QUESTIONS ABOUT U.S. DEBT MANAGEMENT

 

My thanks go to the person who pointed out to me a recent article in the Wall Street Journal published yesterday (February 3, 2025).  The article written by Sam Goldfarb with the headline “Wall Street Frets Over U.S. Debt Plan” (pgs. B1, B6) deals with U.S. debt management issues, meaning the use of shorter-term debt instruments such as T-bills and notes and longer-term debt instruments such as U.S. bonds that upon issuance mature in more than ten years.  It also deals with the size of the U.S. national debt.

The article has me posing questions.  I list the questions below in sets.

 

1. Has the recent reliance on shorter-term debt been successful at enabling businesses to borrow for new buildings and machines at lower interest rates than they otherwise would have to pay?  Has it also enabled consumers to borrow for home mortgage loans at lower mortgage rates than they would have had to pay otherwise?  Was the reason for increasing the issuance of shorter-term debt as a percentage of newly issued U.S. debt to increase liquidity in the longer term, or was it to reduce the interest cost of the debt, or was it something else, or some combination?  I have a little more on this below.

2. If the U.S. Treasury would now switch to relying more on longer-term debt, then would that reduce the amount that firms would be able to borrow to spend on machines and buildings and that consumers would be able to borrow for home mortgage loans?  All other things equal or ceteris paribus, what impact would that have on U.S. real GDP?

3. What impact would the above have on U.S. employment?  My new book from Palgrave Macmillan, Bad Breaks in Real GDP and Employment:  Exploring the Persistence of Aggregate Demand Shocks in the United States, finds that the U.S. economy never completed its recovery from some economic recessions in terms of what both real GDP and employment would have been in the United States had they returned to all pre-recession trends.  Why do many people at least implicitly assume that if the unemployment rate in an economy returns to the ‘natural rate of unemployment,’ then the number of people employed has returned to its pre-recession trend and that real GDP has returned to its long-run equilibrium, which could be thought of as the maximum that an economy can produce sustainably year after year with given resources and technology? 

4. Is increasing U.S. real GDP presently a worthwhile goal if recoveries from some recessions have not been completed?  Is the main potential drawback a possible increase in inflation?

5. From perhaps a mainstream perspective, if the U.S. Treasury is concerned with reducing the cost of the national debt to taxpayers, then would it make sense to issue debt at maturity lengths where the interest rate that the federal government would need to pay to borrow the funds would be the lowest?  Is that what the U.S. Treasury was attempting to do by relying on shorter-term debt?  If the analysis of Irving Fisher was correct that lenders (and perhaps borrowers) factor their inflation forecasts into interest rates on loans to keep the real interest rate essentially unchanged, then was the U.S. Treasury signaling that financial markets were pricing an inflation premium into longer term debt that was too high and that the U.S. federal government could save taxpayers funds by refinancing at lower interest rates in the future?  Is my memory correct that at least some believe that the U.S. Treasury should issue debt at different maturity lengths to accommodate financial market participants with different preferences?  Also, was the goal of increasing the use of shorter term U.S. debt ‘in the mix’ to have funds from businesses and households ‘tied up’ for less time?

6. By contrast, are there lessons from modern money theory (also known as modern monetary theory)?  Am I correct that modern money theory would point out that the U.S. federal government (at least in the very short term) does not spend tax dollars but in essence creates money electronically by crediting recipients’ bank accounts?  Did former Federal Open Market Committee Chair Ben Bernanke make a very similar point if not the same point years ago when he appeared on the TV program 60 Minutes?  Although my understanding is that the excess of federal government expenditures over federal government revenues must be matched by borrowing if the Federal Reserve does not have sufficient funds in the U.S. Treasury’s transaction account held and operated by the Fed, is it the case that the U.S. Treasury (with assistance from the Fed) spends first and funds those expenditures later?  How could the U.S. government (if acting reasonably and responsibly) default on its own debt when most if not all of the debt is denominated in U.S. dollars, where the U.S. government itself exhibits considerable control over the quantity of those dollars in circulation and can increase the supply at relatively low cost?

 

We should have more information about the U.S. Treasury’s debt management plans soon.