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

Peter R. Fishernot really an insurance company at all. It is an accident waiting tohappen.” (“Beyond Borrowing: Meeting the Government’s FinancialChallenges in the 21st Century”, Nov. 14, 2002 1 ) I was trying todraw attention to our unfunded retirement and health care commitmentsand to suggest that more attention be paid to the actuarialposition of the federal government. Draw attention I did, as punditsand journalists picked up on the stark comments of the senior Treasuryofficial responsible for federal debt.89As gloomy as I was then, looking back ten years, I could not haveimagined that over the next decade we would (1) triple federal debtoutstanding, (2) have the federal government explicitly assume theliabilities of Fannie Mae and Freddie Mac as wards of the state, and(3) vastly expand unfunded health care liabilities through both theMedicare drug benefit and universal coverage in the recent healthcare reform and the result would be that yields on the ten-year U.S.Treasury security would fall from 4.05 percent at the time of myspeech to below 2 percent today.I could not have imagined that outcome because of how trappedI would have been in a model that focused on supply. I wouldhave assumed that demand is roughly constant and that the risk tosustainability, or the risk of higher yields, would come from supply“overwhelming” demand. With the benefit of hindsight we cansee that while the current projected supply of federal debt is muchgreater, yields are lower not higher.The difference must be the behavior of demand. Contributing factorsappear to include (a) higher household and corporate savings,(b) stronger demand for the relative safety of Treasuries, (c) a muchlower supply of other “highly-rated” assets – as less credit is createdelsewhere in the economy, (d) weaker expected growth – in part becauseof the high level of debt, and (e) a much lower expected pathof short-term interest rates.1 Remarks to the Columbus Council on World Affairs Columbus, Ohio, November14, 2002, available at http://www.truthinaccounting.org/national_reports/listing_article.asp?section=439&section2=458&page=458&CatID=7&ArticleSource=396.