Skip to main content

Foreign and external debt: not the same

In this whole discussion of the debt-ceiling limit the distinction between foreign debt (that is denominated in foreign currency) and external debt (owned by foreigners) has been often lost.  In the case of the US around 30% of Treasury securities are held by foreigners or around half if you discount the ones held by US governmental institutions (see data here). A country can default on its foreign debt, but not on the external debt denominated in domestic currency.

There is a fear (to some extent manufactured) about the Chinese taking over the country, and not just by pundits and late night comedians, as if the US would be unable to repay debt denominated in a currency that the US can produce.  Even Krugman has been excessively guarded on the issue. While noting correctly that the US is not Greece he said:
"So the US has much less debt than Greece. Also worth noting is the pattern over time. Greece ran up debt relative to GDP at a fairly good clip even during good times, while the United States — despite the Bush administration’s best efforts — did not. So America does not have a comparable record of sustained fiscal irresponsibility; we’ve only developed large deficits in response to the crisis, which happens to be exactly when we should be running large deficits.
And that’s not even to get into the issue of us having our own currency."
The fact that the US has it's own currency was almost an afterthought, and he avoided the crucially important fact that the external debt is in domestic currency.  The point of having your own currency is that you cannot default on debt denominated in it by definition.  This is not about fiscal responsibility or about how large debts and deficits are, but in what currency they are denominated.  The problem is not the ability to print bonds, bills, or dollar bills, which foreigners and the domestic private sector continue to hold without a problem, but the political blackmail by Republicans, and apparently accepted by Obama, to obtain gains for the rich at the expense of the rest.  Franklin Serrano aptly referred to this situation as dysfunctional finance!


Popular posts from this blog

What is the 'Classical Dichotomy'?

A few brief comments on Brexit and the postmortem of the European Union

Another end of the world is possible
There will be a lot of postmortems for the European Union (EU) after Brexit. Many will suggest that this was a victory against the neoliberal policies of the European Union. See, for example, the first three paragraphs of Paul Mason's column here. And it is true, large contingents of working class people, that have suffered with 'free-market' economics, voted for leaving the union. The union, rightly or wrongly, has been seen as undemocratic and responsible for the economics woes of Europe.

The problem is that while it is true that the EU leaders have been part of the problem and have pursued the neoliberal policies within the framework of the union, sometimes with treaties like the Fiscal Compact, it is far from clear that Brexit and the possible demise of the union, if the fever spreads to France, Germany and other countries with their populations demanding their own referenda, will lead to the abandonment of neoliberal policies. Aust…

A brief note on Venezuela and the turn to the right in Latin America

So besides the coup in Brazil (which was all but confirmed by the last revelations, if you had any doubts), and the electoral victory of Macri in Argentina, the crisis in Venezuela is reaching a critical level, and it would not be surprising if the Maduro administration is recalled, even though right now the referendum is not scheduled yet.

The economy in Venezuela has collapsed (GDP has fallen by about 14% or so in the last two years), inflation has accelerated (to three digit levels; 450% or so according to the IMF), there are shortages of essential goods, recurrent energy blackouts, and all of these aggravated by persistent violence. Contrary to what the press suggests, these events are not new or specific to left of center governments. Similar events occurred in the late 1980s, in the infamous Caracazo, when the fall in oil prices caused an external crisis, inflation, and food shortages, which eventually, after the announcement of a neoliberal economic package that included the i…