Dean Baker: The U.S. Cannot Turn into Greece (Although It Might, Someday, far in the Future, After Generations of Failed Policies, Turn into Zimbabwe)
Dean Baker complains about Paul Krugman:
Greece vs. Zimbabwe: More on Krugman and Deficits | Beat the Press: Greece had very little choice in agreeing to the terms of the EU/IMF because it did not have its own currency. The United States will therefore always have the option to risk higher inflation to buy its own debt. Those who claim that we do not have this option are not being honest.
The other reason why it is important that we are not Greece is that we do not have to worry about the psychology of the markets (i.e. the bond market vigilantes [BMV]) in the same way. The story goes that everything was going along just fine with investors willing to hold Greek debt at a very small premium over German debt. Then the BMV got freaked and suddenly interest rates on Greek debt went through the roof.
In an analogous situation, the Fed could just step in and buy the debt that private investors were unwilling to hold. If the economy is fundamentally unbalanced (i.e. we are operating above full employment levels of output) then this will give us a serious problem of inflation, but if the fundamentals are essentially fine and the BMVs just freaked for nothing, then we don't have to worry. The Fed can keep interest rates at reasonable levels and eventually private investors will step in and buy our debt.
It is also important to recognize that there are literally zero incidents of inflation just going through the roof in an advanced economy, absent war, natural disaster, or political collapse. Inflation rises through a gradual process; we don't have to worry that the inflation rate will jump from 2 percent to 20 percent overnight. This means that if the BMV bolted and the Fed filled the gap we would have the luxury of waiting and seeing whether this action was leading to higher inflation and then responding accordingly. The idea that we are sitting on a hairspring trigger that could go off at any moment is just nonsense.
For these reasons it is important that the U.S. has its own currency. It can never be Greece. It may end up as Zimbabwe, but this sort of hyper-inflation would be the result of long period of badly failed policies in which our economy essentially unraveled...
And Paul Krugman agrees:
Paul Krugman on having your own currency and denominating your debt in it:
The Euro Straitjacket : I think Dean Baker and I are converging on deficits and independent currencies. He asserts that having your own currency makes a big difference — you can still end up like Zimbabwe, but not like Greece right now. I’m fine with that. Specifically, the reason Greece (and Ireland, and Portugal, and to some extent Spain) are in so much trouble is that by adopting the euro they’ve left themselves with no good way out of the aftereffects of the pre-2008 bubble. To regain competitiveness, they need massive deflation; but that deflation, in addition to involving an extended period of very high unemployment, worsens the real burden of their outstanding debt. Countries that still have their own currencies don’t face the same problems.... [T]he US and the UK look as if they should be in a similar category with the troubled European peripherals; and Japan is literally off the chart. But having our own currencies makes a big difference.
All I’m saying is that dollar or no dollar, fiscal solvency is still an issue — not now, not for some time to come, but not something we can always ignore.