US Government Debt Different - Finance Department - University of ...

100 Thoughts on Debt Sustainability: Supply and Demand Keynote RemarksWatching the current Greek drama unfold has helped sharpen mythinking about this choice. For present purposes, let’s put aside thequestion of Greece withdrawing from the Euro and simply considerthe question of whether, if you had to play the part of the Greekgovernment, would you default on your debt (by not rolling it overor by falling out of the Euro – either way) or would you try to keeprolling it over at higher interest costs. What are the differences betweendefaulting and not defaulting?First, if you default you will lower your debt burden and improveyour economic prospects. If you do not default you will continue toincur your high debt burden. Second, if you default you are goingto destroy a great deal of wealth and, in all likelihood, destroy theefficacy of your banking system and its ability, in the near term, tohelp you finance your debt in the future. If you don’t choose to default,you are choosing to continue to rely on your banking system tohelp you finance your debt. Since the benefits of reducing your debtburden are obvious, it strikes me that the critical issue is whether, ina country with extremely high debt, your banking system is alreadyso severely impaired that it is not capable of helping you finance yourdebt. If your banking system is already impaired, then you are morelikely to default because you have already incurred the major cost ofdefault. However, if you can find a way to default without impairingyour banking system, by somehow shielding your banks from theconsequences of default, then the attractiveness of default goes up.Which brings me to my final point. Sovereign defaults are not likelyto happen when there is “too much” money but, rather, when thereis “too little” money. These are opposite conditions. So while I fullyunderstand that one can impair the real value of a bond throughinflation as well as through default, the former central banker in merebels against describing as parallel the condition of there being toomuch money around (and its spilling over into inflation) and thecondition of there not being enough money.