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

Zoltan Pozsarfor the reduction in the amount of U.S. Treasury bills left for privatesector cash pools to invest in.41At a macro level, institutional cash investors faced a paradox of safeinvesting.Perhaps the most important “macro-monetary” lesson of the crisisis that money creation is either a solely public or a public-privatepartnership. This observation offers a useful perspective to evaluatethe money-ness of the four basic instruments that function as moneyin today’s financial system. These are currency, insured deposits, andgovernment-only and prime money funds. Of these currency is apublic liability (issued against public debt by central banks); insureddeposits are a public-private liability (issued against private loans andbacked by Fed and FDIC backstops); government-only money fundsare a private-public liability (issued against government guaranteedinstruments (such as Treasury bills, etc.) but with private par andliquidity guarantees by money funds’ sponsors); and prime moneyfunds are a “private-private” liability (issued against secured, privatelyguaranteed instruments as well as unguaranteed instruments, andenhanced with private par and liquidity guarantees by money funds’sponsors).During the crisis, the first three instruments were sources of stabilityand the last was a source of instability. From this angle, prime moneyfunds, as purely private forms of money, should not exist as productsoffering monetary services, or guaranteed liquidity on demand, atpar (see Pozsar and McCulley (2011).The problem revealed by the crisis was excessive private moneycreationin response to an insufficient supply of Treasury bills. Thisprivate money creation in turn can be seen as a modern-day Triffindilemma of the U.S. banking system. Just like the expanding roleof the dollar as the international reserve currency came into conflictwith the dollar’s fixed exchange rate in the 1970s, the rise of institutionalcash pools came into conflict with the U.S. banking system’s(including its shadow banking sub-system) ability to provide themwith guaranteed liquidity on demand and at par without an official