Former U.S. Treasury Secretary Paulson Calls for Contingency Plans to Address U.S. Debt Demand Collapse

ME News message: On April 17 (UTC+8), former U.S. Treasury Secretary Paulson urged the U.S. government to develop contingency plans in order to prevent a potential collapse in U.S. Treasury demand. He warned that such a situation would have “extremely serious” consequences. Paulson said, “We need an emergency response plan that is targeted and short-term, and prepared in advance so it can be activated once a critical point is reached.” Paulson said that once the $31 trillion U.S. debt market malfunctions, its nature would be different from the financial crisis he faced twenty years ago when he was in office. “At the time, things were already very bad, but the government still had fiscal room to respond to the credit crisis. But if a U.S. public debt crisis occurs and reaches a critical point, and when attempting to issue Treasuries there is only the Federal Reserve as the buyer, with Treasury prices falling and interest rates rising, that would be a very dangerous scenario.” For years, U.S. budget experts have warned about a potential “doom loop”: as the government’s debt continues to grow, investors demand higher yields, which increases the government’s interest expense and further widens the fiscal deficit. In extreme cases, if the Treasury is unable to raise enough funds to pay interest or principal, the market generally believes the Federal Reserve will have to step in as an emergency buyer. Paulson said, “Once it happens, the shock will be very severe, so we must be prepared for this possibility.” (Source: Jintou)