For decades, the global financial system has treated US Treasury securities as virtually synonymous with safety. That perception rests on an assumption rarely subjected to serious scrutiny: not merely that the United States has the capacity to repay its debts, but that it will preserve the economic substance of those obligations even when doing so becomes politically or financially costly. The distinction matters. A sovereign may honor a contract in legal terms while materially diminishing its economic value in practice.
American monetary history offers an important example of precisely that. In 1971, the United States unilaterally abandoned one of the central commitments underpinning the post-war international monetary system. Under Bretton Woods, the dollar was convertible into gold for foreign monetary authorities at a fixed rate of $35 an ounce. This was not some ceremonial feature of the monetary architecture. It was one of the foundations on which international confidence in the dollar rested. As America’s dollar liabilities abroad expanded while the capacity of its gold reserves to support them diminished, Washington faced a clear choice. Maintaining dollar-gold convertibility required greater discipline in domestic monetary and fiscal policy. Abandoning it, by contrast, allowed the United States to shift part of the burden of adjustment abroad. Washington chose the latter. On August 15, 1971, Richard Nixon closed the gold window. The United States did not declare bankruptcy. It did, however, abruptly and unilaterally change the rules of the international monetary system once adhering to those rules had become too costly and inconvenient. That is the central lesson of 1971. The question is not whether the Nixon shock can technically be classified as a sovereign default. The point is that the United States demonstrated that when an external financial commitment comes into serious conflict with domestic economic priorities, Washington may choose to change the rules of the game rather than honor the commitment on its existing terms. That precedent has direct relevance to the assessment of US debt risk today.
Hidden Debt Risk
The conventional defense of Treasury securities is that America borrows in a currency it issues itself and therefore cannot “run out of dollars”. Technically, this is true. Economically, it is incomplete. For a sovereign that controls the currency in which its debt is denominated, the principal risk need not be outright non-payment. The debt can be repaid in full, but in money whose real value has been eroded. An investor holding Treasury securities may receive every dollar promised and still suffer a substantial economic loss if inflation exceeds expectations, real interest rates remain negative for an extended period, the dollar depreciates sharply, or fiscal and monetary policies are used to sustain demand for government debt. In each case, the nominal obligation is honored while part of the real burden of the debt is transferred from the sovereign to its creditors. In the narrow contractual sense, this is not default. But for an investor concerned with preserving purchasing power rather than merely securing legal performance of a contract, the distinction is hardly reassuring.
This is where America’s fiscal position becomes increasingly important. According to the Congressional Budget Office’s February 2026 projections, the federal deficit is expected to rise from $1.9 trillion in 2026 to $3.1 trillion in 2036. Debt held by the public is projected to climb from 101 percent of GDP to 120 percent, while net interest costs are expected to rise from 3.3 percent to 4.6 percent of GDP. These figures do not make a crisis inevitable. They do, however, make conventional adjustment progressively more politically costly. Higher taxes, lower spending, higher interest rates and sustained fiscal discipline are all economically available options. Politically, they are painful ones.
History suggests that when the cost of maintaining fiscal discipline becomes sufficiently high, governments begin looking for quieter, less direct forms of adjustment. The United States is not exempt from that logic. Indeed, the dollar’s position as the world’s dominant reserve currency arguably makes indirect adjustment easier. Inflation can erode the real value of outstanding debt. Financial repression can channel the savings of banks, insurers and investment funds toward government securities. Central-bank intervention can prevent disorderly surges in bond yields. Dollar depreciation can shift part of the adjustment burden onto foreign holders of dollar-denominated assets. None of these mechanisms requires Congress formally to vote for default or the Treasury to miss a payment. Yet all can reduce the real value of creditors’ claims. For that reason, a more useful concept for analysing Treasury risk may be not simply “default risk”, but “regime-change risk”: the possibility that the monetary, fiscal and regulatory framework determining the real returns on Treasury securities will change when preserving existing commitments becomes excessively costly under mounting political and economic pressure.
Seen in this light, repeated confrontations over the debt ceiling cannot simply be dismissed as political theatre. They demonstrate that the credibility of US public debt can itself become an instrument of domestic political bargaining. Markets do not wait for an actual default before repricing risk. It is enough for investors to conclude that American institutions are less willing than before to subordinate short-term political objectives to the preservation of long-term financial credibility. That repricing need not be dramatic. It can happen gradually: a few additional basis points in the Treasury term premium; a modest erosion of confidence in monetary-policy independence; greater concern over tolerance for inflation; or a weakening of foreign demand for newly issued Treasuries. Each may appear insignificant in isolation. Taken together, however, they could begin to erode the very privilege that has allowed the United States for decades to finance itself on exceptionally favorable terms.
The Default Illusion
The fundamental mistake, then, is to equate the absence of formal default with the absence of meaningful risk to creditors. The real lesson of 1971 is unsettling precisely because it remains relevant. When Washington was forced to choose between preserving an international monetary commitment and recovering freedom of action in domestic economic policy, it chose domestic policy autonomy and shifted part of the adjustment burden onto the rest of the international financial system.
Against that historical backdrop, there is little reason to assume that future US policymakers, confronted with a serious conflict between preserving the real value of government debt on the one hand and employment, financial stability, fiscal sustainability or even political survival on the other, would necessarily choose differently. US Treasury securities may still rank among the world’s lowest-risk financial assets. But amid current American policies, intensifying economic and trade uncertainty, and the increasingly belligerent posture of the Donald Trump administration, continuing to describe them as “risk-free” in the manner of the past half-century risks obscuring the more important question. The issue is not whether the United States can create the dollars required to repay its debt. It can. The issue is what those dollars will be worth at maturity amid structural deficits, rising debt-servicing costs, mounting public debt and heightened policy uncertainty under the Trump administration—and who will ultimately bear the real cost of adjustment.
Perhaps the mere return of this question, more than half a century after the Nixon shock of 1971, will prove to be among the most consequential and enduring costs of Donald Trump’s strategic trade and geopolitical miscalculations and of his belligerent policies in the Persian Gulf during this term in office. Washington gave one answer to this question in 1971. Investors should not assume that history has made another version of that answer impossible. The Trump administration has brought that possibility back into the calculus of global financial risk.
