US Treasury Secretary Scott Bessent on Tuesday rejected the idea that European governments could aggressively sell American debt to counter Washington's threats over Greenland, saying such a move would "defy logic".But asked by reporters at the Davos World Economic Forum whether the US was preparing for such a scenario, Bessent said that it "defies any logic".
Bonds are US debt, debt that the US uses to pay for stuff like military equipment.
Sure. But what effect does selling the bonds have on this US debt? The money has probably long since been spent. The government won’t give the money back. If I understand correctly, the sale only changes who gets the interest, no?
If everyone sells their bonds, supply outpaces demand, making the bonds less valuable.
The US relies on borrowing to pay off the interest of the debt it already has. If no one wants to buy any more US bonds, then the US can’t make interest payments; let alone principle.
Say you get a mortgage from the bank, which you use to buy a house. Then someone builds a stink factory next to your house, lowering its value. You now owe the bank more than the house is worth; you’re in a deficit, and if you can’t make payments then you default on the loan. You can’t even sell the house to pay off the mortgage at that point.
I’m not sure what the example with the house is supposed to mean, but the difference between me and a country is that the country issues its own currency. Even if supply ever exceeded demand for US bonds, the Federal Reserve could simply step in as a buyer. It is unrealistic that selling government bonds could put the US in a position where it can no longer take on new debt.
A mortgage and a treasury bond are both types of loans, although they do function somewhat differently.
When you mortgage a home, the bank loans you money which you use to buy a house. The loan is then secured against the equity of the house, which still belongs to the lender until you pay it back. As long as the house remains as valuable or more valuable than the amount of principle you have left on the loan, the mortgage remains solvent.
When you buy a treasury bond, you loan the treasury money which is secured against the bond itself: a sheet of paper with no real value except that the treasury promises to pay it back, plus interest. Typically the treasury pays back the principle and interest on its bonds by issuing new bonds, creating a repeating cycle of ever-widening debt. A circular pattern of using new borrowing to pay off debt. It’s been an untenable situation for decades, stacking a jenga tower higher every year along the way, and the only reason it hasn’t collapsed is because people continue to buy new treasury bonds, often by automatically rolling over the ones that complete their term into new bonds, thus enabling the US to continue borrowing.
If countries cease to buy new bonds, or sell-off their existing bonds on the secondary market, those bonds lose value. The interest gained is fixed, of course, so no one would buy a bond for more than it’s worth at the completion of its cycle, but if the value dips below the rate it was purchased at then the seller is at a loss. If bonds are worth less then their original value, no one will buy new ones.
If the US treasury can’t issue new bonds, it can’t borrow new money to pay off the principle and interest on its older debts. It’s as if your house, which is securing your mortgage, lost value, and is no longer worth enough to pay off your remaining debts. It becomes insolvent, and if the debt is recalled, your only option is to default.
If the US can no longer afford the principle and interest on its debts, then US treasury bonds become worthless, because the promise that the US will pay them back becomes no good. Thus completing the cycle of the devaluation of US treasury bonds.
Even if the Federal Reserve tries to mitigate this by buying US treasury bonds, it’s not an infinite pool of money, and this circular lending “borrowing from yourself to pay your debts” is likewise untenable and only further complicates the house of cards without actually securing the flimsy foundations. Plus, the more money the Federal Reserve releases into circulation, the more watered-down the value of the USD becomes, driving the US economy further from credible stability and its place as the global reserve currency.
It is a highly complex situation, and the mortgage analogy is somewhat simplistic relatively speaking, but that’s the point of an analogy: to make a complex topic simpler, even at the expense of some accuracy, to make it easier to understand.
While selling off treasury bonds wouldn’t cause a collapse of the US economy overnight, it has the potential to precipitate a catastrophic collapse and thus even a small movement in that direction can gain a lot of leverage for other countries.
In short, the US is in no place to make claims on other nations’ sovereign territories, especially nations that are allied with its biggest collection of creditors. And that’s what this is all about.
Well it dilutes the demand for new bonds to have those old ones resold. But yes whomever holds those bonds gets paid, no one can call in us debt, it’s due when it’s due.
But if all of europe quit buying US bonds and sold what they have, the US might not be able to raise the next round of trillions of borrowed dollars first chance the administration gets.
Is it plausible to assume that the US will no longer be able to sell its bonds? In the worst case scenario, it will raise interest rates by 0.1 percent. Or the Fed will step in, as it did in 2008 and 2021.
And to add to this, while the secondary market doesn’t affect existing debt it can completely wreck a government’s ability to contract new debt, as anyone affected by the Euro Area Crisis in 2009 can tell.
So European investors can leverage existing bonds to make things much worse than simply not loaning more money.