Demand for U.S. Treasury bonds could surge, even as default looms
AYESHA RASCOE, HOST:
If Congress doesn't end up signing on to the deal, the U.S. government defaults, sending shockwaves through the financial system. But in a surprising turn, some forecasters think that would actually increase demand for U.S. government debt. NPR's Scott Horsley joins us now to explain. Hi, Scott.
SCOTT HORSLEY, BYLINE: Hi, Ayesha.
RASCOE: So why would investors want more government bonds if there are questions about the government's willingness to pay back the money it owes?
HORSLEY: Yeah, that is kind of weird, right? Ordinarily, you would think a deadbeat borrower would have a harder time finding people to lend them money. But whenever there's turmoil in the financial markets, investors look for a safe place to park their money. And some forecasters think that's still going to be U.S. Treasury bonds, even if in this case, the turmoil is the result of the federal government not paying its bills.
It is strange. It's kind of like climbing into a lifeboat with someone who keeps stirring up the waves. But Josh Lipsky, who's senior director of the Atlantic Council's Geoeconomic Center, says there just aren't a lot of other lifeboats around. Germany is one of the few countries with bonds considered as safe as those in the U.S., and Germany doesn't borrow that much money. Government bonds in China, Japan, the U.K. all have their own problems. So Lipsky thinks the U.S. government bonds will still be in high demand. The financial shorthand for this is TINA - that stands for there is no alternative.
JOSH LIPSKY: So that just means that there are few options and the options that exist can't handle the size of demand that might come to them, which make U.S. Treasuries the natural alternative to come back to, ironically.
HORSLEY: Now, that doesn't mean people are going to buy short-term U.S. bonds, the ones coming due right in the middle of this debt ceiling fight. Those are pretty unpopular right now. But if you look just a little further out, once the dust settles, it looks like plenty of people would still be willing to lend the U.S. government money at fairly low interest rates.
RASCOE: Well, does that mean that we don't really have to worry about the debt ceiling fight?
HORSLEY: I don't think we should be complacent about that. Some people might remember the old Lily Tomlin sketch about the phone company. We don't care. We don't have to. That's a dangerous attitude. That kind of monopoly power doesn't necessarily last forever, especially when you throw your weight around carelessly. Competitors eventually sprang up to challenge the phone company, and Lipsky says the U.S. shouldn't take its position in the global financial system for granted either.
LIPSKY: I do think there's global fatigue directed toward the U.S. And while there is no alternative in the short term, that doesn't mean that other countries and investors around the world are not looking for alternatives in the long term. Countries do not want to be so reliant on a system which they see from their perspective right now is dysfunctional.
HORSLEY: Lipsky says it's a privilege that people all over the world want to buy U.S. Treasuries. It lets our government borrow money at very low cost, and there are real economic advantages that come from that. He says the U.S. shouldn't squander that, certainly not as casually as some members of Congress seem willing to do.
RASCOE: Both the president and the House speaker have said they're determined to resolve this in a way that doesn't result in a government default. Has there been any fallout, though, from just coming this close?
HORSLEY: It certainly hasn't been a good look. You remember earlier this month the president had to cancel his planned trip to Australia where he was going to meet with Asia Pacific leaders and what would have been the first ever presidential visit to Papua New Guinea just because he had to come home and deal with this manufactured crisis. The White House downplayed the geopolitical cost of that. But other countries take note. You know, this worries our friends. It emboldens our rivals. Rohit Kumar, who is a former advisor to Senate Republican leader Mitch McConnell, says an actual default would be an even bigger blow to American leadership.
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ROHIT KUMAR: It's hard to imagine a scenario where our standing in the world is improved because we have defaulted on our debt and self-inflicted an economic crisis not only on ourselves, but perhaps on the rest of the world. It's hard to see how that's a pro-American diplomacy move in the grand scheme of things.
HORSLEY: Kumar, who's now at PricewaterhouseCoopers, was speaking at an event this past week sponsored by the Concord Coalition, which tries to promote fiscal responsibility. He added that any actual reduction in government spending that comes out of this fight is likely to be pretty small and certainly not worth the risk of rocking the global economic boat.
RASCOE: That's NPR's Scott Horsley. Thank you so much.
HORSLEY: You're welcome. Transcript provided by NPR, Copyright NPR.