US Government Debt Different - Finance Department - University of ...

88 Thoughts on Debt Sustainability: Supply and Demand Keynote Remarksthey are to be found in the banking system that intermediates betweensources and uses of savings and that creates the “money” thatis available to buy the debt. Our predecessors in the 19th centurywould have understood that a discussion of the banking system wasnot about branches and tellers but, rather, was about the “moneyquestion” – what gets to be money and who gets to create it? Today,we have lost touch with that way of thinking about our banking systemand, thus, our understanding of “money and banking” and thedynamics of debt and money are correspondingly limited.In drawing attention to the demand side of the equation, and particularlyto the banking system, I am not trying to ignore the highlevel of federal indebtedness in order to be comforting or to suggestthat we need not worry. On the contrary, given how close we came toblowing up our banking system in 2008, I find it deeply disturbingto think how dependent we are on our banking system to deliver thedemand that sustains federal borrowing. We are now watching Europecome even closer to undermining the sustainability of sovereignborrowing through the fragility of their banking system.First, let me offer a personal reflection on the mistake of focusing onthe supply of federal debt without giving comparable considerationto the sources and motivation of demand. Then I will outline theconditions under which sovereigns with high levels of indebtednessdo not default, comparing conditions in the United Kingdom in the19th century and Japan in the 21st century with current conditionsin the United States. Finally, I will offer a personal reflection as aformer sovereign debt manager.What a difference ten years can makeAlmost ten years ago, when I was serving as the Under Secretaryof the Treasury for Domestic Finance, I gave a speech about thelong-run fiscal outlook. I said: “Think of the federal government asa gigantic insurance company (with a side line business in nationaldefense and homeland security) which only does its accounting ona cash basis - only counting premiums and payouts as they go inand out the door. An insurance company with cash accounting is