Why Are US Treasury Bonds So Safe Despite Growing National Debt?

The US is expected to pay off its national debt. However, politicians like Republicans are gambling with this reputation. This expectation is based on the safety of US Treasury bonds, despite the potential for a growing national debt.

Key Reasons for the Safety of US Treasury Bonds

There are two main reasons for the safety of US Treasury bonds:

The US Government's Control Over the US Dollar: Because the US Government creates the US Dollar, it cannot be forced to default on any obligation payable in US Dollars. This inherent control and flexibility are crucial in ensuring that Treasury bonds remain a safe investment. Timeliness and Fullness of Payment: The US Treasury is known for always paying its debts in full and on time. This on-time and full repayment is a critical factor in maintaining the safety and reliability of Treasury bonds.

The terminology and legal structures related to money creation can be confusing. Additionally, political rhetoric often uses poorly analogized references to Federal spending and personal finance, which can obscure the true nature of these processes.

How US Treasury Bonds and the National Debt Work

Here are the key details explaining the creation and management of US Treasury bonds:

Borrowing Through Treasury Securities: The Treasury "borrows" dollars from the public by selling Treasury Securities, which are a variety of bonds. Federal Reserve's Role: When a member bank deposits Treasuries in its account at the Fed, the Fed "prints" dollars in an equivalent amount and gives them to the bank. This process allows for the creation of new money. Monetary Policy Flexibility: The Fed can also "print" dollars to buy Treasuries for itself, providing additional flexibility in managing the economy.

It's important to note that the dollars are issued against Treasury Securities, which means the bonds are "backed" by them. The face value of Treasury Securities currently in circulation equals the national debt. Therefore, the national debt is the total amount of Treasury Securities issued, effectively existing to create a currency.

How Investors View the National Debt

When discussing the "paying off" of the national debt, it's worth distinguishing between retiring the debt entirely and meeting the obligations as they come due. Investors don't primarily care if the national debt grows; they only care that they receive the money they're owed according to the terms of their investment. The US is able to support its debt because it can continuously issue new bonds to pay off the bonds that come due. As long as that remains viable, investors are assured of receiving their payments.

There's no reason to believe that this system will fail in the near term, and it has a proven track record of success. The safety and reliability of US Treasury bonds have been consistently maintained despite the increasing national debt.