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

Deborah Lucasly from the global desirability of Treasury debt as a safe store of valueand very low borrowing costs. As economic and financial marketconditions improve, and if investors become nervous about futureinflationary pressures, those borrowing costs could increase sharply.Table 1 shows the sensitivity of interest payments as a share of GDPto the average interest rate.107Contingent Financial Liabilities. Treasury debt currently stands atover $10 trillion dollars. However, that represents only about halfof the explicit financial obligations of the U.S. government that arefirmly committed today. 4 Those other obligations include over $5trillion in debt and mortgage guarantees of Fannie Mae and FreddieMac, government sponsored enterprises that are now in federal conservatorship;about $2.7 trillion of direct government loans and loanguarantees; over $6 trillion of insured deposits, and over $2 trillionin pension insurance. In the event of a further downturn in housingprices or another large wave of financial institution failures, the costof meeting those liabilities could make it significantly more difficultto meet all of the government’s financial obligations.As well as explicit financial liabilities, implicit guarantees expose theTreasury to additional large losses. In evaluating the capacity of theU.S. economy to pay the debt, some argue that it is the total level ofindebtedness, not only federal obligations, that should be taken intoaccount. For example, state and local pension systems are, as a group,severely underfunded, and if those costs fall to the federal government,they will be a further source of fiscal strain.4 Deborah Lucas, “Credit Policy as Fiscal Policy,” MIT working paper, 2012.