Interviewed on Bloomberg News’ “Wall Street Week” show, former Treasury Secretary Henry Paulson foresaw the need for “emergency action” to stop the demand for short-term U.S. Treasury Bills shrinking and then collapsing before long.
“People say, ‘When are you going to hit the wall?’ I obviously don’t know; it’s impossible to know. When we hit it, it will be vicious”: Paulson warned that a public debt crisis will be worse than the private debt crises in the 2007-08 global financial crash. A public debt crisis would be fundamentally different. “When you hit the wall, and you’re trying to issue Treasuries and the Fed is the only buyer, and the prices of the Treasuries are going down and interest rates are up, that’s a dangerous thing.” He described a kind of Treasury “buyers’ strike” in which U.S. investors join the foreign buyers who are beginning to already withdraw from the Treasury market, forcing interest payments to rise and pushing even more buyers to back away. This can leave that market with no buyers—except the Federal Reserve—to buy short-term securities.
Of course Paulson’s “emergency solution” is nothing but raising federal taxes and austerity against federal spending including Social Security, Medicare and Medicaid. This “solution” will worsen the federal debt crisis by losses of revenue in the economy. Nonetheless, his relatively loud warning about a financial crisis that would first appear as mundane, but keep getting worse and worse until an emergency hits the world’s largest financial market, is a matter of note.
