Uploaded January 2017 | Updated September 2026, 3 weeks ago
Amar Reganti, former Deputy Director of the Office of Debt Management at the U.S. Department of the Treasury, discussing the results of a downgrade by credit rating agencies on the debt of a government with a sovereign currency. He has a particularly unique perspective because he was actually working at the Treasury Department at the time that the United States was downgraded.
The conventional logic goes like this: a borrower is associated with the risk they might not pay back, their credit risk. Creditors will evaluate this risk, and adjust the interest rate they charge borrowers accordingly: if the risk is high, the lender will want to be compensated with a higher interest rate. So if your debt gets too large or a credit agency downgrades your debt, this lowers the evaluation of your creditworthiness, and should result in increased borrowing costs, meaning higher interest rates it must pay to borrow.
In fact, not only is this the logic, but you can actually see it happen: when businesses get downgraded, or individuals get their credit score lowered, their costs increase. Heck, it even happened to Greece! And the danger is that as interest rates go up, interest costs go up, further weighing on revenue. Eventually the country might get to the point where it's tax revenue isn't even enough, and it's forced to borrow to cover the cost of interest, and at that point it's the kiss of death: the debt will explode up and the country will be forced to default. Goodbye.
Or is it?
See, something interesting happened in the US after it got downgraded. And the same thing happened in Japan, and in the UK: its interest rate went DOWN, not up. In fact, even as Japan has an unprecedented run-up in debt, at 245% of GDP as of January 2017, it's interest rates have been trending only downward. What's going on here?
In fact, there's an important difference between a household, business or Greece, vs. the US and Japan: the US and Japan issue their own currency, and only have debt in that currency. That means they can never become unable to pay, and to make good on the promise on the debt.
Investors know this. If they buy a US Treasury bond, they're not 'lending money to somebody who needs it to spend.' They are swapping their currency, a government issued asset, back to the government in exchange for a different asset, a Treasury bond. A Treasury bond is the safest, most liquid form for US dollars to exist in, and they pay interest! This creates a high demand for them, that won't go away.
That being the case, the central bank has all the power over all the interest rates, being the monopoly issuer of the currency. It can set its target rate anywhere it wants, and it can target any rate along the yield curve to be any rate it wants, no matter what market investors say. This is what life is like if you're the monopolist. In fact, even in the absence of the central bank targeting a long-term interest rate, the long-term rates tend to move along with the short-term rate that the central bank does directly target. This is due to arbitrage (the 'expectations hypothesis of the term structure'), which keeps the rates closely linked.
See another former Treasury Department insider explain why there will always be demand for US Treasury, here: youtube.com/watch?v=EMEhE-WJFQA
Learn a little more about Japan's interest rate targeting: bilbo.economicoutlook.net/blog/?p=34830
Watch the whole talk here: youtube.com/watch?v=EyBhU19pD3k
Follow Deficit Owls on Facebook and Twitter:
facebook.com/DeficitOwls
twitter.com/DeficitOwls
Amar Reganti, former Deputy Director of the Office of Debt Management at the U.S. Department of the Treasury, discussing the results of a downgrade by credit rating agencies on the debt of a government with a sovereign currency. He has a particularly unique perspective because he was actually working at the Treasury Department at the time that the United States was downgraded.
The conventional logic goes like this: a borrower is associated with the risk they might not pay back, their credit risk. Creditors will evaluate this risk, and adjust the interest rate they charge borrowers accordingly: if the risk is high, the lender will want to be compensated with a higher interest rate. So if your debt gets too large or a credit agency downgrades your debt, this lowers the evaluation of your creditworthiness, and should result in increased borrowing costs, meaning higher interest rates it must pay to borrow.
In fact, not only is this the logic, but you can actually see it happen: when businesses get downgraded, or individuals get their credit score lowered, their costs increase. Heck, it even happened to Greece! And the danger is that as interest rates go up, interest costs go up, further weighing on revenue. Eventually the country might get to the point where it's tax revenue isn't even enough, and it's forced to borrow to cover the cost of interest, and at that point it's the kiss of death: the debt will explode up and the country will be forced to default. Goodbye.
Or is it?
See, something interesting happened in the US after it got downgraded. And the same thing happened in Japan, and in the UK: its interest rate went DOWN, not up. In fact, even as Japan has an unprecedented run-up in debt, at 245% of GDP as of January 2017, it's interest rates have been trending only downward. What's going on here?
In fact, there's an important difference between a household, business or Greece, vs. the US and Japan: the US and Japan issue their own currency, and only have debt in that currency. That means they can never become unable to pay, and to make good on the promise on the debt.
Investors know this. If they buy a US Treasury bond, they're not 'lending money to somebody who needs it to spend.' They are swapping their currency, a government issued asset, back to the government in exchange for a different asset, a Treasury bond. A Treasury bond is the safest, most liquid form for US dollars to exist in, and they pay interest! This creates a high demand for them, that won't go away.
That being the case, the central bank has all the power over all the interest rates, being the monopoly issuer of the currency. It can set its target rate anywhere it wants, and it can target any rate along the yield curve to be any rate it wants, no matter what market investors say. This is what life is like if you're the monopolist. In fact, even in the absence of the central bank targeting a long-term interest rate, the long-term rates tend to move along with the short-term rate that the central bank does directly target. This is due to arbitrage (the 'expectations hypothesis of the term structure'), which keeps the rates closely linked.
See another former Treasury Department insider explain why there will always be demand for US Treasury, here: youtube.com/watch?v=EMEhE-WJFQA
Learn a little more about Japan's interest rate targeting: bilbo.economicoutlook.net/blog/?p=34830
Watch the whole talk here: youtube.com/watch?v=EyBhU19pD3k
Follow Deficit Owls on Facebook and Twitter:
facebook.com/DeficitOwls
twitter.com/DeficitOwls
