What does it mean to be a the risk-free rate in a post debt ceiling world? It is hard to describe any US Treasury fixed income instrument as the risk-free rate in the current world given the current environment. The debt ceiling was lifted with what some would view as a slight loophole that between now and February 2014 there is no debt ceiling at all. The result is that the US Treasury increased their debt by over $300 billion in a week. There is no fiscal conservation or control over the debt process now that the ceiling is gone. The US will borrow more with no constraints. The creditors are left to take care of themselves. There is the exploitation of creditor by the hungry debtor class.
Of course, this is the same problem faced after the last debt crisis in 2011, but it is becoming more apparent that there will be no solution to the growing US debt overhang. Nothing was done post the 2011 crisis and nothing will be done now. Hence, there is less meaning to Treasuries being the risk-free rate. Additionally, there is still the acceptance by the Fed of 2% inflation being the normal, so real rates are still negative. No Fed official cares that creditors will not make a positive return on their money. Their principal is not safe. Treasuries are not a safe asset.
Of course, this is the same problem faced after the last debt crisis in 2011, but it is becoming more apparent that there will be no solution to the growing US debt overhang. Nothing was done post the 2011 crisis and nothing will be done now. Hence, there is less meaning to Treasuries being the risk-free rate. Additionally, there is still the acceptance by the Fed of 2% inflation being the normal, so real rates are still negative. No Fed official cares that creditors will not make a positive return on their money. Their principal is not safe. Treasuries are not a safe asset.
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