Financial Engineering: The Simple Way to Reduce Government Debt Burdens

Dean Baker and Sheva Diagne

CEPR Reports and Issue Briefs from Center for Economic and Policy Research (CEPR)

Abstract: Despite being thoroughly debunked, concern over high government debt-to-GDP ratios has hardly disappeared from policy debates. As such, an overlooked possibility for reducing a high debt burden is simply buying back bonds at a discount when interest rates rise, as is widely predicted. This issue brief calculates the potential savings to the government through a hypothetical buyback of government debt in 2017. Long-term bonds that are issued at low interest rates will sell at substantial discounts to their face value if market interest rates rise. Looking at publicly held marketable debt issued as of the end of February 2013, the face value of the debt is $3,857 billion. The projected market value of this debt is $3,399 billion for an implied debt reduction of $458 billion, or just under 2.3 percent of the GDP projected for 2017. The interest burden on the Treasury will not change through these transactions. The only effect will be to lower the official value of outstanding debt. However if people in policy positions continue to attach importance to this number then this sort of debt exchange should rank high on the list of policy options. There is no less costly way to eliminate close to half a trillion dollars in debt.

Keywords: debt; deficit; fed; debt-to-GDP ratio; government bond; GDP growth (search for similar items in EconPapers)
JEL-codes: E E3 E31 E5 E6 G (search for similar items in EconPapers)
Pages: 6 pages
Date: 2013-07
New Economics Papers: this item is included in nep-mac and nep-pke
References: Add references at CitEc
Citations:

Downloads: (external link)
http://www.cepr.net/documents/publications/financial-engineering-2013-07.pdf

Related works:
This item may be available elsewhere in EconPapers: Search for items with the same title.

Export reference: BibTeX RIS (EndNote, ProCite, RefMan) HTML/Text

Persistent link: https://EconPapers.repec.org/RePEc:epo:papers:2013-12

Access Statistics for this paper

More papers in CEPR Reports and Issue Briefs from Center for Economic and Policy Research (CEPR) Contact information at EDIRC.
Bibliographic data for series maintained by ().