Monday , 2 October 2023

Gross: Beware the Bond/Currency Vigalantes if Debt Ceiling Not Raised

Warning to Washington: Don’t Mess With the Debt Ceiling

The debt ceiling must be raised and not be held hostage by budget negotiations… [If Washington does not] bond and currency vigilantes will make them pay. [Let me count the ways.] Words: 603

So says Bill Gross ( in edited excerpts from an article* which Lorimer Wilson, editor of (It’s all about Money!), has further edited ([  ]), abridged (…) and reformatted below  for the sake of clarity and brevity to ensure a fast and easy read. Please note that this paragraph must be included in any article re-posting to avoid copyright infringement. Gross goes on to say:

Default would…be a huge negative for the U.S. and global financial markets, introducing fear and unnecessary volatility into the economy and global trade…An actual default — or even the threat of one — might set off a chain reaction [such as the following]:

  1. [Default might well] raise Treasury bond yields by 25 basis points (a quarter of a percentage point) or more, pushing up the cost of debt throughout American financial markets… If an extra 25 basis points becomes the new benchmark, federal interest expenses might increase by $30 billion to $40 billion annually over the ensuing years as $1.5 trillion of new debt is issued each fiscal year, complicating efforts to narrow budget deficits.
  2. Bond investors…earn only 1.6 percent on the average Treasury maturity these days, but they expect certainty on when, and whether, they will be repaid. Countries that keep them guessing, or that are expected to default, are punished severely, as reflected in 20 percent bond yields in Greece or even 5 to 6 percent in AA-rated Italy…Global investment managers have global choices these days and a solvent Germany or Canada is just a wire transfer away for trillions of potential investment dollars looking for a safer haven.
  3. The U.S. dollar is the global reserve currency, producing daily liquidity for trillions of dollars of transactions between trading nations. The greenback earned that status from decades of balance-sheet conservatism and strong economic growth. Now, as the ratio of federal debt to gross domestic product creeps closer to 100 percent — symbolic of AA, not AAA, status — and our growth rate remains mired at a 2 percent annualized rate, countries that have reserve surpluses (China and a host of petroleum exporters) are rethinking their currency preferences. A ratings downgrade or an actual default could reduce the willingness of these countries to do business in dollars, jeopardizing trade receivables and overnight letters of credit in the process.
  4. Recent defaulting sovereigns such as Argentina and Russia prove that commerce is difficult to restart once a seller is unsure of being paid in a currency that represents a store of value and is considered “money-good.” If our government doesn’t give a damn about the greenback dollar and its solvency, why should we expect others to protect its status as a reserve currency — a privilege that, by the way, lowers our interest expenses by an estimated $30 billion annually?

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The debt ceiling must be raised and not be held hostage by budget negotiations…[If not] bond and currency vigilantes will make them pay.


Related Articles:

  1. Raising the Roof – On a Higher Debt Ceiling That Is!
  2. Top Myths on the U.S. Debt-ceiling Crisis
  3. America’s Political Process Guarantees Another Financial Crisis!

Editor’s Note:

  1. The above article consists of reformatted edited excerpts from the original for the sake of brevity, clarity and to ensure a fast and easy read. The author’s views and conclusions are unaltered.
  2. Permission to reprint in whole or in part is gladly granted, provided full credit is given as per paragraph 2 above

One comment

  1. Declare the debt on the fed balance sheet toilet paper null and void.
    If we can print the money, why do we need to borrow it? This is a stupid con/ripoff. Granted, we should not be in a place where we are not living within our means….but given the government we have had, just print for now, don’t “borrow” our own money. Then get our expences in line with our income, and LOWER the debt ceiling.
    Bond Vigalantes – put them in jail.