WHY THE US WILL NEVER GO BANKRUPT, TECHNICALLY

We are witnessing the collapse of the American society. The country is irreversibly divided with one side desiring a fascist and decadent social structure, and the other a fundamental conservatism of their founding fathers. The political differences explode at the same time with a financial avalanche crashing down on them as decades of irresponsible deficit spending living off the fat of foreign countries is coming to an end. The US$30.5T national debt is coming home to roost.

Watching the tumultous and bitter political conflicts going on in the US, the Ukraine War, energy crunch, supply chain problems, global inflation, and oil trade in ruble and yuan, there is much talk about the impending bankruptcy of the US. The US has no reserves to service their humongous debt. Yet, impossible as it seems, the country will not go bankrupt, technically.

A person, company or other legal entity, is insolvent when they do not have sufficient assets to meet their obligations as and when they fall due and are liable to be sued for bankruptcy.

In the case of a country, it is different. A country can go bankrupt under two situations - when the debts are in foreign currencies, and when it has no monetary sovereignty. An insolvent country would have run out of reserves to acquire the foreign currencies to pay for public debt and thus go bankrupt. Monetary sovereignty means the capability to manage its own monetary policies. Without the legal right to manage the value of its own currency, the country cannot respond with the appropriate monetary policies. Countries in a monetary union have no monetary sovereignty. The countries in the European Union surrendered their monetary policies to the European Central Bank. In their national debt crisis of 2007, Greece had to accept the severe austerity measures imposed by the EU central bank and suffered greatly.

A country that has monetary sovereignty and public debts in its own currency, can never go bankrupt. It simply prints more money to pay off its debt. If the country runs out of reserves, the central bank simply monetises the debt by crediting the receiving banker's reserve account in settlement. It's as simple as that.

Monetising the national debts of course has its problems. The massive liquidity caused by the excessive money printing guarantees inflation and currency depreciation. Inflation means decreased purchasing power, or loss of wealth. The central bank monetising the debt means it is the public that ultimately pays for it via inflation. But the country is technically never bankrupt.

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In the case of the US, their national debt is all in US$ in the form of government securities - bonds and treasury bills. If China's holdings of US$1.05T were to mature and they present if for redemption, the Federal Reserve will simply monetise it by crediting the Bank of China's (the Chinese central bank) account in settlement.

The US is unique in being the only country in the world without a central bank. The Federal Reserve is not a government agency. It is a private enterprise created by the Federal Reserve Bank Act, owned by member banks, and tasked with maintaining full employment and price stability for the country.  The US government itself (Treasury Dept) does not create any money. The government takes on debt for its spending needs by issuing bonds or treasury bills. The national debt piles up because in its history, the US government has never made any repayment. Maturing securities are simply rolled over - they are redeemed by the proceeds of fresh issues. The printing of US$ is by the Federal Reserve in their Quantitative Easing when they purchase government securities and pay for it by crediting the selling banker's reserve account in settlement, thus throwing more money into the market to stimulate the economy.

The practice of rolling over matured securities can go on as long as there are demand for new issues. We are in an era where confidence in the US and its currency is at an all time low and efforts at marginalising the dollar is in play. The time will come when demand diminishes and maturing securities need to be repaid. The Fed will have to monetise maturing securities, causing inflation and a problem of how to resolve the indebtedness with the Treasury. When the Fed monetises the debt, the Treasury's obligation transfers from the security holders to the Fed. This is virgin territory, never legislated, but trust the Fed to provide some creative accounting solution to resolve the indebtedness between them and accounting in its ledger and that of the Treasury.

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