Download Chapter 19 - McGraw Hill Higher Education

19
Chapter
The Treasury In
The Financial Markets
Money and Capital Markets
Financial Institutions and Instruments in a Global Marketplace
Eighth Edition
Peter S. Rose
McGraw Hill / Irwin
Slides by Yee-Tien (Ted) Fu
19 - 2
 Learning Objectives 
 To examine the many important roles played
by the government’s Treasury Department.
 To identify how the government raises new
funds and how it spends the funds raised.
 To understand how the activities of the
Treasury Department impact the money and
capital markets and the economy.
 To explore two key government policy tools –
fiscal policy and debt management.
McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
19 - 3
Introduction
 The U.S. Treasury Department exerts a potent
impact on the financial system through its
 fiscal policy – the taxing and spending
programs of the federal government designed
to promote various economic goals, and
 debt management policy – the refunding or
refinancing of the federal government’s debt in
a way that contributes to its economic goals
and minimizes the debt burden.
McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Fiscal Policy Activities of
The U.S. Treasury
 Congress dictates the amount of funds the
federal government will spend each year on
programs like welfare and national defense,
and also determines the sources of tax revenue
and tax rates.
 When tax revenues are not sufficient to cover
expenditures, a budget deficit occurs.
 A budget surplus occurs when government
revenues exceed expenditures.
McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Fiscal Policy Activities of
The U.S. Treasury
Federal Government
Revenues, Expenditures, and Net Budget Surplus/Deficit
$ Billions
2,000
1,500
Outlays
1,000
Receipts
500
0
Surplus or Deficit (-)
Fiscal
-500
Years
1961 1966 1971 1976 1981 1986 1991 1996 2001
McGraw
HillU.S.
/ Irwin
Data
Source:
Office of Management and Budget
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
Fiscal Policy Activities of
FederalThe
Government
Revenues, Expenditures,
& Treasury
The U.S.
Net Budget Surplus/Deficit
Source: U.S. Office of Management and Budget
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The Fiscal Policy Activities of
The U.S. Treasury
Recent Tax and Expenditure Legislation
The Economic Recovery Tax Act (1981) aimed to
simulate savings and business investment in order
to reduce inflationary pressures in the economy.
 The Gramm-Rudman-Hollings Balanced Budget
and Emergency Deficit Control Act (1985)
mandated reduced budget deficits.
 The Economic Growth and Tax Relief
Reconciliation Act (2001) was designed to
encourage the public to save more.

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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Fiscal Policy Activities of
The U.S. Treasury
Effects of Government Borrowing
 Borrowing from the nonbank public

higher incomes, spending, and interest rates
 Borrowing from

no change in the money supply or total reserves;
total income, spending, and interest rates rise
 Borrowing from

depository institutions
the Federal Reserve banks
money supply increases; total reserves are
unchanged, but excess reserves fall; total income,
spending and interest rates rise
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Fiscal Policy Activities of
The U.S. Treasury
Effects of the Retirement of Government Debt
 Retiring debt held by the nonbank public

lower incomes, spending, and interest rates
 Retiring

no change in the money supply or total reserves;
total income, spending, and interest rates fall
 Retiring

debt held by depository institutions
debt held by Federal Reserve banks
money supply decreases; total reserves are
unchanged, but excess reserves increase; total
income, spending and interest rates fall
McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Fiscal Policy Activities of
The U.S. Treasury
 The conventional view of government
borrowing adding to income and possibly
driving up interest rates and inflation has been
challenged in recent years.
 It was pointed out that interest rates and prices
may not rise if an equal amount of private
borrowing and spending are crowded out, or if
the added government borrowing has already
been anticipated and discounted by the market.
McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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Management of the Federal Debt
 Corporations, commercial banks, and other
institutional investors rely heavily on
government securities as a readily marketable
reserve to be drawn upon when cash is needed
quickly.
 Today, the U.S. public debt is the largest single
collection of securities available in the
financial system.
McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Size and Growth of the U.S. Public Debt
The U.S. Public Debt
$ billions
6,000
5,000
4,000
3,000
2,000
1,000
0
1901
1921
Data
McGraw
Source:
HillBureau
/ Irwin of the Public Debt
1941
1961
1981
2001
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Size and Growth of the U.S. Public Debt
 On a per capita basis, the U.S. public debt
amounts to more than $20,000 for every man,
woman and child living in the U.S.
 How did the federal debt become so large?
Wars, economic depressions, and the rapid
expansion of military expenditures and social
programs have been among the principal
causes.
McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
The Composition of the Public Debt
Source: Bureau of the Public Debt
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Investors in U.S. Government Securities
(In billions of dollars)
Investor Group
Federal Reserve & Government accounts …
Dec 2000
Jun 2001
2,781.8
3,004.2
Privately held:
Depository institutions ………………………
U.S. savings bonds ……………………………
Pension funds
Private ………………………………………
State and local governments ………………
Insurance companies …………………………
Mutual funds …………………………………
State and local governments …………………
Foreign and international ……………………
Other investors ………………………………
Total privately held ……………………………
198.9
184.8
190.1
185.5
137.7
195.7
110.2
312.5
236.2
1,201.3
303.1
2,880.4
127.5
197.1
94.8
333.2
216.5
1,167.4
210.5
2,722.6
Total public debt …………………………
5,662.2
5,726.8
Data Source: Treasury Bulletin, Department of the Treasury (U.S.)
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Methods of Offering Treasury Securities
 Treasury debt managers are called on
continually to make decisions about raising
new money and refunding maturing securities.
 They must decide what kinds of securities to
issue, which maturities will appeal to
investors, and the form in which an offering of
securities should be made.
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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Methods of Offering Treasury Securities
 The auction method is the principal means of
selling Treasury notes, bonds, and bills today.
 Examples of auction methods used include the
yield auction, uniform price auction, and
“reverse auction.”
 Today, the marketable public debt is issued in
book-entry form only .
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 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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Methods of Offering Treasury Securities
 New Treasury bills, notes, and bonds can be
bought directly from the Treasury Department
or from the Treasury’s agents – the Federal
Reserve banks.
 Many investors also place orders for new
Treasury issues through a security broker or
dealer, bank, or nonbank financial institution.
McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Goals of Federal Debt Management
 Housekeeping goals pertain to the cost and
composition of the public debt, such as
minimizing interest costs and reducing the
frequency of refundings.
 Stabilization goals relate to the impact of the
debt on the economy and the financial markets.
 The goal of economic stabilization often
conflicts with other debt management goals.
McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
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The Impact of Federal Debt Management
 Most experts agree that in the short run, the
financial markets become more agitated and
interest rates tend to rise when the Treasury is
borrowing.
 There is also some evidence that lengthening
debt maturities increases long-term interest
rates relative to short rates.
McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
19 - 21
The Impact of Federal Debt Management
 However, most authorities are convinced that
the debt management activities of the Treasury
do not have a major impact on economic
conditions.
 The effects of debt management operations
appear to be secondary compared to the impact
of monetary and fiscal policy on the economy
and the financial markets.
McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
19 - 22
Money and Capital Markets in Cyberspace
 Find out more about the Treasury by visiting:

http://www.treas.gov/

http://www.publicdebt.treas.gov

http://www.treasurydirect.gov/

http://www.imf.org/external/np/mae/pdebt/2000/en
g/

http://www.iga.ucdavis.edu/
McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
19 - 23
Chapter Review
 Introduction
 The Fiscal Policy Activities of the U.S.
Treasury
Sources of Federal Government Funds
 Federal Government Expenditures
 Recent Tax and Expenditure Legislation
 Effects of Government Borrowing on the Financial
System and the Economy
 Effects of the Retirement of Government Debt

McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.
19 - 24
Chapter Review
 Management of the Federal Debt
The Size and Growth of the Public Debt
 The Composition of the Public Debt

• Marketable Public Debt
• Nonmarketable Public Debt
Investors in U.S. Government Securities
 Methods of Offering Treasury Securities
 The Goals of Federal Debt Management
 The Impact of Federal Debt Management on the
Financial Markets and the Economy

McGraw Hill / Irwin
 2003 by The McGraw-Hill Companies, Inc. All rights reserved.