In the New World of Safe Investments, U.S. Debt Stands (Nearly) Alone

When it comes to borrowing, the United States government gets a pretty sweet deal. The country has an elephantine national debt, which will only get bigger without serious spending cuts and tax hikes. We've had our credit rating downgraded, since nobody really trusts our Congress to act rationally. And yet, investors are so desperate for Treasuries that some would actually pay the government to take their money.

There's a simple reason. When it comes to rock-solid safe investments, Uncle Sam is pretty much the only game in town.

This chart from Credit Suisse illustrates the situation nicely. It looks at the decline of safe haven assets, which borrowers can post as collateral for loans, since the beginning of the recession. These are the sure bets. They're absolutely necessary for a functioning credit market. And they're disappearing.

615_No_Safe_Assets.jpg

Before the recession, investors looking to park their money somewhere safe could choose from mortgage-back securities (in red), debt issued by Fannie Mae and Freddie Mac (in light blue), all kinds of European of sovereign debt, and of course, the Treasury note.

Today, mortgage investments are toxic. European debt is radioactive. Not only has the variety of safe haven assets been whittled down, but the their total value has shrunk. The United States has pumped out more Treasuries, but many are bought up by the Federal Reserve, and the overall increase has not been large enough to make up for the disappearance of other assets. Investors have turned to other safe investments, such gold and the Japanese yen, but there's no real replacement for assets denominated in the major reserve currencies. That consistently rising blue line on the chart is the amount of euro and dollar reserves held by emerging market economies. Right now, there's too much money chasing too few assets.

For the time being, that shortage is great for U.S. taxpayers, who get to keep borrowing at absurdly low rates. But it's not good for the health of the global financial markets. Without collateral to back up loans, credit dries up. And as we all know by now, the world runs on credit. We're the beneficiaries of a very bad situation.

Presented by

Jordan Weissmann is a senior associate editor at The Atlantic.

What Happened to the Milky Way?

Light pollution has taken away our ability to see the stars. Can we still save the night sky?

Join the Discussion

After you comment, click Post. If you’re not already logged in you will be asked to log in or register with Disqus.

Please note that The Atlantic's account system is separate from our commenting system. To log in or register with The Atlantic, use the Sign In button at the top of every page.

blog comments powered by Disqus

Video

What Happened to the Milky Way?

Light pollution has taken away our ability to see the stars. Can we still save the night sky?

Video

The Faces of #BlackLivesMatter

Scenes from a recent protest in New York City

Video

Desegregated, Yet Unequal

A short documentary about the legacy of Boston busing

Video

Ruth Bader Ginsburg on Life

The Supreme Court justice talks gender equality and marriage.

Video

Social Media: The Video Game

What if the validation of your peers could "level up" your life?

Video

The Pentagon's $1.5 Trillion Mistake

The F-35 fighter jet was supposed to do everything. Instead, it can barely do anything.

More in Business

Just In