With news of both a Greek default and what was almost a Puerto Rican default, observers are predictably going to find a way to shift focus at some point – to the $18.2 trillion in U.S. debt.
The big question here is: Could the U.S. go the way of Greece and Puerto Rico? Could the U.S. government default on its debt?
The simple answer is yes, the U.S. government can default on its debt, but not in the same manner as Greece or Puerto Rico.
You see, Greece and Puerto Rico both issue debt in currencies they themselves have no authority to print. Greece's debt is denominated in euros. Puerto Rico's debt is denominated in dollars.
That means they have to obtain those respective currencies to pay off both interest and principal on their debts. In the European Economic and Monetary Union, member states cede control of monetary policy to the European Central Bank. They are essentially using a foreign currency. Puerto Rico operates much like a U.S. state in that it uses the dollar and denominates debts in them but can't print them itself.
Let's look at Greece.
The Greek government, for example, can obtain euros by either exporting goods in exchange for them with other euro area countries or by issuing debt that has to later be repaid in euros.
As the euro-denominated debt grows, Greece can begin saving euros to pay down that debt. It can cut spending or raise taxes.
The moment that debt becomes unpayable, either because Greece doesn't have the productive capacity to support exports or it isn't generating enough revenue through taxes, Greece will default.
This is the same with Puerto Rico and the dollar.
The bottom line is that Puerto Rico and Greece need to have some savings to draw upon to pay back debts.
The U.S. is entirely different. This is because the U.S. debt is denominated in dollars, and the U.S. government is the sole issuer of the dollar. There is no question of solvency because the United States can simply "print" the money it needs to pay its debt.
So, what could happen to make the U.S. government default on its debt?