[ Question ]

Are US treasury bonds liable to fail?

by lc1 min read18th Mar 20203 comments


Personal Blog

Trying to get a sense of how bad the current financial crisis is, and how much the government can expect to credibly spend on stimulus measures. How do I check the likelihood, as measured by bond prices, of the United States defaulting on its debts? I as a non-educated layman look at treasury bond prices, hear that stock traders are moving into bonds as a fail-safe, and am kind of flabbergasted. It seems like they haven't moved at all, and that the market doesn't think that the current crisis is increasing the chance at all that the government won't go bankrupt.

New Answer
Ask Related Question
New Comment

2 Answers

The United States owns its own central bank and printing press. The only way it would ever default is if it chose to do so. The central bank can buy up however many bonds it wants with new money, and the mint can do creative tricks to create as much of its own money as it wants.

There's definitely people on here who know more than I do about this, but here's my (not an economist) line of thought:

The limit on what the government can borrow is ultimately the limit on inflation if it needs to print money to pay debts, so under normal conditions conditions the important figures are the debt/GDP ratio, and the interest rate at which the market is willing to lend money.

However, these are not normal conditions- this is probably something sort of similar to the 2007/2008 crisis. This means we're in a liquidity trap, that things are weird, and that printing money basically doesn't affect inflation, since banks/companies/individuals are all trying to reduce spending. IMO we'll need a strong fiscal stimulus once we've managed to resume normalish activity to avoid a persistent huge slump.

Overall I'd guess the risk of a US default is roughly the risk of the US goverment ceasing to exist in its current form- fairly close to 0%. Things are different for countries that can't print their own money, which is how the Greek economy got savaged.