Why Should We Care What Happens in 2025?
To buy a 30-year Treasury at its current 4.5% yield and get a decent 2% return, you have to bet that inflation will not exceed 2.5% for the next 30 years. You have to bet they will solve the 2025 deficit.
If you decide that the government will just keep kicking the deficit can down the road, sell your 30-year Treasurys. Sell fast, before everyone else does—because if we all try to sell, we just drive down the price and long-term interest rates rise. So as long as we don’t solve 2025, we are at risk of a spike in long-term rates if investors dump long-term U.S. debt.
Makes sense. I agree.
Very good point.The future is now.
Good point. And one that is often overlooked by columnists like Paul Krugman and others who think events that happen decades in the future can be basically ignored.
No other country in the world is able to run deficits equal to 10% of GDP and borrow at 3%. And our ability to keep doing this may soon evaporate.
Isn’t this precisely what worries China? The Chinese hold huge amounts of U.S. government Treasury Bonds; both as a safe investment and as a way to keep the Chinese currency artificially low compared to their trading partners (i.e. the United States). If receipts from exports were converted into Chinese currency, the yuan would rise and the dollar fall making Chinese goods far more expensive – thus reducing the trade imbalance. But, if China holds Treasury bonds indefinitely, the U.S. currency will become artificially high. This means China can never expect to sell their Treasury bonds at face value. The only avenue left is to use the U.S. currency holding to buy into the U.S. economy. This prospect isn’t ideal either if Congress continues to add to the deficit.