Haven't we seen this movie before?
Remember when the idiots at S&P downgraded the U.S. credit rating in 2011? I was on TV that morning and was pounding the table telling people to buy Treasuries.
Now you have the same idiot, S&P, plus a new idiot, Fitch, downgrading Britain's credit rating because of Brexit.
Hey you morons at the credit rating agencies...a sovereign nation that spends in its own currency and where all its obligations are denominated in that currency cannot become insolvent. There can never be an inability to pay its debts.
What idiots.
Buy gilts.
15 comments:
A sovereign nation that spends in its own currency and where all its obligations are denominated in that currency can become insolvant and you know that, because you have already written about that more than once.
Lawmakers can a do create laws that may prohibit payments (like USA neoliberal debt limit) and, in some countries, politicians from the executive branch may have some discretionary power over debt repayment.
So let's frame it precisely to avoid unecessary criticism: sovereign countries that issue their own currency will never became insolvent if politicians desire it to never became insolvent.
Hey you morons at the credit rating agencies...a sovereign nation that spends in its own currency and where all its obligations are denominated in that currency cannot become insolvent. There can never be an inability to pay its debts.
This is true operationally as a matter of the construction of the monetary system.
However, a sovereign nation can voluntarily default as a political choice. This is an issue in the case of the US debt limit. The limit is voluntarily imposed, and if default were to take place, it would be a voluntary political act tantamount to the US refusing to honor its obligations on schedule.
"However, a sovereign nation can voluntarily default as a political choice."
Exacly.
And I know that Mike Norman, Bill Mitchell, Scott Fullwiler and so on know that because they have said the same thing with their own words.
But sometimes we read some misleading sentences like this one:
"a sovereign nation ... cannot become insolvent. There can never be an inability to pay its debts."
There are no qualifiers in that sentence. Anyone who read it will understand the wrong message: that it's impossible for UK and US to default. But we all know its possible because of [self imposed] debt limits and voluntary default.
I am surprised that this is the first instance of this reporting. Why are not other MMT writers saying something? I was starting to think Imhad it all wrong.
"a sovereign nation ... cannot become insolvent. There can never be an inability to pay its debts."
That is a true statement.
Insolvency is an accounting term. Even countries that are not currency sovereigns probably cannot become insolvent in that they have tax bases and equity bases, so they can levy taxes or sell off public assets to raise funds needs to meet obligations.
Nations are not like private economic entities with limited resources. Countries, even small ones, have large resource bases they can draw on.
Where involuntary default looms large is in cases where the government cannot collect taxes in a timely way for lack of the power to do so. That may happen owing to war.
Debt default by sovereign nations is almost always voluntary default in that the country could have taken steps to meet its obligations it is chose to do so politically. Refusal to do so is voluntary default.
Government defaults, like many defaults by business, are therefore "strategic defaults" rather than being unable to meet obligations on time.
I know a government can voluntarily not pay its debts. But guess what, you can jump off a bridge too, if you are fool enough to do it. So I'm good without any further explanation. I don't expect people to shoot themselves in the foot for fun.
When talking about sovereign credit risk, analysts and economists usually understand the word "solvency" as the capacity to meet timely payments.
If the sovereign is not able to pay its debt in time (even if there is only 1 day of late payment), it is deemed "insolvent" in some contexts. Usually "default" is a better word, but that's life.
You can categorize the kinds of default if you wish (in voluntary default and involuntary default, for example). It may be helpful when you are trying to analyize and predict default. But by the end of the day it's all default, and so, it's possible for sovereign nations to default.
So maybe Mike should say something like that: "It's impossible for a sovereign nation to default, except for voluntary default". That would be correct. If you simply say that "It's impossibld for a sovereign nation to default", then you are wrong.
The "voluntary default exception" is extremely important for banks that invest millions or billions in public debt, because each day of late payment is extremely bad por profits. It's important to assess the possibility of default and avoid countries that have problems.
If you believe that a country will not shoot in its foot, then you don't understand the [dumb] world of politicis and you are very naive... This sort of things happens and if you own public debt you may be screwed.
"It's impossible for a sovereign nation to default, except for voluntary default". That would be correct.
The way I would state is, "It's impossible for a sovereign currency issuer to default, other than voluntarily (as a political choice), as long it doesn't obligate itself in a currency it does not issue."
It's impossible for a sovereign currency issuer to become insolvent in its own currency since it can issue its currency without limit, although such a government can choose politically to default voluntarily even though it cannot be forced into default involuntarily due to operational insolvency. For instance, the threat of US default owing to the political imposition of a hard debt limit is an example of voluntary default, since default is unnecessary operationally. It would be the result of a choice made by a political cohort for political purposes rather than an actual financial constraint on the sovereign currency issuer.
Credit rating agencies are likely going to take a country's political conditions into account in addition to economic in assessing the likelihood of voluntary default, for example, owing to political paralysis or for strategic reasons.
Jonf:
"I am surprised that this is the first instance of this reporting. Why are not other MMT writers saying something?"
Because we get everything first, here, Jon. ;)
We do!
Yes, voluntarily. I know this, but I did not want to put that in. Why give these morons even one inch of room to their arguments? They're morons.
Anyone who is in the business and doesn't know this stuff is a moran.
Pedagogy is for those who genuinely have an excuse for not knowing.
S&P, Moody's and Fitch have proven to be very bad in their core competences since at least the 2008 financial crisis. I can't understand why most market participants still trust in their opinions. So I understand what you are saying.
But it's just that I still consider myself a newcomer to MMT and I want to "spread the word". I once had much difficulties in understanding what MMT proponentes were saying because details like this one (voluntary default).
It may be obvious to me now, and it was obvious to you who has already a lot of experience, but this kind of thing sometimes lead newcomers to confusion and may attract some unecessary criticism...
Well, but most posts in this blog are about people in the business that don't know what they are doing (and about some conspiracy theories where people supposedly actually know everything but pretend that they don't to achieve personal interests).
People simply don't know basic concepts about sovereign default. Some readers come here to learn, because usually MN Blog has a lot of good information...
Who buys government debt? It's mainly banks, non-bank corporations and rich individual investors, that is, the very same agents who "own" the government and/or on whose behalf government exercises its power.
So, we can just relax. The government is simply not going to voluntarily punish its owners/beneficiaries with a default.
I don't live in the US, but in my country there were dumber and worse things happening in the late 80s, even against the interests of bankers and rich people.
Never underestimate the lack of intelligence and sanity of politicians.
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