Could the United States Default on Its Debt?

With the recent downgrade of US debt by S&P, the Administration, Congress and most economists say that the downgrade is silly since the United States could never default. “The debt is issued in dollars. That means it is payable in dollars. The U.S. government prints dollars,” wrote Dean Baker of the liberal Center for Economic and Policy Research Saturday. “This means that if for some reason the government was unable to tax or borrow to raise the money to pay its debt then it could always print it. This may carry a risk of inflation, but S&P is not in the business of making inflation predictions, they are in the business of assessing the likelihood that debt will be repaid.”

This raises the question of how exactly would these dollars be printed. The United States Government per se does not print US dollars. This is the responsibility of the Federal Reserve Bank. The Fed itself is a private corporation. The Fed is not a Branch of the Government. It’s shareholders as stipulated under the Federal Reserve Act 1913 are the member banks of the Federal Reserve System..not the US Government..not the people of the United States. In fact, under the formaula for share ownership as set out in the 1913 Act, the five largest banks own about 60-70 per cent of the Fed.

While the US Government is represented on the Board of Directors of the Fed, the Government has no direct Constitutional authority to order the Fed to print money. It has voting power, but the Government could simply be outvoted by the other members of the Board.

As a private corporation, the Fed has a fudiciary responsibility to maximize its shareholder wealth..something it has been very successful in doing, often at the expense of Main Street. What if it was not in best interests of the big banks to print the dollars needed to pay the interest on the US debt and the Fed refused to print the dollars needed to avoid default? What would happen then?

The Fed also has a responsibility to control inflation. What if the Fed determined that to print the money would violate its inflation mandate and refuse to print the money?

The Government does has have the authority to replace the Chairman of the Fed. However, it is not clear that it has the authority to replace the voting members of the FOMC who are regional Fed chairpersons. Replacing the Fed Chairman would require a lengthy process of Congressional approval. In the meantime the debt would have defaulted.

The Government also has the authority to change to change/repeal the Federal Reserve Act but this could take years to happen. In the meantime the debt would have defaulted.

Would any of this actually happen? Probably not. But. under the current laws, it’s not a slam dunk that the United States would never default!!


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