11.29.2012 25

Krugman: National default ‘can’t happen’

By Bill Wilson — In the past 30 years, the national debt has increased 1,328 percent from $1.1 trillion to $16.3 trillion.

From 1952 to 1982, it nearly quadrupled, from about $250 billion to $1 trillion. And from its 1922 level of $23 billion, it increased by 967 percent.

See a pattern?

What will the national debt be in 2042? An historically “modest” tripling to $50 trillion? Or perhaps a mind-boggling $100 trillion?

But not to worry, says New York Times pundit Paul Krugman. No matter how large it gets, we can’t default on our debt.

“[W]e have our own currency,” Krugman reassured the American people in a Nov. 25 column, and the government “literally can’t run out of money. After all, it can print the stuff,” unlike Greece, whose currency is controlled by the European Union.

Besides, he writes, interest rates are low and there is no sign investors are about to flee from the relative safety of treasuries.

That may be so — for now. Yet, for all of Krugman’s happy talk of investors continuing to buy U.S. bonds, he understates the degree to which the government is already resorting to the printing press to meet its weekly funding obligations.

Some $1.65 trillion of the debt is held by the Federal Reserve. Another $4.84 trillion of debt is held in the Social Security, Medicare, and other trust funds.

That means 39.7 percent of the debt — some $6.5 trillion — is held by government agencies. So, yeah, we can print it. But it is hardly a sign of fiscal health or of high demand for treasuries when just to refinance the current level of debt, the government must borrow 40 cents of every dollar from itself.

The share of government debt held by the government itself will only grow this decade. The Office of Management and Budget projects debt held by the trust funds will rise to $6.3 trillion by 2022 alone. As for the Fed, there is no telling how much it will print to finance Washington, D.C.’s insatiable appetite for more spending.

But this is no evidence that a default “can’t happen”.

It merely proves if it were not for the printed money, the government would have apparently defaulted on its obligations years ago. But that is no reason to celebrate.

Even though the national debt soared 10 percent last year alone, countries like China held back on any net purchases of debt — indicating that demand overseas may be beginning to wane.

The basis for the dollar’s reign as the world’s reserve currency rests on the willingness of overseas partners to continue to transact in dollars. But if we print too much to refinance our growing debts — in the process exporting inflation to our own creditors — suddenly the dollar becomes less attractive as a means of exchange.

And that is where the danger lies.

Not that suddenly one day in the near future there will be a run on dollar-denominated assets — although that is certainly always a risk, if only a remote one. But, that over the coming years, the dollar will continue to lose backing in the global economy amid severe financial strain, leading to its eventual collapse as the reserve currency.

At that point, a run on treasuries and an ensuing default would certainly not be out of the question. The foreign bailout would come to an end. Krugman has an apparent belief that the rest of the world will continue to paper over our debts without question for posterity. But that assumption is awfully risky and may prove to be fatally wrong.

When the other shoe drops, or how large the debt will be then is anyone’s guess. But to pretend that it “can’t happen” shows a remarkable lack of foresight — akin to middle-of-the-pack lemmings that follow the crowd over the cliff to their own demise.

Bill Wilson is the President of Americans for Limited Government. You can follow Bill on Twitter at @BillWilsonALG.

  • Guest

    Does anyone still believe the claptrap given out by Krugman?
    he has proved himself to be such an idiot i wonder how he ever got the Nobel prize!
    Seeing to whom they give it nowadays I would find it an insult to even say I received it today!

  • Phillip_in_TX

    He got it the same way “it’s not my fault Obama” got his Nobel Peace Prize, for nothing.

  • If the government can just print money to meet its obligations then why does it need to borrow money at all?

  • Actually, most of the money that the government “prints” is not physical paper money anymore, It is just numbers in a computer saying this bank or that one has this amount of money. If the government can “print” money that easily and quickly they can remove it from circulation just as easily and quickly by changing the numbers in the computer.

  • cowboy

    the man is a moron, once the US dollar is no longer the world reserve currency we will end up just like Greece.

  • reggiec

    The only reason that the dollar has any value at all now is that it is the monetary unit used world wide for trading in energy.(oil to be specific) As soon as the rest of the world gets tired of escalating energy cost because of the debasement of the dollar due to massive printing of even more fiat dollars, they will abandon the dollar, call in loans made to the US to try and get some value back, create a run on the dollar world wide and The US economy will crash and burn.

  • reggiec

    “Sustained high rates of government borrowing would both drain funds away from private investment and increase our debt to foreigners, with adverse long-run effects on U.S. output, incomes, and standards of living.”
    Ben Bernanke
    Our founding Fathers were not ignorant of economics. Here is a bit of their wisdom.
    ***“If the American people ever allow private banks to control the issuance of their currencies, first by inflation and then by deflation, the banks and corporations that will grow up around them will deprive the people of all their prosperity until their children will wake up homeless on the continent their fathers conquered.” – Thomas Jefferson
    ***“Paper money has had the effect in your state that it will ever have, to ruin commerce, oppress the honest, and open the door to every species of fraud and injustice.” – George Washington
    It seems government never will learn the wisdom of history!

  • reggiec

    . One of the very basic reasons for the demise of the Roman Empire was the debasement of their currency. The coined money the Romans used where the gold aureus and the silver denarius. The aureus was originally 8 grams of pure gold and the denarius was 5.5 grams of pure silver. The debasement began when the aureus was replaced with 4.5 gram pure gold solidus.
    From the year 0 to 100 AD the denarius contained over 90% silver. By 200 AD the silver content had fallen to less than 70%. By 300 AD there was less than 5% silver in the coin the rest being base metals like copper. In 350 AD it was worthless and would have taken 9 million denarius coins to equal the buying power of the original 8 grams of gold aureus. Can you see any justification for Cicero’s warning today?
    We can find direct parallels between Roman currency and what has happened to currency in These United States of America.
    The dollar was adopted as the standard US monetary unit by The Coinage Act of 1792.
    The actual metal content of U.S. coins has been debased beginning in with the passage of “The Coinage Act of 1965”. The metal content of dimes, quarters, and half-dollars was changed by law, eliminating the requirement that they be 90% silver. Dimes and the quarters no longer contained any silver. Silver in the half-dollar plunged to 40 percent and was reduced to zero after 1970. Even the penny was debased. In 1981 the 95 percent copper and 5 percent zinc alloy penny, changed to 97.5 percent zinc and 2.5 percent copper. Then there was the elimination of the gold and silver backed paper money replaced by the Federal Reserve Note that inflation has debased beyond all recognition.
    On August 15, 1971, President Nixon “closed the gold window”, ending convertibility between US dollars and gold. Since that time the buying power of a one dollar Federal Reserve note has fallen drastically. What would have cost a single dollar in 1971 now costs $112.43. If you go back to 1913 and the establishment of Federal Reserve itself; the value of a dollar is even worse. What a dollar would have purchased then would now cost $459.93. See US Inflation Calculator
    If the value of the monetary unit of any government is debased, it will eventually destroy the free market and the economic viability of that society.

  • merriel

    What good is paper money if there isn’t anything heavy and metal to back it. You should all watch Ray Steven’s ” Obama Budget Plan” on youtube. It is so true that it would be laughable, if it weren’t true.

  • hookemowls

    Well, there you have it, more “logic” from those running the country, must be an attorney….0 common sense.

  • Former Enron adviser, Paul Krugman, is basically saying there are no limits to how far the US will debase its currency in order to not technically default on its debt. He’s probably right given how morally and intellectually bankrupt the politicians, led by Obama, are in DC. The obvious conclusion to draw is that US dollars, or just about anything locked into being priced in US dollars, is going to become more and more worthless as DC continues on its path of currency debasement. We have now arrived at the most sublime and absurd moment where the Fed’s stated mission is to avoid deflation at all costs by keeping inflation at 2% as measured by the CPI (meaning it is more like 6-8% in reality). I guess no worries if it goes higher, right? Our central bank is committed to inflating away the value of money as a store of wealth right alongside our lying, corrupt and duly-elected politicians. All in order to fund, albeit not a whole lot longer, the welfare and warfare state.

    Invest in the precious metals– gold, silver, lead, brass and steel machined into the shape of a gun.

  • chas615

    If Krugman were right why do we need to ‘increase revenue’? Or pay taxes at all for that matter?

  • The trouble is the underpinning for the dollar while Bernanke is running
    the printing press & for the low interest rates keeping housing
    alive but moribund is the dollar’s status as world reserve currency.

    Unfortunately that status is merely a matter of perception and can
    change very quickly. Already you’re seeing countries engage in regional
    agreements to trade in each others’ currencies without the dollar.
    More devaluation of the currency & there’s a real risk those efforts
    will reach critical mass. When that happens you could find interest
    rates at 20%, a collapsed dollar and collapsed bond & stock markets
    literally overnight.

  • swede41


  • WilliamSpires

    It’s truly amazing that Krugman was given a nobel prize in Economics and he makes such a ridiculous statement . So we continue printing money, then we’d better put Obama’s face on it because we will be buying a loaf of bread with a 10,000 dollar bill just like Zimbabwe on Obama’s home continent.

  • Don39

    I firmly believe that this country can and will go bust, and that it might be a very good thing to happen and soon. Why? Because if it happens soon it may wake a lot of people up and weed out a lot of chaff and a lot of corruption. The longer it takes the worse it will be and the more likely to end with this nation in either a totalitarian government or a civil war.Yes I agree with Limbaugh, I hope Obama fails mightily and the sooner the better for the Constitutional Republic, while it can still be saved for my children and grandchildren, and without a bloody revolution!

  • No , the Norwegians give the astoundingly inept Peace Prizes , eg , this year the EU . The Swedish sometimes have given the Econ prize to real economists , eg , Hayek .

  • Carl Pham

    No, that’s wrong. They need a willing counterparty. RIght now, the Treasury offers Goldman-Sachs freshly-printed dollars (or, as you point out, the equivalent in number in a computer) in exchange for mortgage-backed securities, i.e. a bundle of mortgage loans.

    Now let’s say everything goes tits up, and inflation breaks out with a roar, with interest rates spiking to 20% like they did in the 70s. What happens to house values? Well, naturally they plummet. If you can afford a payment on a $300,000 house with a 4% mortgage, what kind of hourse can you pay for when mortgage rates are 8% or 18%? Far, far less. So the prices of houses collapses. And the value of all those mortgage-backed securities the Fed is holding plummets.

    So when the Fed things, hyuk hyuk I’ll just reverse this ol’ inflation by selling all these mortgage-backed securities for cash, to pull money out of the system — to whom are they going to sell them? Who would part with cash for a worthless security? Nobody. So that won’t work.

    What can they do? Well, there’s the old remedy, the one Paul Volcker used to break inflation in the 70s, which is to crank interest rates up higher and higher. At some point, you can get enough interest leaving your money in the bank to compensate for even rampant inflation, and you leave it there, which drops consumer pressure on prices, and inflation sputters out.

    Ah…but when Volcker did that trick the US was borrowing $200 billion a year, almost entirely from individuals, and cranking the interest rates up boosted interest on the national debt, but not fatally. This is no longer possible. The Federal government is now borrowing $1 trillion a year, and only 60% of it from actual investors. If the Fed stops printing money, they have to borrow an additional $400 billion in real money from investors, and if interest rates shoot up, the interest they have to pay skyrockets and the budget implodes. The only way out would be to raise taxes brutally, which of course would destroy the economy.

    Fact is, Team Obama is now trapped. They cannot get off the treadmill of printing and borrowing money, because every conceivable way of doing so leads to a short-term disaster in which they’ll be lucky not to end up hanged from lampposts. So they’re just pedaling on and on, hoping for a miracle, and hoping they find some way to pin the debacle on somebody else when it comes.

  • pduffy

    I think Germany could print their own currency too just before WW2 broke out. Better buy a wheelbarrow, you will need it to purchase that loaf of bread.

  • The money of the world was once the pound and now it is the dollar, so what may change that to the wan or some other currency. This thing about America on top of the world is sliding away and soon we will no longer be the largest economy in the world, China has over a billion consumers ,so go figure. How many people out there think they can go out there and get unlimited credit? Try it!

  • Public_Citizen

    You are thinking of the Weimar Republic. The collapse of the Papermark due to massive printing of Marks with no physical backing brought on the hyperinflation that led to the collapse of the government and the eventual seizing of power by the National Socialist German Workers Party, commonly known as the Nazis.

    Every country that has ever tried a fiat currency [one not tied directly to a physical asset], from ancient China through the 20th century, has had its government collapse when the purchasing power of the fiat money finally collapsed. The people invariably have paid a harsh price for the recklessness and fecklessness of the elected officials that have allowed the scheme to go to its inevitable ending.

  • Public_Citizen

    What the awarding of the prize is indicative of is that “Economics” as a discipline is suspect. Common sense verified by the historical record show that results of fiscal actions advocated by “economists”, many with advanced degrees in “Economics” uniformly lead to a bad ending.
    It is time to re-examine the entire philosophical edifice upon which modern economics is built. I feel that a careful examination would lead to the conclusion that about 90%of the “discipline” is based on Rainbow Unicorn Logic.

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