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:
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.”
- 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.”
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 BizzyBlog.com.