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

94 Thoughts on Debt Sustainability: Supply and Demand Keynote Remarksgetting wealthier at the same rate that we were accustomed to. (FederalReserve Flow of Funds, Fourth Quarter 2001, p. 106).There is also the pool of foreign savings that ends up in dollar assets.This is the source of demand that is feared will “dry up,” leaving uswith higher interest rates or an inability to rollover our debt. So, isit a weakness or a source of strength that foreigners keep buying oursovereign debt?Let me mention two stories. First, in the mid-1990s, the Prime Ministerof Japan came to New York and, in a speech, threatened to selltheir holdings of U.S. Treasury securities; since then Japan has morethan doubled its holdings of U.S. Treasury securities. Second, in therun-up to the launch of the Euro, I was speaking in Madrid and Iwas asked the question: “How do you Americans trick us into buyingso many dollars?” Had I not been asked such an odd, blunt questionI doubt I would have come up with as good a rejoinder, which was:“If it was a trick it wouldn’t be very interesting; What’s interesting is:Why do you do it of your own free will?”Let me turn to the flows. As already mentioned, we run a currentaccount deficit and this is a problem. The household sector savingsrate was declining but has risen a bit since the financial crisis. But focusingstrictly on the flows – indeed, on the Fed’s Flow of Funds data– the household sector is currently a net saver equal to 2.8% of GDP.The non-financial corporate sector is a net saver of 2.5% of GDP andthe non-financial business sector a further 2.9% of GDP. Foreignersare net savers in dollars equal to 3.6% of U.S. GDP. When you addthose up, it’s pretty easy for the government sector to borrow about10% of GDP.Those who worry about yields backing up, or a U.S. default, usuallyinvoke fears of “foreign flows” into the dollar “drying up” and, thus,creating conditions when the supply of Treasury borrowing “overwhelmsdemand.” I have two reactions to this line of reasoning.First, when some combination of households, non-financial corporationsand foreigners save less, they will be borrowing more and this will