Will the private sector take up Treasuries?

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This post is a guest contribution by Rebecca Wilder, author of the of the News N Economics blog.

Jim Hamilton used the Federal Reserve Flow of Funds data to pose a question: who will buy “the additional $8 trillion in net new debt that would be issued over the next decade under the CBO’s alternative fiscal scenario?”

I thought the analysis was curious and too “partial”. If one believes the deleveraging story, then domestic private saving is going to rise. The answer to his question seems pretty obvious …

Let’s say consumption goes back to the 1960-style 62% of GDP, then get ready for household Treasury accumulation. Spanning the decade of 1960, households held on average 30% of the Treasury’s liabilities.

A simple example illustrates my point. If the Treasury’s book doubles to $16.5 trillion, and the household share of Treasury holdings rises to 30% – as of Q1 2010 the stock of Treasuries outstanding was just about $8.3 trillion (see L.209 here) – then households will accumulate over $4 trillion of these new Treasuries. That’s just households, and holding all else equal (like financial funds and businesses).

So the answer is: the domestic private sector.

Source: Rebecca Wilder, News N Economics, July 19, 2010.

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