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An orgy of debt substitution with no exit

Under the leadership of Timmy (Treasury Secretary Geithner), Larry (National Economic Council Director
Summers) and Ben (Fed Chairman Bernanke), the US government has been using a strategy of borrowing
short-term to minimize interest costs. See Federal Government Faces Balloon in Debt Payments (Edmund L.
Andrews, New York Times, 11/12/09).

Key points

• “The Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during
the financial crisis. Treasury officials estimate that about 36% of the government’s marketable debt
(about $1.9 trillion) is coming due in the months ahead.”

• “The Federal Reserve has used almost every tool in its arsenal to push interest rates down even further.
It cut the overnight Federal funds rate at which banks lend reserves to each other, to almost zero. And to
reduce longer-term rates, it bought more than $1.5 trillion of Treasury bonds and government-guaranteed
securities linked to mortgages.”

• “The current low rates on the country’s debt were caused by temporary factors that are already
beginning to fade. One factor was the economic crisis itself, which caused panicked investors around
the world to plow their money into the comparative safety of Treasury bills and notes.”