Potential U.S. Government Default
I have long been predicting an eventual U.S. government default on its debt. Sunday's Washington Post has an excellent article by Greg Ip on this potentiality, linked to by both Greg Mankiw and Tyler Cowen. Ip reports that as a result of the government's fiscal stimulus, both implemented and projected, credit default swaps have raised the probability of a U.S. default over the next ten years from 1 to 6 percent. (Credit default swaps have been unfairly maligned as a major cause of the current financial crisis, although recent evidence indicates they have weathered the storm quite well.)
Ip also considers whether the U.S. might resort to inflation rather than default in a fiscal crisis, pointing out that Russia in 1998 is just one recent example of many where governments chose debt repudiation over inflation. He however overlooks an even stronger argument. Now that the Fed is paying interest to banks on their reserves, it effectively eliminates much of the remaining revenue (seigniorage) from inflation. Increasing the monetary base is now just an alternative way of issuing government debt.
Meanwhile, Senator Tom Coburn (R-OK) said the following on the floor of the US Senate on Sunday, January 11th:"I believe we are at the ultimate tipping point in this country. I believe if we don't make drastic changes over the next year and a half, that 2012 will see the default of the U.S. Government on its bills. I honestly believe that. There are a lot of economists who agree with me on that point." Full text and video is available here.
Hat Tip: Marc Joffe
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Bill Woolsey - 1/18/2009
It's supply and _demand_.
Other things being equal, an increase in the supply of money raises the price level.
Base money has doubled over the last few months. But the Fed is now paying interest on it, and interest rates on short term goverment bonds are expremely low.
What usually counts as the money supply is up sharply over the last couple of months (though not close to doubing.) However, there is a large increase in demand for insured bank deposits. The M1 and M2 measures of the money supply include lots of those.
To some degree, the "flight to quality" has been an increase in teh demand for money.
David T. Beito - 1/17/2009
It is surprising that price increases in the CPI haven't kicked in despite the massive increase in the money supply.