Consequences of Debt

With the exception of a handful of years during the last half century the United States has funded its government expenditures through debt in addition to taxation. As the government (both at the state and federal levels) discovered that it was more popular politically to issue bonds instead of tax its citizens this practice expanded exponentially. Traditionally, government debt was seen as safer than its corporate or private counterparts. Since it was seen by markets as safer, it has also been cheaper. People would accept less interest payments because they knew they would have a better chance of getting their money back.

However, this era might be in its final stages. I'm not talking about the practice of the government's use of debt to increase spending, but its being able to pay less to do so. There has been much speculation (on this blog and major news outlets) that the US government was in danger of losing its ultra-safe AAA bond rating. If the rating were to go away, the markets would likely demand more interest to make up for the perceived increased risk.

But the market might not be waiting. Bloomberg recently reported that the United States government is now paying a higher interest rate than AAA rated Berkshire Hathaway - a private company. This essentially means that there are people who will loan money to a company than the United States government. The company can only fund its repayment of this debt by earning revenue while the government can back its repayment by taxation and by printing money.

Such a move is very odd. How can the bonds of a private company be cheaper than debt backed by the federal government? Honestly, I don't know - this makes little sense. As I have previously said, the government can just print new money while Berkshire Hathaway can not. It would have to earn money or issue new debt while there always exists a chance it can't repay and goes bankrupt. Is this implying that the United States could go bankrupt? I think not.

Instead, I believe that the US paying more in interest than a private corporation is a sign that those who loan the government money are trying to force it to issue less debt. Foreign countries are scared that the money they are paid back will be worthless. Only the government can devalue the dollar, a private company can not. This message is one that the US government should be very concerned with. If new public debt can not be issued, than the currency must be devalued. Such an action would likely only spiral out of control and lead to hyper-inflation as foreign countries and private citizens become less inclined to purchase treasury debt.