The US Government Won’t Pay You Back.

The US Government has negative cashflow. It sends more money out the door than it brings in. It has done this for a while, and likely will continue to do so for some time longer: their commitments to future cash outflows are larger than their estimated future cash inflows. If you analysed any other institution that had negative cashflow, and little chance of creating positive cashflow, you would hesitate before making them a loan. In fact, you should do more than hesitate: you should not lend them money, because they ultimately have no way of repaying it.

They might refinance i.e. borrow from someone else to repay you. But that leaves you dependent on the willingness of that “someone else”. At some point, there might not be a someone else, and then they have no positive cashflow of their own to pay you back, which requires them to default.

Now, they may or may not technically “default”.  Since they own a printing press, they can just print dollars to pay you back. But this doesn’t count as “paying you back”, and is default by another name. The dollars they give you back will be worth less than the ones you gave them. They are, in effect, defaulting on part of your loan. What you gave them is not what they are giving you back.

You could argue that the US Government will create positive cashflow in the future. That would require reducing cash outflow commitments (esp. social commitments) and increasing cash inflows (primarily the tax take). I don’t think that is terribly likely. You might, but I think you are wrong.

So, do not invest in US Government bonds and expect to get your money back. If you are willing to make a calculated gamble that you can find another chump to give you more money in the future, or if putting money into bonds fits your particular portfolio allocation theory du jour, then by all means go ahead. But that is trading, not investment (see here), and should be risk-managed appropriately. For an investor, the conclusion is simple: do not lend to people who will not pay you back, and that includes the US Government.

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