The Odds Of Uncle Sam Defaulting Are On The Rise

The cost of credit default swaps to ensure against a default on US Treasury bonds is on the rise.  According to CNN Money,

“In New York trading Tuesday, prices rose to a record 31.3 basis points (each basis point is 1/100 of a percentage point) to “insure” Treasury debt, compared to as little as 7.5 basis points in January…”

Put another way, the perceived (though not necessarily real) risk Uncle Sam won’t be able to pay back all he owes has more than quadrupled in the last 10 months.  While it’s important to note 31.3 basis points is still an extremely low risk premium by any measure, this increase is troublesome because it shows the tiniest of cracks beginning to appear in the global perception of the US Government’s creditworthiness and indeed the US financial system as a whole.

Even a year ago, the US Treasury Bill was seen as the safest investment known to man.  It was the type of investment you would flee to in the absolute worst of times because if nothing else, you knew you would get your money back.  It may have been in inflated dollars, but at least your principal was safe.  While that is still more or less the case, this may be the first sign of that rock-solid foundation starting to crumble.  If foreigners begin to fear they won’t be paid back in a timely manner, they will demand significantly higher rates of interest which would cripple our ability to borrow abroad.  While this would obviously be a bad thing, it would force us to learn to live within our means, which I suppose is the silver lining in all this.  Still, it’s not a very bright silver lining because tax rates would likely have to shoot through the roof to compensate, leading to years of slow growth as we get our financial house in order.  It would also probably be the final nail in the coffin of America’s economic superiority.