Join me, if you will, in examining a time capsule from November 2000. A junior economist, burrowed deep in the cubicles of the US Treasury Department, wrote a never-published memo to his bosses about a major problem facing the financial markets titled, ‘Life After Debt.’ How would markets react to the imminent pay down of all our Treasury debt? Projections at the time showed the stock of US Treasury bonds would be completely paid off by 2012.[1]
Meaning, no more government debt. Federal government debt, totally paid off.
Produced in the final weeks of the Clinton administration, the paper never got published. No problem a little more than a decade later, as we know, since this alternative reality never came true. Not even close.
National Public Radio’s Planet Money Program made the unpublished memo available a while ago, but it deserves further study. To read it today opens up the Bizarro World of US national debt, a world a decade ago when our biggest problem seemed to be the issue of disappearing federal deficits and the problem of parking future federal surpluses. Our US Treasury officials lay awake wondering at night – how will we ever invest our untold billions of surplus future tax receipts? How can we avoid dismantling Wall Street’s bond market infrastructure? How can we not crowd out private investments with excess government surpluses?
This is Bizarro World indeed, given the downgrade of United States sovereign debt risk by S&P, the seeming impossibility of producing an annual balanced budget, and the ever-increasing load of national debt.
If September 11, 2001 marked a new era in the United States’ relationship with national security and existential threats, the end of 2000 marked a turning point in our relationship with fiscal responsibility. Concerns before then strike us now as oddly naïve, as if from a different generation from our own, despite their proximity to today. Reading this memo with our present day lens is funny, but not in the ‘ha-ha’ way. More like the laugh-instead-of-crying kind of way.
The Treasury department author worried about three negative consequences of buying back all US Treasuries, specifically the elimination of
a) A risk-free benchmark for pricing risky assets,
b) A fully articulated yield curve for market signaling, and
c) A key instrument of the Federal Reserve for conducting Monetary Policy
As a bond guy by training I will acknowledge that US Treasuries fulfill these roles very nicely, and the author conscientiously consids how to address changes over time in these three key areas. Markets would indeed have to adjust to a new regime if US Treasuries slowly disappeared. I can’t fault the economist for considering the important consequences of such a big changes in US markets.
In addition, as you read the memo carefully and the side notes by the author and editor, you see that they understood that overall reducing or eliminating the Federal Debt was a good thing, but that the risks and costs of doing so should be anticipated, understood, and debated. This understanding works fine as a theoretical exercise deep in the heart of the Treasury Department cubicles. But one does get the decidedly uncomfortable feeling that concern for structurally important institutions such as US Treasury dealers and bond investors would take precedence over the general welfare improvement inherent in paying down indebtedness. This preference isn’t spelled out, but it is implicit.
I do not mean to imply the author is complicit in defending Wall Street bond dealers and their investors, per se. But I do read the memo and want to violently reach back in time and throttle anyone who gave up our best, once-in-a-generation opportunity, at national solvency. We seem so far from it now that the detached consideration of the ‘pros and cons’ of paying off the national debt reads as cruel historic irony.
As a country we’re the Megaball Multi-State winner from 2000 who, ten years later, declared bankruptcy. We took the lump sum lottery that we won and blew it on a speculative Las Vegas condo investment, flashy speedboats, and a few too many wars of choice in the Middle East.
Instead of building national wealth, we now we have deficits as far as the eye can see, to pay off the wars, as well as social safety net programs that are, demographically speaking, unsustainable.
But I digress. It’s worth reading the memo to check out the choices under consideration in 2000 for parking our impending windfall of federal surpluses. The details are funny, but again, not in the ha-ha way.
Up Next…Part II – Weapons of Financial Mass Destruction
[1] Back in 2000, I fully expected to be writing this blog in 2012 from my hovercraft. Life is cruel sometimes.
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