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ix PREFACE Robin Greenwood, Samuel G. Hanson, and David Wessel There is a lot of attention on the size and growth of the federal debt, and for good reason. The U.S. Treasury is the world’s biggest borrower. As of fall 2015, it had run up a debt of more than $13 trillion, not counting the money the government owes to Social Security and other government trust funds. In the fiscal year that ended September 30, 2015, the federal debt increased by $725 billion, a sum larger than the economic output of all but the world’s twenty largest economies.1 Measured as a share of the nation’s economic output, the federal debt today is larger than at any time since the end of World War II. Despite the growing concern about the fiscal health of the U.S. government, Treasury bills, notes, and bonds are still the world’s most widely held and trusted debt securities. There is much less attention paid to how the Treasury borrows all this money—how much is borrowed short-term and how much long-term, how much is borrowed at fixed interest rates and how much at rates that vary with inflation, and so on. These debt management decisions are the subject of intense scrutiny by bond traders, sophisticated institutional investors, 1. Table S-13, “Federal Government Financing and Debt,” Fiscal Year 2016 Budget of the U.S. Government ( 2016/assets/tables.pdf). x Preface and a small cadre of technocrats at the U.S. Treasury and the Federal Reserve, but are largely ignored by Congress, the press, and the public. Yet the way that Treasury borrows affects us all. Debt management decisions can have a large impact on the long-run fiscal health of the U.S. government. They can influence the interest rates we pay when we borrow or the rates we earn when we save. And because the structure of government debt impacts how others in the financial system behave, debt management can affect the stability of the broader financial system. Treasury debt management drew considerable attention in the early 1990s when Salomon Brothers was accused of manipulating the auctions that Treasury uses to borrow money, transgressions that led to a $290 million fine for Salomon, the resignation of its chief executive, the eventual sale of the company—and to more transparency in the way the Treasury borrows money. But the domains of U.S. monetary policy, fiscal and debt management policy, and the prudential regulation of financial intermediaries remained separate and distinct. The president and Congress chose the level of the budget deficit. The Treasury decided in what maturity and form federal debt would be issued. The Federal Reserve determined the level of short-term interest rates with a view toward steering the economy away from recession and high rates of inflation. And supervisory authorities regulated the capital and liquidity of banks and other financial intermediaries. With the onset of the financial crisis in 2007 and 2008 and the subsequent easing of monetary policy, the clean lines between these domains have blurred. Once short-term interest rates hit the zero lower bound, conventional monetary policies lost their impact. As a result, the Federal Reserve resorted to quantitative easing (QE)—purchases of long-term Treasury bonds in the open market—to support aggregate demand. Because QE works by shortening the maturity structure of debt instruments that private investors have to hold, the Fed effectively entered the domain of debt management policy. And with the decision to pay interest on central bank reserves, the nearly $3 trillion of reserves on bank balance sheets have become the functional equivalent of Treasury bills not reflected in Treasury debt statistics. This blurring of functions suggests the need to reconsider the principles underlying government debt management policy. Each of the three chapters in this book focuses on an important, and understudied, aspect of the principles underlying debt management. The chapters, and the comments that follow, are drawn from conferences held in 2014 by the Hutchins Center on Fiscal and Monetary Policy at Brookings Preface xi and the U.S. Treasury—though they don’t represent the positions of either institution.2 In chapter 1, Robin Greenwood, Sam Hanson, Josh Rudolph, and Larry Summers argue that optimal debt management policy balances a number of considerations. First, debt managers attempt to achieve a low cost of financing for taxpayers over time. For instance, the public benefits...


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