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Home Publications Blogs Beat the Press It Matters That Countries Have Their Own Central Bank

It Matters That Countries Have Their Own Central Bank

Wednesday, 15 February 2012 05:54

A Washington Post article on the problems of restructuring of Greece's debt discussed factors that affect country's ability to carry debt. It neglected to mention the issue of whether it borrows in currency it issues. If a country is like the United States or Japan, and borrows almost entirely in its own currency, then it would only default on its debt as a political decision (e.g. it refuses to extend a debt ceiling, authorizing the debt to be paid).

Since it issues its own currency, it can always issue the currency needed to finance its debt. There markets seem to understand this point very well. The countries that issue debt in their own currency (e.g. Sweden, Denmark, the UK) consistently enjoy lower interest rates on their debt than countries with comparable debt burdens who do not have their own currency.

Comments (9)Add Comment
Not Just WaPo Doesn't Understand
written by Charley James, February 15, 2012 7:12
Alas, not only the Washington Post misunderstands this key point. Said in a different way, presidential wanna-be and economic gadfly Ron Paul is just as ignorant about the importance of a country issueing its own currency in financing debt, except he does it by insisting on a return to a gold standard which would limit the amount of currency - and thus debt - could be issued.

Paul seems to think that "printing money" needs to end, not recognizing that anyone who has a credit card prints money every time they buy a candy bar with their MasterCard. Priceless. Paul would have us return to a life with no credit whatsoever, or credit so severely restricted that we might as well join the Eurozone and no flexibility in our ability to manage our national finances - and national wealth.
written by S. D. Jeffries, February 15, 2012 8:51
WaPo's failure to discuss Greece's debt being issued in a currency it does not issue (and few other publication's discussion of it either) is the main cause of the general public's tendency to wail about the U.S. "turning into Greece" and "going bankrupt."

These publications do their readers no favor by failing to mention this fact, and lead those readers who have no understanding of macroeconomics into false and potentially dangerous conclusions (this includes quite a few politicians as well).
WaPo is Disingenuous
written by Paul, February 15, 2012 9:32
The WaPo has long embraced Pete Peterson's well-financed agenda to thwart Keynesian solutions to our economic problems.

The editors and writers at the WaPo fully understand the difference between Greece and the U.S., but they deliberately deceive their readers and the public in pursuit of their political objective of electing conservative crack-pots.
written by freebird, February 15, 2012 9:42
Perhaps what the market understands is that countries whose economic fundamentals are strong enough to borrow on favorable terms in their own currency are low risk credits? These places didn't need to hitch their wagons to the German locomotive; those who saw the biggest bump when they joined up are now the greatest default risks. I see Argentina is offering 3-year 8% YTM Yankee bonds, you think it would be cheaper if they borrowed in pesos?
Dean has been smacked down by Krugman on this before...
written by pete, February 15, 2012 10:26
If they issued Drachma bonds to buy back their Euro debt, it would be hilarious, but they could try to do it. I suspect the interest rate would be much much higher than the Euro rate. Having their own currency AND issuing debt in their own currency are two entirely different points, as PK pointed out. It is fiscal responsibility that ALLOWs a few countries to issue sovereign debt in their own currency.

Note also that unlike companies, there is no real sovereign default...just debt that remains unpaid. There is no "bankruptcy." China cannot come over here if we default and start taxing us. (they might try).

written by Chris, February 15, 2012 12:59
Ron Paul has about one good idea: to shrink the US empire. For the rest his ideas are, well, kooky. His ideas on fiscal affairs are terribly ignorant and foolish.
Pete, Is this Krugman Smackdown of me?
written by Dean , February 15, 2012 1:21
of course
written by joe, February 15, 2012 3:27
if you have your own currency, you don't even need to issue bonds. Why would you borrow back something you can create at will? (in the US, it's interest rate maintenance, but that can be done other ways)
written by Calgacus, February 16, 2012 1:37
Pete: Having their own currency AND issuing debt in their own currency are two entirely different points, as PK pointed out. It is fiscal responsibility that ALLOWs a few countries to issue sovereign debt in their own currency. No, for a normal country, they are exactly the same thing. Everybody, not just "the market" used to know this, before the incredible degeneration of economic understanding in the last 40 years, led by academic purveyors of nonsense, like free-market and central bank cultists.

To quote FDR: "government credit and government currency are really one and the same thing." Bonds are just dollar bills with a date in the future printed on them. The sort of distinctions much "economics" draws between them are insane.

It is not "fiscal responsibility" - which usually means destroying you economy for no reason, but the worldwide dissemination, to be sure often backed by guns, of insane "economics" that gets everything backwards, and generally advises the opposite of the sane course - oh but it always helps make rich people richer in the short term - that limits domestic denominated sovereign debt issuance - and worse advises the insanity of foreign denominated debt issuance.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.