Treasury Default Risk
Treasury Default?
A number of investors and market commentators have predicted that the U.S. Treasury may default on Treasury interest owed or principal payments in the next few years. So long as the Dollar has reserve currency status, that will not happen, which is not to say that the Dollar cannot lose reserve currency status.
Print to meet fiscal obligations? The U.S. already does so.
Other investors and market commentators say it will be a bad day when the U.S. will be required to print new Dollars to make principal and interest payments owed on Treasury debt. The U.S. already does so. The United States runs significant fiscal deficits each year, which by definition means it does not have the cash on hand to meet its obligations. Therefore, Treasury is required to issue new debt to cover the old, and the Fed often participates in Treasury auctions to cover a portion of new Treasury issuances.
We are likely to see more of the Fed subsidizing Treasury auctions in the coming years. Many industrialized nations have preferred to build gold reserves to buying U.S. Treasuries over the past decade, and I expect that trend to accelerate. Shorting Dollars for Gold may become sport.
Can anything curb out-of-control fiscal spending?
Yes. If U.S. fiscal spending continues at this torrid pace, global investors will likely seek alternatives to U.S. Treasuries, which will see yields spike. A 7% or 10% yield on the 10-year Treasury for example would halt spending.