July 14, 2011
The Washington Post, which regularly uses both its editorial and news pages to push for budget cuts, has a front page article today that warns the United States could end up like Greece. The article includes a quote from University of Maryland economist Peter Morici, telling readers that:
“If Congress raises the debt ceiling without a long-term plan for reducing the federal deficit, he added, ‘they’ll never solve the problem, and we’ll end up like Greece.'”
It would have been worth pointing out that the United States cannot end up like Greece because the United States, unlike Greece, has its own currency. Greece is like the state of Ohio. If it has a shortfall it has to borrow in financial markets. Ohio can appeal to the federal government for assistance, just as Greece can turn to the EU, the ECB, and the IMF, but both have to accept whatever terms these bodies impose as a condition for their support.
By contrast, the U.S. government is always free to buy up debt issued in its own currency through the Fed. In principle, this could lead to a problem of inflation, however the economy is very far from reaching this point with a vast amount of unemployed labor and under-utilized capacity.
Of course, the U.S. government also has no difficulty whatsoever borrowing in financial markets. It is currently able to sell long-term debt at interest rates just over 3 percent. This means that the people investing trillions of dollars in these markets do not share Mr. Morici’s assessment of the fiscal situation of the U.S. government.
It would have been worth presenting the views of someone who could tell the difference between the United States and Greece in this article.
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