That’s Right, the US Government is not Running out of Money….

Matt Yglesias has an important piece over at Slate discussing the idea that the US government is “running out of money”.  He says:

“As Mark Schmitt wrote last year regarding a book from Welch and co-author Nick Gillespie this assertion that America is “out of money” has become an all-purpose crutch through which Reason can push an ideological agenda of skepticism about programs without actually making the case in its particulars. But it’s simply not true that we’re out of money. Many states and municipalities are up against hard budget constraints, but the US government has the ability to create US currency in unlimited quantities. It hasn’t run out of money and won’t ever run out of money. It would be nice for people to understand this point separately from controversies over whether public sector programs are wise or just. “

I know regulars are tired of hearing me beat this drum for years on end, but it’s important so if you know the story feel free to move on.  Anyhow, how does this work?  What makes The USA so different from, say Greece?  As I’ve explained before, the USA is structured in such a way that the government is always able to procure funds from the private sector.  It can tax us at will.  And it can harness the private banking system to sell bonds.   Although the US Treasury is designed as a currency user it can always procure funds.

The only situation where the government is unable to procure funds is during a very high inflation or period of hyperinflation (tax receipts would decline and banks would likely reject their mandate to buy bonds at auction as they become survive first, government agents second).  But even in this scenario the government does not “run out of money” because it can always tap its central bank to provide the funding.  Again, there’s no constraint like there is if you’re on a gold standard.  The government quite literally has a printing press at its disposal if it really needs it.

But this all highlights a crucial understanding.  Unlike Greece, the USA is specifically designed in a way that it cannot have a solvency constraint that results in it “running out of money”.  In fact, this is lack of unity in the European monetary system is one of its primary flaws.   Granted, we could suffer a high inflation or possibly even a hyperinflation, but this is a totally different phenomenon than suffering from a solvency constraint like Greece.  Misunderstanding this crucial element of the monetary system is playing a substantial role in our economic malaise as one of the most powerful tools we’ve ever designed (our very government) is being misrepresented as having a constraint that is totally inapplicable.  And during a time of 1.7% inflation that’s causing a lot more hardship than is necessary….