The Bill America Can't Keep Ignoring
In certain corners of Washington and on the populist right, a theory that has been gaining traction that goes something like this: America’s real problem is that it is too successful. The dollar is too strong and our markets too free. Foreign countries are taking advantage of our openness. The solution is to protect ourselves from trade, from competition, and from a global monetary system that is rigged against American workers. This theory found its most dramatic expression on April 2, 2025 “Liberation Day” when President Trump announced sweeping tariffs as the opening move of what New Right architects describe as a historic restructuring of the global economic order.
Despite the many errors with this theory, it has diverted our attention from a real and more fundamental problem now facing the US. A new paper from economists at Harvard, the Federal Reserve, and Columbia points to some bigger issues.
Two Verdicts, Rendered
The new paper tracks something called the Treasury convenience yield. That is the premium that global investors are willing to pay to hold US government bonds rather than equivalent bonds from other countries such as Germany, Australia, or Sweden. When this premium is high and positive, America’s debt is genuinely special. Global investors want US bonds so badly that they will accept lower returns to own them. This specialness is a concrete financial benefit of the US dollar’s reserve-currency status; it is one factor that has allowed the US government to borrow more cheaply than anyone else.
That premium has largely disappeared. For ten-year maturities it turned negative around 2010. For five-year maturities, it turned negative around 2012. Even at much shorter maturities it has turned negative since 2023. Across the entire maturity spectrum, US Treasuries are no longer inherently more special than equivalent bonds from other stable developed countries, a finding the paper describes as a pronounced secular decline.
A reasonable objection here is that convenience yields are also shaped by factors beyond any one country’s fiscal position, including changes in bank liquidity regulations, collateral rules in derivatives markets, and shifts in how central banks manage reserves. I take those measurement complications seriously. But a fifteen-year decline across the entire maturity spectrum, correlated with rising debt-to-GDP across administrations of both parties, is not a story that institutional plumbing can fully explain. The trend is telling us something, and it is not good.
While Treasury convenience has collapsed, dollar convenience has done the opposite. The premium that market participants pay to hold dollar-denominated risk-free assets remains strong and actually rises during periods of global stress. The dollar’s role as the world’s dominant funding currency has not changed. When panic hits, the world still rushes into dollars. That has not changed.
The paper documents a striking decoupling: the same global markets are rendering two separate verdicts at the same time. The dollar retains its special and safe-haven characteristics. The Treasury bond, increasingly, does not.
The paper’s explanation for this divergence is technical but important. Dollar convenience reflects the structural role of the US dollar in global funding markets: foreign institutions need dollars for hedging and funding, global banks earn an intermediation fee supplying those dollars through the FX swap market, and this demand is sustained by how the international financial system is built. Treasury convenience, by contrast, reflects the relative supply of US government bonds compared to government bonds issued by other developed countries. As the US has issued far more debt relative to GDP than its peers, the convenience premium on Treasuries has been progressively crowded out. The two measures are driven by different forces.
One interpretation of this divergence is that global markets are distinguishing between two different things when they look at the United States. The dollar’s ongoing strength reflects the structural centrality of American financial markets to global commerce and funding. The erosion of Treasury convenience reflects something narrower and more troubling: the US government has issued so much debt, relative to every other developed country, that its bonds no longer command a premium. Those are not the same judgment, and it matters enormously that they are now pointing in opposite directions.
About Liberation Day
For those interested in what the bond-market data show about “Liberation Day” specifically, the paper provides a live test and the results are instructive. In the ten days after the tariff announcement, dollar convenience rose, consistent with the dollar’s historical safe haven behavior. Treasury convenience fell sharply at medium and long maturities. The countries best positioned to substitute away from American bonds, those with low debt and strong institutions like Germany and Australia, moved most aggressively. It was so bad that the most aggressive tariffs were paused in response to market pressure.
The falling Treasury convenience yield was the market’s simultaneous verdict on the government’s side of the ledger.
The Indictment of Our Political Class
When the paper goes looking for why Treasury convenience has collapsed, the answer is uncomfortable and bipartisan. It is not China’s fault. It is not the fault of international monetary system. it is the relative volume of US government debt compared to other developed economies. Every time the US debt-to-GDP ratio rises by one percent, Treasury convenience falls by a measurable, statistically significant amount. The relationship holds across time periods, across maturities, across administrations of both parties.
The Obama administration ran large budget deficits through the financial crisis and never fully normalized them. The Trump first term jacked up the deficit during a strong economy when surpluses should have been accumulating. The Biden administration spent enormously through COVID and added long-term commitments on top. The second Trump administration is now continuing down this path at faster speed. Each wave of borrowing pushed the convenience yield further negative, in a relationship the paper quantifies.
As Treasury convenience falls, borrowing costs rise. Rising borrowing costs expand the budget deficit directly through higher interest payments. A larger deficit requires that more debt be issued. More debt further suppresses the convenience yield. The US is not approaching a fiscal cliff so much as it’s in a fiscal downward spiral, and the speed of descent is not linear.
There’s a painful irony in all of this. The very strength of the American private economy has made the fiscal deterioration easier to sustain and easier to ignore. A weaker private economy would have produced a crisis much sooner; bond markets would have forced discipline through rising yields and collapsing demand long ago. Because the dollar remains essential to global finance and the American economy remains genuinely impressive, the US has been able to borrow far beyond what would have been sustainable for any other country. The private sector’s strength bought the government time. The government used that time to borrow more rather than restore discipline – actions that, in a terrible irony, threaten to inflict serious damage on the very private economy that allowed the government to behave so recklessly.
The Conversation We Refuse to Have
The federal budget is Social Security, Medicare, Medicaid, and interest payments. Everything else is noise. DOGE discovered this reality the hard way. Total federal spending rose by $300 billion in fiscal year 2025 above its original baseline despite the loud and garish theater of contract cancellations and workforce reductions, because cutting consultants and foreign aid while leaving entitlements untouched is like bailing out a flooding large ship with a teaspoon.
The exorbitant privilege, America’s ability to borrow cheaply because its debt instruments were the world’s safest assets, has been spent down by the government. The cost of continued denial is now showing up in the prices of the bonds that finance that denial. At some point the markets will stop waiting for Washington to notice.