The problem with the eurozone is that each nation gave up its sovereign currency in favor of the euro. For individual nations, the euro is a foreign currency. It is true that each national government still spends by crediting the bank accounts of sellers, and this results in a credit of bank reserves at the national central bank. The problem is that national central banks have to get euro reserves at the ECB for clearing purposes. The ECB in turn is prohibited from buying the public debt of governments: even though national central banks can facilitate “monetization” to enable governments to spend, the clearing imposes fiscal constraints. This is similar to the situation of individual U.S. states, which really do need to tax or borrow in order to spend.
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By contrast, a sovereign nation like the United States, Japan, or the UK does not borrow its own currency. It spends by crediting bank accounts. When a country operates on sovereign currency, it doesn’t need to issue bonds to “finance” its spending. Issuing bonds is a voluntary operation that gives the public the opportunity to convert their noninterest-earning government liabilities, currency, and reserves at the central bank into interestearning government liabilities, treasury bills, and bonds, which are credit balances in securities accounts at the same central bank. If one understands that bond issues are a voluntary operation undertaken by a sovereign government, and that bonds are nothing more than alternative accounts at the same central bank operated by the same government, it becomes irrelevant for matters of solvency and interest rates whether there are takers for
government bonds or whether the bonds are owned by domestic citizens or foreigners.
There is a further consideration. When a private entity goes into debt, its liabilities are another entity’s asset: there is no net financial asset creation. When a sovereign government issues debt, it creates an asset for the private sector without an offsetting private sector liability. Hence, government issuance of debt results in net financial asset creation for the private sector. Private debt is debt, but government debt is financial wealth for the private sector. A buildup in private debt should raise concerns, because the private sector cannot run persistent deficits. However, a sovereign government, as the monopoly issuer of its own currency, can always make payments on its debt by crediting bank accounts;
those interest payments are nongovernment income, while the debt is nongovernment assets. Put another way, when one must borrow to make future payments, one is in a Ponzi position. For a government with a sovereign currency, there is no imperative to borrow; hence, it is never in a Ponzi position.
With a sovereign currency, the need to balance the budget over some time period or over the course of a business cycle is a myth. When a country operates with a sovereign monetary
regime, debt and deficit limits—even bond issues, for that matter— are self-imposed; that is, there are no financial constraints inherent such as those that exist under a gold-standard or fixedexchange- rate regime. But that superstition is seen as necessary, because if everyone realized that government was not actually constrained by the necessity of a balanced budget, then it might spend “out of control,” taking too large a percent of the nation’s resources. The late Nobel Laureate Paul Samuelson (1995) agreed: "I think there is an element of truth in the view that . . . the budget must be balanced at all times. Once it is debunked, [that] takes away one of the bulwarks that every society must have against expenditure out of control. There must be discipline in the allocation of resources or you will have anarchistic chaos and inefficiency. And one of the functions of old-fashioned religion was to scare people, by [using] what might be regarded as myths, into behaving in a way that the long-run civilized life requires. We have taken away a belief in the intrinsic necessity of balancing
the budget, if not in every year, [then] in every short period of time. If Prime Minister Gladstone came back to life he would say, “Uh-oh, what have you done?” and James Buchanan argues in those terms. I have to say that I see merit in that view."
Sovereign governments do not face financial constraints in their own currency, as they are the monopoly issuers of that currency. They make any payments that come due, including interest payments on their debt and payments of principal, by crediting bank accounts—meaning that, operationally, they are not constrained in terms of how much they can spend. Nor does a sovereign government have to allow the markets to determine the interest rate it pays on its bonds, since bond issues are voluntary. On the other hand, countries that give up their monetary sovereignty do face financial constraints, and are forced to borrow from capital markets at market rates in order to finance their deficits. As the Greek experience shows, this monetary arrangement allows the markets and rating agencies (or other countries, in the case of Greece) to dictate domestic policy to a politically sovereign country.
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