2 Concerns About The U.S. Government’s Debt
The comedy website Mises.org had some responses to the recent uproar over the TIME magazine article referring to the US government as insolvent. The two big concerns were in fact funny which is good because comedy websites are supposed to be…funny. Specifically, they said:
- The US government can’t afford the interest on the national debt.
- Foreign governments might sell US government bonds crashing the US bond market.
The first one is common and I wrote a detailed answer on this back in 2014. The short answer is that the US government can completely control the cost of its debt if it so desires. In fact, it could issue nothing but 30 day paper at 0.35% and investors would scoop it up so long as we’re not in an inflation crisis. But the main point is that the US government can completely control the cost of its debt by altering the duration of its liabilities and rolling them over. So long as this paper is expected to be repaid at par (which doesn’t appear remotely in doubt) then there’s no reason to expect cash holders to forgo the extra 0.35% the US government is guaranteeing them. Mises appears to be confusing a solvency crisis with an inflation crisis. One is a potential threat (though unrealistic at present) while the other simply doesn’t apply for a sovereign country who has its own bank and printing press.
The second one is also common and it’s something I wrote about in detail back in 2013. The short answer is that the US government doesn’t rely on foreign governments to bolster demand for bonds. This gets the causation backwards. Foreign governments end up with US dollars because they run trade surpluses with the USA. What they do with those dollars is completely up to them. They can leave them as cash or they can choose to earn that interest premium. If they decide to sell their holdings or forgo that interest premium then that’s their loss. But what they won’t do is stop demanding US dollars because they want those dollars as a function of their trade position. So, it makes no sense to argue that demand for bonds might dry up when the very demand for those bonds comes from the high demand for dollars via trade. Mises confuses the context of the discussion and misunderstands basic facts.
The third (and less important) assertion made in the Mises piece was that this is all politically motivated by liberals commentators. I don’t think that’s true at all. I am a pretty centrist person. I have no problem being critical of government spending and citing potential risks with government debt. But I also understand the operational realities of the US monetary system and how the US economy specifically fits into that context. And from that view, I find no credibility in the idea that the US government is insolvent.
Make no mistake. A sovereign currency issuer can default. I’ve written about that in detail here. But the concerns raised in TIME and on Mises are not legitimate concerns. They are taking the story and operational realities out of context.
Disclosure: None.
I agree with 2 in that there is massive demand for bonds. Mises just doesn't get that this demand exists. In fact, there is no doubt too much demand for long bonds.
But as to number 1, there is so much US debt as collateral these days that if the government went to short term instruments only, the collateral of treasury long bonds would soar so much in price that it could cause problems for derivatives clearinghouses. Also, the Fed may not be able to raise rates in an inflationary scenario, or at least not be able to raise IOR in an inflationary scenario. Fed researcher, Christopher Phelan says that could result in a massive run on the Fed and thinking about it, it could cause government debt payments to soar as well.