Undoubtedly, one of our countries biggest long-term risk is managing, and eventually paying off, our debt. dollar could lose its status as the world’s reserve currency, and our country’s role as a global economic superpower could diminish rapidly. If countries ever lost that confidence in the U.S., then the system that has worked for so long could collapse. Sounds messed up right? Well this cycle has always worked in the past because the world has had great faith and confidence in the U.S. has always had the ability to “print more money” to pay back our debts, and then reissue more bonds – some of which we buy from ourselves via the Fed. bonds, it will be harder for our country to pay back its debt because more money must be paid in interest. That would be bad, but in the long-run, the consequences could be much more dire.įor example, if the rates are higher on U.S. In the short run, higher rates could cause a shock to the economy and lead us into a recession. would be forced to raise the rates it offers on its bonds to attract buyers. This domino effect could dry up the demand for our bonds, and in response, the U.S. If China stops buying our bonds because they feel they are too risky, then others countries might follow suit. So in the same way that low rates helps individuals afford to pay back their mortgages, low rates have also enabled the U.S. While the amount of debt we have on our books is astronomical, our saving grace has been that interest rates have been at historic lows. In other words, they have played the role of banker in financing much of our country’s debt binge. The largest foreign buyer of our bonds has been China. has run up a tremendous amount of debt, especially over the past 10 years since the financial crisis. So why is this a big deal? First, the U.S. Chinese officials publically announced that they will be considering halting the future purchases of U.S. This week, we received news from China that has the potential to be the first signal of a future black swan event. When it happened, it nearly brought the economy to its knees. Housing prices had always gone up with great consistency for decades, so much so that almost no one expected the housing market to crash. The mortgage crisis in 2008 was a black swan. And as we know with Murphy’s Law, all things that can happen will happen over a long enough time period. Think of it as an outlier that is very unlikely to happen, but if it ever does happen, the consequences would be dire. In the world of finance, there is something called Black Swan Theory, which describes a “black swan” as a rare surprise event that has a major financial impact on the world. Then one day, as unlikely as it seemed, black swans were discovered in the wild shattering the collective wisdom. For a long time, no one had ever seen a black swan, and it was presumed that they did not exist.
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