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

96 Thoughts on Debt Sustainability: Supply and Demand Keynote RemarksMuch like the U.K. banking system in the 19th century, the U.S.banking system today is the dominant wealth storage and transfertechnology on the planet.The speed with which the U.S. authorities moved to recapitalize themajor U.S. banks in 2008 and 2009 was hugely important in stabilizingthe U.S. and world economy – and in ensuring the sustainabilityof financing for federal debt.Think about the difference between the American and the Europeanbank stress tests. The critical difference is not to be found in the technicalitiesof the tests themselves. Rather, the key difference is thatSecretary Geithner wisely announced in advance of the 2009 stresstests which (19) banks he was going to save and that he was runningthe stress tests to figure out how much capital they needed (and ifthey could not raise the additional capital themselves he was goingto inject whatever capital was necessary). As Europe is now discovering,their mistake has been to run stress tests and then simply ask themarket: “So, what do you think?” This has put continued pressure onall banks to de-lever, with corresponding adverse consequences forgovernment bond markets – as banks reduce their demand for sovereigndebt, the easiest market in which to adjust their balance sheets.Banking, money and “monetary arrangements”I mentioned earlier that our 19th century predecessors would haveimmediately recognized a discussion of the banking system as beingabout the money question: what constitutes money and who gets tocreate it? This topic is also connected to the issue of reserve currencystatus and to an important piece of central bank mythology thatneeds to be debunked.Reserve currency status is not about the “unit of account” but, rather,is about the reserve asset. The dollar’s popularity as a notation in accounts– as a measurement and reference unit – is not what makes ita reserve currency. Rather, the fact that the world’s principal reserveasset, U.S. Treasury securities, is denominated and traded in dollarsmakes the dollar a popular unit of account.