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July 27, 2012 at 09:50 AM
When a commercial company goes bankrupt, the bankruptcy judge and the bankruptcy lawyers use a somewhat complicated list of rules to decide who comes first when it comes to creditors and others who have claims on the bankrupt comanies’ assets.
Federal tax authorities come before bond holders; secured bond holders come before holders of unsecured debt. About $2,000 of a worker’s pay and benefits has a relatively high priority level, and the rest of the compensation a worker is owed has a relatively level of priority.
The U.S. government is unlikely to go bankrupt the same way a company would because, in a serious crisis, the government could make most of its obligations disappear by simply printing a lot more money. The government could, in effect wipe out all of its debt overnight by printing many trillions of funny money dollars and using those to pay off all of the government’s debts.
Chances are there would turn out to be legal and regulatory barriers to using that solution, but the real obstacle is that it would wipe out the value of the U.S. dollar and the U.S. government’s ability to borrow money or issue currency that others would trust.
So, the government hasn’t and won’t erase the entire federal debt, or even the deficit, by printing money, but the Federal Reserve Board has been trying to keep the economy going by expanding the money supply at a more moderate pace, simply to give bankers, business managers and consumers the sense that money is easier to come by and that they can spend it more readily.
