Is the US Broke?

Listening to the desperate cries of impending doom from conservative-oriented budget cutters, one might well assume that the US is on the berge of insolvency. Is there any substance to that point of view? Hardly.

Marshall Auerback explains why in NewDeal 2.0 via WonkMonk:

"With the budget battle raging on, cries that the US’ finances are ruined are growing to a fever pitch. So Marshall Auerback bravely headed into the lion’s den (aka Fox News) to explain some basic accounting rules. Is the US broke? Marshall says no: “We’re not really broke because the US government, by constitutional mandate, is the sole issuer of the currency. It can always create dollars.”

While the common metaphor is that in lean times the federal government has to tighten its belt, it doesn’t hold up to scrutiny. “It’s not like a household, which can be externally constrained by its own private debts,” Marshall explains. The key to bringing down the deficit is to grow our way out of it, just as the US brought down its public debt to GDP ratio of 125% after WWII.

The counter example is the UK. Also a sovereign issuer, it’s decided to buy into the fiscal austerity fans’ advice and slash government spending. “What’s happened is that the economy has started to contract further, economic activity has slowed down, revenues have declined even further, the automatic stabilizer payments have gone up, and the deficit has gone higher,” Marshall points out. The opposite of what we want to happen.

If households and businesses are saving because of the downturn (which only seems logical when job seekers don’t know when they’ll get an offer and businesses can’t rely on solid sales), Marshall makes it clear: “then there’s only one entity that can fill the gap, and that’s the government.”