Why The US Cannot Default on its Debt

Over the past several years, I’ve steadily come around to the MMT (Modern Monetary Theory) view of macroeconomics. Some of my past posts make me out to be a deficit hawk; while still true, I now believe that the ROI of government spending is more important than simply looking at the deficit and gross debt alone. This brings me to the headline – why is it that the US cannot default default on its debt, except by choice?

The answer lies in Modern Monetary Theory. In brief:

1. If all of a nation’s debt is denominated in its sovereign fiat currency, it cannot default. The fundamental point here is that the US can always print its way out of default, and so insolvency is never an issue.

2. This is totally different from Europe, in which individual nations do not have sovereign control over their currencies.

3. The only risk of printing money is inflation. This threat must be respected, but it is fundamentally different from a debt default.

While MMT is not yet in the academic mainstream (taught only at University of Missouri-Kansas City), it is the only theory that explains why Japan has yet to default on its debt, why the US can never default on its debt (except by choice), and why the Euro Zone is so screwed.

In future posts I’ll likely dive deeper into MMT, but let me first reference some great resources from around the web on the topic:

http://pragcap.com/where-does-the-money-come-from greenhouses

http://agonist.org/bolo/20100426/modern_monetary_theory_an_overview

movingestimate.co moving estimate

http://pragcap.com/warren-buffett-does-mmt

5 thoughts on “Why The US Cannot Default on its Debt

  1. THE USA WILL DEFAULT
    A FEW QUESTIONS
    Who’s hooked on prescription drugs?
    Who’s hooked on welfare?
    The second highest high school drop out rate in the world?
    Obese?
    Who has been UNEMPLOYED FOR 3.5 YRS?
    Who has an aging population 1 foot in the grave the other on a banana peel?
    Has reverse mortgages?
    Living in subsidized housing & a multitude of other Gov. Subsidies?
    WHO HAS 13,000 CITIZENS DIEING ANNUALLY FROM GUNFIRE BY THEIR FELLOW CITIZENS?

    WHO HAS 800 MILITARY BASES ARIUND THE WORLD?
    More soldiers killing themselves then dieing in action?

    THE WAR HAS BEEN HERE THE WHOLE TIME!!!

    Where does it cost 1 MILLION DOLLARS a year per troop & theirs100,000 troops there? AFGANASTAN

    LARGEST PRISON POPULATION IN THE WORLD?
    5% of th world population 25%
    of the worlds PRISON POPULATION

    YOUR TAX DOLLARS AT WORK
    1.25 MILLION GANG BANGERS WITH ASSAULT RIFLES ON THEIR STREETS?
    Who does all the manual labor? MEXICO
    Cup of coffee? INDIA
    Bus ride? INDIA
    TANK OF GAS? INDIA
    Hotel room? INDIA
    LIQUOOOOR STOOOORE?
    Who delivers the USA’s babies? INDIA
    Who keeps their hearts beating? INDIA
    Ever seen gang of Indian kids?
    WHO HAS THE GREATEST UNIVERSITIES IN THE WORLD? THE USA
    WHOS IN THEM?
    WHEN THE RIOTS START HERE THERE IS NO ARMY HERE TO STOP THE RIOTS
    WHEN THE RIOTS START HERE THERE IS NO ARMY HERE TO STOP THE RIOTS
    NICE FXER UP PROPERTY
    Hostile Citizen

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