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

Charles W. Mooney, Jrticipants, did see what was on the immediate horizon. They issuedappropriate warnings, but they were not heeded.173As the economy entered (or reentered) a recession by the first or secondquarter of 2013 (which quarter is not very important, lookingback about five years), the U.S. deficit continued to grow apace.U.S. Treasuries continued to roll at every auction but at ever increasinginterest yields. The largest holders of U.S. Treasuries (suchas the Chinese and Japanese governments) began to question moreopenly the ability of the U.S. to continue to finance its growingdebt burden. Eventually, it appeared that the time was approachingwhen the U.S. would not be able to continue to roll the increases indebt necessary for the debt service.The U.S. government’s response was to “monetize” its debt (an oversimplification,but sufficient for this sketch). Conventionally, theFed continued to provide more and more funds to banks which,conventionally, increased the money supply through increased lending.But Congress, surprisingly, took a bolder step of directly creatingmore money by firing up the printing presses. Not surprisingly,Congress took the less bold approach of continuing to spend the increasingmoney supply beyond its available revenues and to refusemeaningful tax increases. While this spending did provide benefits,such as increased employment and enhanced infrastructure, the netresult of the U.S. strategy was negative. Cutting to the chase, the resulthas been hyperinflation which now approaches 60% per year inthe U.S. (shades of Germany and Austria almost a century ago). TheU.S. has good company in 2018, as many other states face similarsituations. The dollar remains a reserve currency, although a distantsecond to the Euro, only because of the relative size of the U.S.economy, the large volume of U.S. dollars, and the dollar’s liquidity.Nonetheless, since 2012, the dollar’s value against a typical basket ofother currencies has fallen by about 70%.So far, the principal benefit of the U.S. strategy has been to avoid atechnical (i.e., actual) default on its debt. Even now, in this precarioussituation in 2018, the conventional wisdom (in the U.S. andelsewhere) remains that a U.S. default is unthinkable. As it turns