Is A Future U.S. Default 'Absurd'? : Planet Money Two views on the health of the U.S. and global economy
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Is A Future U.S. Default 'Absurd'?

Earlier this week, a friend sent me a recent opinion piece by historian and Planet Money contributer Nail Ferguson's about why Ferguson believes the U.S. is more like Greece than anyone wants to believe.

Judging by the Fed's decision yesterday to raise the discount rate, it seems U.S. policymakers think Ferguson and other worryworts are too pessimistic. (Lower down, I've included a response from Nobel Prize-winning economist Joseph Stiglitz on the issue. He's more bullish about the U.S.'s future.)

From The Financial Times:

It began in Athens. It is spreading to Lisbon and Madrid. But it would be a grave mistake to assume that the sovereign debt crisis that is unfolding will remain confined to the weaker eurozone economies. For this is more than just a Mediterranean problem with a farmyard acronym. It is a fiscal crisis of the western world. Its ramifications are far more profound than most investors currently appreciate.

For the world's biggest economy, the US, the day of reckoning still seems reassuringly remote. The worse things get in the eurozone, the more the US dollar rallies as nervous investors park their cash in the "safe haven" of American government debt. This effect may persist for some months, just as the dollar and Treasuries rallied in the depths of the banking panic in late 2008.

Yet even a casual look at the fiscal position of the federal government (not to mention the states) makes a nonsense of the phrase "safe haven". US government debt is a safe haven the way Pearl Harbor was a safe haven in 1941.

Even according to the White House's new budget projections, the gross federal debt will exceed 100 per cent of GDP in just two years' time. This year, like last year, the federal deficit will be around 10 per cent of GDP. The long-run projections of the Congressional Budget Office suggest that the US will never again run a balanced budget. That's right, never.

Speaking at an event at the London School of Economics, Joseph Stiglitz recently said the U.S. is not at risk of default and continues to push the idea that the year-old U.S. stimulus plan is insufficiently large to get the economy back on track.

Mr Stiglitz called the likelihood of a default "so small, particularly in the US because all we do is print money to pay it back."

Mr Stiglitz, a former chief economist at the World Bank, said that the idea of a default by the US or Britain is "so absurd, it's another reflection of the absurdities in the financial markets."

As a bonus: here's a video of Stiglitz on how governments should try and "burn" speculators who are currently trying to profit off of public finance woes.