As the Financial Times has reported:
[US] Treasury Secretary Scott Bessent has insisted the US would never default on its debt as he sought to assuage Wall Street concerns over the state of the country's public finances.
They noted him saying:
“The United States of America is never going to default, that is never going to happen,” Bessent told CBS's Face the Nation on Sunday. “We are on the warning track and we will never hit the wall.”
Quite what the last sentence means is anyone's guess: I leave it in to emphasise his incoherence, which is so typical of those serving Trump.
His incomprehension is, however, already apparent in his first statement.
The only way the US can default is by choice. Presuming that the US government gives the Federal Reserve power to create money, then, of course, it can never default: the Fed can always produce, on demand, the money required to settle any obligation the USA has owing. It is as straightforward as that.
What Bessant needed to say were two things. The first was what I have just noted.
The second was to say that the Trump administration will always ensure that the Fed has the power to create the necessary money to settle the obligations owed by the US government.
In combination, those two statements would close this debate.
There are three reasons why Bessant did not close the debate.
First, he does not know this.
Second, he does not know whether Trump has the ability to authorise the Fed to make payments of all sums owing by the USA. Congress may not agree, and Trump does not have the power he would like over it.
Third, he does not know whether Trump has the desire to authorise such payments: Trump has opted for bankruptcy far too often throughout his career to be sure that he will not do so again.
And so, the uncertainty will continue.
God bless America, as they say. They need something like that right now.
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How long can the US’s debt go on increasing before it starts to impact social cohesion? I believe it’s currently around 100% of their GDP. Is that right? And I’ve seen a prediction that, under the current legal framework, it could rise to around 170% by the mid 2050s. This involves ever increasing interest payments, and these interest payments, as I understand it, by and large end up in the pockets of the wealthier sections of society. If this goes on and on, is there a breaking point and societal breakdown begins, as ordinary people see the rich getting richer; their standard of living stagnating at best; possibly higher interest rates, and their taxes going up and up to service the debt interest burden? In these circumstances, though default might be a choice, does it become an inevitable one?
It is the US Federal Government that services the debt, not taxpayers. And the dollars in the economy, created by the interest payments, will be used to purchase more bonds from the US Federal Government.
The Federal Government chooses the Fed Funds Rate and the rest of the interest rates in the yield curve are pretty much based on what banks predict the Fed Funds rate to be set at over time.
So if your question is about whether structurally, the US has any financial risk with a large national debt, the answer is no. But if your question is about whether the vast wealth inequality getting more and more exacerbated by the rich holding more and more dollars in the form of government bonds, then there is definitely a risk of revolt. Especially as these billionaires who are running the economy and the government show more and more incompetence.
The USA defaulting is an interesting scenario to say the least……………..
For that matter, God bless the rest of the world, as they need it as much as the US does, not least because of the Trump administration . . .
Thank you, Richard.
Last week, Bessent was interviewed by the BBC World Service (radio). He expressed amazement that, at recent talks, Chinese ministers and officials that have nothing to do with the finance and trade ministries were so well educated in economics. I wasn’t surprised as, in 2009 or so, I did some work preparing young Chinese and Russian officials, an initiative that arose from the G20.