Stuart Armstrong,
I think you are way overstating things. Did you read earlier comments? Are you aware how close we came to defaulting in the 1990s when Congress and the president gridlocked over a budget? We have a systemic setup in contrast with all those countries with parliamentary systems that could let it happen much more easily with nothing near some kind of horrendous catastrophe. And if we began to experience some kind of serious pressure from a foreign creditor, China anyone? on top of some internal deep conflict and economic problems (and US politics is not all polarized, now is it?), it could happen.
Regarding this business of the foreign creditors, there is an important reason why most Americans simply pay no attention to our mounting foreign indebtedness: up until now the that humongoug foreign net indebtedness has not resulted in a noticeable net deficit on the investment income part of the current account part of the US international balance of payments. However, as that foreign net indebtedness increases, this will inevitably change. When we start to see several hundred billions of dollars flowing on net overseas as interest on that debt, and the accompanying upward pressure on US interest rates start to negatively impact the US economy, there might even be an outright move to do what Argentina did to our bankers, and what New York state did to British bankers back in the nineteenth century regarding the debts for financing the Erie Canal construction: consciously default.
The bottom line on why we even fuss about the "risk-free rate" is that it is a necessary input to the standard formuli for pricing all kinds of options and derivatives via Black=Scholes and its variations. Something has to go in there, even if the wise really do understand that the underlying asset on which that rate is based is not really so risk free after all.
I've always been annoyed by the term "risk-free bonds rate", meaning the return on US Treasury bills. Just because US bonds have not defaulted within their trading experience, people assume this is impossible? A list of major governments in 1900 would probably put the Ottoman Empire or Austria-Hungary well ahead of the relatively young United States. Citing the good track record of the US alone, and not all governments of equal apparent stability at the start of the same time period, is purest survivorship bias.
The United States is a democracy; if enough people vote for representatives who decide not to pay off the bonds, they won't get paid. Do you want to look at recent history, let alone ancient history, and tell me this is impossible? The Internet could enable coordinated populist voting that would sweep new candidates into office, in defiance of prevous political machines. Then the US economy melts under the burden of consumer debt, which causes China to stop buying US bonds and dump its dollar reserves. Then Al Qaeda finally smuggles a nuke into Washington, D.C. Then the next global pandemic hits. And these are just "good stories" - the probability of the US defaulting on its bonds for any reason, is necessarily higher than the probability of it happening for the particular reasons I've just described. I'm not saying these are high probabilities, but they are probabilities. Treasury bills are nowhere near "risk free".
I may be prejudiced here, because I anticipate particular Black Swans (AI, nanotech, biotech) that I see as having a high chance of striking over the lifetime of a 30-year Treasury bond. But even if you don't share those particular assumptions, do you expect the United States to still be around in 300 years? If not, do you know exactly when it will go bust? Then why isn't the risk of losing your capital on a 30-year Treasury bond at least, say, 10%?
Nassim Nicholas Taleb's latest, The Black Swan, is about the impact of unknown unknowns - sudden blowups, processes that seem to behave normally for long periods and then melt down, variables in which most of the movement may occur on a tiny fraction of the moves. Taleb inveighs against the dangers of induction, the ludic fallacy, hindsight, survivorship bias. And then on page 205, Taleb suggests:
Does Taleb know something I don't, or has he forgotten to apply his own principles in the heat of the moment? (That's a serious question, by the way, if Taleb happens to be reading this. I'm not an experienced trader, and Taleb undoubtedly knows more than I do about how to use Black Swan thinking in trading. But we all know how hard it is to remember to apply our finely honed skepticism in the face of handy popular phrases like "risk-free bonds rate".) Regardless, I think that if you advise your readers to invest 90% of their money in "extremely safe" instruments, you should certainly also warn that it had better not all go into the same instrument - no, not even Treasury bills or gold bullion. There is always risk management, and you are always exposed to error. The safest instruments you can find on this planet aren't very safe.