I think you are way overstating things. Did you read earlier comments? Are you aware how close we came to defaulting in the 1990s when Congress and the president gridlocked over a budget? We have a systemic setup in contrast with all those countries with parliamentary systems that could let it happen much more easily with nothing near some kind of horrendous catastrophe. And if we began to experience some kind of serious pressure from a foreign creditor, China anyone? on top of some internal deep conflict and economic problems (and US politics is not all polarized, now is it?), it could happen.
Regarding this business of the foreign creditors, there is an important reason why most Americans simply pay no attention to our mounting foreign indebtedness: up until now the that humongoug foreign net indebtedness has not resulted in a noticeable net deficit on the investment income part of the current account part of the US international balance of payments. However, as that foreign net indebtedness increases, this will inevitably change. When we start to see several hundred billions of dollars flowing on net overseas as interest on that debt, and the accompanying upward pressure on US interest rates start to negatively impact the US economy, there might even be an outright move to do what Argentina did to our bankers, and what New York state did to British bankers back in the nineteenth century regarding the debts for financing the Erie Canal construction: consciously default.
The bottom line on why we even fuss about the “risk-free rate” is that it is a necessary input to the standard formuli for pricing all kinds of options and derivatives via Black=Scholes and its variations. Something has to go in there, even if the wise really do understand that the underlying asset on which that rate is based is not really so risk free after all.
Stuart Armstrong,
I think you are way overstating things. Did you read earlier comments? Are you aware how close we came to defaulting in the 1990s when Congress and the president gridlocked over a budget? We have a systemic setup in contrast with all those countries with parliamentary systems that could let it happen much more easily with nothing near some kind of horrendous catastrophe. And if we began to experience some kind of serious pressure from a foreign creditor, China anyone? on top of some internal deep conflict and economic problems (and US politics is not all polarized, now is it?), it could happen.
Regarding this business of the foreign creditors, there is an important reason why most Americans simply pay no attention to our mounting foreign indebtedness: up until now the that humongoug foreign net indebtedness has not resulted in a noticeable net deficit on the investment income part of the current account part of the US international balance of payments. However, as that foreign net indebtedness increases, this will inevitably change. When we start to see several hundred billions of dollars flowing on net overseas as interest on that debt, and the accompanying upward pressure on US interest rates start to negatively impact the US economy, there might even be an outright move to do what Argentina did to our bankers, and what New York state did to British bankers back in the nineteenth century regarding the debts for financing the Erie Canal construction: consciously default.
The bottom line on why we even fuss about the “risk-free rate” is that it is a necessary input to the standard formuli for pricing all kinds of options and derivatives via Black=Scholes and its variations. Something has to go in there, even if the wise really do understand that the underlying asset on which that rate is based is not really so risk free after all.