When Moody's recently downgraded US Treasuries over "unsustainable debt," it tapped into a classic fear: a government going broke. But this view treats the US federal government like a household or business, entities that must earn or borrow before spending. In reality, the US issues its own currency, so the real danger lies elsewhere.
Unlike families that track bank balances, the federal government spends first by crediting bank accounts and issues Treasury bonds after the fact. These bonds are not fuel for spending; they are interest-bearing tools to manage bank reserves and offer safe assets to investors.
The idea of "public debt" implies a limit tied to scarce resources. However, a currency-issuing sovereign never truly "runs out" of its own money. Its capacity to pay is not a solvency issue but a question of political will, think debt-ceiling showdowns, not balance sheets.
So what really strains public finances? Rising interest rates. As Treasury yields climb above historical norms, interest payments have swelled to surpass defense spending. Instead of funding schools, infrastructure or healthcare, each rate hike channels more income to bondholders, big banks and wealthy investors, a built-in pipeline of wealth redistribution.
Beyond domestic politics, the US dollar's global reserve status gives it unmatched borrowing leeway. Foreign governments and investors hold trillions in Treasuries, oil trades in dollars, and global banks clear payments through the US system. But this privilege hinges on trust and on America's ability to deliver real goods and services.
Calls for de-dollarization show that if demand for dollars falters, the US won't default, but its cost of capital could rise and the burden of financing deficits would shift more to domestic actors. A shrinking foreign appetite for Treasuries could expose cracks in the current fiscal setup.
Perhaps it's time to rethink the archaic rule that forces the Treasury to issue bonds to match every dollar spent. This convention transforms fiscal policy into a mechanism for private wealth accumulation via interest, rather than directing funds toward public priorities.
True fiscal credibility isn't about appeasing ratings agencies or hitting a debt-to-GDP target. It's about investing in infrastructure, education, health and climate resilience, assets that drive real growth and shared prosperity. The US can always pay its bills in dollars, but maintaining a stable, inclusive economy depends on policies that spread benefits widely, not just on paper.
Reference(s):
cgtn.com
