The US CANNOT Go Bankrupt

I have my disagreements with modern monetary theorists, but one thing I've always agreed and believed is that the US can never really go bankrupt and will not default - it is not Greece.

Listening to Mitch Daniels' Republican response to the State of the Union and talking to friends though, you'd think our "grave" situation is just a day away from our government taking our country into ruin and bankruptcy.

It's just not so folks.  For those of you that want a bit more of a lesson, go here.

But generally,
Companies can go bankrupt, and many do every day.

States, while technically not able to go bankrupt, can 'ruin' their economies very quickly by over-borrowing as they are forced to borrow from private markets much of the time at increasing costs to cover risk.

But countries like the US that 100% controls it's money supply, can NOT go bankrupt and runs no risk of default.  Even politically, if politicians were to force a default, the Fed would undoubtedly work with the Treasury to make sure it didn't happen.   Markets believe that to be the case, and so do I.

Corrections to over-spending means either the country increases taxes (politics), borrows more (with minimal risk to higher interest rates given the way the rest of the world views US currency as a safe haven), or inflates its currency by issuing new money (via Treasury and Fed) that pays for the increase in the spending.

In the first case, if taxes rise (or other spending falls), the debt "problem" can be solved but at significant cost to the economy.  I don't view the second case, and neither do markets, as an issue.  If the country inflates its currency, it may do so but only if the private market allows it to do so.   And, ceteris paribus, there is no reason to suspect that pumping new money into bank reserves would increase loans, as we in fact know that loans happen in reverse.  IE., banks don't make loans based on reserves.  Though the stock of reserves can fluctuate based on loans made.   Loans are made based on present business conditions, credit worthiness etc.   If that doesn't change, loans don't change, and if loans don't change, inflation doesn't change (much).

Look at the world today.  The Fed has pumped million upon millions of dollars into bank reserves....and we have low inflation still today.  Why, because that money just sits there.

Greece meanwhile, having forsaken its own central bank in favor of a united Euro, has lost its connection between its treasury and Fed.  Hence the reason why Greece is different than the US.

Hence the reason why the US is not like Greece.

All this being said, there are still legitimate reasons to want to reduce government spending, not the least of which concern issues I have brought up before regarding moral hazard and inefficiencies and unfairness created via special interests.  Nevertheless, the fact remains the argument on 'bankruptcy' is unfounded.

Hence the reason why the Republican response represents fear-mongering and nothing more.