Greenspan on Meet the Press: No Chance of Default. Really?
We’ve just spent the past month or so having politicians and the press tell us that if there was no debt-ceiling deal by August 2, the government might default on its debts (of course, Tim Geithner and Barack Obama could indeed have strategically defaulted if they had wished, but work with me here).
But Sunday on Meet the Press, in a remark I expect will not be relayed much if at all by the rest of the establishment press, Alan Greenspan said that default is impossible — which puts him directly at odds with the rest of Washington’s elites and Ben Bernanke, his successor as Federal Reserve chairman. On July 14, Bernanke said: “A default on … (U.S. Treasury) securities would throw the financial system … potentially into chaos.”
Wait until you see the reason why Greenspan says default is impossible, as carried at CNBC’s web site in an item by Patrick Allen:
Former Federal Reserve Chairman Alan Greenspan on Sunday ruled out the chance of a US default following S&P’s decision to downgrade America’s credit rating.
“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.
“What I think the S&P thing did was to hit a nerve that there’s something basically bad going on, and it’s hit the self-esteem of the United States, the psyche” said Greenspan.
Well, Alan, I don’t know exactly why you said what you said, but perhaps you used the same “logic” employed by Yves Smith at the New York Times in April:
The United States is simply not at risk of default. Default is impossible for a sovereign currency issuer.
As I wrote at the time in reaction to Ms. Smith’s contention:
It must be my fertile imagination which found the following currency-issuing nations which have defaulted in past few decades:
- Mexico, 1982 — “In the wake of Mexico’s default, most commercial banks reduced significantly or halted new lending to Latin America.”
- “On August 17, 1998, the Russian government devalues the ruble, defaults on domestic debt, and declares a moratorium on payment to foreign creditors.”
- “Argentina defaulted on part of its external debt at the beginning of 2002.”
Then there are nations which have repudiated their debts. As seen here (go to the second page of the document), “Mexico (1914), Russia (1917), China (1949), Czechoslovakia (1952), and Cuba (1960) repudiated their debts after revolutions or communist takeovers. Some countries, such as Austria (1802, 1868) and Russia (1839), defaulted after losing wars; others, such as Spain (1831) and China (1921), defaulted after enduring major civil wars.”
If Greenspan, Smith et al are additionally leaning on the fact that the dollar is still the world’s reserve currency, that’s not a long-term given either. And just because your country wants to issue debt, that doesn’t mean anyone will want to buy it. Even if investors are willing to buy a overindebted country’s new bonds, it doesn’t mean that they won’t demand interest rates that are much higher than risk-free.
Much like bankrupt persons with the delusion that they’re okay because they still have unused checks in their checkbook, Alan Greenspan apparently thinks the Fed can create money out of thin air forever without dire consequences as long as the Fed’s computers still have power. And here I thought he was old enough to remember the Weimar Republic.
I suspect a comment such as this would have received pretty wide play by now if it had been uttered during the Bush administration after Greenspan’s retirement.
Cross-posted at NewsBusters.org.
You know, I read an awful lot of blogs. And your research is always first rate. I read Smith and at times, she just says things that sound ‘of course’ but feel ‘whaaaaait a minute’. I have heard/read that comment about default and thought it flippant but couldn’t put a finger on it.
You did, and once again…well, again today….proved that people that live and work in the real world of finance far surpass the ‘wisdom’ of those feeding off the top.
Thank you.
Comment by Tracy Coyle — August 8, 2011 @ 4:46 am
I do not believe Greenspan, but I do believe Ron Paul
http://www.newsmax.com/Headline/RonPaul-economy-obama/2011/08/05/id/406256
Ron Paul: Debt Deal is a ‘Fraud’
Friday, August 5, 2011 12:37 PM
By: Jim Meyers and Ashley Martella
Republican Congressman and presidential candidate Ron Paul tells Newsmax the bill designed to cut the budget deficit and raise the debt ceiling is a “fraud” because it actually does nothing to reduce current spending levels. The Texas lawmaker also says it is “discouraging” that many new members of Congress who were backed by the tea party voted in favor of the bill, the Budget Control Act of 2011. Rep. Paul has served 12 terms in Congress and is chairman of the House Financial Services Subcommittee on Domestic Monetary Policy and Technology. He previously ran for president in 1988 and 2008, and has announced he will retire from Congress when his current term ends. Paul is one of five Republicans from the Texas congressional delegation to vote against passage of the budget bill. In an exclusive interview with Newsmax.TV, he takes issue with claims that the bill contains cuts in current spending.
“This is one of the most annoying things about the reporting on what we’ve been trying to do in Washington and what we pretend to be doing,” he says.
“They always talk about cuts, cuts, cuts, and everyone’s screaming you can’t cut this, you can’t cut that. But there are no cuts. What they’re talking about is cutting proposed increases. So it’s a real misleading definition when they talk about cuts. Anything we do for future years doesn’t hold water anyway because you can’t tell the next Congress what to do.
“Basically it’s a fraud. If they were serious about it they could freeze the budget and give everybody the same amount of money they got last year.”
Paul maintains that if the federal government went back to 2004 spending levels, we would have a balanced budget right now. …
Comment by Greg — August 8, 2011 @ 5:17 am
#1 Tracy, Thanks for the nice words. Hope all is well.
Comment by TBlumer — August 8, 2011 @ 9:23 am