Photo: NBC News
One reason, probably, there’s been so much incredulity at the S&P downgrade of US credit is the simple fact that the US pays all its debts in dollars.Former Fed Chairman Alan Greenspan summed up the sentiment:
“The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default” said Greenspan on NBC’s Meet the Press.
This is basically true, but it’s also interesting that Greenspan in the past has expressed alarm about the ballooning size of the national debt.
So it would seem that the Greenspan view of the debt is: It’s a big problem, but if the US needs an escape hatch, it can always reach up and hit the PRINT button, and take care of things.
But the printing press is not an escape hatch, or an emergency measure. It’s actually the basis of how the US spends money.
Currency in circulation has done nothing but go up for basically ever.
And it’s got nothing to do with The Fed or anything like that.
While the Fed Funds rate has gone lower over time, no period of “tightening” (reverse printing, if you think about it that way) has ever had an impact on the amount of money there is out there.
There’s also no discernible correlation between the amount of currency out there, and the value of the dollar. For a long time, the value of the dollar rose alongside the amount of currency.
Finally, one more.
There’s definitely no relationship between the amount of money out there, and the rate of inflation, which generally has trended lower since the early 80s.
So, the bottom line is, currency continues to go up without inflation, regardless of the Fed’s activities, and basically independently of the value of the dollar.
In other words, we’re always printing. It’s not an escape hatch where we go into inflation overdrive to pay our debts. It’s just what we do every day. And the market is fine with it.
The Greenspans and the S&P’s seem to think that printing is an emergency measure. The market intuitively gets that it’s not a big deal. That’s why US yields don’t spike when credit is downgraded. And it’s why UK CDS (a country that prints money) are now lower than German CDS (a country that can’t print money).
Where printing money is the foundation of the monetary system, markets don’t freak out about the debt. Countries that are reliant on a third party to print money (like Italy hoping that the ECB will bail it out) do have problems.