Upon first hearing there was some bailout plan coming out of the White House, I jokingly asked if we were going to use our armed forces to prevent creditors from collecting.
In reality, any plan will require the use our soft and hard power to collect on the public debt:
So is all this magic? No, over time Treasury has to pay interest and principal on the bonds it issues; the value of the bonds comes from the fact that people believe the US government can do that, which ultimately comes from the government’s ability to raise taxes. If investors lose faith in that …
So, the bailout will be based on investors’ trust in – and hope for – the American experiment. Wow. “Obama ’08.”