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91 3 A NEW STRUCTURE FOR U.S. FEDERAL DEBT John H. Cochrane What securities should the U.S. Treasury offer? Traditionally, the Treasury has offered long-term coupon bonds, short-term notes and bills, and retail savings bonds, securities not much changed since the nineteenth century. But Treasury debt has taken on new and different functions in our financial system and in monetary and fiscal policy. Short-term debt has become a form of interest-paying electronic money, and all Treasury debt is widely used as liquid collateral. Underlying these changes, financial, communications, and information technology have changed rapidly. The securities that financed Treasury borrowing and served financial markets decades ago are not obviously optimal today. Furthermore, though we are currently experiencing a quiet time of great demand for U.S. Treasury debt, a strong dollar, and low interest rates, we also live in a time of large debt and doubts about the long-term ability of I thank Effi Benmelech, Michael Boskin, John Campbell, Don Kohn, Sebastian Di Tella, Darrell Duffie, Niall Ferguson, Bob Hall, Derek Kaufman, Josh Rauh, Larry Summers, John Taylor, Luis Viceira, and participants at the U.S. Treasury 2014 Roundtable on Treasury Markets and Debt Management for many helpful comments. 92 J. H. Cochrane the U.S. and other governments to pay those debts. Unexpected events such as a war, recession, or a new financial crisis will put pressure on the U.S. budget and borrowing capacity. An improved structure of Treasury debt can contribute to the ability of the United States to meet these challenges. Finally, economic understanding of government debt has advanced in the last several decades, both through advances in economic theory and via the experience of policy innovations and events around the world. The Treasury has already pursued several innovations, including inflationprotected securities and floating-rate notes. One can imagine many similar innovations and a more comprehensive approach. For all these reasons, a ground-up reexamination of the structure of Treasury debt is important and timely. Goals The right structure of Treasury debt follows from the goals one sets for it as well as a recognition of the changed environment. The first, traditional goal of debt management is to fund deficits at lowest long-run cost to the taxpayer.1 Moreover, in times of war or economic emergency such as the recent financial crisis, the United States needs the ability to borrow additional amounts quickly and cheaply. A second goal is to provide liquid and otherwise useful securities that the market desires—securities that enhance financial and macroeconomic stability, and securities that the government has a natural advantage in producing . To some extent, this goal is a consequence of the first. If the United States can issue securities that are more liquid, more useful, or otherwise more valuable to investors, then it will be able to borrow larger amounts at lower rates. But this second goal has a direct policy purpose as well. U.S. Treasury debt has unique financial features and uses, deriving ultimately from the fact that U.S. debt is uniquely liquid and much less likely to default than any private debt. Providing the right structure and quantity of Treasury debt therefore has an economic policy benefit unrelated to financing deficits. 1. For example, the first item in the Bureau of the Public Debt Strategic Plan is “Government financing at the lowest possible cost over time.” U.S. Department of the Treasury, Bureau of the Public Debt Strategic Plan, Fiscal Years 2009–2014, p. 5 ( A New Structure for U.S. Federal Debt 93 By analogy, the government profits by printing money. But monetary policy is primarily devoted to inflation control and economic stabilization, not to maximizing seigniorage revenue. More generally, the government provides public goods that it has a unique ability to produce, such as roads, defense, measurement standards, and currency. A third goal is to manage the risks of interest rate increases and other adverse events to the U. S. budget and to the economy. For example, if interest rates rise 5 percentage points back to historical norms, then Congress must either raise taxes, lower spending, or borrow an additional $650 billion per year, once the $13 trillion of publicly held debt rolls over. The longer the maturity of outstanding debt, the longer that day of fiscal reckoning is put off. But issuing long-term debt may be more expensive. It’s not a trivial problem, as...


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