The Bond Market Straw Man Argument

No, The United States Will Not Go Into A Debt Crisis, Not Now, Not Ever

If there’s one article of faith in Washington (and elsewhere), it’s the idea that the United States might get into a debt crisis if it doesn’t get its fiscal house in order.
This is not true.
The reason why it’s not true is because we live in a fiat currency system, where the United States government can create an infinite number of dollars at no cost to meet its obligations. A Treasury bill is a promise that the government will give you US dollars–something that the United States government can produce infinitely and at no cost.
That’s the reason why interest rates on United States debt have only gone down even as the debt has ballooned. That’s the reason why Great Britain has very low rates on its debt despite having very high debt-to-GDP. That’s the reason why Japan has an astounding debt-to-GDP ratio and still enjoys some of the lowest rates ever. Investors have bet for so long that there would be a run on Japanese debt and have ended up so ruined that in financial circles that trade is called “the Widowmaker”.

.... while in theory printing tons of money could create inflation, in practice demand for the dollar is so high–and for structural reasons that have very little to do with how the US economy is doing at a particular point in time–that it’s hard to imagine a circumstance under which the US government would have to print so much that it would cause significant inflation.  And even if it did–well, for all the bad memories we have about it, the Stagflation of the 1970s was many things, but it was not Greece. Life in the 1970s was still relatively okay, despite the stagflation. That is to say, even in the extremely unlikely event that the government had to print so much money to get out of its debt that it caused moderate inflation, it still would not be a debt crisis of the kind that Greece and Spain are under right now.  

 My view:

The writer of this article from Forbes has advanced a straw man argument.

From Wikipedia: " To "attack a straw man" is to create the illusion of having refuted a proposition by replacing it with a superficially similar yet unequivalent proposition (the "straw man"), and to refute it, without ever having actually refuted the original position.[3][4]"

Arguments set forth in this article contain so many logical fallacies and errors that it difficult to believe this was published in Forbes.

Like many neo-keynesians, the author dismisses any suggestions that debt is a drag on the economy and that there are limits to how much patience the bond market has with spendthrift nations.

If indeed, fiat currency allowed unlimited money creation, why go to the bond market at all to sell Treasuries?

Just print more money!

How does $100,000 for every man, woman, and child in the United States sound?

Clearly, this solution is simply nonsense.

The author argues that perhaps the worst outcome would be stagflation similar to the 1970s.

While I agree with the author that inflation is not a serious danger in the short term, he does not acknowledge that debt deflation is the counterbalancing force to the Fed's inflationary money printing extravaganza.

So, for the next few years, as debt deflation continues to run its course, inflation dangers should be relatively contained.

However, near zero interest rates are building up enormous risks in the economy as investors, businessmen, and speculators desperately seek yield as this graphic from Elliot Wave International demonstrates.

Money has recently poured into municipal and junk bond markets.
In the case of muni-bond investors, many fear the tax hikes that will be triggered if lawmakers go off the "fiscal cliff."
Investors are barreling into municipal bonds, driving yields to record lows and hoping for a safe hiding place at a time when taxes are almost certain to rise.
From Nov. 7 to 12, about $500 million of new money flowed into muni bond funds.
CNBC, Nov. 14

Municipal bonds, widely seen as one of the safest investments, actually default more often than most people realize. ... For example, Moody’s Investors Service has reported that from 1970 to 2011, there were only 71 municipal bond defaults. But the Fed report counted 2,521 defaults in that time.
New York Times, Aug. 16
So it is clear that this article put forth by apparently intelligent people is worse than simplistic, it is pure fantasy.

Put your faith in fiat currency bonds if you choose.  But consider the lesson of the three little pigs.

The straw man argument is like the house of straw of pig #1.

While the investor of precious metals is like little pig #3

For me, I will choose brick over straw any day of the week.