The Unwarranted Fears of U.S. Default and their Sad Consequences

U.S. Treasury Secretary Geithner warned that the national debt, now standing at $14 trillion, will (some time between March and May) hit the limit set by U.S. Congress last year at $14.3 trillion.  He warned that failure to raise the limit would cause a default by the U.S.

He chooses to ignore the fact that if the limit were hit and it could not issue any more securities, the U.S Treasury would only default if it refused to request that the Fed honors all payments due, as explained here.

Republicans and many Democrats agree that national debt is a real long-term problem, so they most likely will agree on raising the debt limit and cut the annual Federal budget.

According to Warren Mosler:

[This] dooms the US economy to suffer from a severe lack of aggregate demand for the foreseeable future. The one very faint glimmers hope are the Senators from CT- Joe Lieberman and Richard Blumenthal, only because they alone know better.

Both have read my book, the 7 Deadly Innocent Frauds of Economic Policy, and have engaged me in thorough discussion, and both know as a fact of monetary operations that:

1.  The Federal govt. can’t run out of money.

2.  Paying off China is nothing more than debiting their Fed securities account and crediting their Fed reserve account, with no grand children writing any checks.

3.  The Social Security issue, therefore, can’t be about solvency, only potential inflation.

4.  For a given size of the Federal govt. there is always a level of taxation that corresponds to full employment.

5.  The trade deficit is an enormous benefit, and we can set taxes at a level where we have enough spending power to support both domestic full employment and the purchase of anything the rest of the world wants to sell us.

However, it is highly unlikely they will even attempt to be heard, because, based on their history, they don’t act with specific regard to public purpose.  They are more micro oriented, acting solely for political gain from their immediate constituents.  So on this issue they will likely play along with what think is their voter’s understanding of these issues, and make no effort to educate them for the public good.

The words that come to mind when that happens are ‘intellectually dishonest.’

But I do hope I’m wrong and that at least one of them comes through for all of us.

There are also others outside of Congress who could come through and save the day.  Current and senior Fed officials in the Department of Monetary Affairs are more than well versed in monetary operations, and know for a fact that operationally, Federal spending is in no case revenue dependent.  And much of the CBO, including former heads, know as a fact of accounting Federal deficit spending equals, and is in fact the only source of net savings of financial assets for the rest of us.  But it’s highly doubtful any of them will come forth to save the day.

Bottom line – believing we could be the next Greece continues to keep us on the path of becoming the next Japan.