He’s great at some analysis of finance, but his understanding of monetary theory is a bit lacking:
The entire world financial system revolves around the notion that the U.S. will never default, because under normal, rational circumstances, it can’t. (It can always print enough money to meet its obligations, as even Alan Greenspan conceded two years ago.) Before this latest political madness, no one could ever have conceived of a sovereign state intentionally defaulting. But we’re, like, a week away from this happening, and where’s the emergency mobilization?
Read more: http://www.rollingstone.com/politics/blogs/taibblog/democrats-must-stop-ted-cruzs-hollywood-ending-20131011#ixzz2hipRo3gY
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It is true that the entire world financial system revolves around the notion that the U.S. will never default. It is not true that the U.S. “can’t”. It is also not true that the U.S. “…can always print enough money to meet its obligations.” And it is also not true that “…no one could ever have conceived of a sovereign state intentionally defaulting.” Indeed it has happened many times. No less a luminary than Ken Rogoff has commented on this very fact as recently as 2010.
The point being that having the “world financial system” predicated on the impossibility of a US default is obviously a mistake, since such a thing is surely possible, as we are now seeing.
Economists predict this and that. Notably, they did not predict the financial meltdown of 2008 and the president’s nominee to head the Federal Reserve, Janet Yellen, has specifically said that no one – at least among her circle – saw that one coming. So now they see economic Armageddon if the US defaults. So what?
Maybe, maybe not. Taibbi picks a strange place to become credulous.
You’ve still got that section 4 of the 14th amendment thing, which has been in the news again lately (although only this blog was citing it more than two years ago) going for you. I suppose that means that a default would be unconstitutional. But of course the constitution is breached all the time.
We look for people to wave a magic wand and make everything better all too often.
Lawyers on Strike 
Taibbi did not say that the US cannot default, he said that it could not under “normal, rational circumstances”. And, since 1971, it has had a fiat currency, so that the only bar to paying its bills is political. It does not need to borrow money to pay its bills. Ask Abraham Lincoln about that. 🙂
Also, one of the first laws of the US put a premium on paying its debts. That underscores the traditional importance that the US has put on avoiding default. I am not a constitutional scholar, but whether the debt ceiling law conflicts with the Fourteenth Amendment or not, the amendment also places importance on paying our debts. (It was also passed at a time when greenbacks were in circulation, so it did not mean payment in gold.)
Unfortunately, there are enough Killer Clowns in Congress that conditions are neither normal nor rational. Default is a possibility.
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Min, long time.
There’s a lot going on in your comment. A lot more to what you are saying than the simple saying of it.
The only bar to the US “paying its bills” is political? Yes and no. Can any entity, including a sovereign government, “pay” a bill in any meaningful sense just by declaring it paid – that is, print a note that is simultaneously the promise to pay the debt and the payment of it? This is what you are suggesting.
The government doesn’t need to borrow to pay its bills? Then why does it?
I don’t mind a premium on payment of debts. But there are limits.
Should people starve in the effort to pay their debts? Shall we do away with discharges in bankruptcy because it’s so important to pay your debts?
Section 4 of the 14th amendment was quite obviously civil war specific, and an effort to differentiate between the debts incurred by the confederacy and the debts conferred by the Union. Obviously the government did not want to be liable for the former.
Be that as it may. As I think I said in the linked post, passing a law that the debt of the United States “shall not be questioned” is not going to stop it from being questioned.
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Hi. I have been reading your blog, but really did not have anything to say. 🙂
“Section 4 of the 14th amendment was quite obviously civil war specific, and an effort to differentiate between the debts incurred by the confederacy and the debts conferred by the Union. Obviously the government did not want to be liable for the former.”
I do think it related to not paying Confederate debts, but I think that Congress also had in mind the tradition of the US of honoring its debts, and reiterated the commitment to do so. After all, at the start of the Union the Federal gov’t assumed the debts of the states and paid them off over time. It established its creditworthiness.
“Can any entity, including a sovereign government, “pay” a bill in any meaningful sense just by declaring it paid – that is, print a note that is simultaneously the promise to pay the debt and the payment of it? This is what you are suggesting.”
Well, it has been done. That is how the world works these days (post 1971), with the major exception of Europe, where the Euro acts like a gold standard. I don’t mean just issuing currency, but I do mean paying its bills with promises in the form of money. Currency is redeemable in itself. It was done with the greenbacks during the Civil War. It was done with colonial currencies in the decades before the Revolutionary War. It was done with tally sticks in England for 600 years, until 1834. True, there were signal failures, such as the Continental Dollar and the French Republic’s assignats. Benjamin Franklin, who had been instrumental in the creation of Pennsyvania’s currency, understood that the Continental Congress needed to have taxing power to support the Dollar, but the states did not want to give it that power, and the Continental crashed. The French believed that backing assignats with land would work, but it did not. I do not know enough about that, but it was a mess.
“The government doesn’t need to borrow to pay its bills? Then why does it?”
I suspect that history is the main reason. After all, European monarchs borrowed money from the great banking houses to finance their wars. (Napoleon paid cash, however. 🙂 ) Abraham Lincoln did not want to borrow at the rates the money lenders demanded, and asked Congress to issue currency, which they did, after due consideration. (I have read some of the debate.)
To my mind the main question is who has the ultimate power, Los Ricos or We the People? (Not that I think that subsidizing the money lenders is necessarily bad. I do think that the gov’t should provide safe investments in the form of treasuries. But I do think that in a depression, such as the one we are in now, the gov’t deficit should be financed mostly by issuing currency. People need the money.)
“Should people starve in the effort to pay their debts?”
Absolutely not. There is a great burden of debt on the general populace now, just as there was during the Great Depression, just as there was during the Long Depression. Where do the people get the money they need? There are two basic ways that money is created today. The first is through bank loans. Creating money by going into debt to bankers does not reduce the overall debt burden of society. It just shifts it around. The second is through the Federal deficit. Usually that means that the gov’t borrows money, but it can also just print it or coin it. Printing it or coining it does not increase the debt burden of society, or just shift it around. That is one reason that I think that it is preferable in times like these. In any event, we need to increase the Federal deficit in order to inject money into the economy, so that people can get the money that they need.
“Shall we do away with discharges in bankruptcy because it’s so important to pay your debts?”
In the early days of the republic it was important for the US to establish its creditworthiness so that it could borrow from European banks. Now it is important for the US to pay its debts so that people will have safe investments by lending to the US. We do not have to go hat in hand to Los Ricos anymore. 🙂
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Sorry, that last sentence was left over from copying. But to answer it for the gov’t, there is no good reason for the gov’t to go bankrupt, nor for it to default.
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Corrected! Through the miracle of the wordpress “editing” feature, over which I have total control! You’re welcome!
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Much grass! 🙂
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Truth is the debts are not “paid” in any meaningful sense, unless you think kicking the can down the road is meaningful payment.
Anyway, the big problem here is that you run out of road. Well, that’s one big problem. There are others.
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What do you mean by “run out of road”? The Canadians invade? 😉
As for paying for anything with currency, why is that not meaningful? Money is, after all, a social construct.
Some quotes from Thomas Edison on such issues. (You may already have read them, I don’t know. 🙂 ) (From http://www.monetarylaw.com/2012/04/thomas-edison-answers-money-question.html )
” If our nation can issue a dollar bond, it can issue a dollar bill. The element that makes the bond good makes the bill good, also. . . .
“It is absurd to say that our country can issue $30,000,000 in bonds and not $30,000,000 in currency. Both are promises to pay; but one promise fattens the usurer, and the other helps the people. If the currency issued by the Government were no good, then the bonds issued would be no good either.”
“It is not the gold that makes the dollar. It is the dollar that makes the gold. Take the dollar out of the gold, and leave it merely yellow metal, and it sinks in value. Gold is established by law, just as silver was, and gold could be disestablished, demonetized by law, just as silver was. When silver was demonetized the former so-called dollar became worth about 50 cents.”
Ciao. 🙂
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Money is a social construct? Like so many things in this area, yes and no.
I don’t like being in a position to have to argue with Thomas Edison, one of my childhood heroes, but so be it. He’s way off on this, too. The “dollar” makes the gold? What is the dollar in the first place? At least he understands that there is law involved in this, not just “economics”. That’s certainly an important insight.
This is not about paper money. Paper money is fine with me. It is about “fiat” money. The dollar is what I say it is, and tomorrow a dollar can be something different if I feel like it. When I promise to pay that is payment. That is a “fiat”, and the “social construct” involved is tyranny, a lawless dictatorship. That is the only political term that describes such an arbitrary and whimsical exercise of such an important function of government, the function of defining the monetary unit of account that binds everyone, including the government.
Can the government change the definition, because for whatever reason things have gotten out of whack and in justice an adjustment must be made? Sure. Do it out in the open and everyone lives with the consequences, the government included.
But for some, even this is not enough power. There must also be no accountability for the consequences of the change. This is the system we have. It is rotten, unjust, unintelligible and doomed. We are watching it pan out every day. For me it’s like Chinese water torture: drip, drip, drip day in and day out and I already know how the story ends. Some days I just wish it would get there so we could start over. But I don’t relish any of it. Mostly I just hope it doesn’t turn out as badly as it sometimes does in my thoughts.
Ugh.
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Hi. Sorry not to have gotten back to you, but my brain has been otherwise engaged. I am definitely interesting in understanding your views. 🙂 Let me respond tomorrow or Sunday. 🙂
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