It’s a good thing America is not a small, struggling country on the periphery of Europe hoping to be admitted to the European Union. We wouldn’t stand a chance, especially not after the Greek disaster.We’ve run budget deficits for years that were well above the fiscal prudence required for European Union membership. So did Greece, although they kept promising to get their fiscal house in order. Now our budget deficit is projected to run over 10% of the GDP, putting us up there with Greece’s 13% deficit.
But if we’re just about as far outside of EU standards of fiscal prudence as Greece, why isn’t the US government in a financial crisis? We’re actually far from it. Treasuries still sell at stunningly low rates and the dollar is appreciating against other currencies. What’s going on? Why can the US defy the laws of financial physics that are dragging Greece down?
The answer is simpler that you might think. The US is benefiting from its status as the best debtor nation that the world has ever known. For hundreds of years, the US government has paid off every single dollar it has borrowed. Never once has the debt been repudiated or a debt payment delayed. What’s more, we’ve never had hyper-inflation that quickly ameliorates debt. When inflation did get bad in the late 1970s, we showed the world we were wiling to endure a very tough recession, slash taxes, and adopt labour union reforms to address the problem.
Compare that to the rest of the world. Or just to Greece. Greece has been a recidivist defaulter on its debt. It has never shown the willingness to get tough and tighten its belt to deal with fiscal problems. Even now, as it teeters on the edge of default, its population shows little willingness to adjust.
The world’s investors are willing to lend to the US even as its financial situation mirrors those of nation’s in a debt crisis because we are the world’s best debtor. But this is no reason to get cocky. We could easily lose that status, squander our centuries of hard won trust, by taking on too much debt and defaulting or inflating our way out of it.
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