Every year, the Morningstar mutual fund tracking organization releases a list of the worst new ETF investments—and generally, these tend to be trendy new offerings that are designed to catch the eye of investors who are responding to yesterday’s headlines rather than their long-term economic future.
Many are cheering the S & P’s new “Negative” Outlook on the U.S. Credit Rating (which remains at AAA), the market is not taking it lightly – but all this proves is that the rating companies still have no idea what they are doing. As if the subprime meltdown wasn’t evidence enough, the incoherent ramblings of the folks at S & P about the future of our debt situation confirm they don’t understand our monetary system.
In an ironic twist it is stocks tanking, not the bond market or the dollar.
I want to be clear that I do believe we have long term economic problems that are not being dealt with and that reckless spending in a balance sheet recession is not the answer. But the United States can only default on their debt if its politicians make a political decision to do so. There will not come a day where the United States cannot pay its dollar-denominated debts, unless our politicians simply refuse.
Our monetary system is different than that of Greece, Spain, Portugal, Ireland and other countries that do not issue their own currency. The U.S. is the monopoly issuer of its own currency which means it can print dollars.
Warren Mosler, author of “Seven Deadly Innocent Frauds of Economic Policy” says the following:
“Governments, using their own currency, can spend what they want, when they want, just like the football stadium can put points on the board at will. The consequences of overspending might be inflation or a falling currency, but never bounced checks.
The fact is: government deficits can never cause a government to miss any size of payment. There is no solvency issue. There is no such thing as running out of money when spending is just changing numbers upwards in bank accounts at its own Federal Reserve Bank.”
There are certainly huge risks to running massive deficits, especially when those deficits are inept and unproductive. But there is no risk that the United States could not pay its debts denominated in U.S. Dollars….unless politicians make an election to do so. Once again the rating agencies have demonstrated they don’t know what they are talking about (in this case it is the S & P, Moody’s has not changed their outlook, but they did so once in 1996).
Scott Dauenhauer, CFP, MSFP, AIF