I have just been reading the comments of a neo Keynesian economist called Stephen Galbraith of the University of Texas who has laughed off the announcement of the rating agency Standard & Poor that because of the US’s failure to rein in its deficit the US risks a downgrade in its credit rating. Galbraith’s response to this is that it is “impossible” for the US to default on debt denominated in its own currency, by which I take him to mean that if the US were to experience repayment problems on its debt it could solve them by simply printing more dollars.
I do not take seriously anything any of the big credit agencies say. I suspect that the reason for the warning from Standard & Poor is that it is preparing a downgrade of certain European countries with better debt to GDP ratios than the US and does not want to be exposed to charges of bias. Having said this I have to say that I find the casual way in which some extreme neo Keynesians like Galbraith treat the issue of the US’s deficit and debt to be both frivolous and reckless. If the US government can pay its debt by simply printing more dollars why can it not pay for all its spending that way? Why in fact does it in that case need to borrow money or raise taxes at all?
The growth of the US deficit or to be precise the growth of the US’s trade and budget deficits and the steady deterioration of the US’s fiscal and trade position, which has been getting steadily worse since at least as far back as the mid 1960s, is a very serious problem that lies at the heart of the global imbalances that have caused the world financial and economic crisis. It is legitimate to discuss what the right solutions to this problem are and as it happens I am firmly of the view that cutting social, education and health care spending as opposed to defence spending is the wrong solution. However to deny or pretend that the problem does not exist is delusional.