Many are convinced that the U.S. government will likely either default or hyperinflate its way out of debt. I disagree: I think Treasury bondholders will win. As I wrote in Econ Journal Watch:
A U.S. default is unlikely: As a demographically young nation, the United States will watch other nations face demographic crises years before it faces the full brunt of the same. The spectacle will furnish salient examples of the short-run shame and suffering caused by default.
Right now, the U.S. Senate is allegedly trying to broker a long-term deal with some mix of tax increases and entitlement cuts (combined with marginal tax rate cuts). It’s along the lines of the
Bowles-Simpson proposal, which
Arnold has
discussed.
I don’t know if some form of this plan is going to pass after the election, but if the probability of serious reform passing is, say, 30% this year, and 30% in every
lame duck session for the next decade, then we’ve got a better than 80% chance of reform in the next ten years. And remember, lame duck deals are only one path to bondholder paradise–there are plenty of
other roads that get you there.
That means Treasury bondholders can agree that Congress will “probably fail this time” while still agreeing that the federal government will probably get its act together someday soon.
I still think default is possible, and if it happens, it will probably be caused by the noblest of motives. From my
abstract:
[T]he GOP offers a uniquely American path to default: An unwillingness to raise taxes. Bondholders the world over will be watching to see if “starve the beast” is a pathway to “default on the beast.”
We’ll see if the House GOP gives Treasury bondholders a case of heartburn this fall.