UNCLE SAM AIN'T RUN OUT OF RACKS

On Thursday, January 19th, the federal government ran up against its debt limit-- that is, the total amount of money that the government is authorized to borrow to meet its existing obligations.

Just a few days before the ceiling was hit, the Secretary of the Treasury, Janet Yellen, fired off a letter to Congress, notifying key members that she would be undertaking "extraordinary measures" to buy an additional six months before the gig was up and a default was officially declared.

Secretary Yellen figures that she can temporarily put "Peter" on hold to get "Paul" paid.

Meanwhile pundits have been all over the joint warning about how a default on the part of the government would spook financial markets, jack up interest rates, hike joblessness, and put the squeeze on social security recipients, Medicare beneficiaries, and folk waiting for their tax refunds to drop.

By the way, the national debt currently clocks in at $3.4 trillion dollars.

If you had to write that out as a check it'd be:

$3,400,000,000,000

That's a lot more zeros than we're used to dealing with and, undoubtedly, that humongous number--$3.4 trillion-- helps fuel the fear that Uncle Sam's spending is out of control and, that if we don't put "him" in check, the nation will find itself flirting with insolvency.

But is that possible?

Can the federal government go bankrupt?

Can Uncle Sam run out of cash?

Is that really a thing?

WHAT WE KNOW THAT JUST AIN'T SO

There's a quote that's often attributed to Mark Twain, and it seems particularly apropos here:

"It ain't what you don't know that gets you in trouble. It's what you know for sure that just ain't so."

There's no doubt that we believe the federal government can run out of money if it doesn't restrain its spending. There's no doubt that we believe that it's possible for Uncle Sam to come up with short and not be able to handle those bills. There's no doubt that we believe the federal government can become insolvent.

After all, we're constantly exhorted to view the federal government's budgeting process through the lens of the household.

And just as a household--or a private business, for that matter-- can run out of "racks", so can the federal government.

Or at least that's what we're told and what many of us believe:

The federal government can run out of money and be forced to squelch on the debt.

Uncle Sam can run out of "racks."

But, as economists like Stephanie Kelton have noted, we're in Twain's terrain of knowing something for sure "that just ain't so."

In other words, it's simply not true that the federal government can run out of cash and become insolvent.

In other words, it is straight up wrongheaded--and dangerous-- to analogize a household's budgeting process to that of the federal government.

The reason for this is simple: Unlike your household, countries like the US are monetarily sovereign. Kelton, a leading figure in the school of economics known as modern monetary thought (MMT) puts it this way:

"Viewed through the lens of MMT, we see that the US is nothing like a household or private business. The key difference is simple and inescapable. The government issues the currency (the US dollar), and everyone else--households, private business, state and local governments, and foreigners-- merely uses it. This gives Uncle Sam an incredible advantage over the rest of us. Uncle Sam doesn't need to come up with dollars before he can spend. The rest of us do. Uncle Sam can't face mounting bills that he can't afford to pay. The rest of us can. Uncle Sam will never go broke. The rest of us could."

Thus, a country that's monetarily sovereign issues its own currency, doesn't tie that currency to something they can run of (e.g. gold) and has all of its debts denominated in that currency. It possesses the power of the purse and can create the funds that are needed to pay any bills that are due.

On that note, it's interesting to recall a 2005 exchange between Paul Ryan and Alan Greenspan. Greenspan, who served as chair of the Federal Reserve between 1987 and 2006, offered the following response to Ryan's invitation to agree with him that social security was bound for bankruptcy. Here's a snippet of Greenspan's response to Ryan:

"There's nothing to prevent the federal government from creating as much money as it wants and paying it to somebody. A fiat money system, like the ones we have today, can produce such claims without limit."

Or, also from the mouth of Greenspan:

"A government cannot become insolvent with respect to obligations in its own currency."

Apparently, then, Greenspan also agrees that insolvency is not possible for any country that issues its own currency and whose debt is also denominated in that currency.

Monetary sovereignty is a big deal.

CONCLUSION

So, bottom line, the federal government ain't like your household.

Or like Circuit City.

Or like Blockbuster.

Or like Radio Shack.

Or, for that matter:

Like Bridgeport, CT in 1991

Or:

Like Orange County, CA in 1994

Or:

Like Detroit in 2013

There is no room or vault somewhere that contains a supply of money that dwindles 10 cents for every dime that the federal government spends.

There may be some reasons that can be adduced for reigning in public expenditures. But that's entirely separate from the issue of insolvency.

A currency issuing government with debts denominated in that currency has about as much of chance of running out of dollars as the scorekeeper at Dallas Mavericks has of running out of points.

And if now--or in the future-- cuts are made to, say, social security, that'll be because powerful people have decided to do so, and would have been successful at doing so.

It'll have nothing to do with Uncle Sam running out of racks.