Yep. But it's also good to have a history of credibility. As Michael Tomz argues, a country's reputation plays a big role in the supply of funds available for them to borrow, and the rates a country must pay to get those loans. That reputation is forged over long and short time horizons, and investors update their beliefs about the true "type" of a borrower according to the country's behavior. The U.S. has a pretty long history of paying its debts. Not only that, but it has a pretty long history of not inflating the value of its debt away, which is why the spread on inflation-protected Treasury securities has stayed tight despite the fact that the U.S. has been racking up debt over the past year.
(That's what the above picture shows: the difference in yields between inflation-protected securities and regular securities. As you can see, the historical spread is between 2 and 3 percentage points, reflecting the unofficial inflation target of roughly 2%.)
As Tomz's book Reputation and International Cooperation shows, a good track record can reassure investors even in bad times. This has made it easy for the U.S. to sell Treasury securities at very low cost during this downturn, while some other countries can't get funding at almost any rate.
That said, the benefit of the doubt doesn't last forever. A reputation can be built up or torn down; it is not a bottomless resource. If the U.S. shows signs of defaulting on its loans or a tendency to inflate the value away, investors will punish the U.S. for a long time to come. The more debt the U.S. adds, the more incentive it has to do some such thing, and the closer it moves to the point where investors lose confidence in the capability or willingness of the Treasury to pay up when the bill comes due. So the U.S.'s long-constructed credibility should not be squandered; if it is, the negative consequences will be far-reaching and long-lasting.
IPE @ UNC
IPE@UNC is a group blog maintained by faculty and graduate students in the Department of Political Science at the University of North Carolina at Chapel Hill. The opinions expressed on these pages are our own, and have nothing to do with UNC.
Bookshelf
Tags
Academia Adjustment Afghanistan Africa AIG America Argentina Austerity Bailout Banking Bargaining Basel Bernanke Bias Blogging Business cycle; recession; financial crisis Cap and Trade capital controls capital flows central banks; moral hazard Chavez China China Trade Climate Change Contentious Politics Cuba Currencies Currency Crises; financial crisis Current Account Data Debt Debt; China; United States; Decession Politics Decoupling Deflation democracy Democrats; Trade policy development Diplomacy Dollar; China; Currency Manipulation; Exchange Rates dollar; exchange rate policy ECB ECB; Fed; Monetary Policy Economic Growth Economics Egypt election EMU; monetary union Environment EU; Agriculture; Common Agricultural Policy Euro Europe; labor; immigration European Union Exchange Rates Farm Bill; Agriculture FDI Fed; Monetary Policy finance financial crisis financial crisis; subprime Fiscal Policy; monetary policy; elections Fiscal Stimulus Foreign Aid Foreign Policy France Free Trade Agreements G-20 G20 Summit Game Theory Germany global recession globalization Grand Theory Great Britain Greece health care reform Hegemony Human Rights Iceland imbalance IMF immigration Incentives income distribution income inequality; globalization India Inequality inflation institutions Interests international finance International Law International Monetary System International Relations Investment IPE Iran Iraq Ireland ISA Italy Japan labor markets Latin America Libya Macroeconomics Marxism Mexico Microfinance Miscellany monetary policy Monetary policy; Federal Reserve moral hazard Narcissism Networks Nobelist Smackdown North Korea Obama Oil PIGS Pirates Political Economy Political Methodology Political Science Political Survival Political Theory Power Protectionism Protests Public Choice Public opinion Rational Choice regulation Research Review Russia Sanctions Security Dilemma security threats Soccer Social Science Sovereign Debt Spain Sports Statistics stock markets Systems Tariffs TARP Taxes TBTF Technocracy technology terrorism Trade trade policy UNC Unemployment United States US-South Korea Venezuela WTO WTO; Doha
Blog Archive
-
▼
2009
(521)
-
▼
August
(68)
- Was This Really Needed?
- Nobelist Smackdown Watch II
- Power Corrupts
- Ted Kennedy
- Walt on Politics and the Rule of Law
- The Baseball Bat Violinist
- "It's good to be an advanced country"
- A Comparative Look at Japanese Health Care
- A Must-Read on Securitization
- Social Science Battle Royale!
- Naomi Klein: Pro "Shock Doctrine"
- U.S. Makes Money from Citi Bailout
- Against Industrial Farming (?)
- "Today derived impression that war is almost certain"
- Ledes That Make You Stop Reading
- Good Point
- Sunday Links
- I Have to Admit It's Getting Gotten Better
- Capabilities Cost Money
- Welcome to Social Science
- Who's Been Sleeping in Putin's Bed?
- Another View on the Iran Election
- Matt Rognlie Does Not Understand the Public Option
- Good News on Remittances
- For Insomniacs
- What do Political Scientists Study?
- The Cleveland Fed Has Some Fun!
- U.S. Loses W.T.O. Dumping Appeal
- Zombies!
- PSA: IR Theory Resource
- Why We Can't Prevent Financial Crises with Regulation
- Kind of Blue
- Good News and Bad News in Afghanistan
- This Does Not Mean What You Think It Means
- BdM
- A Question for Progressive Egalitarians
- Why Oh Why Can't We Have a Better Press Corp?
- Links
- Entrepreneurship and Health Care in the OECD, part...
- Entrepreneurship and Health Care in the OECD, part...
- The Pirate and Mafia Models of Corporate Management
- Business and Ethics
- Political Survival vs. Political Suicide
- Some good videos
- Sixteen Receive Presidential Medal of Freedom
- Piracy in Europe?!
- Ode to Skeptics
- Staying Afloat During the Great Recession
- We Are All Ross Levinians Now
- US Defeats China in WTO
- U.S.A. v. Mexico
- The Importance of Accurately Modeling Politics
- Early-Week Link Dump
- Guess Who Wrote This
- In Defense of Getting Paid for Your Work (if you w...
- Entrepreneurship in the OECD
- The International Political Economy of Beer
- That's One Way to Do It
- WTO: Protectionist Anti-"Dumping" Tariffs on the Rise
- Au Revoir, Brad Setser
- China, 17th-Century Mercantilists, Space Explorati...
- Is Obama Exploiting Africa?
- The Dumbest Thing I've Read in Awhile
- How to Immunize a Country from Financial Crises
- Rethinking China
- "In Favor of Industrial Farming"
- China's Dollar Problem
- New E.U. Visa-free Travel Rules for the Balkans
-
▼
August
(68)
Tuesday, August 25, 2009
"It's good to be an advanced country"
Subscribe to:
Post Comments (Atom)
0 comments:
Post a Comment