HomeFormer Treasury Staffer: US Debt-to-GDP Doesn't Matter (But Greece's Does)tbdFormer Treasury Staffer: US Debt-to-GDP Doesn't Matter (But Greece's Does)

Former Treasury Staffer: US Debt-to-GDP Doesn't Matter (But Greece's Does)

Frank Newman, former Deputy Secretary of the US Treasury, discussing the US national debt, how it compares to other countries’ debt, and debt-to-GDP ratios. For a country with its own currency (who doesn’t promise to keep it at a fixed exchange rate), the national debt-to-GDP ratio simply does not matter. There is no chance of markets ‘getting spooked’ and pulling out of US Treasury bonds.

This is because there is nowhere else for dollars to go. No matter how much spending or lending or trading people do with US dollars, at the end of the day *somebody* ends up with them, and whoever this is has exactly two choices: they can hold on to the dollars (as reserves or as currency) or they can sell them to the US government for a Treasury bond. There are no other choices. The person could choose to sell the dollars to somebody else, but this just pushes the choice to the next person. *Somebody* has to choose between holding dollars and holding Treasuries.

And Treasuries is the logical choice. Treasuries and cash are exactly as risky (since they are both merely IOUs of the federal government), except that Treasuries pay interest while cash does not. And very wealthy people and institutional investors won’t choose to keep their money sitting in a bank, because banks are risky and deposits are only ensured up to $250,000, while Treasuries are backed by the full faith and credit of the US government. Between these forces, there will ALWAYS be a strong demand for US Treasuries.

But even if for some reason there weren’t, this still wouldn’t affect the US government’s ability to issue them as part of its spending procedure, because there are special banks who by law must buy any Treasuries that the broader market doesn’t want at auction.
More on that here: https://youtu.be/u0e4afZElBE?list=PLZJAgo9FgHWZZHf8kluvJT3MwQmLQ9XX0

Watch the whole talk here: https://vimeo.com/41449585

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