Much bad politics thrives on a simple lie -- that the federal government might go bankrupt. That tidbit of misinformation is the basis for many an unnecessary federal spending cut and for many an unnecessary federal tax hike. The federal government is monetarily sovereign, which means that it, and it alone, creates the US dollar, can do so at will and in any amount necessary, and can always pay any bill or debt denominated in US dollars. When a politician tells you that Social Security is running out of money, that federal spending is out of control, or that your grandkids must pay for our current spending, you can be assured that that politician is either lying or is woefully misinformed about federal finances. Could federal spending cause national inflation? Possibly, but highly unlikely when we have unused productive capacity.
But do not take my word for it. Here are some expert views on this topic:
"The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default." Alan Greenspan, former Federal Reserve chairman.
"There is 0% chance that the US will be forced to default on the debt." John T. Harvey, PhD, Texas Christian University.
In the case of United States, default is absolutely impossible. All U.S. government debt is denominated in U.S. dollar assets.” Peter Zeihan, Vice President of Analysis for STRATFOR.
“In the case of governments boasting monetary sovereignty and debt denominated in its own currency, like the United States (but also Japan and the UK), it is technically impossible to fall into debt default.” Erwan Mahe, European asset allocation and options strategies adviser.
“There is never a risk of default for a sovereign nation that issues its own free-floating currency and where its debts are denominated in that currency.” Mike Norman, Chief Economist for John Thomas Financial.
“There is no inherent limit on federal expenses and therefore on federal spending…When the U.S. government decides to spend fiat money, it adds to its banking reserve system and when it taxes or borrows (issues Treasury securities) it drains reserves from its banking system. These reserve operations are done solely to maintain the target Federal Funds rate.” Monty Agarwal , managing partner and chief investment officer of MA Managed Futures Fund.
"As the sole manufacturer of dollars, whose debt is denominated in dollars, the U.S. government can never become insolvent, i.e., unable to pay its bills. In this sense, the government is not dependent on credit markets to remain operational." Federal Reserve Bank of St. Louis.
“A sovereign government can always make payments as they come due by crediting bank accounts — something recognized by Chairman Ben Bernanke when he said the Fed spends by marking up the size of the reserve accounts of banks.” L. Randall Wray, Professor of Economics at the Univertsity of Missouri-Kansas City and a Senior Scholar at the Levy Economics Institute.
(Thanks to John T. Harvey for providing some of these quotes).