Is the U.S. Government ‘Too Big to Fail’?

Treasury Secretary Janet Yellen. (Photo by Drew Angerer/Getty Images.)

It always makes me smile a little—and wince a little—when the World Socialist Web Site, the official online publication of the International Committee of the Fourth International, feels compelled to write about the market for U.S. Treasury bonds. It’s even more alarming when the rotten old reds have the story more or less right. 

To mark the occasion, here’s a little bonus “Economics for English Majors.”

The U.S. government funds its operations—and creates its debt—by selling a variety of bonds to investors around the world. Some of those investors are individuals, but the most important of them are large institutions: foreign central banks, insurance companies and other financial institutions, pension funds, etc. Because U.S. government debt is considered very safe—meaning that the investors judge the possibility that Washington will fail to make good on its debts to be very low—investors don’t get paid very high interest rates to lend the U.S. government money, which is what buying a bond amounts to. But even though returns typically are low, Treasury bonds are attractive to investors for many reasons beyond yield: The returns may be low but they are predictable, it is usually easy to sell your bonds if you decide you need to raise some cash, investors in countries with less stable currencies like having some of their money in dollar-denominated assets, etc. 

So attractive are those qualities that some investors will even willingly lose money on them, accepting “negative yields,” at least for a time, paying for the privilege of putting their money into something as safe and stable as U.S. Treasuries or high-quality European government debt during times of uncertainty and volatility. But there are limits to that. While we sometimes talk about the Federal Reserve or the U.S. government as though they have godlike powers to dictate what interest rates are, it is markets, not policymakers, that really set interest rates: You can offer a bond for sale at 5 percent, but the market decides whether that’s a good price or not. If the markets aren’t buying your economic story, you’ll find out in a hurry—ask Liz Truss.

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