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

Zoltan Pozsarfunding for safe, short-term liquid assets supplied by the shadowbanking system—was procyclical as well. It wasn’t and after a collapsein the supply of shadow banking liabilities, it was absorbed byan increased supply of short-term government debt (in the form ofTreasury bills, agency discount notes and increased deposit insurancelimits). Taking into account these substitution flows, demand fordollar-denominated safe, short-term, liquid instruments looks stable,similar to the findings of Gorton, Lewellen and Metrick (2012)(see Figure 3-2). Thus, the shadow banking system should not belooked at in a vacuum but in the context of the broader money marketwhich includes banks as well as sovereign issuers of short-termclaims.39Figure 3-2 No pro cylicality in the demand for safe, short-term liquid assetsSource: Pozsar (2011)The extremes of “unlimited” demand for government guaranteedinstruments and limited demand for unsecured, uninsured depositsalso puts the argument that “search for yield” was the dominanttheme behind the rise of shadow banking into perspective. For example,the yield differential between 3 month negotiable CDs (largedenomination, that is “institutional-class,” uninsured CDs) and othermoney market instruments is instructive. What this shows is that,