Gensler Letter to Spratt on Public Debt

February 27, 2001

[1] I an writing in response to your request for a brief analysis of the Treasury debt held by the public and in particular how much of that debt is available to be paid off over the next ten years.

[2] Based upon my recent experience as Treasury Undersecretary for Domestic Finance responsible for Treasury's debt management, and my prior experience as a partner of Goldman, Sachs, I believe that close to $3.0 trillion of the currently outstanding $3.4 trillion in publicly held debt could be paid off, leaving outstanding between $410 and 500 billion in debt at the end of ten years. I believe that Treasury can achieve this in the future, by: (1) allowing the vast majority of this debt to mature as it comes due; (2) making various changes to debt management policies over time; and (3) smoothly repurchasing over time the majority of Treasury's long term debt at market level prices.

[3] This estimate of potential remaining debt is somewhat lower than that of others, including the Congressional Budget Office at $818 billion or that of the Federal Reserve Chairman in his recent testimony of somewhat more than $750 billion. The following analysis may help to put this lower estimate in perspective and show how there are a variety of policy steps that may be taken to achieve potential remaining debt over ten years of between $410 and 500 billion.

[4] There are two main components of publicly held debt. By far the largest component is that which is traded freely in the market place, the marketable debt of $3.0 trillion as of January. Of this amount, approximately $2.5 trillion matures (or is callable) by 2010. Therefore, nearly $2.5 trillion in marketable debt is available to be repaid by allowing it to mature. Treasury would over this time make decisions, as it has in the past, as to the discontinuance of its various debt offerings.

[5] There is currently outstanding just over $500 billion in debt that is scheduled to mature after 2010. Excluding holdings of the Federal Reserve, the privately held portion of this long maturity debt is $460 billion. Treasury has available to it a number of policy alternatives to assure that this longer maturity debt declines significantly and smoothly over the next ten years. First, Treasury can determine to discontinue issuance of any new longer-term debt. A group of outside financial experts advising the Treasury, The Borrowing Advisory Committee, voted as a majority in January to advise the Treasury to do just that later this year.

[6] There also are a number of ways to reduce the amount of longer maturity debt outstanding. Over the last year, Treasury successfully and efficiently repurchased approximately $35 billion in long maturity debt. Debt buybacks have been used for many years as a successful financial tool both by the private sector and the public sector. Buybacks had been used throughout our nation's history during periods of sustained budget surpluses, most recently 70 years ago. Treasury Secretary Alexander Hamilton, in fact, was the first to recommend them in his report to Congress in 1795. The financial markets anticipate that Treasury will repurchase between $35 and 40 billion in longer-term debt this year and continue the program into the future, even though plans for future buybacks have not yet been incorporated into Federal Budget estimates. I believe that Treasury can continue this program well into the future, smoothly repurchasing substantial amounts of long-term debt at market level prices.

[7] Lastly, the Borrowing Advisory Committee has recommended that Treasury consider conducting debt exchanges. Treasury last used debt exchanges in the 1960's and could use them again to exchange short maturity debt for long maturity debt.

[8] Using a combination of these methods over the next ten years, I believe that Treasury could smoothly retire one half and possibly up to two thirds of its current long-term marketable debt, adding between $260 and 340 billion to debt available to be repaid.

[9] The second main component of publicly held debt is non- marketable debt of $426 billion. Depending upon decisions, which the Treasury has authority to make, approximately half of this debt is available to be repaid over the next ten years.

[10] State and local governments hold approximately $148 billion in non-marketable debt. Approximately 90% of this debt mature within the next five years. The Treasury has the authority to discontinue issuance of these securities 'ust as it has in the past discontinued issuance of other securities. Municipalities would then choose to invest in alternative debt instruments in the market while still abiding by anti arbitrage rules related to the tax code.

[11] The Thrift Savings Plan holds $33 billion in Treasury debt to back Federal Government employees' selections of investing in the bond market. While the TSP invests directly in private sector equity securities, the arrangement with Treasury regarding bond investments was set up during the mid 1980's in a period of significant and growing fiscal deficits. In this new environment, the TSP could initiate a new bond fund, which would actually earn a higher return for Government employees by investing in private sector debt securities.

[12] The remaining non-marketable debt includes $185 billion in savings bonds and $55 billion in long maturity zero-coupon bonds issued to foreign governments to back the Brady program and to the REFCorp to back the resolution of the thrift crisis. These bonds are probably the only difficult non-marketable debt to redeem. In particular, the Savings Bond program, while not growing in many years, still has broad public appeal and is thought by many to be an important vehicle to promote private savings among small savers.

[13] Lastly, Treasury will continue to have seasonal cash management needs and will periodically wish to address those needs by issuing and redeeming short-term cash management bills.

[14] In summary, there is currently $3.4 trillion in Publicly Held Treasury debt outstanding, of which close to $3.0 trillion is available to be redeemed over the next ten years. Letting it mature under its terms could pay off the vast majority of this debt. No doubt, Treasury will have many policy decisions to make over this time, but it is within their authorities and ability to smoothly repurchase significant long-term debt at market prices and to redeem significant non-marketable debt. This would leave only between $410 and 500 billion in debt over the next ten years.

Very truly yours,