People are worried about America’s solvency

Here’s a fun NBER paper where some economists surveyed bond investors, ordinary voters and people with economics or finance degrees about the US government debt load.

Ricardo Delao and Wenhao Li of the University of Southern California’s Marshall School of Business asked a lot of different questions, such as what each group thought was the main support for the Treasury market (sadly, no one seemed to say demand for synthetic duration/the basis trade).

But what tickled FT Alphaville the most was the expected probability of a US debt crisis that respondents gave the two economists. FTAV’s emphasis in bold below:

Once the respondents were shown the current debt level and the latest Congressional Budget Office forecasts, they increased their estimated probability of a debt crisis by another 14.9 percentage points.

But does the seemingly major possibility of an actual American debt crisis actually matter to what these people are doing now? Lol, no, of course not.

And although showing the actual debt data and CBO projections jacked up the expected odds of a debt crisis, it only translated into a plan to reduce Treasury purchases by 4.2 percentage points.

Looking at the details there are some interesting nuances. For example, ordinary voters feared a debt crisis more than bond investors, but bond investors were more worried than finance and economics grads. The last group were actually the most accurate when guessing the debt-to-GDP ratio.

However, econ/finance grads and bond investors were roughly just as likely to have taken any actual action on their investments as a result of their expectations. While the music is playing you still gotta dance, presumably. Or as the two economists concluded: