That is the question of the hour, as a downgrade looms for our public debt bond rating. The question is far larger than mere return on investment. Return on investment is a small investor’s perspective: the perspective of someone who just hopes to get a return on margin from a system he has no real say in – and not much of a stake either, all things considered.
But there is a larger perspective. US Treasury securities have performed a unique role for the last 70 years. The biggest one by far may not be the one you think. Many readers probably have a mental image of US securities being a safe place to park colossal chunks of change and generate lendable capital, backed by the dynamism of the US economy. That is an important function, but an even more basic one is setting the standard for transparency and accountability. A key reason why such a standard matters is that if it exists, everyone else issuing public securities has to compete with it.
If you’re Country B, and you want your securities to be interesting to buyers at the most advantageous rate for you, you and your securities have to meet the fiduciary standard of the US Treasury. If they don’t, you’ll have to offer a higher return to attract buyers, and probably a substantially higher one.
US Treasury securities have been the standard for so many decades now (and before our securities, those of the United Kingdom) that we hardly think about this factor today. In the minds of many, the assumption of fiduciary accountability in the management of a national treasury is simply a given. Indeed, a lot of people will mistake my meaning here for the concept of sound fiscal management. But that’s not what I’m talking about. The concept I’m addressing is public accountability.
A national treasury is only accountable when the people have real power over the government. When the people don’t hold such power – when they can’t remove officeholders at will, or expect to have their electoral choices respected – the accountability of the national treasury is one of the first casualties. Honesty and transparency with the public is not the natural state of affairs when it comes to public treasuries. Those qualities have to be guarded with the vigilance inherent in consensual, electoral systems of government, where the citizen’s rights are respected, and the rejection of incumbents results in peaceful transfers of power.
We have become so accustomed to a global regime in which the US Treasury is the standard of fiduciary accountability that we have little concept of what it would be like without that standard, existing in the same form it has since World War II. The world’s largest economy has had the government with the world’s most accountable treasury. The US Treasury has set another standard as well: what we might call customer blindness. What a buyer can expect to get out of his transaction with a US Treasury security depends on generic Treasury policies and independent market factors – not on who he is.
The power of the US standard lies not in any ability our government has to enforce it on other nations and their securities issues. Rather, as long as we adhere to our own standard, the market enforces it on other nations, to everyone’s advantage. The reason this factor has been so powerful since World War II is that the US economy is so very large, compared to all others. There are other nations that will continue to operate accountably even if the US loses market prominence in this regard (e.g., Japan, much of Europe, the British Commonwealth nations), but none of them has the economic size to generate the same effect.
China, meanwhile, has a very large economy, but a very poor record when it comes to public accountability. Global financial analysts have had to speculate for years about things like what China’s cash and gold reserves really are, because Beijing is not at all transparent on these matters. Brazil, Russia, India – the other BRICs may have relatively stable government, tremendous natural resources, and growing economies, but they are also rife with low-level public corruption and bureaucratic caprice, and they have nowhere near the public financial-transparency record of the US or other G-7 nations.
Investing with their public treasuries is one thing when there is a US standard for them to compete with. If that standard ceases to dominate the public-securities market, however, there is literally nothing that can take its place. The market would sort itself eventually into a different steady state, but it would be likely to fragment into politicized consortiums of securities sellers and buyers – and lose its comparative customer blindness, along with any semblance of political neutrality in honoring fiduciary obligations.
The convenience and desirability of a public-securities market dominated by the US Treasury standard has been one of the props under our continuing AAA bond rating. No one in foreign capitals wants to see that prop crumble – at least not yet – because if it does, everything will change. Trillions in global capital is available almost seamlessly across borders today because US Treasury securities are administered accountably, transparently, and fairly. The “faith” part of “faith and credit” is as important as the “credit” part; we just haven’t had to think about it much for a long time. But it’s why global investors have stuck with our public securities, and why we are still in a limbo in which they are willing to give us a chance to get our house in order.
We need to take advantage of that chance. It is quite likely that Moody’s could downgrade our bond rating and nothing would change, at least not quickly – because there is no alternative to the US Treasury security. There is nothing that produces the same effect for the rest of the world. Investors, in the aggregate, have nothing to flee to that offers them even the same payoff, much less a better one. The alternative to a continued robust position for US Treasury securities is not and cannot be continuation of the status quo; it’s tectonic and unpredictable change.
But our obligation as a people – first to ourselves, and then to those who hold our securities – is to take advantage of the opportunity this gives us, rather than coasting on the precarious interim in which inertia is still preferred by all over the collapse of the existing order.