Greece can’t issue new bonds or, for that matter, turn over old debt, because investors fear the country will eventually default. And, as you’ve probably rediscovered in the last few weeks, Greece’s membership in the European monetary union effectively prevents the government from paying its bills by printing money because Greece’s central bank doesn’t have the authority to create euros.
But the debt-ridden United States could never be caught in that circumstance because Uncle Sam can create dollars, and thus can always meet its fiscal obligations by selling dollar-denominated bonds to the Federal Reserve. Right?
The answer to that question is no longer as simple as it seemed even a year or two ago. Yes, unlike Greece, the United States has the technical ability to create as much of its own currency as its regulators choose. But in global financial markets that have just begun to rethink the safety of holding assets in the form of the sovereign debt of the world’s economic superpower, it is far from clear how such an event would play out.
OK. Say the day comes when United States is unable to find private investors (more to the point, government investors including the Bank of China and the Bank of Japan) to absorb its latest debt offerings and instead sells the IOUs to the Fed in return for dollars deposited to Treasury accounts. If nobody blinks – that is, if the owners of the trillions of dollars in outstanding Treasury obligations don’t react by trying to sell their bonds – all that happens is the U.S. money supply gets a little bigger. That would be a bit inflationary in the long run. But in a global climate in which deflation seems more of a threat than inflation, no big deal.
More likely, though, investors would blink: Owners of U.S. Treasuries would try to exchange them for assets denominated in other currencies, driving down both the market value of Treasury securities and the exchange value of the dollar. Just where that fire sale on dollars would take the global economy is one of the great imponderables of contemporary international finance. Other governments (and the IMF) would surely come to America’s aid, buying up Treasury debt in order to stabilize exchange rates. But America isn’t Argentina: the volume of outstanding U.S. debt is humungous, and other governments would be loath to pony up the sums that might be needed to convince private investors (as well as skittish central banks in Asia and the Persian Gulf) to stop dumping dollars.
In any event, even in the best of scenarios, the rescue effort would be temporary. Unless Washington sharply cut its budget deficit, the fix wouldn’t stick.
So, what has changed since the days when the dollar was truly the only global currency? Lots of things. But two biggies stand out. First, more than 100 percent of the world’s (entirely ample) savings has been accumulated outside the United States in recent years — a process that must eventually force people and governments to contemplate how the imbalance will right itself. Second, the era of uncontested American dominance is ending, and no collective institutions have risen to replace it as keeper of global economic stability.
Greece’s fiscal problems are scary. America’s are much, much scarier.
(This blog post was published earlier on The Hill’s Congress Blog)