Startling news from the Federal Reserve’s Jackson Hole conference is raising alarms over the safety of America’s public debt — even as the Fed chairman’s headline vow to cut rates has buoyed markets for now. That’s the upshot after scholars at the parley warned that America’s spiraling debt means that Treasuries, long a byword for security, are, as Reuters puts it, “no safer than a bund. Or a gilt,” using the shorthand for German and British government debt. 

Nor, the monetary Cassandras fret in a new study, are Treasuries any safer than France’s obligations assimilables du Trésor. It’s a finding that might have offered a kind of grim satisfaction to monetary purists like President De Gaulle and his advisor, Jacques Rueff, both backers of restoring the gold standard. Not to mention Valéry Giscard d’Estaing, who described as an “exorbitant privilege” America’s advantage in having the world’s reserve currency.

That privilege, Monsieur d’Estaing and others observed, allows America to run up deficits — both trade and budgetary — without the consequences, like higher interest rates or elevated borrowing costs, that would normally apply to profligate nations. The news now is that — say three academics: New York University’s Roberto Gomez-Cram, London Business School’s Howard Kung, and Stanford’s Hanno Lustig — America’s advantage could be waning.

Their findings, put out by the Kansas City Fed, note how investors, contrary to expectations, failed to rush to Treasuries during the pandemic. It raises new “questions,” Reuters says, about the durability of Uncle Sam’s “exorbitant privilege” to “borrow broadly on the global market even as federal budget gaps grow ever wider.” The scholars mark a dilemma for “governments and central banks” amid “spending shocks” — protect taxpayers or bondholders?

“When they choose to insulate taxpayers,” the scholars write, by, say, failing to cut spending, then “government bond yields need to increase.” That, they say, is a “response to unfunded fiscal expansions as the government debt is marked to market.” In that event, they add, “the risks of unfunded spending shocks are then borne by bondholders who demand a bond risk premium.” In short, higher borrowing costs to cover the perceived greater risk. 

“It’s a timely question” for America, Reuters says, looking at the fiscal prospects for the years ahead. Indeed, America’s debt is poised to soar under the Biden-Harris budget program of unchecked spending and escalating student loan amnesty, reaching some $52 trillion in public hands by 2034. That would amount to 122 percent of the gross domestic product. The Fed scholars go so far as to describe America’s fiscal dynamic as a “risky debt regime.”

They’re not the only ones raising alarms about the safety of America’s debt. The head of the Congressional Budget Office, Phillip Swagel, fears that “unprecedented” debt could spark a “Liz Truss-style market shock,” per the Financial Times. That would amount to a kind of worst-case scenario, these columns have noted, in which America’s failure to regain control of its fiscal affairs would lead to the loss of its “freedom of economic action.”

This vicious circle of overspending, overborrowing — and then yet more spending and borrowing to cover the higher costs of “risky” debt — is symptomatic of the fiat money era. Currencies are severed from any tie to the historic basis of monetary value — gold. Instead of producing real growth, the result is the “illusion of wealth.” Asset prices, and debts, spiral higher, while the value of the dollar hits a record low, sinking below a 2,500th of a gold ounce. 

Which brings us back to General De Gaulle and the far-sighted Frenchmen who foresaw, some 60 years ago, where America’s monetary indiscipline was heading. In 1965 De Gaulle summoned 1,000 journalists to the Elysée palace to warn that the dollar was losing its intrinsic value and to urge a return to a global system of honest money. “In truth,” De Gaulle cautioned, “one does not see how one could really have any standard criterion other than gold.”