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

Jim Millsteinits spending and tax cutting credentials with its core constituencyonce the Congress re-convenes in 2013. In short, the cliff is morelikely to be a small step down.153Restoring some of the automatic spending cuts would be a goodoutcome for the economy in the short run. However, it increases thelikelihood that the Congressional Budget Office’s (CBO) “alternativescenario” fiscal projection will be realized: deficits averaging 5.4percent of GDP over the 2013-2022 period, and debt held by thepublic increasing to 94 percent of GDP by 2022. 3While deficits and debt levels of such magnitude would normally attracthigher borrowing rates, a Federal Reserve dedicated to avoidinga deflationary debt spiral and the safe-haven status of Treasury securitiesfor European investors confronting a more imminent sovereigndebt crisis have combined to mute the bond market vigilantes. Butwe should not be lulled into a false sense of complacency: The FederalReserve’s recent intervention in Treasury markets has been unprecedentedin the post WWII era. Between 2009 and 2011, the USDepartment of the Treasury issued $5.8 trillion of interest-bearingmarketable debt to finance record deficits and the Federal Reservepurchased $1.3 trillion of those securities in the secondary market,$772 billion in 2011 alone—equivalent to 48 percent of the amountTreasury issued into the market that year.These purchases by the Federal Reserve held down Treasury’s borrowingcosts and allowed Treasury to extend the average maturity of itsportfolio from 4.1 years to 5.2 years over the last three years, despitea worsening fiscal position.3 Congressional Budget Office, 2011 Long-Term Budget Outlook, Feb. 29, 2012(assumes tax cuts implemented by President Bush apart from payroll tax reductionare extended, the alternative minimum tax is indexed for inflation after 2011,Medicare payment rates for physicians remain at current levels, and the automaticdiscretionary spending reductions required by the Budget Control Act do not takeeffect).