How Paul Ryan inadvertently rescued U.S. Treasuries
Paul Ryan's greatest contribution to America's economy was purely accidental.
The outgoing House speaker made his name predicting disaster from Obama-era deficits. He sold himself as a policy wonk and deficit hawk. But it's clear he didn't mean any of it. Deficits have increased by nearly 80 percent on his watch.
The irony of Ryan's deceit is that it also revitalized the supply of U.S. Treasuries — and may well have made the American economy safer in the process.
Just to review: The deficit is the annual gap between the government's spending and its tax revenue, and thus how much it needs to borrow for that year. The debt is the total load of the government's borrowing — all its previous deficits added up.
Ask pretty much any major politician in Washington, or any mainstream journalist or policy expert, and they'll tell you that in an ideal world we'd eliminate future deficits and eventually pay off the country's debt load. That America never actually pulls this off is lamented as an embarrassing and dangerous failure.
Yet U.S. deficits are also the source of all U.S. Treasury bonds, the financial instruments by which the government actually borrows money. Ask anyone with even passing knowledge of economics or finance, and they'll tell you that U.S. Treasuries lay at the absolute foundation of all financial markets, both in America and around the world. They are the gold standard for safe investment; barring the arrival of the zombie apocalypse, if you invest your money in U.S. Treasuries, you're going to get it back.
If we finally balanced the U.S. federal budget, we would stop adding U.S. Treasuries to the economy. If we paid off the U.S. federal debt, we would eliminate all Treasuries from existence.
There's a fundamental tension here. Doing this seemingly sensible thing — paying off America's debt — would actually thrust the world into a new, unprecedented, and quite possibly catastrophically destabilizing economic situation.
You might recall how, back in the late 1990s, the U.S. briefly ran a budget surplus. It was paying down its debt, and projections showed that, if the trend continued, all U.S. debt would be eliminated within a few decades. The Clinton administration wanted to trumpet this accomplishment, and told some of its economists to write a chapter on "Life Without Debt" for the president's annual economic report. But once the economists began digging into the issue, they realized it wasn't a straightforward win: Investors and banks would be deprived of their go-to instrument for hedging against risk and balancing portfolios; the Federal Reserve would lose its primary tool for conducting standard monetary policy; countries around the world would have to find a new way to build up currency reserves. The cognitive dissonance was so great that the White House ultimately buried the whole chapter and never published it. We only know it exists because NPR dug it up with a FOIA request.
Of course, the Clinton surpluses are now long dead. These days we're in no danger of running out of U.S. Treasuries.
But we are in danger of not having enough for the economy's needs.
That might seem remarkable, given the federal debt load is around $20 trillion. But it's all relative. If enough surplus money is sloshing around the global economy, looking for somewhere to land, even $20 trillion in U.S. debt won't be enough to soak it all up. And that's exactly the situation we're in. When economists like Ben Bernanke or Lawrence Summers discuss the "global savings glut," that's what they're talking about.
Not having enough U.S. Treasuries out there to match all that money causes several problems.
First off, when they're deprived of their premiere safe asset, investors go looking for alternatives. And they can be deceived. In the 2000s, fancy financial engineering by Wall Street convinced global markets that mortgage backed securities and related instruments were AAA-rated safe investments. Trillions of dollars from around the world promptly poured into the U.S. housing market.
That ended very badly. But if there'd been enough U.S. Treasuries in the global financial system, it's conceivable we could've avoided, or at least significantly shrunk, the housing bubble and subsequent crash. Looking forward, if we want to prevent investors from inflating another bubble — say, in bad corporate debt — we should give them an alternative safe asset.
More broadly, if demand for safe assets outstrips supply, the price of those assets will rise. That will drive interest rates down. And lower interest rates make it harder for monetary policy to boost the economy out of recessions or to add fuel to recoveries. Thus a chronic undersupply of U.S. Treasuries can leave the economy stuck in a kind of permanent semi-slump.
Lo and behold, that's exactly what's happened.
There are downsides, of course. These gluts of surplus money are caused by rising inequality — rich people having more cash than they know what to do with. Giving them U.S. Treasuries to invest in may prevent riskier ventures, but it also adds to inequality by giving the rich a steady stream of interest payments. On top of that, a big part of how Ryan and the Republicans increased deficits was by giving the wealthy a massive tax cut. They alleviated the safe asset problem while inflaming the inequality problem.
Still, by ballooning deficits, Ryan inadvertently helped to inject hundreds of billions of new U.S. Treasuries into the system. That's made the American economy at least somewhat safer from the next financial crisis, and added some fuel to the post-2008 recovery.