The full column appears here:
https://www.ft.com/content/a371909e-a3fe-11ea-92e2-cbd9b7e28ee6
Summary:
The recent surge in public debt in all of the major advanced economies is almost without precedent, even in wartime. In the US, for example, the government's financing requirement from April-June 2020 will reach $3tn, equal to 15% of this calendar year's GDP.
The IMF estimates that US government debt will exceed 130 per cent of GDP after the recession, more than 30 percentage points higher than a decade ago. These public debt mountains will need to be managed indefinitely, with little immediate prospect of reducing their size. The larger the scale, the greater the economic costs of debt mismanagement.
So far, there has been no panic about the sustainability of government debt, either in the US or elsewhere. This is a big success story for debt management policy.
However, much of the funding has been accomplished by the sale of Treasury Bills, which has shortened the duration of the debt. This exposes the US government to increased interest rate risk, which can only be alleviated by extending the maturity of the debt over time.
In the 2010s, the US Treasury succeeded in extending duration, at a time when the Federal Reserve was attempting to shorten duration because it wanted to reduce long dated bond yields as part of its QE programme. This led to a tug-of-war between the two institutions, and their actions came close to negating each other entirely.
As the Treasury and the central bank are two parts of a
single public sector balance sheet, it makes little sense for them to pull in
entirely different directions. If secular stagnation deepens in coming
years, as many expect, the Treasury should focus on shorter-term funding
to help the Fed reduce bond yields and support economic growth. This would
be likely to result in lower long term bond yields, and flatter yield curves,
than those seen in the 2010s.
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John Cochrane has commented on the FT column here:
