Money is ruthless. The genius of compounding confirms the previous truth. This rates mention as economists Yeva Nersisyan and L. Randall Wray promote the fiction that U.S. “cannot default on debt denominated in dollars.” In their defense, they’re far from the first academics to assert what's false about dollars and debt, and surely not the last.
About what you’re about to read, fear not. As in don’t worry about reading yet another impassioned call for the proverbial “adults” in the room to get serious about the looming crisis of the national debt. Quite the opposite. As my upcoming book, The Deficit Delusion, argues endlessly, the deficits and debt are but symptoms of the real problem: too much tax revenue collection by the U.S. Treasury now, and much worse, much more tax revenue collection by Treasury in the future.
In short, the surest sign there’s no looming debt crisis is all the debt. Markets are wise, and returning to the top of this opinion piece, money is ruthless. The true crisis, though unseen since we can’t see the immense wealth not being created thanks to so much government consumption, is in the present and future extraction of wealth by Treasury. The debt is a mere effect of this crisis.
Back to Nersisyan and Wray, they claim “the U.S. government" can't "default on debt denominated in dollars, since it is the issuer of dollars.” The professors could perhaps be convinced to rethink their argument.
If we ignore that a currency devaluation (we’ve had a few of those throughout U.S. history) is in reality a default, we can’t ignore soaring yields on Treasuries in the same decade that President Nixon severed the dollar’s link to gold. The latter was an explicit devaluation, meaning an implicit default, and it revealed itself in greatly reduced trust in present and future income streams paid out by the U.S. Treasury. Which is a reminder yet again that the U.S. can and does default on its debt.
Ok, but what about the U.S. as the “issuer of dollars”? Sure, what about it? It’s utterly meaningless, including for Americans, assuming Treasury seriously embraces devaluation. That’s because no one buys or sells with “money,” rather products buy products. And precisely because no producer of a market good is going to accept “money” that will exchange for less than what he or she has brought to market, only good currencies circulate.
See the “dollar booths” that sprouted up all over Germany in the 1920s. With the mark quite literally trash, it ceased to circulate. Assuming a substantial decline of the dollar (meaning default), so will the dollar cease to circulate since producers will no longer accept them. And Treasuries will collapse to reflect the worthlessness of the income streams they'll pay out.
That’s why the wise won’t take seriously the notion that so long as the U.S. can print dollars, it can’t default on its debt. It can, and it could.
Production is what pays off debt, always and everywhere. Treasury has too much access to abundant U.S. production, hence all the debt.
Which is just a comment that if Treasury ever needs to print dollars to pay off its debts, forward looking markets will cut Treasury off long before it prints. As in if Treasury ever needs to print dollars to pay its dollar debt, it will have no dollar debt to pay off.
