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One could argue that it became slightly more likely today that the U.S. will eventually pay off its national debt, wiping the Treasury market out of existence. But that would be silly of one.

President Clinton

today announced that his budget for fiscal 2001, to be unveiled next month, will enable the government to pay off the national debt by 2013 -- two years sooner than he said would be possible six months ago.

That makes it more likely the government will actually accomplish this feat because now we only have to go another 13 years without a recession, instead of 15.

Sarcasm aside, it's premature to take as gospel truth the notion that the federal government will continue to run surpluses for long enough to not only eliminate its need to issue any more Treasury bills, notes and bonds, but also to buy back all $3.3 trillion (yes, trillion) of those securities currently in investor hands, experts say.

"I wouldn't be at all discouraged if I were an operator in the wide, wonderful U.S. Treasury market," says Jack Malvey, chief global fixed-income strategist at

Lehman Brothers

. "There will be Treasury securities in 2013 and in 2031, in our view."

It simply isn't possible to accurately forecast so far into the future, Malvey says.

'I wouldn't be at all discouraged if I were an operator in the wide, wonderful U.S. Treasury market,' says Lehman's Jack Malvey. 'There will be Treasury securities in 2013 and in 2031, in our view.'

The U.S. would have to steer clear of recession for the next 13 years to make today's budget forecasts come to pass, since countries in recession typically run budget deficits rather than surpluses. The forecast surpluses also depend on yet-to-be-formulated tax policies of yet-to-be-elected presidents, some of whom may be inclined to use a larger share of any surpluses to finance tax cuts. To say nothing of the rest of the world, where wars could force increased military spending by the U.S.

"I'm very skeptical that the degree of debt reduction envisioned today will ever be realized," Malvey says.

Some degree of debt reduction is very likely, however. Greg Valliere, managing director of

Charles Schwab's

Washington research group, says the government could easily pay down $150 billion of Treasury debt this year, the third year in a row the government will pay down debt, and that a $200 billion paydown is possible next year. "The big story on the budget front is going to be continued paydown of Treasury debt," Valliere says.

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But by the same token, it's too soon to start contemplating a total drying up of the Treasury market, Valliere says. Three trillion dollars' worth of securities is a lot of securities. If the country is fortunate enough to be able to pay down $1 trillion or $2 trillion of the total, it should do so to give itself increased fiscal flexibility, an argument



Alan Greenspan

has made on numerous occasions. "If we got it down to $1 trillion, it would become a subject for legitimate debate," Valliere says. (The national debt actually totals $5.8 trillion, but some $2.5 trillion of Treasury securities are nonmarketable, with the vast majority of those residing in the government's Social Security trust fund. Clinton's plan does not envision paying those off.)

Keeping Some Treasuries Coming Makes Sense

There are good reasons why the government might want to continue to issue some quantity of Treasury securities even if the surpluses never end.

"It behooves borrowers to maintain a presence in the bond market to demonstrate their standing," Lehman's Malvey says. "That way, it's less of a big deal for them to come to market." In other words, an issuer that always keeps some debt outstanding should get a better reception from investors (and thus a lower interest rate) than an unfamiliar issuer. Having debt outstanding also lets issuers monitor their cost of capital, should they need to borrow.

In addition, yields on Treasury securities are benchmarks against which other types of bonds, such as corporate and municipal bonds, are valued. The loss of those benchmarks might inadvertently result in higher borrowing costs for those issuers, although that could never be known for sure.

Finally, the drying up of the Treasury market could threaten the dollar's status as the world's reserve currency. "Foreign governments will not likely put their public money in anything other than sovereign debt,"

Miller Tabak

chief bond market strategist Tony Crescenzi points out. "In other words, they will not be parking their money in


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bonds simply to hold dollar reserves."

In exchanging U.S. government debt for other governments' bonds, foreign governments will have to sell dollars for other currencies. Without a simultaneous increase in demand for dollars from another source, the value of the dollar would fall, making U.S. financial assets less appealing and contributing to higher inflation.