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Ex-Treasury chief warns of US bond crash, calls for contingency plan
TL;DR
Former Treasury Secretary Henry Paulson warns of a potential collapse in demand for US Treasurys, urging authorities to prepare a contingency plan. He describes the fallout as likely to be 'vicious' and emphasizes the need for readiness.
Key points
- Henry Paulson warns of a potential collapse in US Treasurys demand
- He calls for a short-term contingency plan for authorities
- US Treasurys are crucial to the global financial system
- Current US debt exceeds $39 trillion
- Instability could trigger a 'doom loop' in the market
Mentioned in this story
Henry Paulson
US TreasurysUS government debt
Former Treasury Secretary Henry Paulson has urged US authorities to prepare a contingency plan for a potential future collapse in demand for US Treasurys, warning that the fallout would be “vicious.”
“We need an emergency break-the-glass plan, which is targeted and short-term, on the shelf, so it’s ready to go when we hit the wall,” Paulson told Bloomberg in an interview on Thursday.
“People say, when are you going to hit the wall? I obviously don’t know, it’s impossible to know. When we hit it, it will be vicious, so we have to prepare for that eventuality.”
The US Treasury market acts as the bedrock of the global financial system, serving as a “risk-free” benchmark with other assets, such as corporate bonds, mortgages, and stocks, being priced relative to Treasurys. Instability could cause ripple effects in the global economy.
For years, economists have warned of a potential “doom loop” where investors start demanding higher yields on Treasurys due to risks tied to the government’s burgeoning debts, which are currently more than $39 trillion.
This could cause an increase in interest payments, currently 4.3% on 10-year notes, which would widen the deficit. But if the Treasury cannot raise what it needs to pay interest, many assume the Federal Reserve would become the principal buyer, Bloomberg reported.
US national debt is almost $40 trillion. Source: USDebtClock
A double-edged sword for crypto
There could be several potential impacts on crypto markets if the $31 trillion US Treasury market were to melt down.
A Treasury market crisis could potentially trigger a flight to alternative stores of value such as Bitcoin () or gold. This may happen if the Fed is forced to monetize debt, stoking inflation fears and undermining confidence in the dollar.
Q&A
What did Henry Paulson say about the US Treasury market?
Henry Paulson warned that the US Treasury market could face a collapse in demand, which would have severe consequences for the economy.
Why is a contingency plan for US Treasurys necessary?
A contingency plan is necessary to mitigate the potential 'vicious' fallout from a collapse in demand for US Treasurys, which are critical to the global financial system.
What risks are associated with the US government's debt levels?
The US government's debt levels, exceeding $39 trillion, could lead to a 'doom loop' where investors demand higher yields on Treasurys, increasing financial instability.
