I wholeheartedly agree with your concerns. If there's one thing to learn from this housing mess, it's to not place too much weight on one assumption. But here I am, learning models after models that take the Treasury bond as the risk-free rate, and I think, "with all this new debt the US government is taking on, when will our credit rating deteriorate? Who will be ready for the massive market dislocations if the world decides that the US Treasury bond isn't risk-free?"
Premier Wen Jiabao's warnings solidified these fears. I mean, I know the US government can just print more money, and I realize I don't know much about economic theory, but there has to be consequences to just printing more money to pay your debts. My intuition tells me the only way to pay back debt is with operating cash flows (in this case tax revenues or however the government gets money).
I don't know if the world will ever lose confidence in US Treasury bonds, but I don't doubt a few speculative shorts on the USD and T-bonds would be a good investment.
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timeasmymeasure
no subject
Date: 2009-03-22 05:50 am (UTC)I wholeheartedly agree with your concerns. If there's one thing to learn from this housing mess, it's to not place too much weight on one assumption. But here I am, learning models after models that take the Treasury bond as the risk-free rate, and I think, "with all this new debt the US government is taking on, when will our credit rating deteriorate? Who will be ready for the massive market dislocations if the world decides that the US Treasury bond isn't risk-free?"
Premier Wen Jiabao's warnings solidified these fears. I mean, I know the US government can just print more money, and I realize I don't know much about economic theory, but there has to be consequences to just printing more money to pay your debts. My intuition tells me the only way to pay back debt is with operating cash flows (in this case tax revenues or however the government gets money).
I don't know if the world will ever lose confidence in US Treasury bonds, but I don't doubt a few speculative shorts on the USD and T-bonds would be a good investment.