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

Peter R. Fisherboth sides of their balance sheets, our shadow banking systemprovides a persistent source of demand for Treasury securities. 299A final word about demandLet me conclude with another observation as a former debt manager.If you ask Treasury or finance ministry officials responsible for debtmanagement “What keeps you up at night?” the only candid replywill be: the risk of not being able to rollover their debt at the nextauction. In practice, debt sustainability is about rollover risk: the riskthat demand at an auction will drop precipitously from recent, priorauctions. Of course, at the moment that the worry surfaces one canwish, one can imagine, having a lower amount to rollover and thispermits you, in your imagination, to cover the auction despite thefewer bids. But that is a mere counterfactual. What you worry aboutis a failure of demand.If we peel back the question of sovereign debt sustainability to thequestion of whether there is the “political will” to sustain high debtburdens, we should recognize that this is not a question of politicalwill in the abstract. Rather, it will involve a concrete choice betweenwhether to try to roll over your debt or not to try to roll over yourdebt. The actual policy choice is a practical one among the consequencesof (a) not rolling over your debt, and all that default entails,(b) trying to roll over your debt at increasing cost and (c) trying toroll over your debt and failing do so and, thereby, defaulting.2 Who is holding the federal debt? According to the Federal Reserve’s Flow of Fundsdata, at the end of 2011, the Fed held 14 percent of the total outstanding amount ofTreasury, Agency debt and agency mortgage-backed securities, up from 7 percent for2005, but down from 17 percent in 1975. So the Fed is monetizing less as a share ofthe total than it was in 1975, but double what it was in 2005. Unsurprisingly, theholdings of foreign authorities, or “the rest of the world” as the Fed puts it, equaled32 percent at the end of 2011, up from 28 percent in 2005 and 12 percent in 1975.The holdings of the household (and nonprofit) sector were at a mere six percentin 2011, down from nine percent in 2005 and from 22 percent in 1975. Mostinterestingly, the group of institutions that we would broadly lump together as nonbankintermediaries (money market mutual funds, mutual funds, closed-end funds,exchange-traded funds, government-sponsored enterprises, asset-backed securitiesissuers and broker-dealers ) held 18 percent in 2011, down from 19 percent in 2005but up from a mere one percent in 1975.