How Dangerous Is
U.S. Government Debt?
The Risks of a Sudden Spike in U.S. Interest Rates
Francis E. Warnock
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In 1961, the Belgian economist Robert Triffin described the dilemma faced by the country at the center of the international monetary system.1 To supply the world’s risk-free asset, the center country must run a current account deficit and in doing so become ever more indebted to foreigners, until the risk-free asset that it issues ceases to be risk free. Precisely because the world is happy to have a dependable asset to hold as a store of value, it will buy so much of that asset that its issuer will become unsustainably burdened. The endgame to Triffin’s paradox is a global, wholesale dumping of the center country’s securities. No one knows in advance when the tipping point will be reached, but the damage brought about by higher interest rates and slower economic growth will be readily apparent afterward.
For a long time now, the United States has seemed vulnerable to the fate that Triffin predicted. Since 1982 it has run a current account deficit every year but one, steadily piling up obligations to foreigners. Because foreigners have been eager to hold dollar assets, they have willingly enabled this pattern, pouring capital into the United States and financing the nation’s surplus of spending over savings. The dollar’s