Does U.S. Government Debt Carry the Risk of Default?
No! Yes, the U.S. Treasury is in the process of borrowing $3 trillion to pay for the coronavirus response. It is not surprising that this unprecedented increase in the national debt has given rise to the issue of default. But the short and simple answer is, no, because the government can print money. If you borrow in your own currency, you can always print enough to pay back the holders of your debt. Countries like Argentina have had continuing default problems because they borrow in a currency they can’t print, and frequently have difficulty earning enough of the borrowed currency to repay lenders.
Former Fed Chair Alan Greenspan made it perfectly clear, saying “The United States can pay any debt it has because we can always print money to do that. So there is zero probability of default.”
Investors should recognize that, while there is zero chance of a default on U.S. government obligations, there is an increased risk of inflation. If you hold U.S. Government debt, you will be paid. The question is, what happens to your purchasing power?
All comments and suggestions are welcome.
Walter J. Kirchberger, CFA