In 1790 America’s finances were in a precarious state: debt-servicing costs were higher than revenues and government bonds traded at 20 cents on the dollar. Alexander Hamilton, the country’s first treasury secretary, wanted a deep and liquid market for safe government debt. He understood the importance of investor confidence, so proposed honouring all debts, including those of states, and offering to swap old debt, at par, for new bonds with a lower interest rate. This was controversial. Shouldn’t speculators who picked up cheap debt in secondary markets be paid less? Yet Hamilton could not be swayed: “When the credit of a country is in any degree questionable, it never fails to give an extravagant premium, in one shape or another, upon all the loans it has occasion to make.”
More than two centuries later American politicians are busy undermining Hamilton’s principles. Debt-ceiling brinkmanship has pushed America towards a technical default. Rising interest rates and incontinent spending have seen debt balloon: the country’s total stock of it now amounts to $26.6trn (96% of gdp), up from $12.2trn (71% gdp) in 2013. Servicing costs come to a fifth of government spending. As the Federal Reserve reduces its holdings of Treasuries under quantitative tightening and issuance grows, investors must swallow ever greater quantities of the bonds.
All this is straining a market that has malfunctioned frighteningly in the past. American government bonds are the bedrock of global finance: their yields are the “risk-free” rates upon which all asset pricing is based. Yet such yields have become ..
Support the originator by clicking the read the rest link below.
