The United States faces a choice between default and inflation thanks to its massive debt burden, says Citigroup chief economist Willem Buiter.
He expects default.
“The U.S., like every country that has independent monetary authority, has two options when it has an unsustainable fiscal situation,” he said in a recent speech.
“One is default, and the other, if the debt is domestic-currency-denominated, as is the case for the U.S., is inflation.”
While the Obama administration and Congress may be inclined toward the inflation option, the private sector isn’t, Buiter points out.
“There's private debt as well, and depending on the political configuration in a country, the creditors' lobby may be stronger than the debtors' lobby,” he said.
“That will be the case at the moment.”
The Federal Reserve also stands as a bulwark against inflation.
“The current Federal Reserve Board and FOMC simply wouldn't deliver that,” he said.
“They may not be as fearsomely Teutonic in their price stability preferences as we saw the ECB was, but they won't inflate the debt away.”
Bottom line, Buiter said, “If debt's unsustainable, then for the U.S. too there's only one option, and that is restructuring, default.”
Many experts predict the United States will lose its triple-A credit rating.
"While we see limited risk of a U.S. sovereign debt downgrade in the next two to three years, beyond that we cannot be so certain," Societe Generale economists wrote in a recent report, according to Investor’s Business Daily.
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