The USA cannot go bust. But Wall Street can

SUMMARY

Richard Murphy, political economist and author, addresses widespread speculation about the potential collapse of the US economy and dollar, arguing that while the US government cannot go bankrupt due to its monetary sovereignty, the financial markets remain dangerously exposed. He warns that the real threat lies in an unprepared financial system facing mounting pressures, with the risk of a major crash and subsequent economic depression if governments fail to intervene.

MAIN POINTS

• Speculation arises about the US going bust, but its debt is denominated in dollars, so it cannot default. [0:00]
• US financial markets are stressed, with high share prices, low liquidity, and a record hedge fund loss highlighting vulnerabilities. [1:01]
• Potential triggers for a financial crisis include political actions, institutional collapses, or accounting scandals, with bubbles inevitably bursting. [2:02]
• A financial market crash would rapidly impact banks, pensions, and the real economy, leading to widespread losses and reduced consumer confidence. [3:00]
• Governments saved economies in 2008, but current neoliberal attitudes may prevent similar intervention, risking a depression. [5:00]
• While the US and UK cannot go bust, their banks can fail, and without preparedness, the consequences for jobs, savings, and pensions could be severe. [6:01]

DETAILED ANALYSIS

The notion that the United States could go bankrupt is dismissed on the grounds that all US government debt is denominated in its own currency, allowing the government to create dollars as needed for settlement. This principle, rooted in modern monetary theory, distinguishes sovereign currency issuers from other economic actors. However, the current state of US financial markets is described as precarious, with share prices at historical highs and investment funds holding minimal cash reserves, increasing systemic risk.

Liquidity is low, and government bonds are being sold to fuel further equity investment, amplifying market instability. Recent events, such as a US hedge fund's unprecedented $15 billion loss in a single month, signal underlying stress, even if markets have not yet reacted with panic. The potential for a crisis is attributed to the likelihood of a trigger event—be it political, institutional, or stemming from a major corporate scandal—that could rapidly erode confidence and burst the prevailing market bubble.

The Financial Times is cited as characterizing US markets as detached from reality. In the event of a crash, the consequences would extend beyond financial institutions to the broader economy, as falling asset values undermine consumer confidence and spending, potentially driving companies and banks into insolvency. The risk of a severe recession or depression is heightened by the prevailing neoliberal belief that governments cannot afford large-scale interventions, unlike the coordinated bailouts seen in 2008.

The absence of contingency planning for such a crisis is identified as the most significant danger, with warnings that banks, pensions, and individual livelihoods are at stake. The analysis concludes by emphasizing the need for a new economic approach that prioritizes systemic resilience and proactive government action to prevent future crises.

LINKS

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