Tag Archives: National debt

Not the Country We Once Were 2.

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            Why are bond-holders retreating from U.S. Treasury bonds now?  The huge deficits and growing national debt have been around for a while.  The willingness and ability of the United States government to pay the interest on the debt is no different now than it was a year ago or—in all likelihood—a year from now.  How is the sell-off to be explained? 

            Peter Goodman of the New York Times,[1] has raked up a variety of explanations.  They require some interrogation.[2]  Goodman doesn’t necessarily connect the explanations, but they can be read to point in one direction. 

“An erosion of faith in the governance of the world’s largest economy appears at least in part responsible for the sharp sell-off in the bond market in recent days.”  President Trump’s tariffs, he reports, have “shaken faith in that basic proposition [that the US will properly manage the global environment and maintain its creditworthiness], challenging the previously unimpeachable solidity of U.S. government debt.”  Goodman quotes Professor Mark Blyth of Brown University for support.  “The whole world has decided that the U.S. government has no idea what it is doing.”  He adds that “[o]ne reason [for the bond sell-off] appears to be an effective downgrading of the American place in global finance, from a safe haven to a source of volatility and danger.”  Purportedly, the tariff war with China, in particular, creates the danger of a global recession and undermines the role of the U.S. as the manager of the world’s “peace and prosperity.” 

I can believe the first half of this, but the second half is less credible.  Nothing fiscal is threatening the creditworthiness of the United States right now.  Why do tariffs disturb the bond market?  Similarly, bonds are commonly regarded as a hedge against stock fluctuations and in recession.  So, fear of a recession is making people sell bonds, rather than buy them? 

Goodman mentions other possible factors:

“Hedge funds and other financial players have sold holdings as they exit a complex trade that seeks to profit from the gap between existing prices and bets on their future value.”  This sounds very much like “financial players” are dumping bonds now to force the government to raise the yield on bonds.[3]  Today’s sellers will then buy back the bonds at a higher rate tomorrow.  Similarly, “[s]ome fear that China’s central bank [which holds $761 billion] in U.S. Treasury debt, could be selling as a form of retaliation for American tariffs.” 

What are the effects of investors selling bonds now?  In early April 2025, “the yield on the closely watched 10-year Treasury bond soared to 4.5 percent from below 4 percent—the most pronounced spike in nearly a quarter century.”  Raising interest rates to attract borrowers “tends to push up interest rates throughout the economy, increasing payments for mortgages, car loans and credit card balances.”  This will hurt ordinary Americans.  They will howl. 

            Are Wall Street and China pressuring President Trump to lay off his incoherent tariff policy?  If so, is that who we want to surrender to?  It won’t be the last time. 

[1] Peter Goodman, “Trump Tariffs Shake Faith In the Safety of U.S. Bonds,” NYT, 14 April 2015.

[2] Pin on The Far Side 

[3] “Speculators have been unloading bonds in response to losses from plunging stock markets, seeking to amass cash to stave off insolvency.”  Does this mean that other “financial players” are in danger of getting gored as collateral damage? 

Not the Country We Once Were 1.

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For quite some time now, United States government bonds were a global safe-haven when conditions got rocky somewhere else in the world.  This rested upon the belief that the US government could and would pay its IOUs.[1]  It has been easy for the United States to find lenders willing to buy Treasury bonds at lower rates of interest than might otherwise have applied. 

The consequences have been good or bad depending on how you look at it.  Various benefits for the United States flowed from the belief in the reliability of American public credit.  For one thing, the willingness to lend has eased the cost of the big deficits and growing national debt.  Americans have not had to strike a balance between taxes and spending. 

Furthermore, for those individuals who rely upon credit purchases, buying a car, or a house, or a lot of stuff at Walmart has been cheaper.  The reverse of the medal here is that all those foreigners who wanted dollar-denominated bonds raised the value of the dollar relative to the currencies of those other countries.  These “strong” dollars made imports cheapish.  This, too, eased the cost of consumption.[2]  OK, where did these foreigners get the dollars to buy Treasury bonds?  They got them by selling cheap goods to Americans.  Then they buy US Treasury bonds, which raises the value of the dollar, which makes their goods cheaper for Americans and American goods more expensive for everyone. 

Along the way, all those cheap imports first undercut, then destroyed, much of America’s manufacturing base.  If all it had done was wreck the American production of teddy-bears, we could live with that.  However, many of the goods now produced abroad are things like pharmaceuticals, computers, information/communications technology, and automobiles.  Since joining the World Trade Organization in 2000, China has been the main predator stripping the bones of the non-financial and non-entertainment sectors of the American economy.[3] 

As the national borrowing has increased, the size of the debt has grown to very high levels.  The debt can be regarded as solid so long as the United States has the will and the means to pay the interest, at least, on it.  The share of the interest payments in government spending has grown in recent years.  Partly, this reflects the sheer volume of the debt; partly, it reflects the higher interest rates charged to control the inflation. 

However, what if the debt or the interest rate on the debt grow so large, that the interest payment exceeds what Americans are willing and able to pay?  This has been a continual and growing theoretical concern among economists and investors for many years.  People will lend so long as they believe that they will be paid back.[4]  If they lose confidence, then they will try to get rid of their government I.O.U.s.[5]  (I don’t recall hearing any of this discussed in presidential debates.)  It is possible that the recent “retreat” from bonds is the first tremor of an earthquake.    

Or perhaps not.  A large share of the small group controlling global business and financial resources (countries, companies, banks) really dislike the current American economic policies.  So is also possible that this is just a warning shot.  Will people attend to the warning? 

[1] Peter Goodman, “Trump Tariffs Shake Faith In the Safety of U.S. Bonds,” NYT, 14 April 2015. 

[2] Just for fun, go through all your stuff, from underwear to lap-tops and make a list of where everything comes from. 

[3] How do you fight a war with fictional “super heroes” dressed in Spandex and piles of money? 

[4] They will lend even when they suspect that they will not be paid back in full.  Under these conditions, they charge a “risk premium’ in the form of higher interest rates still.  Argentina, a notorious bad bet, pays high rates. 

[5] Maybe something like this.  Fire sale – Margin Call (2011) 

Slowly for a long time, then all of a sudden.

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            The newspapers are reporting large-scale decline in sales of United States Treasury bonds.  It is believed that “investors” are losing confidence in the United States as a world economic leader. 

            First, who is doing the selling?  Is it financial firms, like banks and hedge funds?  Is it the central banks of the targets of President Trump’s tariffs (the Peoples’ Republic of China, the European Union)?  There is plenty of evidence that all of these entities are opposed to the tariff policy.  Are they trying to exert pressure on the United States to alter its policy?  Is the government of the United States going to have to yield to this pressure? 

            Second, the government of the United States is in a precarious financial position.  The balance between revenue and spending has been out of whack for quite some time, although it got dramatically worse with the arrival of Covid.  The interest on the national debt has become the third largest government outlay, shouldering its way past military spending. 

            The reason to consider this issue is because the falling market for Treasury paper—like what we are now seeing—is how a financial crash could begin. 

Ruthless.

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            Here’s the rot at the heart of the Republic: American voters of both parties have come to love “free stuff.”[1]  In a Democracy, politicians and political parties see the road to their own success running through giving voters what they want.  For Democrats, it means Tax-Spend-Elect; for Republicans it means Tax Cut-Spend-Elect. 

            As a result, in 2023, federal spending hit $6.75 trillion, with the federal deficit (not debt, just one year’s worth of spending above revenue) hitting $1.8 trillion.[2]  That deficit is 6.4 percent of Gross Domestic Product (GDP).  That isn’t a record.  It has been surpassed before.  However, those other peaks occurred during some kind of emergency: wars, recessions, etc.  Those conditions don’t apply at the moment. 

“Goo-goos” hate this trait.[3]  In the present day, all sorts of experts and commissions offer warnings of coming catastrophe and plans to avoid same.  The trouble is that this is like trying to talk a drunk into giving sobriety a spin.  It isn’t going to happen until they “hit bottom” or have a “moment of clarity.”[4]  What might bring on such a change? 

            Can you cut federal spending by shrinking the federal government?  YES!  And this idea is supported by a majority of Americans.[5]  Can you cut a LOT of federal spending simply by shrinking the number of civil service employees?  NO! 

First, the cost of salaries for all civil servants runs in the area of $200-$250 billion a year.  You will recall (from just above) that this year’s deficit is $1.8 trillion.  So, $200-$250 billion is about one-eighth of the deficit. 

Second, there’s interest on the debt at $882 billion.  An actual default, not just cuts to existing spending, may be coming.  We’re not there yet and we may be able to fend it off. 

Then there’s “discretionary” spending.  This includes the defense budget and everything else.  This comes in at around $2 trillion.  You can cut the defense budget a bunch.  You just have to believe that we are entering an era of peace and tranquility in which no other country will seek to challenge American interests. 

            Third, there’s the elephant in the room: “mandatory” spending on Social Security, Medicare/Medicaid, and related programs.  This amounts to $4.1 trillion, more than double “discretionary” spending.  “So taming mandatory spending means reining in benefits.”  Ouch! 

            It seems impossible for either Congress or the American people in their present state of desiring “free stuff” from the government to address this issue.  Nor will they raise taxes. 

However, there is scope for executive action.  For example, one “Goo-goo” estimate suggests that as much as $1.4 trillion could be saved by reversing Biden administration executive actions.  All we need is a ruthless lame-duck president who doesn’t care about established traditions or Beltway verities or even what he may have promised to get elected. 

[1] This has become a cultural force.  How and why this has happened is worth exploring. 

[2] Greg Ip, “Cutting Deficits Is Easy—Just Unpopular,” WSJ, 27 December 2024. 

[3] See: Goo-goos – Wikipedia 

[4] You might think that the recent unpleasantness with inflation fueled by deficits would have awakened ordinary Americans to this issue.  It doesn’t seem to have done the trick.  Or perhaps the pre-existing interest groups and political habits were just too strong for a not-yet-crystalized change of attitude.   

[5] According to an Ipsos poll, 57 percent of Americans favor downsizing the federal government.  “Poll Watch,” The Week, 6 December 2024, p. 17. 

Default Setting.

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I’m not sure that History weighs on us, but Memory certainly does.[1]  For example, inflation and deflation are subjects of learning and memory for those who experience them.  Deflation (falling prices) plagued American borrowers and benefitted American lenders in the last quarter of the 19th Century.  People looked at inflation (rising prices) with longing or loathing.  If you were, say, 64 in 1934, then you were born in 1870.[2]  Growing up, you would probably have heard about reams of paper money printed without any fixed relationship to gold in order to finance your particular country’s search for victory in the Civil War.  As an adult, you would have read with exultation or dread, depending on your social class, William Jennings Bryan’s “Cross of Gold” speech and the Populist calls for the free coinage of silver at a ratio of 16:1.  That is, you would have been familiar with inflation as a good thing (for debtors) or a bad thing (for creditors), rather than as just a normal thing.  In the wake of the election of 1896, a conservative victory, Congress enacted American adhesion to the gold standard.  However, that was just Congress, a bunch of gutless poltroons (why else would you bribe them?) who might change their minds with the wind.  As a result, many lenders inserted “gold clauses” in contracts.  These obligated borrowers to repay in gold coins of “present weight and fineness” or in paper of equivalent value.  Basically, “gold clauses” were inflation-proofing insisted upon by lenders.  They applied to various contracts, but especially to bonds—government and corporate IOUs.

OK, skip ahead to the Great Depression of the 1930s.  Taking the leadership of a country sunk in the slough of despond, Franklin D. Roosevelt opted for inflation over deflation.  He severed the United States from the Gold Standard, which kept currencies fixed at specific rates of exchange, and then revalued the dollar.  This allowed Roosevelt to “raise” the price of gold held by the United States and print more dollars to accommodate its higher price.  The “price” of gold rose from about $21/ounce to $35/ounce.  So, by about two-thirds.  This inflated prices and devalued debts.  Great!  For anyone who had debts not inflation-proofed.

At this point, Roosevelt’s policy slammed into the “gold clauses” on many bonds.  Because of the two-thirds rise in the price of gold, debtors had to pay lenders about two-thirds more than they had borrowed.  One of those debtors was the United States government, which owed about $20 billion in gold-clause bonds.[3]  In 1935, the Supreme Court—in the “gold clause cases:–held that the government could abrogate public and private gold clauses.  That is, the U.S. government is not obligated to pay its debts and it did not pay them in this case.

Still, it is a commonplace that the United States has never defaulted on its debts.  That reassuring belief keeps people buying Treasury bonds when the deficit and national debt keep growing to extraordinary levels.  Except, maybe Bill Gross when he was at PIMCO.[4]

[1] That’s probably why “we” never learn from the past, but individuals often do learn from the past.  There is no way to transmit the acquired knowledge.  They why study History at all?  Because smart people will be among the few who learn lessons and for everyone else, it’s pretty entertaining.

[2] Sebastian Edwards, American Default: The Untold Story of FDR, the Supreme Court, and the Battle over Gold (2018).

[3] Worth about $380 billion in 2018 dollars.

[4] https://www.theatlantic.com/business/archive/2011/03/pimcos-gross-asks-who-will-buy-treasuries-when-the-fed-doesnt/72276/ ; https://www.theatlantic.com/business/archive/2011/05/bill-gross-on-deficits-and-the-fed/238682/