From Treasury Scarcity to a Debt Deluge

In early 2001, Washington grappled with a problem that now feels like a dispatch from a parallel universe. Projections for budget surpluses were so vast that policymakers debated not how to rein in deficits, but how to manage a future with no government debt at all. The Congressional Budget Office (CBO) projected that, under the policies of the day, the entirety of America’s redeemable public debt could be paid off by 2006. This prospect led the Treasury Department to take extraordinary measures, such as conducting "reverse auctions" to buy back its own long-term debt and eliminating the issuance of certain bonds to prevent a scarcity of the benchmark asset for the global financial system. This scenario prompted Alan Greenspan, then Chairman of the Federal Reserve, to issue a historic warning before the Senate Budget Committee. Continued surpluses, he cautioned, would force the federal government to "accumulate large amounts of private assets," risking the "sub-optimal performance of our capital markets" and the politicization of investment decisions. This dilemma became known as the "peril of zero debt." The concern was not theoretical; it was an imminent operational issue. The U.S. Treasury market was, and remains, the bedrock of the global financial system, the quintessential "risk-free" asset. Its potential extinction threatened to destabilize global markets, and the Treasury was already facing distortions, such as fails-to-deliver in the repo market that became so severe they required an emergency auction of 10-year notes in October 2001 to alleviate the squeeze.