U.S. Debt: Greece Is Not the Only Country with a Debt Problem

Policymakers need to start being more honest about how the U.S. debt works.

It's an age-old debate among the members of Congress. How do we cut the budget? How do we reduce the debt?

But the argument over whether to raise taxes on the rich or cut spending to social programs is not the most frustrating part of this never-ending debate.

Rather, the whole debate is built off a misunderstanding of how the U.S. debt works and how the government spends money.U.S. Debt

At best, Congress is ignorant of the process. At worst, they're fully aware of how the U.S. debt works and are simply molding their arguments to push a sinister political agenda.

How the U.S. Debt Works

The U.S. Federal Reserve acts as the U.S. government's banker. It is also the banker for the private sector's commercial banks and for foreign holders of U.S. dollars.

When the government wants to make a purchase, it simply wires money to a commercial bank and those funds are held as an overdraft in the commercial bank's reserve account at the Fed.

Let's say the U.S. government wanted to buy a weapons system from a defense contractor. They would wire those funds to the commercial bank holding that defense contractor's account. And the defense contractor could then withdraw those funds and convert them to cash, or more likely, let them sit in the commercial bank's reserves until they want to draw on them to pay a business expense.

Where did the U.S. government get that money in the first place? Here's what no one in Congress is telling you about how the U.S. debt works...

Could the U.S. Default on Its Debt?

With news of both a Greek default and what was almost a Puerto Rican default, observers are predictably going to find a way to shift focus at some point - to the $18.2 trillion in U.S. debt.

The big question here is: Could the United States go the way of Greece and Puerto Rico? Could the U.S. government default on its debt?

The simple answer is yes, the U.S. government can default on its debt, but not in the same manner as Greece or Puerto Rico. 

You see, Greece and Puerto Rico both issue debt in currencies they themselves have no authority to print. Greece's debt is denominated in euros. Puerto Rico's debt is denominated in dollars.

That means they have to obtain those respective currencies to pay off both interest and principal on their debts. In the European Economic and Monetary Union, member states cede control of monetary policy to the European Central Bank. They are essentially using a foreign currency. Puerto Rico operates much like a U.S. state in that it uses the dollar and denominates debts in them but can't print them itself.

Let's look at Greece.U.S. Debt

The Greek government, for example, can obtain euros by either exporting goods in exchange for them with other euro area countries or by issuing debt that has to later be repaid in euros.

As the euro-denominated debt grows, Greece can begin saving euros to pay down that debt. It can cut spending or raise taxes.

The moment that debt becomes unpayable, either because Greece doesn't have the productive capacity to support exports or it isn't generating enough revenue through taxes, Greece will default.

This is the same with Puerto Rico and the dollar.

The bottom line is that Puerto Rico and Greece need to have some savings to draw upon to pay back debts.

The United States is entirely different. This is because the U.S. debt is denominated in dollars, and the U.S. government is the sole issuer of the dollar. There is no question of solvency because the United States can simply "print" the money it needs to pay its debt.

So, what could happen to make the U.S. government default on its debt?