WILL THE UNITED STATES DEFAULT ON ITS DEBT?

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?”

Bernanke:

“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 good.  I have long maintained that our economic problems cannot be solved by pressing a button.  In fact, they could make matters worse in the long-run.  The deficit and the government debts are not sustainable as they are potentially a risk of 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.