Pop quiz kids. The following image is from Paul Ryan who appears to be on a perpetual campaign to scare Americans into believing that we’re Greece. And he keeps making a really basic error in this campaign. Now, can anyone spot the odd man out in this picture (h/t Joe Weisenthal):
If you guessed the USA then you’re right. You don’t win a prize because we don’t offer prizes here at MMR for understanding basic macroeconomics. The difference of course, is that the USA is the only currency issuer listed on this image. The others are all European currency users. Why does it matter? Well, primarily because a currency issuer can never “run out” of money. So their debt markets aren’t inhabited by investors who are perpetually fearful about receiving payments. Being a currency issuer puts the government in the driver’s seat in many ways and reduces various economic risks when it comes to government policy. All these European countries, however, have a real solvency risk because they can’t print the currency that they need to pay their debts. They’re now relying largely on politicians in Germany to ensure that the ECB continues to keep the insolvency scenario off the table. And the austerity is the trade-off. It’s sort of like having a gun held to your head and agreeing to have your arm cut off (so you can continue to live) as opposed to just being shot in the head. Either way, you’re likely to do, but Europe hasn’t quite figured this out yet….My guess is they will sooner or later.
But the key point here is that being a currency issuer matters. A LOT. And to compare a currency issuer to a currency user is a colossal mistake. One that the Chairman of the House Budget Committee should NEVER make. So, you don’t win a prize, but you do get to brag to your friends that you understand macro better than Paul Ryan. In fact, your prize from this might just be a worse economy in the years ahead assuming this sort of thinking comes to move the policy needle. And in that case, you might want to just stock up on beer so you can give yourself that “prize” when the economy goes into the tank again and you look back and say “we should have known better! Wait, some of us DID know better!” But hey, at least you’ll be drunk through most of it so that’s some consolation, right?