Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / Why Government Bonds Are the Most Powerful Tool You Cannot Use
Transcript
- Lucas: So the US government borrows roughly one to two trillion dollars a year. It does this by selling bonds at auction — Treasury bills, notes, bonds — and those auctions are the single most important funding mechanism for the federal government. Luna: And most people assume they could just go buy those bonds directly, right? Like, it's a public auction. The government is borrowing from 'the people.' Lucas: Exactly. And that's where the gap is. You, as an individual, cannot participate in those auctions. Not directly. The Treasury has a list of about two dozen approved primary dealers — banks like JPMorgan, Goldman Sachs, Citigroup — and only they can bid in the auction. Luna: Hold on — so the government's entire borrowing apparatus is intermediated by a cartel of Wall Street banks? That seems like a big deal. Lucas: It is a big deal. And it's been this way since 1917. The Liberty Bond Act created the primary dealer system to sell war bonds efficiently. The argument then, and now, is that you need a concentrated group of deep-pocketed intermediaries to absorb the supply and ensure a smooth auction. Otherwise you risk a failed auction. Luna: But in 2026, with electronic trading and millions of potential retail buyers, does that logic still hold? Lucas: That's the question. The Treasury itself has studied this. In 2023, the Federal Reserve published a paper looking at the cost of this intermediation. They found that retail investors who buy Treasuries through brokers — the only channel available to most people — pay a spread of roughly 15 to 50 basis points compared to what primary dealers get. Luna: Fifteen to fifty basis points — on a five percent yield, that's a five to ten percent haircut on your return. Lucas: Right. And it compounds. Over a decade, losing 25 basis points every time you roll over a one-year bill eats into real returns. But there's a deeper point here: the system is designed for institutional efficiency, not for retail inclusion. Luna: So what's the alternative? TreasuryDirect exists — the government website where you can buy bonds directly. Lucas: TreasuryDirect works, but it's clunky. It was built in the early 2000s and it shows. You can't trade on the secondary market. You can't sell before maturity easily. And the user interface is often described as 'government-grade.' Luna: So the retail investor is stuck: either use a broker and pay the spread, or use TreasuryDirect and accept a subpar experience. Lucas: Exactly. And that's the unglamorous reality of public debt. The Treasury gets its funding, the primary dealers make their margins, and the individual saver — the person the government is theoretically borrowing from — gets the short end. Luna: You know, this reminds me of something I read recently. The Treasury Borrowing Advisory Committee — the group that advises the government on debt management — includes representatives from the primary dealers. So the same banks that profit from the system are also helping design it. Lucas: That's a classic regulatory capture dynamic. The TBAC is made up of senior executives from the very institutions that benefit from the status quo. They're smart people, and they do produce good analysis, but the incentive structure is baked in. Luna: So what would it take to change the system? Could the Treasury open auctions to retail? Or create a parallel retail-only auction? Lucas: Technically, it's possible. The UK does something similar with its 'Retail Gilt' program. But there's resistance. The primary dealers argue that fragmenting the auction would reduce liquidity and increase borrowing costs for the government. The Treasury's own analysis in 2020 estimated that moving to a fully retail-accessible system could increase the government's interest costs by 5 to 10 basis points. Luna: So the argument is: the system is unfair to individuals, but fixing it would cost the taxpayer money. That's a hard trade-off. Lucas: It is. But let's put that 5 to 10 basis points in perspective. The government borrows about twenty trillion dollars in marketable debt. Ten basis points on that is twenty billion dollars a year. That's real money — enough to fund the IRS or the National Park Service. Luna: But isn't that twenty billion also the implicit subsidy that primary dealers get? The spread they earn is essentially a tax on retail investors. Lucas: That's exactly how some economists frame it. The economist Zoltan Pozsar called primary dealers 'the gatekeepers of the sovereign's balance sheet.' And gatekeeping has a price. A 2024 study from the Bank for International Settlements estimated that the primary dealer privilege is worth roughly 0.2 percent of GDP annually — about fifty billion dollars in the US. Luna: Fifty billion dollars a year — that's more than the entire budget of the Department of Education. Lucas: Right. And you never see it as a line item in the federal budget. It's a hidden transfer from savers to intermediaries. Which brings us to the real question: should the government be in the business of subsidizing Wall Street's bond-trading profits? Luna: And walking through the economy with us, thinking about these hidden transfers — if that's made something click for you, I think it's worth mentioning that a couple of dollars a month genuinely keeps these episodes coming. Buy me a coffee dot com slash fexingo — if you've gotten something out of them. Lucas: Yeah, it really does make a difference. We keep the show ad-free, and listener support is the reason. Back to the bond market — so the question is whether the system is efficient or extractive. Luna: And I think the answer is both. It's efficient for the Treasury, but extractive for the retail investor. And maybe that's okay if you think the government's primary duty is to minimize borrowing costs. But if you think the government should also care about financial inclusion, then it's a problem. Lucas: There's a middle ground. Some have proposed a 'Treasury Direct Plus' — an upgraded platform that allows secondary market trading and auto-rolling of bills. The cost would be maybe a few hundred million to build, but it would save retail investors billions in spreads over time. Luna: Has that ever been seriously considered? I know TreasuryDirect has been around since 2002, but there was a modernization effort under the Biden administration — I think it stalled? Lucas: It did. The Fiscal Responsibility Act of 2023 included a provision requiring the Treasury to study a modernized retail platform. That study was due in 2024, but it was never released publicly. A Government Accountability Office report in 2025 found that the Treasury had spent seventy million dollars on IT modernization for TreasuryDirect, but the project was over budget and behind schedule. Luna: So even the fix is broken. That's very on brand for government IT. Lucas: It is. And that's the frustrating part. The technology exists. The demand exists. But the political will doesn't, because the primary dealers have lobbyists, and retail investors don't. Luna: Let's zoom out for a second. Is this unique to the US? Or do other countries handle retail bond access better? Lucas: Other countries do it much better. The UK's 'Gilt Purchase Facility' lets individuals buy gilts directly through a simple online platform. They even have a 'Gilt Savings Certificate' that's specifically for retail. Australia has the 'Australian Government Bonds' program with a dedicated retail website. And Japan has 'JGBs for Retail Investors' with lower minimums and tax advantages. Luna: So the US is an outlier in how poorly it treats retail bond buyers. Lucas: Yes. And it's ironic because the US Treasury market is the deepest and most liquid in the world. But that depth is almost entirely institutional. Retail is an afterthought. Luna: What about the argument that retail investors don't need direct access because they can buy bond ETFs? That's essentially the same thing, right? Lucas: That's the counterargument. But bond ETFs have their own issues. They trade at a premium or discount to net asset value. They have expense ratios. And they expose you to counterparty risk. A direct Treasury bill is the safest asset in the world. An ETF is not. Luna: So the gold standard is direct ownership. And the system makes that hard. Lucas: Exactly. And I think this is one of those cases where the financial system has evolved in a way that benefits the intermediaries at the expense of the end users. It's not malicious — it's just the path of least resistance. But once you see it, you can't unsee it. Luna: So what's the one concrete takeaway for someone listening? If they want to buy Treasuries, what should they do? Lucas: The best option today is to use TreasuryDirect for new issues, despite the clunky interface. You'll get the full yield, no spread. For secondary market trading, you'll have to use a broker, but look for one that offers commission-free Treasury trading — some online brokers now offer it. And avoid buying Treasuries through a mutual fund or ETF if you can help it, because the fees eat into the yield. Luna: And if you're a policy nerd, what's the single change you'd advocate for? Lucas: I'd push for a modernized TreasuryDirect with auto-roll, secondary market access, and a mobile app. The cost is trivial compared to the savings for retail investors. And I'd require the Treasury to report annually the implicit spread paid by retail investors — transparency is the first step to reform. Luna: So the bond market's hidden tax is real, but fixable. That's a rare combination in fiscal policy. Lucas: It is. And it's worth paying attention to, because the next time you hear about the government borrowing a trillion dollars, you'll know who's really borrowing it — and who's getting paid to facilitate it.