The treasury bond is essentially a low return loan to the government, expected to be paid by economy via taxation and economic growth. If you do not invest in bonds you are taxed the same as someone who does. (Mostly.)

Governments can and do default on loans, but more rarely than companies. The other form is by adjusting interest rate on the bonds.

(Well, technically they could choose to, but only out of incompetence or malice, never by necessity.)

2. A soft default is still a default for the investor

3. I’m confused by your characterisation of the US as a sovereign country vs the EU - they are both very similar federal groupings of states, just at different points on their lifetimes. US states have defaulted and some are at risk if it now.

The US became monetarily sovereign when they removed the unnecessary artificial constraint of the gold standard after Bretton Woods fell apart (as all gold standards do eventually) and floated their exchange rate.

In comparison, Greece, Italy, Portugal, Spain, France, etc. do not have central bank that can issue Euros. So they cannot issue risk-free debt, like the US, UK, Australia, NZ, Japan, etc. can. The EU does have a central bank, but doesn't have any federal fiscal function to reduce imbalances between the member states (self-imposed, because politics), and the central bank is not allowed to buy bonds directly from member states (because politics) although did eventually have to start buying it up on the secondary market. But mostly the only options of the weaker member states in a crisis are austerity, which leads to unemployment, and eventually contraction and default.

I hoped point 2 would make it clear I think this a specious argument. A soft default (what you espouse when you say they can’t run out of dollars) is just a default by another name. If they truly can’t run out of dollars, why bother with taxes at all - just keep printing dollars? A soft default is arguably more pernicious than simply defaulting - it hurts future generations as well as the present.

The EU has a central bank, engages in QE, sets interest rates etc, and has the same problems with inequality as any other large super-state like the US has. It also redistributes funds to poorer regions. There are clear differences, but also striking parallels with the early US. The states within it have chosen to subsume their economic identity within a larger bloc, they have the same ability to print Euros as a group as the united states (and have done so).

Austerity was a political choice, imposed by the troika, it is not the only possible solution. Just to take one example, the EU could have engaged in more QE (or another variant of money printing), in order to fund Greece debt, but it was not judged politically expedient in Germany to do so.

The reality is there is no such thing as a "soft default," there is just an elastic money supply. At what level of elasticity does it stop being normal balance sheet expansion and start being "soft default?"

I find it helpful when discussing literally quantifiable subjects like sovereign accounting, to stick to terms that can be meaningfully defined. Those who do not are being ignorant or dishonest.

A flexible money supply and low, controlled inflation are good. Using inflation as a way of avoiding debts and obligations is not good (and yet so tempting that rulers have attempted to do so throughout history, with disastrous results). Doesn’t really matter what you choose to call it, but money is not infinitely elastic, and high inflation has nasty consequences.

More importantly, the vast majority of money used by citizens and thus that can have an effect on inflation (which is caused by too much money chasing too few goods and services) isn't controlled by the Federal Government or the Federal Reserve. It's created ex nihilo as deposits in privately owned licensed banks. Is a bank "soft" defaulting on its depositors every time it creates a mortgage which results in the creation of new deposits, often in the amounts thousands of times larger than the typical depositor's entire account?

This implies an infinitely elastic money supply, where creating it has no impact on assets prices or inflation. The high inflation caused by that attitude would be a violation of the implicit contract with creditors and citizens.

The money supply created by external banks is still controlled by the government indirectly via various levers (interest rates, buying bonds, reserve requirements etc).

Defaults come in all shapes and sizes - most defaults are not a straightforward loss of all money but negotiated haircut(s) of some kind (see greece defaults rercently), similar to the gradual loss of spending power caused by inflating away debt. Inflating away debt is preferred by governments precisely because it is so hard to calibrate and nobody really notices it, but it is a dangerous game when taken to extremes and taken for granted (as the parent advocated).

That’s why the idea of a ‘soft default’ doesn’t really exist in the modern economy.

Basically, taxes are the main anti-inflationary mechanism that the economy has. The Government needs to spend money (and the private sector really needs them to spend, because in the modern economy we can’t create new money without creating debt - only the Government can do that), but if they spent without taxing aggregate demand would be way too high and you’d get inflation.

The Government doesn’t need your money at all, but they do need the private sector to not have it and spend it. Some economists looking at these kind of monetary issues call that ‘fiscal space’.

Secondly, you need taxation to have a stable currency, because it creates a baseline demand. Without a population of people required to pay taxes in a currency, it may become more attractive to the private sector to switch to a different currency.

Third, taxes are useful for encouraging (by tax breaks) or discouraging certain activities (by taxing them more). And finally, taxes can serve a redistributive purpose if you have a progressive system, reducing the financial assets of the wealthy somewhat while balancing it out a bit with spending.

By the way, you still haven’t understood what I mean about the EU...

Historically, monarch bonds which are a precursor to government bonds have defaulted. As have bonds of weak countries in severe crisis. (Argentina comes to mind.) It is a last resort of course.

None of the countries you mentioned, not even China, are economically independent. Thus when one falls, the others will feel it. Monetary policy alone won't work if you have to combat huge inflation or deflation, it has been shown in past crises. (Especially US ones.)

For example, my country’s federal Government can never run out of Australian dollars (we own the central bank!). But if I remember correctly, Argentina has a great deal of debt (like a lot of developing countries) denominated in foreign currencies. They can absolutely be forced to default on that.

The Eurozone basically all use a currency they can’t control, so have similar problems if they don’t have a big enough trade surplus to compensate (like Germany does). Those problems were predicted from the very earliest days of a common currency being discussed, like by the great economist Wynne Godley in 1992 (London Review of Books, November issue if I recall). He wrote a great textbook on monetary economics in 2006 with Mark Lavoie which discusses this kind of thing.

Inflation and deflation are a different issue, but can both be better controlled through fiscal measures (The monetarists’ fantasy that you can control everything just with interest rates is definitely wrong. It’s way too blunt a tool for the job).

The governments can’t default on loans nominated by their currencies.

Their currencies might dip 100% though.