As a follow up to my previous post on the Eurozone, I will now attempt to explain is why the US is different than the Eurozone. Again, I am going to use a very basic example:
- Country US and Country Emerging have different currencies.
- Country US and Country Emerging borrow at different rates given that they have independent central banks and their currencies fluctuate freely in the market.
- Country US borrows money from Country Emerging; however, it borrows in its own currency. This makes Country US’s currency depreciate in value.
- Country Emerging wakes up one day and realizes this is lunacy and stops funding to Country US’s private sector. This presents a problem, as Country US’s growth is dependent on this funding.
- Given Country US has a different currency than Country Emerging they print money and inflate/devalue their currency, increase competitiveness, and boost exports, which reduce the debt burden and help growth.
- To further ease the slowdown, Country US’s government spends money in order to keep growth from plummeting. Given they print their own currency and have debt denominated in their own currency, they are not dependent on Country Emerging to fund their government. Thus, they can continue to borrow.
- As a result, Country US has the ability to increase government spending, helping the economy grow or at least hamper the slowdown.
