Quote:
Originally Posted by Mutt
you're talking from the borrower's point of view, what about the lender? with real estate the lender's loan is secured by the land property. if the borrower can't make its payments the lender forecloses. what's China got as security?
Bonds are just more debt and it just keeps adding to the national debt. The answer is that the United States can't pay back the principal if it had to, but due to its place in the world 'it's too big to fail'. for now. While the US does have its special place in the world it should just print the hundreds of billions and pay down the debt to China and other major creditors - let them take that money and invest it elsewhere or buy up more US resources.
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They can't just print the money.
In the past few years they have printed too much money, as much as they could, for bailouts and military spending. While they didn't actually "print" cash, they sold securities worth trillions of dollars which has a similar effect as printing money because it adds to the available funds in the pool without having increased the actual worth of the nation. When you add to the pool without increasing actual worth, you devalue your currency as it is a product of your worth.
so, if the federal reserve / mint decides to just print a trillion dollars, they devalue each and every dollar in existence and while they can immediately use the money they printed, they have not increased the overall worth of all the money there is.
in this scenario the gov can use that trillion dollars to retire some outstanding debt, but the US runs at a perpetual deficit and will simply need to issue new debt in the near future, the problem is that when they do go do issue new debt, they have devalued their currency due to the printing of excess money, thus the value of the new debt will be lower, this means in the end, they will have to issue more debt to accomplish the same things than they would have had they not printed more money.
the issue compounds because the value of the securities is a product of a required return that factors in not only real interest rates on risk free debt, but accounts for several risk issues including inflation risk, default risk, currency exchange risk, etc.
US treasury Bonds used to be the definition of a risk free investment, they no longer are, virtually the entire world has moved to using the LIBOR rate because of the new risk that is now associated with the US economy. Thus it already costs the US slightly more to issue new debt than it used to. If the US prints more money than the economy can sustain, they increase currency exchange risk and inflation risk due to the devaluation of the dollar and they increase default risk as other countries will understand that printing more money is no longer a viable option. Then new US Government debt issues will be worth even less than they were before because lenders are requiring a greater rate of return. Either the Gov would have to offer a higher coupon rate on their debt, or their issues would sell at a discount.
it's a vicious cycle.