[House Hearing, 105 Congress]
[From the U.S. Government Publishing Office]
MANAGING THE PUBLIC DEBT IN AN ERA OF SURPLUSES
=======================================================================
HEARING
before the
COMMITTEE ON WAYS AND MEANS
HOUSE OF REPRESENTATIVES
ONE HUNDRED FIFTH CONGRESS
SECOND SESSION
__________
JUNE 24, 1998
__________
Serial No. 105-104
__________
Printed for the use of the Committee on Ways and Means
COMMITTEE ON WAYS AND MEANS
BILL ARCHER, Texas, Chairman
PHILIP M. CRANE, Illinois CHARLES B. RANGEL, New York
BILL THOMAS, California FORTNEY PETE STARK, California
E. CLAY SHAW, Jr., Florida ROBERT T. MATSUI, California
NANCY L. JOHNSON, Connecticut BARBARA B. KENNELLY, Connecticut
JIM BUNNING, Kentucky WILLIAM J. COYNE, Pennsylvania
AMO HOUGHTON, New York SANDER M. LEVIN, Michigan
WALLY HERGER, California BENJAMIN L. CARDIN, Maryland
JIM McCRERY, Louisiana JIM McDERMOTT, Washington
DAVE CAMP, Michigan GERALD D. KLECZKA, Wisconsin
JIM RAMSTAD, Minnesota JOHN LEWIS, Georgia
JIM NUSSLE, Iowa RICHARD E. NEAL, Massachusetts
SAM JOHNSON, Texas MICHAEL R. McNULTY, New York
JENNIFER DUNN, Washington WILLIAM J. JEFFERSON, Louisiana
MAC COLLINS, Georgia JOHN S. TANNER, Tennessee
ROB PORTMAN, Ohio XAVIER BECERRA, California
PHILIP S. ENGLISH, Pennsylvania KAREN L. THURMAN, Florida
JOHN ENSIGN, Nevada
JON CHRISTENSEN, Nebraska
WES WATKINS, Oklahoma
J.D. HAYWORTH, Arizona
JERRY WELLER, Illinois
KENNY HULSHOF, Missouri
A.L. Singleton, Chief of Staff
Janice Mays, Minority Chief Counsel
Pursuant to clause 2(e)(4) of Rule XI of the Rules of the House, public
hearing records of the Committee on Ways and Means are also published
in electronic form. The printed hearing record remains the official
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C O N T E N T S
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Page
Advisory of June 16, 1998, announcing the hearing................ 2
WITNESSES
U.S. General Accounting Office, Paul L. Posner, Director, Budget
Issues, Accounting and Information Management Division;
accompanied by Thomas J. McCool, Director, Financial
Institutions and Markets Issues, General Government Division;
and Jose R. Oyola, Assistant Director, Budget Issues,
Accounting and Information Management Division................. 7
U.S. Department of the Treasury, Hon. Gary Gensler, Assistant
Secretary of Financial Markets................................. 44
------
Campbell, John Y., Harvard University............................ 75
Fischer, Francis, Trees & Watts, Inc., Stephen C. Francis........ 64
J.P. Morgan & Co. Incorporated, Mark B. Werner................... 69
SUBMISSION FOR THE RECORD
Stark, Hon. Fortney Pete, a Representative in Congress from the
State of California............................................ 6
MANAGING THE PUBLIC DEBT IN AN ERA OF SURPLUSES
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WEDNESDAY, JUNE 24, 1998
House of Representatives,
Committee on Ways and Means,
Washington, DC.
The Committee met, pursuant to notice at 10 a.m. in room
1100, Longworth House Office Building, Hon. Philip Crane
presiding.
[The advisory announcing the hearing follows:]
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Chairman Crane. The Committee will come to order, and if
everybody will please take seats we can begin.
Today's hearing will focus on managing the public debt in
an era of surpluses. Frankly, it's a pleasure to chair this
meeting. I was first elected to the Congress in 1969 and that
was the last year we had a budget surplus. It was $3.6 billion,
as I recall, that we came in in the black that year, but I kind
of took it for granted that that would be an ongoing thing. And
we waited until this year before we were confronted with the
possibility of again having a budget surplus. As a result of
last year's Balanced Budget Act, and with the help of a strong
economy, CBO now projects we are entering an era of budget
surpluses, and last month CBO projected a surplus for the
current Fiscal Year of between $43 and $63 billion with larger
budget surpluses as far as the eye can see.
In today's hearing we will review the debt-management
practices of the U.S. Treasury, including recent changes
adopted by the Treasury Department in response to the budget
surplus. For example, last month the Treasury suspended its
auctions of 3-year notes and cut the number of its 5-year note
auctions from 12 to 4 each year. In addition, the Treasury
Department also issued inflation-indexed bonds for the first
time beginning in January of 1997.
I will now turn to my distinguished colleague Ben Cardin
for an opening statement.
Mr. Cardin. Thank you, Mr. Chairman, and on behalf of
Ranking Member Rangel, let me thank you for holding these
hearings. The Department of Treasury is widely recognized for
its excellent job of managing our public debt soundly and
diligently. They do so in a completely professional manner,
devoid of partisan political influence. They do so in a manner
that holds the cost of debt management at a prudent level. They
are always mindful of the status of our financial markets and
the importance of maintaining their stability. Let me take this
opportunity to congratulate the Treasury Department on a job
very well done.
Mr. Chairman, you have made note of the current budget
surplus. Isn't it wonderful that President Clinton's economic
policies of the last five years and the bipartisan Balanced
Budget Act enacted last year have made it possible for us to
regain control of our fiscal finances. Back in the 1980's and
early 1990's, we were faced with deficits well above $100
billion and soaring to $300 billion-plus in the worst years. It
seemed as if this day may never come. We should not squander
this opportunity to make the future better for our children and
grandchildren.
I must say, though, Mr. Chairman, I don't see a whole lot
of significance that the surplus holds for debt management.
Naturally, if we have a surplus, the Treasury will have to
borrow less from the public in order to fund the operations of
government, and so they will reduce the amount of certain
securities they offer to the public. I'm sure that Assistant
Secretary Gensler can describe the technical details if we are
interested in that.
One of the great debt-related opportunities that the
surplus provides us is that we can reduce our national debt,
thus preserving our resources to save Social Security first, as
the President has so wisely suggested.
So, I commend the chairman for convening these hearings
today so we can learn more about how the Treasury Department
manages our financial debt and how they are able, in the last
few months, to save some of the government's money, so that we
can dedicate it to making the Social Security System solvent
for many decades to come.
I look forward to the testimony of all of our witnesses and
I thank you, Mr. Chairman, for this opportunity.
Chairman Crane. Thank you, Mr. Cardin.
[The opening statement of Mr. Stark follows:]
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Our first witness today is Paul Posner of the General
Accounting Office, and he is accompanied by Thomas McCool and
Jose Oyola, also of GAO. And we've asked Mr. Posner to present
a primer on the Federal debt, if you will, as a prelude to the
more technical discussion of debt management practices which
will follow. Our normal procedure is five minutes in oral
presentation and all written remarks will be made part of the
permanent record, but in as much as you are monopolizing the
time for your panel, Mr. Posner, we'll yield you additional
time, especially since you have these important charts to
present before the committee.
STATEMENT OF PAUL L. POSNER, DIRECTOR, BUDGET ISSUES,
ACCOUNTING AND INFORMATION MANAGEMENT DIVISION, U.S. GENERAL
ACCOUNTING OFFICE; ACCOMPANIED BY THOMAS J. McCOOL, DIRECTOR,
FINANCIAL INSTITUTIONS AND MARKETS ISSUES, GENERAL GOVERNMENT
DIVISION; AND JOSE R. OYOLA, ASSISTANT DIRECTOR, BUDGET ISSUES,
ACCOUNTING AND INFORMATION MANAGEMENT DIVISION
Mr. Posner. Thank you very much, Mr. Chairman. It's a
pleasure to be here. I'll submit my statement for the record.
Our role here, as you indicated, is to set the stage for the
subsequent discussions. We at GAO have not yet done any
independent analysis of Treasury's debt-management operations.
What we have done is substantial amount of work on the meaning
of debt and deficits and we culminated this with a primer that
you referred to. We felt the primer was necessary because, as
big as the debt was and as large as interest is as a share of
the budget, there still seemed to be substantial confusion in
the public about such things as the difference between deficits
and debt, different kinds of debt, what does debt mean for our
long-term future, what can we do about it. And that's what our
charts are going to address in the next few minutes.
The first chart here shows you the total gross Federal debt
of $5.4 trillion and this, with fairly minor exceptions, tracks
the limit on the public debt which is currently $5.9--which,
according to CBO, will be reached sometime in fiscal year 2001.
The chart shows that, essentially, the debt is comprised of
two rather disparate elements that serve very different
purposes and respond in very different ways to a surplus. The
first one there on the bottom is the one we're all familiar
with, on the left side is debt held by the public which
currently stands at $3.8 trillion and this is really the single
best figure that summarizes how much of the Nation's wealth is
used to finance government's obligations. Essentially it
represents the cumulative total of all past deficits and all
past surpluses in the Nation. The owners of the public debt are
wide-ranging. They include individuals, corporations, banks,
pension funds, State and local governments, and, increasingly,
foreign governments and individuals. In fact, foreign holders
now comprise 33 percent of the debt held by the public.
The next chart shows the next component of debt which is
debt held by Government accounts, which happens when the
government ends up owing money to itself. Essentially what
happens, as you can see in the pie chart there, trust funds
take in surpluses from the public of revenues over spending and
they essentially park those surpluses in Treasury notes. They
essentially accumulate these IOU's from Treasury, these are not
real assets, and when it comes time for the trust fund's need
to tap those notes, to pay off benefits, Treasury actually has
to go out and get money to back those. So the special
Treasuries that trust funds hold are government debt, the
government-held debt, but there really is no money there. These
are really IOU's that the Treasury will have to go out and
borrow from the public or raise taxes or cut spending elsewhere
to come up with the money to satisfy these future claims on the
budget.
Let me go to the next chart here, and this starts to tell
you a little bit about the trends in the debt over time and
shows you how different the trends are for those two components
of the debt I just talked about. Overall, over the next 10
years, gross debt will rise by $1.8 trillion, and as the chart
shows, this rise in the gross debt is driven by the government-
held debt which is that dotted line there. That's the debt
driven by the large Social Security surpluses, primarily, that
are accumulating and buying up these Treasury securities. So
that kind of debt will be increasing at the same time as the
solid line that you see there, the debt held by the public,
will be dropping as a share of the economy from 47 percent as
it stands today to 24 percent in the next 10 years. And, again,
this largely reflects as you've indicated, the surpluses that
we've achieved in the budget and the growth of the economy
itself. So the developments with the overall debt held by the
public are very salutary; the rising share of debt held by
government accounts indicates that there is a cloud on the
horizon in the form of potential future claims on downstream
budgets, if you will. And so that's what those two lines,
essentially, represent.
I'm going to turn to the next figure here, 5 and 6, which
gives you a little bit of the history which says a lot about
the present and the future as well. The history we're
portraying is debt is a share of GDP because that's really the
best measure that tells you how much the public debt is
consuming of our Nation's economic resources. And one of the
interesting things you can see here is that, really, in our
Nation's history from 1797, high public debt, exceeding 30
percent of GDP, is an exception essentially--that has only been
broached by the Civil War, World War I, World War II, and the
Great Depression. So, basically what we, as a Nation, have
collectively decided is that it is reasonable to borrow from
the public for cataclysmic national events and all of us would
probably agree with that: To save the nation itself and save
the economy. But what you can see is that after those events
occur, the Nation's debt returns to a fairly low level as a
share of the economy after a number of years. As the economy
starts to grow again, as the government becomes more
contractionary in its fiscal policies, the debt begins to
shrink. And that's what makes the most recent 30 years so
unusual in our history, beginning in the 1970's, because, as
you can see, in the 1970's, the debt held by the public started
to rise again, above these levels that are only seen in wars
and depression, up to 50 percent of GDP in recent years.
And what was unusual about this is, as you know, we did not
have a great war or cataclysmic depression. This was really
fueled by a kind of chronic deficit period that we entered into
during that time. Now the bottom part of this chart shows the
budget deficits themselves, and the differences between the
deficits and debt are illustrated nicely here. The deficits
essentially are related to the debt in that they essentially
are annual events that add to the stock of debt. Debt, in turn,
adds to deficits by requiring interest payments that are
recorded in the budget as outlays. The two closely track each
other.
As you can see, the deficits really sharply grew in the
same cataclysmic national events that I just talked about but,
as you can also see, once those events were over, whether as
wars or depression, the nation returned very quickly to a
policy of budget surplus or balance which is essentially the
norm for the Nation's fiscal policy in our broad sweep of
history. Essentially, conservative fiscal policy, strong
economies, and inflation all succeeded in pulling the nation
back out of the deficit.
But what is interesting is when you look at the debt chart
above, you can see how much more sluggish the debt has been to
respond to those reversals; that while the deficit quickly
reverses itself, the debt is a legacy which is more sluggish to
change and whose momentum takes longer to reverse. Essentially,
this is because it takes a longer time for economic growth to
take over and a longer time for the accumulation of budget
surpluses to eat into the stock of debt that we accumulated
during these very sharp periods of national crisis.
Let me go to the next chart here and this shows you why the
debt makes a difference. Why should we be worried about the
debt? There are really two reasons. One of them has to do with
the economic consequences of our borrowing and the other has to
do with the budgetary consequences of our borrowing. Very
simply put, borrowing by the public sector absorbs savings that
otherwise would be available for private investment. That's a
familiar story to many of you; this bids up the price of
capital by Treasury and private investment that might enable us
to increase our productivity, wages, and potential growth in
the economy is not as large as it otherwise would be. The
effects, importantly, are cumulative. You are not going to
sometimes see this in a given year or two, but over time, as
the private investment is lower than it otherwise might be, the
Nation's productivity and growth rate declines. And as Charles
Schultz once said, the debt crisis is not the wolf at the door;
it's the termites in the basement, and that's why it is so
difficult sometimes to grasp.
What's most disturbing about the growing debt in recent
years is the low national savings that you see in this chart.
The size of those bars is the total net savings available from
the domestic economy to fund investment. As you can see, the
total size of that bar has been going down and the share
absorbed by the deficit which is the white part has been
growing. Now recently that's reversed, and foreign owners of
debt have helped as well by investing in our economy. But,
nevertheless, the size of those bars is something that's quite
worrisome.
Finally, the next chart here, is really what we might call
the bottom line. GAO has done a long-term model linking these
annual budgets to long-term economic growth and what we've
tried to demonstrate is that, short-term aside, the cumulative
results of deficits and debt over time are quite compelling. We
have modeled two fiscal policy paths. One is what we call no-
action, which is the bottom line there, which essentially
assumes we will just follow the baseline and after a while,
after we come out of these periods of surpluses, Social
Security, Medicare, and Medicaid are going to kick us into a
deficit again and that is going to lower our real incomes by
2050.
If we maintain budget balance through this entire period,
you can see that by 2050, we reach a real increase in the per-
capita GDP available for Americans to 25 percent above this
baseline. So, essentially, what we've done this modeling for is
to help leaders understand the long-term consequences of these
budget choices. This increased income available toAmericans is
particularly critical because as you know, future generations are going
to be much smaller than ours and are going to have to pay for the large
retirement costs of the Baby Boom generation. That generation--those
smaller work forces are going to need higher incomes to be able to
afford these burdens that are going to be foisted on them unless we
change our policies. So, again, this is trying to illustrate how
important the deficit and debt are to the future incomes of this
country.
And the final point I will make, and will close at this
point, is just to illustrate another familiar story, which is
that debt also has a legacy for the budget itself. In other
words, when you see this chart here, you see the largest
outlays in the budget by function and, net interest on the debt
is the third-largest function in the budget. And unlike any
other functions, Social Security, national defense, Medicare,
and whatever, it's the most uncontrollable. We can't do
anything directly to reduce this. We can't trim benefits, we
can't improve administrative efficiency; essentially this comes
right off the top before we allocate resources to anything else
and the principal way you can really change the interest path
in the budget is by fundamentally doing something about
deficits and, ultimately, going into a surplus that will
actually reduce your nominal debt as a share of the economy.
So, that basically, in a nutshell, summarizes, the broad
issues. We, will hand it off to Treasury to talk more
specifically about the debt management consequences of the
budget surpluses.
[The prepared statement and attachments follow:]
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Chairman Crane. Thank you very much, Mr. Posner.
Turning to chart number two, the ownership of our debt held
by the public. Foreign investors is listed at little over 33
percent. Has that been affected by any of the panic in the
Asian-Pacific region?
Mr. Posner. I think it is probably safe to say that it has
been affected by those recent trends, that is the dollar's
strength and an open economy. There's the flight to safety and
Treasury bills are considered a safe investment. Throughout the
world the dollar is a reserve currency which are invested by
many central banks and governments in Treasuries. Many
observers feel, that those events are related to that spike.
Chairman Crane. And has it resulted in more investment in
our debt, or less, taking money out?
Mr. Posner. I think it's more foreign investment. I believe
it's grown from something like 25 percent several years ago to
34 percent today, so there's a greater foreign investment in
our debt than before.
Chairman Crane. And what percentage of that is held by the
Japanese?
Mr. Posner. We can provide that for you for the record. We
don't have it right----
Chairman Crane. Off the top of your head, do you think it's
a majority?
Mr. Posner. No, I don't think it's a majority. No.
Chairman Crane. Who is the biggest investor in our debt?
Mr. McCool. It would most likely be a combination of
European governments, I would expect, governments, individuals,
and institutions.
Chairman Crane. No individual, single government comes to
mind?
Mr. Posner. The United Kingdom.
Chairman Crane. The United Kingdom?
Mr. Posner. Yes.
Chairman Crane. Another question I would like to put to you
is this booklet that GAO put out in 1996 ``Federal Debt Answers
to Frequently-Asked Questions.'' Are you contemplating getting
a reissue published?
Mr. Posner. We're actually contemplating doing that. Mr.
Domenici, the chairman of the Senate Budget Committee, has
asked us to do this and to, essentially, talk about what it
means to run a surplus for the public debt. What are the new
issues raised by the budget surplus, including debt management
issues, the very topic of your hearing, so we are planning on
doing that.
Chairman Crane. Very good, I appreciate that. I'd like to
now yield to our distinguished ranking minority member, Mr.
Rangel.
Mr. Rangel. I have no questions. I want to thank you, Mr.
Chairman, for having these our hearings and our witnesses for
helping us better understand the budget process.
Chairman Crane. Mr. Camp. Mr. McCrery.
Mr. McCrery. Mr. Posner, I just have one question. In the
periods of declining debt in our history, what is the process
of actually reducing the debt held by the public? How do we do
that?
Mr. Posner. There's essentially two ways to think about
that. One is just simply, when a war is concluded, or the Great
Depression, for example, was over, just the rise in economic
growth shrinks the proportion of debt to the economy, so that's
one thing that happens. The other thing that happens is very
typically we go into a budget surplus, which is the only way we
can actually reduce the nominal level of debt and that's been
the typical response.
Mr. McCrery. How do we reduce the nominal debt?
Mr. Posner. By any combination of revenue increases or
spending cuts that produces an annual budget surplus.
Mr. McCrery. Yes, I know, we have to have a surplus to
reduce the debt, I'm with you. But what's the actual mechanical
process of getting that debt back and extinguishing parts of
the debt?
Mr. Posner. Right. Essentially, the debt mechanically is
rolled over, most of the debt is rolled over so the mechanical
process that happens is you simply have less need to finance
debt so you roll less of it over. That's essentially the way we
reduce the debt. At least recently, we haven't bought back any
outstanding debt, but basically the mechanics is you simply
roll over less of it.
Mr. McCrery. How much of our debt, you know, we hear a lot
of talk about buying down the publicly-held debt. We've got
this surplus and we want to use it all to buy down the debt.
How easy is it to buy down the debt? In other words, how much
of that debt rolls over each year which would lend itself to
buying back?
Mr. Oyola. About 50 percent of the debt held by the public
will mature within the next two years, which means that the
Treasury has the ability to roll over less of it. As debt
matures, the Treasury could choose not to issue new debt, so
about 50 percent of the debt held by the public could,
potentially, be subject to less reduction.
Mr. McCrery. Okay. Thank you.
Chairman Crane. Let's see. Mr. Cardin?
Mr. Cardin. No questions, Mr. Chairman.
Chairman Crane. Mr. Herger. Oh, wait, I'm sorry, Mr.
Portman is he here? Mr. Herger, then. Mr. Watkins. Is Mr.
Watkins here? Mr. Houghton.
Mr. Houghton. Thank you very much, Mr. Chairman. I havenot
been here for this whole discussion, but I do have a question and I'm
not sure that it's easily answered and if it's not, then we can talk
about it personally later on. I guess the thing I've always worried
about is the short-term debt financing long-term objectives. And it
just seems that when we were in a crunch we tend to shorten up in order
to reduce the out-of-pocket costs to the government at that particular
time. So the question really is, are we doing right by that ratio now
and, also, what might be an ideal ratio?
Mr. Posner. That is, as you noted, a complicated question
that I think Treasury may very well address in their remarks
because there are a number of variables to consider. Cost to
the government being one, which shorter terms denominations
generally gets you lower costs. The market conditions and the
liquidity of the various Treasury notes in maintaining a
healthy market for Treasuries is another. As they will tell
you, there are a variety of factors that are considered. We
have not, again, looked at this in any independent way at this
point, but my understanding is that the maturities of the
Treasuries on average have been on the upswing, in the past 20
years. I think they reached a low in the mid-1970's, and now
they are averaging a little over five years. But as to how they
decide the mix of bills and notes and bonds and that kind of
thing is something I think they will probably be addressing.
Mr. Houghton. So you haven't done any studies on that?
Mr. Posner. No, not right----
Mr. Houghton. Thanks very much.
Chairman Crane. Mr. Neal.
Mr. Neal. Thank you, Mr. Chairman. I just bumped into a
reporter in the hallway and he said that Speaker is very upset
today with CBO numbers and that he is very upset with the Joint
Tax Committee's estimates on revenue forecasts. Would you care
to comment on the role that CBO plays here in offering these
revenue estimates for us? Any of the panelists?
Mr. Posner. We have not looked, and do not have the
responsibility to examine and independently evaluate CBO's
numbers. They are the, as you know, the forecaster for the
budget, for the Congress, and they estimate costs, but we at
GAO do not have the role to examine their assumptions or their
models.
Mr. Neal. You wouldn't suggest that they ought to fudge any
numbers along the way so that they can comply with the request
of the leadership for tax cuts that may not well be necessary?
Mr. Posner. All I can offer in response to that is that we
work very closely with the CBO analysts and they are highly
professional and I've not known that to be a problem in their
past history.
Mr. Neal. Could I ask, do you know who appointed the
current CBO team?
Mr. Posner. Well, the current director is appointed by the
Congress, by the leadership of the House and Senate, I believe,
three-and-a-half years ago.
Mr. Neal. Okay. Thank you, Mr. Chairman.
Chairman Crane. Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman. Just one question in
particular. We will see, with the rollover of the private
sector portion of the debt, a reduction. We will see an
increase with the public sector portion of it. What will be the
bottom line as compared to a year ago? Will there be an
increase or a decrease overall?
Mr. Posner. Increase over all in the gross Federal debt.
Mr. Collins. And by how much? I looked for it in some of
this information and I didn't----
Mr. Posner. Basically the gross debt in 1997 was $5.3
trillion; in 1998, it will be $5.5 trillion; 1999, $5.7; and it
grows to $7.1 trillion by 2008, the gross debt. And, again, the
net debt to the public goes down; the debt held by the
government accounts goes up.
Mr. Collins. Okay. One other question, the chairman
mentioned foreign investors, particularly in Japan, and Japan
has quite a bit of accumulated savings in private sector there.
How does their interest rate for those savings compare to the
investment in our securities?
Mr. Posner. I'm sorry, could you repeat that?
Mr. Collins. In Japan, the private sector has an
accumulated savings of about $10-$11 trillion. How does the
interest rate on those savings in Japan compare with the
interest rates we pay on securities? Or do you know?
Mr. Posner. Don't know. Tom, do you----
Mr. McCool. I don't know what longer-term interest rates in
Japan are. I know that their short-term rates tend to be very
low and, certainly, in comparison with U.S. rates. But then you
also have to take into account the potential for currency
fluctuations, so it's a fairly complicated mix but Japan's
interest rates are, I think, quite low right now.
Mr. Collins. Okay. Thank you. Thank you, Mr. Chairman.
Chairman Crane. Mr. Tanner.
Mr. Tanner. Thank you, Mr. Chairman. I, like Mr. Houghton,
haven't been here the entire time. For that, I'm sorry because
I am very interested in this subject. From the charts that I
have seen, foreign investors, according to the chart, hold
about a third of our public debt. Is that an acceptable number
or should we be concerned or is it something that really
matters?
Mr. Posner. It's probably a dual-edged kind of answer to
that. On the one hand, the foreign investors help us finance
our investment at levels above that we can finance from our own
savings because our savings from domestic sources are so low.
So, on the one hand, foreign investment helps prop up our
investment. In an open economy, the influx of foreign dollars
the Treasuries is a reflection of the strength of the dollar,
the strength of the American economy compared to other
economies right now, and so it's in some sense a tribute to the
American economy. On the other hand, the downside of this is
that the earnings from those investments in our assets flow
overseas to foreign residents and not to American citizens.
There is probably no one level that would be--that you can
say is appropriate. But, certainly by propping up levels of
investment, they are helping us attain higher levels of
investment and plant equipment that ultimately helps long-term
growth, assuming foreign dollars are invested in productive
assets.
Mr. Tanner. Well, looking at this chart, from what you say,
I assume that a third of the $244 billion or thereabouts is
going overseas, which would be a trade imbalance with regard to
currency, would it not?
Mr. Posner. I'm not exactly sure how much of the net
interest specifically is denominated to foreigners. The foreign
holdings have just recently climbed to that level, so I'm not
sure that a third would be the right figurethere but----
Mr. Tanner. Well, would you have a comment as to whether a-
third, in your opinion, was too high, too low, about right, or
does it matter? I know that's very subjective--but, at home we
get asked questions like this and when we say, well, the
foreigners hold a-third of our debt and people ask if a third
is too much? Should we be concerned? And I'd just like your
opinion about it, that's not a----
Mr. McCool. Well, again, I think part of the issue also is
it's not just how much they hold of our debt, but how much we
hold of their debt and the issue is really the net. So you
would expect in a world where the U.S. is the dominant economy
and the assets of the U.S. government are the most attractive
risk-free assets around, that foreigners would want to hold a
lot of our debt, so that's not really the issue. I think the
issue is the relative flows and the relative stocks, compared
with what we hold of theirs. And I think that, recently has,
been the issue. There's been more of their money investment
flows coming to the U.S. than vice versa over that time.
Mr. McCrery. Will the gentleman yield?
Mr. Tanner. Yes.
Mr. McCrery. I think the gentleman asked a good question.
Is it safe to say that in times of surplus here the extent of
the debt held by foreigners is less of a problem? Let me
explain. If we're in times of deficit, then we have to actually
go to the markets and borrow money ourselves, the government,
to finance our deficit. So, it's possible that if foreigners
held too high a percent of that debt, that they could kind of
hold us hostage because we have to go to them in effect to
borrow money to finance our own operations. Whereas in times of
surplus, we don't really care who holds the debt or who's
buying it because we're not issuing new debt, we could be
actually buying it back, so that's part of my fear when we were
having high deficits and, as far as the eye could see, as that
percent of debt grew, held by foreigners, I could see us
possibly at some point in the future being held hostage by
those foreign debt holders.
Mr. Posner. I think certainly when the debt is declining
and the share that is held by anybody is less--as you indicate
perhaps less critical. The vulnerability point is something we
have a little track record on. In the 1980's, there was a
disinvestment of our bonds by Japanese investors, for example,
and yet, in fact, many other international investors filled the
gap. Spain, the United Kingdom, and other nations came in and
bought Treasuries, and so there's a fairly active diversified
worldwide market for Treasuries that helps address some of
those vulnerability concerns. However, the other issue to raise
here is that other economies are facing a baby boom crisis of
their own, earlier than ours: Italy, Germany, Japan, France are
also going to be facing quite a--problems in the public sector
in the next 30 years, that are going to draw back into those
nations their investment resources for public sector programs.
So, the amount of foreign investment we can rely on over time
may, in fact, decline from those sources at the very least.
Mr. McCrery. Thank you, I won't ask the gentleman why the
Italian and the French have a sooner baby-boom problem than we
do, I'll leave that to others. I thank the gentleman for
yielding.
Mr. Tanner. Thank you. Mr. Chairman, could I ask unanimous
consent for two additional minutes.
Chairman Crane. Sure thing.
Mr. Tanner. Thank you. Following up on what Mr. McCrery
said, I think the idea here is more maybe in the nature of a
political fear or a political problem than it may be in terms
of a financial matter. The political fear, of course, is that
the fear that some have that this debt held by foreigners gives
them inordinate leverage over what happens internally in
America and so that's the reason for the discussion here about
how much is too much. But I thank you for that.
Going back to one thing that Mr. Houghton said, if I may
real quickly. I, too, have been concerned about the short-term
nature of some structural debt that's basically built in. We
can say we'll pay it back some day but the truth is we probably
never will, and I'm not sure financially that it's necessary.
It's always been my thought that if we could stabilize the
debt, and then let the economy double, triple, and quadruple, a
$5 trillion debt in an $8 trillion economy is very much a
problem, in a $20 trillion economy, it is much less of a
problem. Which brings me to my second question. The interest
that we pay on this debt amounts to somewhere around 14 cents
out of every dollar that comes to the Treasury. Is that
correct?
Mr. Posner. Yes.
Mr. Tanner. All right, said another way and the way I
explain it to people at home, 25 years ago about 7 cents of
every dollar that came was paid in interest. Now, any business
person knows that if one is paying 7 percent for one's
inventory, if it's a car dealership or whatever, you can make a
little money. If you're paying 14 percent interest on your
inventory, it becomes very problematic as to whether or not
your business can make it. Now, we have in effect a 14 percent
mortgage on the country, would that be a fair statement in your
opinion?
Mr. Posner. Well, I think it's 14 percent of spending; it's
roughly 3 percent of the economy, of GDP, but I think it's a
fair way of saying that it's a concern. As we say, it comes
right off the top, you can't do anything about it directly
unless you reduce the size of the debt held by the public. The
other concern is do we want this overhang from the debt
buildups in the past 30 years to be carried forward into the
next 30 years when we know that that next generation is going
to be struggling to pay for these new bills that are going to
be coming due for Social Security, Medicare, Medicaid that are
also going to be facing them. So that's another concern and the
question is we have an opportunity now to, reduce that as a
share of the budget, to kind of reduce that legacy.
Mr. Tanner. I certainly thank the gentleman. I'm going to
read this in depth and perhaps maybe we could follow up with a
meeting at some point about this and I'd really like to get
with Mr. Houghton and explore the imbalance in the debt versus
the structure, particularly with no entitlement reform in
sight. Thank you, very much, Mr. Chairman.
Chairman Crane. Mr. Christensen.
Mr. Christensen. Thank you, Mr. Chairman. Mr. Posner, I've
got just a couple of questions. One is that as director of your
Division of Accounting and Information Management, how are you
guys prepared for the Y2K problems and, as the manager, are you
up to speed on getting ready for the Year 2000?
Mr. Posner. Well, in terms of--GAO has done--is making a
major investment in analyzing the Federal agency's readiness
for the Y2K. As a matter of fact, we have a request to look at
the Bureau of Public Debt and those operations to make sure
that they are Y2K compliant, which we have not yet begun but
are about to begin. Is the question about our own operations?
Mr. Christensen. Your own division.
Mr. Posner. That's not in my bailiwick, but I know the GAO
has been undertaking a review of our systems and that kind of
thing to ascertain----
Mr. Christensen. Do you know how far along you are?
Mr. Posner. I really don't. We could certainly get back to
you with information on that for the record.
Mr. Christensen. I'd like to know that.
Mr. Posner. Sure.
[The folllowing was subsequently received:]
[GRAPHIC] [TIFF OMITTED] T3455A.026
Mr. Christensen. At what phase of review you are, at what
percentage completion, and if it was tomorrow, what kind of
catastrophe we would have in your division. Another thing I'd
like to ask is what effects, if we were to significantly reduce
the debt, will it have on our markets, and what effects has the
Treasury's sale of the 4-, 7-, and 20-year had on our markets?
The 20-year securities.
Mr. Posner. Well, we have not really looked at the effects
that individual denominations have had on markets of Treasury
notes. What we have done is we've modeled the results for the
economy for the long-term of debt reduction and what do you get
in terms of long-term growth dividends from that? And that's
the chart that we had up there before that shows that if, in
fact, we reduce debt, essentially by following a balanced
budget, once the baby boom bills come due, our per capita GDP
would be much higher than it would be if we just followed the
current course. And that's pretty much what we've done to try
to illustrate the benefits of doing something about this. But
we have not followed individual bills and issues.
Mr. Christensen. That's all, Mr. Chairman.
Chairman Crane. Mr. Hulshof.
Mr. Hulshof. No questions, Mr. Chairman.
Chairman Crane. Mr. English.
Mr. English. Thank you, Mr. Chairman. This is a very
distinguished panel. I really only have one question having to
do with what is owed by the General Fund to Social Security.
Social Security has over time accumulated nonnegotiable
Treasuries as, in effect, a collection of IOU's against the
$700 billion that the General Fund has taken out of the Social
Security System. I know I am not describing this precisely,
but, in effect, I am describing it accurately. In your view, is
there a meaningful difference between negotiable and
nonnegotiable government securities and is, simply if we were
to try to compare their value, would it not be fair to say that
a nonnegotiable Treasury security, by virtue of being
nonnegotiable, inherently would have an inferior position
because it can't be offered in the market. Do you care to
comment?
Mr. Posner. Well, the nature of these debt instruments is
very, very different. Social Security has some advantage in
that it gets unlike other trust funds, it gets redemption at
par regardless of the market value or the change in the market.
Mr. English. That's true.
Mr. Posner. And that is an advantage that the Social
Security fund has specifically by law. The whole question of
even calling these securities is something that is problematic
because it kind of leads to the impression that there's a
funded portion that's available to be culled. And, as you know,
these are IOUs, as you said, that, when the time comes, when
Social Security runs out of surplus and has to dip into this
reservoir of ``assets,'' there really is no money there. And
Treasury has to go out, unlike a State and local government
pension fund, which has, you know, money that it can tap in the
market, Treasury has to go out and either borrow it or raise
taxes or cut spending somewhere else, as we're currently doing
with Medicare, which has a $5 billion cash deficit. Medicare is
starting to call back some of its treasuries on a net basis,
although it's hard to tell the impact of that on a $1.7
trillion budget; nevertheless, Medicare is becoming a net drain
on the Federal budget. And that's the kind of thing that will
happen with Social Security around 2014.
Mr. English. I think that's actually a wonderful summary,
Mr. Posner, and I thank you for it. What you've made clear in
your statement is that a non-negotiable treasury is not like a
standard negotiable security. And what seniors and others have
in their name posted, wherever it is in West Virginia, really
does not have the same value as the security. Although, as
you've noted, there are some legal protections built in to make
sure there's a payment. And I thank you for it, and I yield
back the balance of my time.
Chairman Crane. Mrs. Thurman?
Mrs. Thurman. Mr. Posner, I am like Mr. Tanner--sorry I
wasn't here for the full explanation--but I'm just trying to
catch up and read through this by looking at your charts, and
particularly the conversation that took place on the foreign
investments. You made a statement where it says, ``the United
States benefits from foreign purchase of government bonds
because as foreign investors fill part of our borrowing''--I
can't even say the word--``more domestic saving is available
for private investment, and interest rates are lower than they
otherwise would be.''
Based on the conversation, as you said, as France and
others start to need these dollars, what happens then to our
economy in the United States based on that statement?
Mr. Posner. Well, several things could happen. One that you
might hope is that our own domestic savings might grow so that
we can finance more of our investment from our own sources.
Another scenario might be that as these advanced nations
reach their own public sector crisis or challenge, if you will,
that other nations throughout the world might find treasuries
and our investments to be, a good investment. So it's hard to
tell what will actually happen there.
Mrs. Thurman. But is it something we should be watching and
be concerned about, based on that?
Mr. Posner. A number of economists would argue that yes, in
some sense, it is; and that it's generally preferable to
increase the national savings rate from domestic sources.
Anybody? Thanks.
I will yield back the balance of my time.
Chairman Crane. Mrs. Johnson.
Mrs. Johnson of Connecticut. Thank you very much.
I don't know whether it's fair to ask these questions of
the next panel or your work enables you to answer them. But
over, say, the last six months, how much debt have we actually
retired as notes have come due, and we have just not refinanced
them because we had surplus dollars? And of that debt, how much
was high-cost and how much was low-cost? The gradations and----
Mr. Posner. I think because they have some of the figures
there we can----
Mr. Oyola. We have some of the figures here. As of
September 30, 1997, the total marketable debt, which is
comprised of bills, notes, bonds, and the Federal Financing
Bank, was $3.4 trillion. As of May 30, 1998, the total
marketable debt was $3.3 trillion. So there has been a slight
decrease, from $3.439 trillion to $3.353 trillion. That's $86
billion less in marketable debt--bills, notes, and bonds.
Mrs. Johnson of Connecticut. And of that, how much was what
you would categorize as high-cost debt?
Mr. Oyola. The bills, which will be normally lower-cost
debt, in September were $702 billion. And in May 31, it was
$648 billion. So there has been a reduction in the bills.
Mrs. Johnson of Connecticut. And that's the lower-cost
debt?
Mr. Oyola. Yes.
Mrs. Johnson of Connecticut. And a higher-cost debt?
Mr. Oyola. Higher-cost debt would normally be bonds. And in
the case of bonds, on September 30, there were $576 billion;
and on May 31, there were $599 billion.
Mrs. Johnson of Connecticut. So actually there's more high-
cost debt?
Mr. Oyola. There has been an increase in the amount of
long-term debt.
Mrs. Johnson of Connecticut. So the--all of the drop has
been in the lower-cost debt?
Mr. Oyola. There has been a decrease in the bills, which
are lower cost. There has been an increase in the bonds, which
are long-term; and in the present environment, they are higher
cost. There has also been an increase in the amountof inflation
indexed securities, which are notes and bonds.
Mrs. Johnson of Connecticut. Did--did--were the bonds that
came due during that period were they retired? I'm finding it a
little hard to understand why the amount of bonded indebtedness
went up so significantly, and the amount of short-term debt
went down. Was is that longer-term high-cost debt didn't come
due. Or did they choose not to pay it off?
Mr. Oyola. We don't have the amounts that came due in that
period of time, but we can certainly find the information for
you. What probably happened is that the bills, which are short-
term in nature, came due at a higher volume than any bonds. So,
naturally, the bills will have been retired.
Mrs. Johnson of Connecticut. And I didn't understand you
correctly that the inflation-indexed debt went up?
Mr. Oyola. Excuse me.
Mrs. Johnson of Connecticut. The inflation-indexed debt
went up?
Mr. Oyola. Yes.
Mrs. Johnson of Connecticut. Thank you.
Chairman Crane. Ms. Dunn.
Ms. Dunn. No questions.
Chairman Crane. Well, with that, I want to express
appreciation to our panel for their presentation this morning,
and we look forward to working with you in the future. You may
be excused, and we shall invite next the Honorable Gary
Gensler, Assistant Secretary of Financial Markets for the U.S.
Department of the Treasury.
Mrs. Johnson of Connecticut. Mr. Gensler. Welcome.
STATEMENT OF HON. GARY GENSLER, ASSISTANT SECRETARY OF
FINANCIAL MARKETS, U.S. DEPARTMENT OF THE TREASURY
Mr. Gensler. Thank you, Madam Chairperson, and
distinguished members of the committee. It is an honor to be
here today in front of this committee to talk about debt
management and the Treasury.
With the Clinton administration's policy of fiscal
discipline and its fostering of a strong U.S. economy, we have
experienced our first budget surplus since 1969. The
administration welcomes the challenge of managing a surplus
rather than financing a deficit.
If I could just submit for the record my written testimony,
I'm going to just briefly summarize in some oral remarks.
It is important in this endeavor for the government to have
goals and principles. And I'd like to just lay out some of
those goals and principles that guide treasury and its debt
management.
First, in terms of our goals, we broadly have three goals
that drive our debt management. The first is sound cash
management. That is to say, that we want to ensure that our
cash balances at all time are sufficient to meet our
obligations.
Second, is achieving low-cost financing for the taxpayers.
We look at this over time, both in the short-term and the long-
term. And we consider risk, as many of the members had
mentioned earlier, with the earlier panel.
And third is the promotion of efficient capital markets, to
ensure that the U.S. capital markets continue to be the
strongest around the globe.
In achieving these goals, five interrelated principles
guide us.
First is maintaining the risk-free status of Treasury
securities. This is accomplished through prudent fiscal
discipline and timely increases in debt limits.
Second is maintaining consistency and predictability in our
financing. Treasury issues securities on a regular schedule,
with set auction procedures. This reduces uncertainty in the
markets and helps minimize our overall cost of borrowing.
Third, Treasury is committed to ensuring market liquidity.
Liquidity promotes efficient capital markets and, again, lowers
the cost of borrowing over time.
Fourth, Treasury finances across the yield curve. What this
means is we not only borrow money for short-term periods, like
90 days or 6 months in what we call the Treasury Bill market,
but we also finance over the long term, as long as 30 years.
This appeals to the broadest range of investors. And we feel
that by appealing to a broad range of investors, we, again,
help lower the cost of financing and promote an important goal
of having the most efficient capital markets in the globe.
And then fifth, Treasury employs unitary financing. We
aggregate virtually all of the government's financing needs and
finance as one nation. Thus, all programs of the Federal
Government can benefit from Treasury's low borrowing rate
rather than competing in the marketplace with smaller, more
costly issuances.
We have been responding to dramatic changes in our
financing needs. At the start of the Clinton administration
estimates were that the level of privately held debt today
would be approximately $4\1/2\ trillion. As you can see from
this exhibit--and I apologize if the print is a little hard to
see--that currently there's about $3.4 trillion of privately
held debt. That includes marketable debt of about $3 trillion
and $400 billion of non-marketable securities--savings bonds,
State and local government series, and the like.
In addition, the Federal Reserve holds a little over $400
billion of debt; and then, of course, the government accounts
and trust funds hold $1.7 trillion.
But the $1 trillion less debt today than was estimated just
five years ago is a remarkable accomplishment, which has
benefitted all Americans through higher national savings and
lower interest rates.
Exhibit D shows how the components of our financing needs
have changed over the last several years. The unified budget
deficit, which historically drove our borrowing needs, has
decreased dramatically and finally has become a surplus. Just
three years ago, the unified budget deficit of $164 billion
really drove our needs. And this year, OMB estimates a $39
billion surplus.
Moreover, an increasing share of our financing needs come
from non-marketable securities, this is the sale of securities
to State and local governments, to small investors, through
savings bond programs and other programs. This year, we
estimate that over $50 billion of our financing needs will come
through non-marketable securities.
Thus, in Fiscal Year 1998, with all these factors, we will
pay down approximately $79 billion in marketable securities,
which is our last component.
I would like just to discuss for one brief moment the May
announcements. First, we stopped offering three-year notes,
and, second, we reduced the frequency of our offerings of five-
year notes. In formulating this strategy, there were three
questions, all of which are more detailed in the prepared
testimony that we've submitted. But all of them were meant to
promote the efficient capital markets, lowest-cost financing,
and cash management goals that Ireferred to earlier.
In addition, the Clinton administration has made
innovations that this committee had asked us to address, one in
particular in terms of the inflation index program. The
securities diversify the government's financing sources, and we
believe that this will lower Treasury's borrowing costs over
the long run. In addition, they provide inflation protection
for investors and help promote savings.
Other innovations have been the innovations in State and
local government series. We have innovated in savings bonds to
make them more attractive to American savers. And in addition,
we are making our securities more accessible to small
investors--putting savings bonds on the Internet and making
enhancements to our Treasury Direct program for small
investors.
I believe the committee had some questions on the Year 2000
that I would be glad to take, and there's more in the prepared
testimony.
In conclusion, as I said earlier, the administration
welcomes the challenge of managing a surplus rather than
financing a deficit. I would also like to mention my deep
appreciation and respect for the career staff at Treasury, who
have done such excellent work on these issues for so many
years.
Mr. Chairman, I will be happy to answer any questions you
may have regarding Treasury debt management in this new era of
budget surpluses.
[The prepared statement and attachments follow:]
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Chairman Crane. Thank you, Mr. Gensler.
Mr. Rangel.
Mr. Rangel. Treasury now has a history of selling
inflation-indexed bonds. Could you summarize how this new
policy has unfolded?
Mr. Gensler. We introduced the inflation indexed bonds just
about a year and a half ago, and since then have had six
issuances. And we're about to announce our next issue--I
believe it's next week. We've been very satisfied with the
inflation indexed program to date, and we feel it's an
important innovation, again broadening out the access that the
Treasury has to markets. Some have said that this is a new
asset class. We believe that it brings new investors into the
Treasury. And importantly, as we said, it offers inflation
protection for investors and a way for the economy as a whole
to see inflation signals. So we're quite pleased.
It still, though, of course, is embryonic. We only have a
little--about $50 billion of our financing through this
program, which is a small portion of our program at this time.
Mr. Rangel. Thank you.
Chairman Crane. Mr. McCrery.
Mr. McCrery. Mr. Gensler, if we were to drastically reduce,
or even eliminate, the debt. What effect would that have on
capital markets? Since you can imagine that.
Mr. Gensler. No, it's a very good question, and hopefully
not just a hypothetical question. Over the long term, we think
that it would have an effect of most likely lowering interest
rates. And more specifically to your question about capital
markets, there is a very important function that Treasury
securities serve: to be the benchmark or the--if I may use a
technical term--the hedge security for the markets. That means,
whether it's corporations' borrowing, or mortgage borrowing,
many people use the Treasury securities as a benchmark for
pricing that borrowing.
There would be effects on capital markets if there were no
Treasuries, and the market would have to find another hallmark
or benchmark security n that hypothetical case. But, again, I
think that would be an interesting and good challenge.
Mr. McCrery. Thank you.
Chairman Crane. Mr. Herger.
Mr. Collins.
Mr. Collins. Thank you, Mr. Chairman.
Mr. Gensler, in the previous panel it was estimated that in
2008 the debt would be somewhere around $7 trillion. Do you
know what percentage of ratio that will be at that time as
projected based on private versus public?
Mr. Gensler. And was this in the year 2000, sir?
Mr. Collins. 2008.
Mr. Gensler. 2008, I see.
Mr. Collins. I was going to ask the other panel, but I
didn't.
Mr. Gensler. I don't know the specifics of their model,
sir, but currently the privately held debt, as we showed in the
earlier table, is $3.4 trillion. And that, in fact, through
2008 will decline as the unified budget balances in surplus. So
one would--we could get back to you specifically, but it would
be well less than half of that $7 trillion that you referred
to.
[The following was subsequently received:]
In the May Midsession Review of the Budget, the Office of
Management and Budget estimated that the U.S. Government debt
held by the public will total $2.1 trillion at the end of FY
2008. That figure includes holdings of the Federal Reserve
System, which were not estimated for FY 2008, but which totaled
$424 billion of the $3.7 trillion of debt held by the public at
the end of FY 1997.
Mr. Collins. Well, one other question pertaining to the $7
trillion, too. I'd like to know what the projected percentage
of that public debt would be Social Security, because that's
just before the Baby Boom generation is hitting the eligibility
rolls.
Mr. Gensler. We could get back to you, sir, with the
specific number on what the Social Security Trust Fund balance
would be in ten years time.
[The following was subsequently received:]
Based upon the 1998 Social Security Trust Fund Trustee's
Report, it is estimated that the Social Security Trust Fund
will hold $1.964 trillion at the beginning of 2008.
Mr. Collins. Okay. There's one other thing: In your opening
comment, you mentioned that due to the Clinton administration's
policy, fiscal policy, that it's fostered the strongest economy
and experienced the first balanced budget surplus since 1969.
You know, it just gets to be a point that it seems like some
people like to stand up andsay, look what we did. Look what I
did. You know, I want to point out to you that in 1993 and 1994, the
Clinton administration policy to deal with the budget and the deficit
was to raise taxes, increase entitlements, interest rates went up, the
stock market kind of held stable.
But you look at what happened in 1995, 1996, and 1997. It
had to be signed by the president. It was a joint effort. The
budget has been balanced, erasing the deficit. Tax reduction.
Entitlement reform in the era of welfare and Medicare. Interest
rates are down. The stock market's more than doubled. It wasn't
all the Clinton fiscal policy. A lot of it came from Congress.
It had to originate in Congress, in cooperation with the
president and his signature.
So it wasn't one of these I did it, Mr. Gensler. It was a
we did it. Thank you.
Mr. Gensler. If I might say, I think the bipartisan
cooperation has been very, very positive.
Mr. Collins. Good. Then maybe you should change your
opening statement.
Chairman Crane. Mrs. Johnson. Oh, wait. I'm sorry, Mrs.
Johnson. Mr. Hulshof.
Mr. Hulshof. Thank you, Mr. Chairman.
Mr. Gensler, how does your statement and the charts you
brought us on debt management square with the Clinton
administration's call that every penny of the surplus should go
to save Social Security?
Mr. Gensler. Congressman, as you've said, the President
called in his State of the Union address to save Social
Security first, and reserve the surpluses until a long-term
solution is, on a bipartisan basis, sorted through on Social
Security. What we have done is--on a basis of financing, as
opposed to budget--borrowed less money in this period of time.
But we have not used those dollars for any spending or tax
programs. And, in fact, just as I believe one of the earlier
panelists said, we have borrowed less money in this period of
time as we've had stronger fiscal results.
Mr. Hulshof. Because you were running out of time, let me
invite you to expand a bit, if you want to, on some of the May
announcements. I know one of the first questions was whether to
further decrease the issuance of Treasury bills and the
response in May was what? And I'll give you chance to expand a
bit.
Mr. Gensler. Well, we looked at three questions, that I
believe Congresswoman Johnson had asked in the earlier panel.
We had experienced a decrease in the shorter-term offerings of
Treasury securities over the past 18 months of about 23
percent, as the fiscal picture continued to improve. Rather
than decreasing short-term securities issuance further, we
chose to instead, in May, decrease the amount of longer-term
debt. And, in fact, our hope is to increase the offerings of
the shorter-term, and, as the Congresswoman had pointed out,
less costly debt. That was our first desire.
The second question was, now that we would do that, how
would we best do that? How would we best shrink the longer-term
offerings? And we thought it best to concentrate the offerings
in fewer offerings, again to promote liquidity and promote
lower cost borrowings for the taxpayers.
And then lastly, it was a more technical question as to,
well, if we're going to concentrate, at which ones?
Mr. Hulshof. Elimination of the three-year T-bill, and
again, the reason you mentioned was market response? Was that
because of the two-year maturity----
Mr. Gensler. That's right, Congressman.
Mr. Hulshof [continuing]. Being close enough or--or----
Mr. Gensler. We surveyed the market. We talked to many
market participants. Because we also offer two-year securities,
and five-year securities, we felt that the three-year security
was the least demanded by the marketplace.
Mr. Hulshof. Thank you, sir. Nothing further. I yield back.
Chairman Crane. Mr. Cardin.
Mr. Cardin. Thank you, very much. Thank you, Mr. Gensler,
for your testimony.
As the projections indicate, although debt will be
increasing over the next decade, the amount held by the public
will actually be decreasing and that they'll be more
interagency debt. And, as I look at one of the charts that was
prepared by GAO, it shows that the debt held by the public as a
percentage of GDP is declining significantly between 1997 and
the year 2020. And I guess my question--I'll appreciate your
observations on it--would it, therefore, be a good time for us
to consider investing some of the Social Security Trust Funds
in the private market by the trustees. That would trigger more
debt held by the public, keeping it more constant in our
economy, allowing the Social Security Administration to have a
more diversified investment return for the recipients under our
Social Security system, and it seems to me--and you look at the
projections going into the year 2050, with public debt, again,
with there being no changes, would then tend to increase. So
that, therefore, we try to keep it more level in our economy--
the amount of debt held by the public as a percentage of GDP.
Any thoughts on that?
Mr. Gensler. Congressman, it's a very good question and an
important question of great national import. And the President
has suggested that he look to 1998 as a year of debate and
dialogue with this Congress and with Americans broadly about
Social Security. And so I would not want to, in essence,
comment on that great national debate about which I think there
will be many hearings.
Mr. Cardin. I appreciate your candor on that. I thought we
were supposed to start the debate this year, and resolve it
next year. So I thought it was a fair question to ask.
Mr. Gensler. I think it's a very fair question, a very
important question. But as a representative of the Treasury,
focused on debt management, I feel it's best to allow others to
engage in that broader, very important debate.
Mr. Cardin. And I won't press you anymore on that question,
except to say that perhaps you could get us some figures, or
get me some figures, as to how much of the debt held by--how
much of the securities held by SSA could be invested privately
to be able to maintain a constant amount of publicly held debt
as a percentage of GDP over the next decade. That might be an
interesting number for us to be able to take a look at for some
of us who are trying to project ways of solving the Social
Security issue.
Mr. Gensler. Congressman, it would be our pleasure to get
you those figures. It's also a great honor to be here as I was
born and raised in your district.
[The following was subsequently received:]
In the May Midsession Review of the Budget, the Office of
Management and Budget projects that the GDP will increase by
4\1/2\ to 5 percent per year over the next decade a period of
time in which OMB projects budget surpluses. Therefore, OMB
projects that the Federal debt held by the public will decline
from 45 percent of GDP in FY 1998 to 16 percent of GDP in FY
2008--a decline of 29 percent of GDP.
Mr. Cardin. See, if I knew that. You still vote in my
district? [Laughter.]
Thank you very much. Thank you, Mr. Chairman.
Chairman Crane. Mr. Houghton.
Mr. Houghton. Yes, good morning. I want to ask a question
of comparison or contrasts. In taking a look at the average
length of privately held marketable debt, how do we compare in
our planning with, let's say, Germany or Great Britain or
Japan? Are we more or less conservative?
Mr. Gensler. It's a very good question. What we find
actually, sir, is that many of these nations look to us for our
debt management principles and skills and guidance. And many
Treasury representatives actually are called upon and asked to
speak at international conferences about our approach to
markets.
Having spent much of my career in the financial markets,
and only joining Treasury nine months ago--I actually lived in
Asia for three years, trading Japanese government bonds. I
would say we have the most efficient, broadest markets. And, in
part, that is because of Treasury policies over many
administrations. We look overseas also to see if they have
innovations that we might adopt. We recently adopted inflation-
indexed securities which were offered in England and Canada and
elsewhere.
But I'd say, broadly speaking, we're at the cutting edge or
the forefront of innovation in our markets.
Mr. Houghton. Yes, I'm not quite sure that's what I was
searching for. You know, when you try to make money on money,
sometimes you do things on a national scale which are inimical
to a very sort of conservative, basic Treasury policy on bond
management. So, I just wondered, how on a rating of between one
and ten, ten being the most conservative, one being the most
liberal, how do we rate with other countries? I know we're
innovative. I know we've got a broad market. There's no market
like it in the world. But how are we in terms of our
conservative policy?
Mr. Gensler. Congressman, I take your question to be about
our debt management. And within our debt management, I think
that we benefit from being conservative in many aspects of what
we do.
We are conservative in cash management. We feel, foremost,
it is our job at Treasury to make sure we have sufficient cash.
I think, though, we benefit in a way that other countries can't
by borrowing longer term. Our economy is stronger, more stable,
over two centuries. And so many other nations cannot borrow as
long term--out to 30 years--as we can, because we're such a
strong and viable economy.
I view that as conservative, but other nations can't do
that. And so for many of them, it would be risky to try to
borrow that long. But I would think that overall, our debt
management does have some conservatism in it that I would think
this Congress would want us to have.
Mr. Houghton. Okay. Thank you very much.
Chairman Crane. Mrs. Johnson.
Mrs. Johnson of Connecticut. Thank you.
You mentioned in your earlier comments that, you know, you
were looking at working down the long-term, more costly debt.
Are you succeeding in doing that because it doesn't show up in
the figures yet?
Mr. Gensler. Well, with three trillion plus dollars of
debt, it takes a little time to steer this thing. The changes
that we announced in May will first begin to take place in July
1998 and moving forward. We were trying to arrest the
lengthening of the average maturity of the debt that you've
rightly pointed out.
I would say also just to possibly address your earlier
question to the earlier panel, the debt that we're retiring was
issued at much higher interest rates than we are issuing debt
today. So, in fact, the American people are saving money as we
retire close to a half a trillion dollars of older, longer-term
coupon debt. And we're borrowing today fortunately at some of
the lowest interest rates in the last 30 years.
Mrs. Johnson of Connecticut. I agree, absolutely. And
that's why I was really surprised at this drop in short-term
debt, and the actual increase in long-term debt. It seems to me
that from the very beginning, the Treasury would have focused
on, you know, really working down that long-term debt. And
while I understand maturity times vary, it does seem to me in
the period that we've had surplus that there would have been
more evidence of a reduction in long-term debt burden.
Mr. Gensler. In 1993, at the start of the administration,
there was a decision to do precisely what the Congresswoman
suggests and shorten the maturity, from about a six-year
average maturity to a little over five-year average maturity.
In the last 18 months, as you rightly point out, there's a bit
of a gradual creep the other way, as we reduced Treasury bills
to manage the very strong cash flows that were coming in, and
sometimes unexpected cash flows. And now we feel we've had time
to reflect on that and address it again.
Mrs. Johnson of Connecticut. Well, thank you. I appreciate
those comments very much.
I also would like to just comment on the part of your
testimony in which you address the year 2000. And I'm
particularly pleased that you expect to complete coding and
testing. Is that end to end testing, is that complete testing
of all but one system by the end of 1998?
Mr. Gensler. It is. We're looking at both code testing and
interface testing. There are 14 critical systems that we look
at, and all but one of them will be tested by the end of 1998.
Ms. Johnson of Connecticut. So those would be system-wide
tests that you'd have confidence in? I'm looking--there's a lot
of different kind of tests you can do along the way. We
certainly want to be sure the equipment works. We want to be
sure it works within an office. But the important thing is it
works throughout the system. And the end testing----
Mr. Gensler. That's right. And for many of our systems,
we're testing the interface with the dealer community and
investor community, and we're working with them on what's
called end to end testing, literally. How they enter a trade
and the cash movements and the flow of all the documents.
Mrs. Johnson of Connecticut. When will you be able to start
that level of testing?
Mr. Gensler. Well, in fact, because there are 14 systems,
much of that has started. Some of it this summer. Some of it
through the fall. I believe the bulk of those 14 systems will
have been tested by October, if I recall the specific dates.
Mrs. Johnson of Connecticut. I was also very pleased that
you have been having conferences to raise the issue of
readiness with all market participants. And are you satisfied
that you are reaching the major market participants and what
are you doing to reach the minor market participants, the
smaller ones?
Mr. Gensler. This, as the Congresswoman points out, is a
challenging task, and it is one that is not without risk. But
we're reaching out--and the New York Federal Reserve is working
with us. We're working with The Bond Market Association. We're
also, I should say, working through the various international
organizations--the G-7 and G-10 and other organizations,
reaching out internationally, to highlight this very critical
issue.
Mrs. Johnson of Connecticut. Since so much of our debt is
held by foreigners, it is very critical that at least some
portion of the international community be well prepared. What
is your sense of their preparedness? Has Europe's preoccupation
with the Euro and its other issues diverted it from this? Has
the Asian financial problems diverted the Asian community from
the year 2000 compliance attention?
Mr. Gensler. While I'm not an expert on some of those
matters, I think the Congresswoman is correct. The challenges
in Europe, given their integration, are very real. They
understand the year 2000, but this administration and the
Federal Reserve, I know, have highlighted those issues around
those international conferences. Asia, of course, hasgreat
other challenges.
Mrs. Johnson of Connecticut. Thank you. I would just say I
appreciate having you testify. Mr. Chairman, I appreciate your
having this hearing. I think it's a very important one, but I
also think the public ought to understand that we--our
obligation is to manage to debt to minimize taxpayer costs. And
that all the rhetoric around Social Security and all those
things is actually just rhetoric. That as long as Social
Security is running the potential deficit that it is running,
it is in everyone's interest, people of ages, that we reduce
the national debt and the carrying costs.
Thank you.
Chairman Crane. Ms. Thurman.
Ms. Thurman. I have no questions.
Chairman Crane. Mr. Gensler, before you leave, I was just
told that the British have issued debt in perpetuity. Are you
familiar with that?
Mr. Gensler. I must--I can get back to the Chairman and
give you and your staff more details on the British perpetuity
debt.
[The following was subsequently received:]
Prior to 1948, the British Government had issued some debt
instruments without a maturity date that required only the
payment of interest. These perpetual bonds were known as
consols.
Chairman Crane. Yes, I'm curious as to what the advantages
would be of that. I mean, to me, we should be focused on total
elimination of debt if possible. And to make that a permanent
component of your national budget? The service on a debt in
perpetuity would put people on the dole. I guess, that is the
rationale behind it. But I was curious--I had not heard of that
before either. I thought maybe you could fill me in.
Mr. Gensler. No, I hadn't. There are some studies as to how
long a maturity debt should be for low-cost financing. The 30-
year horizon is one that the Treasury has studied at times
whether to go further, and we have been comfortable that, for
promoting our goals over time and given risk, 30 years is
probably the most appropriate horizon. But you raise an
additional point of fiscal discipline.
Chairman Crane. Well, we thank you very much, Mr. Gensler.
And we look forward to continuing to work with you. With that,
I would like to call our final panel: Stephen Francis, Vice
Chairman of Fischer, Francis, Trees and Watts, Inc.; Mark
Warner, Managing Director, Interest Rate Markets of North
America; Dr. John Campbell, Otto Eckstein Professor of Applied
Economics at Harvard University.
And if our panel will take their seats. We shall start with
Mr. Francis, and then Mr. Werner, and then Dr. Campbell. If you
gentleman can try and keep your presentations--your oral
remarks to five minutes or less, any printed statements will be
made a part of the permanent record. Mr. Francis?
STATEMENT OF STEPHEN C. FRANCIS, VICE CHAIRMAN, FISCHER,
FRANCIS, TREES & WATTS, INC., NEW YORK, NY, AND MEMBER,
TREASURY BORROWING ADVISORY COMMITTEE
Mr. Francis. Thank you, Mr. Chairman. Mr. Chairman and
distinguished members of the committee on Ways and Means, I am
pleased to have been invited to appear before you today.
You are reviewing in this hearing the debt management
practices of the U.S. Department of Treasury in an era of
budget surpluses. In my judgment, the objectives and principles
of debt management should be largely unaffected by whether the
budget is in deficit or in surplus. Building on the Treasury's
public statements repeated here today by Assistant Secretary
Gary Gensler, I believe there are three main objectives of debt
management.
The first objective is to raise whatever cash is required
to ensure that the Government's functions smoothly everyday and
meets every financial commitment on time.
The second objective is to keep the cost of borrowing and
hence the cost of the debt to the taxpayers as low over time as
is possible and with due regard to risk.
The third objective is to promote an efficient market for
the Government's debt.
The first two objectives--raising the cash required and
minimizing the cost over time--are necessarily overriding. The
third--promoting an efficient market for the Government's
debt--furthers the first two objectives and in addition has
significant ancillary benefits for the national and
international capital markets.
To translate these objectives of debt management into
practice, the Treasury has adopted some important operating
principles. One is to issue securities on a consistent and
predictable basis. This is an extremely potent principle for it
reduces uncertainty. Reduced uncertainty about the Treasury's
future borrowing plans means lower borrowing costs.
The second operating principle is to issue securities
across a broad spectrum of maturities. Offering a wide choice
of investment alternatives encourages participation in the
Treasury market from all types of fixed income investors around
the world. Enlarging the pool of investors fosters liquidity.
Liquidity is a valuable attribute because it makes Treasury
securities more attractive to investors which has the
consequence of lowering borrowing costs. A broad spectrum of
maturities also diversifies the Treasury's financial
liabilities, providing resilience in changing financial
conditions and a solid financial platform for any future change
in debt management strategies.
The third operating principle is to introduce innovations
after ample time for discussion and evaluation. Change in debt
management as in all areas of finance is inevitable. The
opportunity for improvements is always present. Many changes
are technical refinements, but some are innovations. Among the
important innovations during the span of my own career are the
replacement of fixed price offerings by competitive auctions,
the supplementing of multiple price auctions by single price
auctions, and the issuance of inflation-indexed securities. All
innovations are accompanied by some degree of uncertainty. The
aim is to keep any potential cost associated with the
uncertainty as low as feasible.
The Treasury has done this by airing prospective changes it
is considering publicly over comparatively long periods so that
the market has an opportunity to digest the changes and adapt.
To my mind, these objectives and operating principles of debt
management are important constants which are essentially
unaffected by whether the budget is in deficit or in surplus.
Periods of budget surpluses do, however, raise one specific
challenge to debt management. That challenge is one of ensuring
that the new issues of Treasury securities sold to redeem and
refund maturing issues are large enough to be liquid. In
periods of surplus, the concern is that the smaller sizes of
new issues compared to the levels to which the market is
accustomed may result in a degree of illiquidity for the new
issues.Illiquidity deters investors and consequently raises the
cost of borrowing and reduces the efficiency of the market.
The solution to this problem is fairly straightforward
although the scheduling steps can be intricate. Essentially, it
is a matter of consolidating a larger number of issues of
declining size into a smaller number of so-called benchmark
issues whose size are each sufficiently large to ensure
superior liquidity. In its announcement last month in
connection with the regular quarterly funding, the Treasury set
forth such a program of issue consolidation.
In my judgment, debt management is functioning
effectively--now and, in fact, throughout the past few
administrations. During this period, debt management has
adapted to changing budget considerations in a manner that has
avoided surprises and consequently helped keep borrowing costs
to a minimum. Credit for the success, it should be noted,
belongs both to the official appointees and to the Civil
Service employees who together are responsible for debt
management at the Treasury.
What should be addressed? While still in our minds, I would
urge Congress to find a way in the present benign budget
environment to eliminate the delays in passing the debt limit
that we endured in the past. These episodes are shameful and
costly, and they damage our country's standing among advanced
nations. I do not disparage the political aims behind the
delays and I find it difficult to blame politicians for using
tactical tools which are available. But as the world of finance
becomes more open and more global, our competitive state
becomes increasingly important to the future growth of our
economy. Now, it seems to me, is a propitious time to move up a
rung on the ladder of fiscal responsibility.
That concludes my statement. I would be pleased to respond
to any questions.
[The prepared statement follows:]
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Chairman Crane. Thank you, Mr. Francis.
Mr. Werner.
STATEMENT OF MARK B. WERNER, MANAGING DIRECTOR, INTEREST RATE
MARKETS NORTH AMERICA, J.P. MORGAN & CO. INCORPORATED, NEW
YORK, NY
Mr. Werner. Mr. Chairman and members of the committee,
thank you for giving me this opportunity to share my views with
you on this very important topic for all of us today.
To put my views in context, please consider the following:
The federal budget picture has shifted dramatically over the
past few years. Going from a deficit of $255 billion just 5
years ago to what we at J.P. Morgan estimate will be a surplus
of $60 billion in the current fiscal year. Moreover, we would
expect a surplus of $50 billion in the 1999 fiscal year. You
should all be commended for this dramatic improvement and
grateful for the extraordinary economic environment which
helped make it possible.
While the Government will not be likely to need to raise
new cash for the next year or longer, the U.S. Treasury will
still face the daunting task of managing over $3.4 trillion of
total publicly-held debt outstanding, which arguably forms the
most important fixed-income securities market in the world. I
would like to make four points with regard to the U.S.
Treasury's financing needs.
First of all, the U.S. Treasury will need to retain a high
degree of flexibility going forward due to our extraordinary
current environment. The forecast for financing needs have
often been subject to wide margins of error. For instance, the
mid-session review of the Fiscal Year 1998 budget made last
Fall, called for a deficit of $121 billion. It is now widely
acknowledged that the budget will be in substantial surplus.
These divergences stem only in a small degree from fiscal
policy actions, rather they are primarily due to
miscalculations and forecasting of overall course of the
economy and its precise impact on the various components of
Government revenues and expenditures.
In recent years, budget performance has benefitted
enormously from what Fed Chairman Alan Greenspan has called a
virtuous cycle affecting the economy. Robust payroll tax
increases reflecting the strongest labor market in 30 years and
capital gains receipts resulting from 3 successive years of
sharply rising stock prices have been particularly important in
this regard. It is important to remember that changes in the
economic or market environment can produce negative, as well as
positive surprises with little notice, and a corresponding risk
that budget performance may be considerably less favorable than
the current best forecast. Sensitivity to actual budget
performance and to actual cash flow and a willingness to make
small financing adjustments in the absence of formal forecast
revisions, is likely to produce more favorable borrowing rates
for the Treasury than abrupt changes. To repeat, a high degree
of flexibility will be key.
My second point is that the U.S. Treasury, as a large
issuer of securities, will be rewarded by predictability and
transparency in its offerings to market participants. Over the
years, Treasury has, for the most part, observed a set of debt
management principles that allow the markets to make informed
judgments regarding response to changes in the size of its
borrowing need. I think the Treasury would benefit by
continuing to observe these principles, which I would summarize
as follows:
One, the changes in the composition of the Treasury's cycle
of offering, that is the timing and frequency of various
maturities, are far less frequent than changes in offering
sizes of individual maturities.
Two, gradual changes in the offering size of individual
maturities, even when frequent, are preferable to abrupt
changes.
Three, note and bond offering sizes should be less volatile
than bill offering sizes.
Four, seasonal and other large temporary cash needs should
be met, to the maximum extent feasible, by issuance of off-
cycle cash management bills, thereby minimizing impacts on
regular cycle issues.
If the dealers are to maintain the excellent depth,
breadth, and liquidity that the Treasury securities market
currently enjoys, then changes in the issuance pattern should
be rare, well advertised, and gradual.
My third point is that the Treasury will benefit by
anything that enhances liquidity. That is to say, prefer large
benchmark issues. Reduce the number of issues, but raise the
outstanding sizes of those issues. Liquidity in secondary
markets and financing markets is of major importance in
eliciting the broadest possible investor interest and
participation in the Treasury market, and has become a more
critical issue in the context of reduced overall debt issuance.
In general, liquidity is enhanced by opting for fewer, but
larger, individual debt offerings. Treasury's recent revamping
of its auction cycle should go a long way towards improving
liquidity in several sectors. Larger individual issues should
benefit the intermediate sector, while the bill sector should
benefit from increased overall issuance.
My final point is that the U.S. Treasury market is the
benchmark for interest rate capital markets around the globe.
In this capacity, U.S. Treasuries function as benchmarks and
hedging vehicles for a wide variety of markets around the
world. The benchmark status not only enhances the overall
demand for Treasuries, but also may be vital for the efficient
functioning of markets such as corporate bonds, Federal agency
securities, mortgage-backed securities, and interest rate swap
transactions. All of these securities trade at a spread
relative to U.S. Treasuries. In making financing decisions,
Treasury officials must consider factors such as this that
potentially impact all the closely linked dollar denominated
capital markets.
Ours is the most efficient debt market in the world. It got
that way through the extraordinary cooperation of the Congress,
the Treasury, the Federal Reserve, and the dealer community.
This fortunate period of budget surplus requires that this
cooperation and flexibility continues. Thank you.
[The prepared statement follows:]
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[GRAPHIC] [TIFF OMITTED] T3455A.042
[GRAPHIC] [TIFF OMITTED] T3455A.043
Chairman Crane. Thank you, Mr. Werner.
Dr. Campbell.
STATEMENT OF JOHN Y. CAMPBELL, OTTO ECKSTEIN PROFESSOR OF
APPLIED ECONOMICS, HARVARD UNIVERSITY, CAMBRIDGE, MA
Mr. Campbell. Mr. Chairman and distinguished members of the
committee, I'm honored to have been asked to give you an
economist's perspective on the Treasury's task of managing the
public debt.
I'd like to begin by questioning the assumption that the
Treasury's job is simply to minimize the average cost of
financing the debt. While this assumption is a natural one, it
omits two critically important factors. The Treasury must also
consider the risk of the debt and its role as a form of
infrastructure for private financial markets.
First, the Treasury must take account of the risk of
alternative financing strategies. If the Treasury were to
disregard risk--I should say that I'm not suggesting that the
Treasury does disregard risk--it could reduce the average cost
of financing the debt to any desired level by including
desirable insurance features in the claims it sells to the
public. For example, the Treasury could issue bonds that would
pay extra in the event of a stock market crash. Such bonds
would be highly attractive to investors, and would have a low
cost on average since stock market crashes rarely occur. Of
course, no responsible person would advocate the issue of such
bonds since they would involve extreme risk to the Treasury,
and hence to the American taxpayer.
How should the Treasury measure the risk of a financing
strategy? It should consider alternative plausible scenarios,
and in each scenario it should calculate the long-run tax
burden of servicing the public debt. If the tax burden is much
greater in some scenarios than in others, the financing
strategy is a risky one; the burden is stable across the
scenarios, the strategy is relatively safe.
Now this procedure is very different from calculating the
short-run variability of the market value of the debt. Treasury
bills have stable market value in the short run, but they
involve risk to the Treasury because they must be rolled over
at uncertain future interest rates. If interest rates rise in
the future, for example, because there's a financial crisis or
because the Federal Reserve is forced to raise rates to control
inflation, then short-term financing with Treasury bills
becomes expensive. For this reason, it would not be prudent for
the Treasury to rely exclusively on short-term debt.
Long-term bonds, on the other hand, have unstable market
value in the short run, but they protect the Treasury against
the risk of interest rate movements. When the Treasury borrows
long, it can avoid expensive refinancing if interest rates rise
in the future. This advantage of long-termfinancing is
especially pronounced for inflation-indexed bonds which stabilize the
tax burden of the public debt even in the face of uncertain future
inflation. I and many other economists therefore applaud the Treasury's
move last year to begin issuing inflation-protected securities--known
as TIPS.
A second important consideration for the Treasury is that
public debt instruments provide infrastructure for financial
markets, analogous to the infrastructure of the Internet or the
highway system. The Treasury should manage this infrastructure
to maintain liquidity, to provide information, and to stimulate
innovation in U.S. financial markets.
An important attribute of our financial markets is
liquidity--the ability of investors to trade at low cost and
with confidence that trading costs will remain low in the
future. Markets for Treasury debt securities are liquid because
these securities are issued in large quantities, in
standardized form, and with essentially no risk of default.
Investors are willing to pay a premium for this liquidity,
bidding up the prices particularly of Treasury benchmark bonds
which are the most actively traded. If the Treasury sought to
minimize its financing costs, it might be able to exploit its
position as a monopoly supplier by restricting the supply of
benchmark bonds in order to receive the scarcity premium. But
this would be an inappropriate policy in light of the
Treasury's responsibility to act on behalf of the public.
Treasury debt markets also provide information about
investors' expectations of future interest rates. The issue of
TIPS, together with conventional bonds is particularly helpful
in this regard because it makes it possible to measure
investors' expectations of future inflation. This information
is valuable for private market participants, and also for
policymakers at the Federal Reserve who can evaluate the
credibility of their anti-inflationary stance.
Finally, Treasury innovations promote beneficial
innovations in the private sector. TIPS issues have been
followed by some private issues of inflation-protected debt,
and the existence of TIPS will make it much easier for pension
funds and insurance companies to offer inflation-protected
annuities. Such products will become increasingly important as
the U.S. population ages in the early part of the next century.
In conclusion, the Treasury should consider far more than
just average cost when managing the public debt. I believe it
has done so in a highly competent fashion. Recent developments
in Treasury policy, including the gradual lengthening of the
average debt maturity since the low point reached in the mid-
1970's and the issue of inflation-protected bonds, are
justified both as prudent risk management and as a form of
infrastructure provision to U.S. financial markets.
[The prepared statement follows:]
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Chairman Crane. Thank you, Dr. Campbell. Generically, for
all of you, what are the characteristics of past debt
reductions and are there any lessons for the present?
Mr. Francis. Trying to think of when there was a period of
past debt reduction. [Laughter.]
It's certainly beyond my career.
Chairman Crane. Well, let's see before World War I we got
down from that slide from the Civil War. Then after World War
II, we went from roughly 100 percent of debt held by the public
during the war, as late as 1947; down to--the lowest figure
here looks to be about 25 percent in roughly 1970; and it's
gone up since that time.
Mr. Francis. There're two dimensions. One is the nominal
reduction and the other is relative to the size of GNP. As GDP
grows, the relative size of debt declines if the total remains
constant. The nominal amount can decline when fewer securities
are sold--when the refunding amounts are smaller than the
maturing amounts. That's the process which has begun in this
period.
Chairman Crane. Anyone else have any observations?
Mr. Campbell. Well perhaps, I could bring in the experience
in some other parts of the world which have faced declining
debt. An issue that's arisen in some places is whether to
continue issuing long-term debt given very minor financing
needs. Nations have made different choices. For example, in New
Zealand, I understand they're planning simply to eliminate
borrowing altogether. Whereas in Hong Kong, the decision has
been to maintain long-term borrowing in order to provide a
benchmark for the financial markets even though frankly
speaking their financing needs don't require such borrowing. I
would support the Hong Kong approach on the grounds that
benchmark issues are important for financial markets. However,
of course, we're nowhere near that point yet and the debt will
remain out there for a very long time to come.
Chairman Crane. Mr. Werner, do you have any observations?
Mr. Werner. I guess I would reiterate what my colleague,
Mr. Campbell, has just said that the benchmark status of the
U.S. Treasury market is a reserve holding, or dollar
denominated reserve, that many countries hold U.S. Treasuries
in. Many markets trade at a relative spread to the U.S.
interest rate benchmark. I think it's probably very important
for our capital markets in this country to maintain that
status.
Chairman Crane. Thank you. Mrs. Thurman.
Mrs. Thurman. Thank you, Mr. Chairman. Mr. Francis, in your
short statement, you mention at the very end that quite frankly
you thinkTreasury is doing well in handling and all of those
things are going pretty good. But you said that one of the things that
you suggested for Congress was to not delay the raising of the debt
limit. Is that correct?
Mr. Francis. Yes, that's correct.
Mrs. Thurman. Okay. Are there other things that Congress
should be doing, as well? I mean, you mentioned that as one.
Are there other issues that we should also be looking at that
could put us into some kind of turmoil, or cause us some
problems that you could give us some examples of?
Mr. Francis. Well, I think that first of all, that Congress
is obviously part of the political process in the Nation and
there has to be give and take and a lot of debate. Occasionally
statements made in the debates have some effect on the market,
but the markets have to live with that. I put Congress's role
higher in importance than market stability day-by-day. I do
think there is something that Congress has done--or put it the
other way around--hasn't done that is useful with respect to
debt management and that is by and large it hasn't interfered.
Debt management is a fairly technical area. And, a lot of
people would consider debt management fairly boring. It
certainly hasn't engendered the impassioned statements that
occur sometimes before the Ways and Means Committee. I think
there's a reason for that. Not just in this administration but
also in past administrations, debt management has functioned
quite effectively. I think it's not a bad idea to let it
continue to work the way it has.
Mrs. Thurman. What about the debate that's going on now as
we're putting our budgets together and looking at issues and
the surplus, of course? We all go home and talk about how
wonderful this is. Then the next question is what do we do with
these surpluses? Do we look at the Social Security? You hear
Greenspan say that's the best thing you can do because then you
give more private probability to have more borrowing. I mean,
if I'm stepping out of line here--but I'm just kind of curious
to find out where and what your thinking is as far as the
debate that is going on in Congress today.
Mr. Francis. Well, Congressman Thurman, you're--yes, we're
going beyond debt management here to views on what the Nation's
finances ought to be. I have, of course, my own views and
everyone else in this room does, too.
Mrs. Thurman. But you get an opportunity to tell us those
views now if you'd like. [Laughter.]
Mr. Francis. As I recall, the government spending in the
United States amounts to something like 40 percent of the GDP?
That's a lot. Wouldn't it be nice to see that trailing off over
time? That's my view.
Mrs. Thurman. Would any--Mr. Werner, Dr. Campbell? Come on.
Mr. Campbell. Congressman Thurman, perhaps I could add a
word. In thinking about Social Security, the Social Security
system has large future liabilities. Now the accounting system
under which we operate doesn't record that as a form of debt,
but in economic terms, it has perhaps equivalent meaning. The
existence of these future liabilities--the future retirement of
the baby boom generation is a serious issue. We should all be
concerned about promoting national savings in order to build up
the capital that we need to cover these liabilities. So this
switch to a period of surpluses, I think is very appropriate
seen in that light.
Mrs. Thurman. Okay. Mr. Werner?
Mr. Werner. I don't have any further comments on it.
Mrs. Thurman. That's fair enough. Thank you, Mr. Chairman.
Chairman Crane. Mr. McCrery.
Mr. McCrery. Thank you, Mr. Chairman. I have no questions
but I appreciate the panel dealing with such an arcane and
boring subject so well today.
Chairman Crane. Mr. Houghton?
Mr. Houghton. Yes, just a couple of quick questions. I
guess the issues that I'm always wrestling with is should we
try to pay down or grow out of our debt? Because that will come
into consideration in terms of our budget consideration. Also,
if you had a different scenario, the surplus dipped--maybe went
into deficit, inflation were up, more borrowings--would you
suggest the same policies under those conditions that you're
suggesting now? Those are the two questions.
Mr. Francis. I'm pleased to respond to the second question
that you asked--and my answer is yes. I think the same
objectives and the same operating principles that the Treasury
is following and has been following in greater or lesser degree
for the past decade or so would be the correct objectives and
practices to follow if the surplus were to turn to deficit. I
think with respect to your first question, I've said about as
much as I can on that. My own belief is that the Government's
portion--claim on GDP is larger than it ought to be and it
ought to be declining over time. But that again, is just a
personal view.
Mr. Campbell. Perhaps I could add a word. I basically
endorse Mr. Francis' answer with one qualification which is
that if the Government could anticipate a particular moment in
the future when revenues would be particularly robust, it might
be appropriate to structure the debt in such a way that more of
it becomes due at that time. Now this is more of a theoretical
issue in most countries. I think that the forecast for the U.S.
fiscal position are very smooth over time, so it just doesn't
suggest lumping--concentrating a debt on any particular
maturity. But there are circumstances where a government may
have a major asset which is going to throw off a lot of cash at
a particular time. For example, the UK at one point had
tremendous North Sea oil which had a very predictable revenue
pattern. In managing that, it was appropriate to have debt come
due at a time when the oil revenues would be there to pay it
off. But as I say, in the U.S. situation with a very
diversified tax base and smooth forecast, what we should try to
do is have a smooth pattern of maturing debt in the future.
Chairman Crane. Well, we want to express appreciation to
all of our panelists for their patience and participation
today. Please continue to provide ongoing input to all of us
here on the committee. We need your assistance. Thank you so
much. With that the committee stands adjourned.
[Whereupon, at 11:54 a.m., the hearing was adjourned
subject to the call of the Chair.]