Every so often the US government thinks about defaulting on its debt for no particular reason; this is called the “debt ceiling standoff.” The somewhat surprising rule of thumb is that when there is a debt ceiling standoff — when the US government starts thinking about defaulting on its debt — the price of US government debt goes up . The thinking is:
- A US government default would be a bad destabilizing event in financial markets generally.
- When markets are bad and destabilized, there is a flight to quality; people want to buy safe assets.
- The safest assets are US government debt, so the price of US government debt goes up.
- Even in a US government default , US government debt will be safe, because the government has plenty of money and is defaulting for no particular reason, and it will quickly fix the default and start paying its debts again.