it spikes).  The government is the supplier of the sovereign currency.  The government is a currency issuer & carries NO foreign currency denominated debt.  If they have fiscal problems they simply print more.  They press a button on a computer and magic money appears in an account.  That’s literally how it works.    The US government is not a household or a state.  They are not Greece who does not print their own currency.  It’s ENTIRELY different.

I am not certain if Frank is asking this question in all seriousness (or to make deficit hawks appear foolish), but if he is it shows a remarkable and frightening misunderstanding of his knowledge of monetary operations.  How can the Chairman of the House Financial Services Committee even ask such a question?  It would be like asking an alchemist if he is running out of gold.  It’s utterly ridiculous.

Now don’t get me wrong.  I’m not implying that money printing (or whatever you want to call it – “button pressing” is fine by me) is goodI have long maintained that our debt problems cannot be solved by pressing a button.  In fact, they are likely to make matters worse in the long-run.  The deficit and the government debts are not sustainable as they are potentially a risk of horrendous inflation and mal-investment, but the default question & remarks need to end.  The implication here is not that the deficit is not an issue (regular readers know I think government spending will not get us out of this mess), but the potential default of the United States is simply out of the question barring dramatic changes in our monetary system (for instance, a reversion to the gold standard).

It’s simply frightening that the people running this country appear to know very little about the actual workings of the monetary system in which we live.  To Bernanke’s credit, he seems to understand it.  And “button pressing” appears to be one of his favorite hobbies.  Of course, to the detriment of us all.


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Cullen Roche

Mr. Roche is the Founder of Orcam Financial Group, LLC. Orcam is a financial services firm offering research, private advisory, institutional consulting and educational services.

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  • Frederick

    TPC, I agree, Frank is downright scary. I wish I could link the video, but I remember an equally alarming soundbite from him late in 2008 saying in effect that nobody should ever be afraid of buying any US municipal bond, because the Federal Government would step in and pay. He actually, without putting one iota of thought or caution into the situation, just basicaly said something like, “Well then we’ll just back those directly also”, in response to an interviewer’s question of the muni market getting dicey. It was like he thought he had some magic stamp where he thought he could just go around magically proclaiming everything okay.

    To your basic point: Yes, a crisis always reveals some very frightening details about how little politicians understand money.

  • http://seekingdelta.wordpress.com/ seekingdelta

    Thanks for article.

    I sincerely hope that Mr. Frank asking about a U.S. default was more of a rhetorical question meant to score some points with Krugman & Co and take a jab a deficit hawks like you suggest. That said I would not be surprised in the slightest if the Chairman of the House Finance committee has no fundamental understanding about how dollars are created and debts repaid.

    Further evidence that our ‘leaders’ in congress remain wholly oblivious to how the real world operates; From the WSJ today: (http://tinyurl.com/yjnenvu)

    Imagine that; a company making business decisions based on its affect on profit margins. The horror! Does he not realize that a company that ceases to earn adequate returns will cease to be able to obtain funding and thereby cease to exist? My guess is he does not care.

  • http://seekingdelta.wordpress.com/ seekingdelta

    Quote from the WSJ that was meant to be included:
    “Rep. Henry Waxman (D., Calif.), chairman of the House Energy and Commerce Committee, pointed to internal company documents he said demonstrated that profit influenced the decision by WellPoint’s Anthem Blue Cross unit to raise prices on individual insurance plans by as much as 39%.”

  • DanH

    This is a great clarification piece TPC. Thanks.

  • chris

    david wessel is his book in fed we trust has a quote of barney asking ben during the talp discussions whether ben had $80B to devote to the plan, and ben says that i have $80B, i even have $800B. talk about learning on the job.

    wild day in the market, not sure that either longs or shorts have any comfort from this tape

  • pjfny

    You might be right that in theory the US can avoid default legally, but let’s take a more practical example (not totally out of the realm of possibilities)….lets say the Fed prints lots of money and our creditors demand higher…lets say 30 or 40%, does this not in effect mean default in reality, if not de jure?
    A lack of confidence in US monetary/fiscal policy taken with a dollar crisis, is not that unrealistic!

  • shrek

    The fed chairman is the most arrogant and over confident clown on the face of the planet. No one should be shocked when he blows up the entire western world through a massive deflation and then hyperinflation.

    he seems to have invented some sort of fantasy land that he can just print money and tweek things and some sort of desirable outcome will take place. Does it ever occur to him that we have too much debt? No one can make any judgement abou the future with all backstops and screwing around with money printing.

  • billw


    You are so wrong, the US can default on its debt. We finance almost all of our budget. When the point arrives that no one wants our dollars, regardless of how many we print, then we will be in default. Heck, Germany printed trucks full of their currency ( after WWI) and they still went into hyperinflation ( default because no one will accept your currency for payment).

  • http://www.pragcap.com TPC

    Nope. Germany was on the gold standard. By definition, they had a finite amount of money. Apples and oranges.

  • Lou

    Barney Frank is an idiot, is there any need to mince words? Bernanke is trash left over from the Bush Administration. And I guess the whole thing adds up to “Change you can shove up your Ass” which I predict will be the rally cry for the 2010 mid term elections.

    The entire debt crises is mind boggling. Where is the money, where did it go, nobody knows the answer or even asks the question. You look at America disintegrating right before your eyes. Dilapidated, bombed out looking cities in decay and a society on the verge of an intellect apocalypse. Is this what an extra $14 trillion of spending produces? A somatized, obese, population that wallows on their way to the slaughterhouse of once great ideas and ideals.

  • Mickeydee

    Prior to WW1 Germany, Britain, Italy, Russia, Austria-Hungry and France were on the gold standard. In order to finance their lovely little war these countries simply decided to leave the gold standard and turned to the European Central banks for financing via fiat currency.

    The United States also helped finance WW1 and the collateral was the warring countries’s gold supply which ended up in Ft.Knox. At the conclusion of WW1 the USA was the largest creditor nation and holder of gold in the world.

  • Kari

    The government gets money by asking the Federal Reserve for a loan. Bernanke said on Wednesday that he will not monetize the debt any more. Deflation here we come.

  • Numonic

    US commercial banks lend money to the govt.(by buying treasuries) just like those same banks lend money to you and me. And the govt. racks up debt which we call the “budget deficit”. Banks can lend as much as they want and it seems the commercial banks are in favor of lending the govt. as much money as it wants which would keeps rates down. If foreigners decide to stop lending the govt. money, the govt. always has US commercial banks to lend the govt. money. The govt. is able to continue to refinance it’s debt as long as the commercial banks are lending the govt. money. As long as the commercial banks continue to lend the govt. money, the govt. will continue to get the money it needs to roll over debt and keep rates low. Just like as long as you’re able to continue to borrow to pay down debt, your credit score will continue to get better. But the reason the govt. borrowing won’t help the economy much is not because it will lead to taxes to pay down the govt. debt, it’s because the govt. doesn’t borrow anywhere near as much as the private citizens do. Govt. debt is dwarfed by private debt. And it was that magnitude of debt that private debt is that put us in a boom era. People can’t buy big screen TVs with unemployment/welfare checks.

  • Wellink

    This is totally wrong. Printing money = issuing more debt, which needs more interest payments etc. The spiral ends in a crack up boom with the currency being destroyed. This is virtually the same as a debt default. Read Ludwig von Mises.

  • TPC

    It’s actually completely right. You can’t have inflation when the private sector isn’t borrowing. Printing money means we’re increasing bank reserves. It doesn’t mean the money is being lent out to the market.

  • Peter J. of Minneapolis

    If one does not change the way money works, nothing changes.

    I see a great misapprehension and miscommunication of the nature of money in this article and the comments. I say that without giving any credit to Rep. Frank. I consider him an obstacle to recovery, prosperity, and renewal of this nation on account of his work in Congress.

    At the moment, Congress delegated the sovereign power of money creation to a private cabal known as the Federal Reserve. Congress did this with Pres. Wilson’s signature in the Federal Reserve Act of 1913. This created, in effect, the Third Bank of the United States.

    Congress must take back the nation’s sovereign power to control its own money by (a) first an audit of the Fed (H.R. 1207), and (b) passage of the American Monetary Act of 2009. In the meantime, I support (a) local currencies, (b) feed-in-tariff systems at the city, county, and, where possible, state levels, to encourage energy production at the lowest levels, and (c) creation of state banks, like the Bank of North Dakota.

    The Bank of North Dakota has the backing of the full faith and credit of the state of North Dakota, loans money at lower rates than private banks, takes partnership interest in loans with private banks, and remits the interest earned on loans to the state treasury. The successors to the Populists, the Non-Partisan League, created the bank in 1919 with a state-owned grain elevator association to save North Dakota’s farmers and workers from depredations of Minneapolis bank and grain traders. The bank enjoys the support of Republicans and Democrats alike. The incumbent Republican Governorn, John Hoeven, served as the director of the bank in the 1990’s. He remains its biggest booster. With more states having their own state banks, people would lessen poverty, unemployment, budget deficits, and taxes closer to home.

    If there were any pragmatic capitalist act that had a moral foundation, it would be the recapture of the people’s sovereign right to control its own money supply and establishment of publicly owned and accountable banks.

  • Peter J. of Minneapolis

    For further discussion on the manner in which creation of new money does not necessarily lead to inflation, see Ellen H. Brown’s “The Web of Debt” (www.webofdebt.com) and her discussion of the Land Bank of Pennsylvania and the American Greenback of Pres. Lincoln’s era. She also explains the real reason for the destruction of the American Continental and the German hyperinflation of 1923 — massive short-selling of the currency by speculators, not hyperactive government printing presses.

  • mark

    U.S. actually defaulted on it’s debt back in 1974

  • http://www.youngcss.com EconLurker

    Doesn’t the statement, “The US could never possibly default on its debt” seem even the least bit arrogant?

    While roughly 60% of world reserves are in the US dollar, the debt of the US is only worth what other countries think it is. Any fiat money system relies on a societal illusion and acceptance of that illusion. Once that illusion is no longer accepted, what happens?

    “We are all Keynesians now.” – Richard Nixon

    C + I + G = Y

    That’s an illusion of economic health – and incredibly short-sighted at that. And I think it’s one that all of us need to stop accepting. By allowing people like Helicopter Ben and Tiny Tim to continue to ply their trade, we’re continuing to accept this illusion.

    History is incredibly clear about fiat money systems; they all have failed in time. To say that it could never happen to the US is just asking History to repeat itself.

    Just my $.02.

  • King Kong

    You have it correct “pjfny” – printing your way out of debt is a “default”. When you control the printing presses, defaulting on your debt is done by diluting the value of the currency. Do creditors care whether you withhold cash payments when they know you can just as easily decide to pay them back with dollars that in effect equal a fraction of the actual amount owed? Which method of default is used is irrelevant to creditors. The United States has been able to attrack investment at low interest rates due to the stability of our currency. Once we devalue our currency as the “pinhead” Bernanke wants to do, we have effectively become “deadbeats” just like all of the other two bit no-body countries who have done so in the past. If these points on not clear to the people reading this web site, America is in deed in trouble long term.

  • Sam

    True-the day it went off the Gold standard. Nobody seemed to notice it though, except France.

  • Peter J. of Minneapolis

    Fellow readers:

    Please check the Fourteenth Amendment, § 4: “The validity of the public debt of the United States, authorized by law, including debts incurred for payment of pensions and bounties for services in suppressing insurrection or rebellion, shall not be questioned.”

    To default on the debt will require repeal of this section of the Fourteenth Amendment, by ratification of the states or enactment of a new constitution by a constitutional convention under Article V.

    Please check this link to http://www.webofdebt.com:


    Peter J. of Minneapolis

  • Michael

    No offense but I think Frank knows perfectly well what he is talking about. I loathe the man with a passion but ignorance on this is not something I criticize him for.

    It is quite possible for the US to “default on the national debt”. Other knowledgeable writers on this subject have remarked that the US is ALREADY defaulting on its debt. Just like printing money is a form of backdoor taxation, printing money without originating new debt to underlie it is a form of default. Basically, it sucks the value out of previous debt that was sold by altering the balance of new money created to debt originated to back up its value. The fed was hiding this by printing even more new money and buying the new debt itself. The cute euphemism of “monetizing” the debt is being used here. Having many meanings in the past, here it is a euphemism for default. Monetizing US debt is the same as defaulting on it. It’s not refusal to pay, it’s a reduction in the value of the money used to pay it with.

    Bernanke put Frank on notice that, yeah, the fed isn’t going to do that anymore. He’s basically saying to Frank that if Congress spends more than he can legitimately print new money for and sell new debt to cover, he’s going to refuse to give them the money. Note the balance of power here. Frank is supposedly one of the guys in charge of running the country….one of our leaders. Bernanke is an employee. Yet, whom tells whom, the bottom line with regard to this issue?

    Who really controls this country? It’s not Obama, and it’s certainly not Congress.

    Remember that as the budget is slashed left and right, mysteriously by people who have spent their entire careers bloating it up.

  • JLW

    You can absolutely have inflation without (significant) private borrowing. The government will always be a big borrower, and the Fed can always monetize their debt. The govt does not keep the borrowed money as reserves like banks, they spend it. It goes into employees and contractors paychecks, and gets spent into circulation (government employees also take out home mortgages, etc.)

    The other posters are right. Default – correctly defined – includes paying ones debts back in a devalued currency. By that definition, the Government is already in default, and will continue to be so (even more so) in the future. Perhaps it’s semantics, and we need another definition for an outright refusal to pay, to distinguish from other forms of default.

    On Germany after WWI, I’m not sure what kind of gold standard results in people burning piles of paper money for heat.

  • tooppy

    This game will last until someone ( who said China ? ) decide to be paid in comodities or …. in gold.
    And don’t believe it’s unrealistic, it is only until it happen !

  • tooppy

    Reserves cannot be paper, it has to be something of value, you can go against it for a while and lure the blinds, time will prove it has it did for centuries.
    It is some kind of a “physical” law !

  • tooppy

    Nixon raped any “amendment”, “law” or whatever you call it the day he decided to get ride off gold.
    Laws stop nothing to happen ! They are made to be offset !

  • LocalHero

    Where the hell have you people been? The U.S. government no longer exists. It already declared bankruptcy (at least) 3 times (1859, 1933, 1999). It’s in the Congressional Record if you’d bother to look it up. It’s just another corporation now & feeds off the debt (credit) created and pledged by your Birth Certificate. It’s a registered security. Look at your (long-form) BC. It’s got the same red numbers on it as any other security. Your bodies & income were pledged to cover the debt before your eyes were even open. WAKE UP!

  • AndyB, Davie, FL

    The Progressives have enviscerated the Constitution since the passage of the Federal Income Tax; since they are now in full power, nothing in the Constitution will disuade them from going all the way to the final “crisis”.

  • Simon

    If the US paid $100 million every day, it would take 3500 years to pay back the national debt.
    And that’s without any further borrowing, or interest accruing.
    Don’t knock Barney Frank too hard. He’s only asking the question that the rest of the world is wondering.
    You dumb Yanks – you had it all – and blew it.

  • Numonic

    The only way the US will default on it’s debt is if the US commercial banks decide to stop funding the US govt. Technically it is possible for the US to never default. If US commercial banks chose to forever continue lending to the US govt. by buying US T-bonds, the govt. will always have money to pay it’s debt and keep it’s programs going. Sure this will eventually cause inflation but currently govt. spending is a small fraction of what private sector spending was during the credit boom and even smaller than what private sector spending is today despite the credit contraction and the previous credit boom didn’t collapse the $ so govt. spending replacing the spending that was lost due to this recession won’t collapse the $ either. But if you didn’t know, US commercial banks are the major buyers of US Treasuries. And banks can create an infinite amount of money. And I believe US commercial banks have a vested interest in providing the US govt. with as much money as it needs/wants. So knowing that, that means the US won’t default on it’s debt. Total US spending (private and public) is still very low compared to what it was during the credit boom several years ago. Most spending is coming from outside the US, like China.

  • Attitude_Check

    Hypothetically, I can easily see a scenario where Congress would rationally decide to not increase the debt limit and force a default. Given our present extreme short-term debt, if interest rates went to 10% on short term interest (don’t say it couldn’t happen, it did in the 70’s, and it is certainly a theoretical possibility) we would get to the point were the entire US tax receipts would be used to pay the interest. At that point continuing to “print more money” that has to borrowed into existence by the Government, which will only increase the interest rate is not reasonably possible. If we get to this position it is “game over” and must repudiate the debt.

    I’m not saying this is a likely scenario, but it is much too strong to say there is no possible condition that will result in Sovereign Default when the debt is in the National Currency.