“We interrupt regular programming to announce that the United States of America has defaulted …” Will we ever actually hear this piece of news?
High levels of debt are sustainable provided the borrower can continue to service and finance it. The US has had no trouble attracting investors to date. Warren Buffett (in his 2006 annual letter to shareholders) noted that the US can fund its budget and trade deficits as it is still a wealthy country with lots of stock, bonds, real estate and companies to sell.
In recent years, the United States has absorbed around 85 per cent of total global capital flows (about $US500 billion each year) from Asia, Europe, Russia and the Middle East. Risk adverse foreign investors preferred high quality debt – US Treasury and AAA-rated bonds – including asset-backed securities (ABS) and mortgage-backed securities (MBS). A significant portion of the money flowing into the US was used to finance government spending and (sometimes speculative) property rather than more productive investments.
