Wednesday, May 11, 2016

US National Debt "Least Risky Asset in International Finance"

Recently Donald Trump proposed defaulting on the US national debt. One commenter responded to this by noting the following facts.
The U.S. dollar is a global reserve currency. It is considered the least risky asset in international finance. If investors have to start taking haircuts on this debt, it means that the way money is measured around the world would be thrown into question. All kinds of businesses, both domestic and foreign, would grind to a halt as investors stopped to figure out how to sort out the mess. Even in a best-case scenario, the results would be catastrophic. Financial markets eventually sorted things out after the 2008 meltdown, but it still sparked the worst recession in 75 years. A default on U.S. government debt would be worse.

And there is no reason for the government to default. The U.S. government owes $12.8 trillion to the public. The majority of this money is owed to American citizens and businesses. And the annual output of the U.S. economy is currently $18.1 trillion and growing. The federal government collects over $3 trillion in taxes every year. The national debt just isn’t that big a deal. If it were, you’d see investors demanding high interest rates on American debt. But interest rates are in fact very low, meaning investors think the U.S. will not have trouble paying its debts. 

Even if the United States eventually saw interest rates rise, the government could easily deal with it by raising taxes or simply printing more money. Printing money would pose the risk of modest inflation over the long term, and inflation isn’t an ideal way to deal with problems. But a little bit of inflation is way better than crashing the global economy. (Zach Carter, "Great, Donald Trump Threatened To Default On The National Debt," Huffington Post, May 6, 2016.)
And so often the COGs do not explain these things to COG members and scare monger that the US national debt will cause the United States to soon collapse. Such talk is utter nonsense. It is not going to happen.

The COG leaders like Richard Ames, Stephen Flurry, Robert Morley and many others who insist that the US federal debt will bring catastrophe are wrong. What else are they wrong about?

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