Latest / The Fiscal Policy Podcast with Fexingo: Government Budgets, Stimulus, and Public Spending / How the Government Borrows Eight Trillion Dollars a Year
Transcript
- Lucas: The U.S. government borrows roughly eight trillion dollars a year. That’s not the total debt — that’s just the new borrowing, every twelve months, to roll over maturing debt and fund the deficit. Luna: Eight trillion dollars. That’s larger than the entire economy of Japan. And most of us have no idea how it actually happens. Lucas: Right. And honestly, if understanding how that process works is worth a coffee to you, there’s a link — buy me a coffee dot com slash fexingo. That kind of listener support is what keeps this show ad-free and independent. Now, back to the machinery. Luna: So how do you auction off eight trillion dollars? It’s not like selling a painting at Sotheby’s. Lucas: It’s actually a very specific process run by the Bureau of the Fiscal Service — a little-known agency within the Treasury Department. Every Monday, they announce the upcoming auctions for the week. Typically, that’s bills, notes, bonds, and sometimes Treasury Inflation-Protected Securities. Luna: And when you say 'announce,' what does that look like? A press release? Lucas: Exactly. A public notice with the exact amount to be auctioned, the maturity, the date and time of the auction, and the settlement date. For example, the most common is the 10-year note. They’ll announce on a Wednesday that they’re selling, say, 40 billion dollars worth on the following Monday. Luna: And who shows up to buy? It’s not just grandma with a TreasuryDirect account. Lucas: No. The auction is dominated by a group of about two dozen banks and broker-dealers called primary dealers. These are the big players — JPMorgan, Goldman Sachs, Citigroup, Bank of America, and a few others. They are required to bid in every auction, and they act as intermediaries for the rest of the market. Luna: So they’re like wholesalers. They buy the entire lot, then sell to pension funds, foreign central banks, hedge funds — basically everyone else. Lucas: Exactly. But the auction itself is a single-price auction, also called a Dutch auction. Here’s how it works: investors submit bids by 1:00 PM Eastern on the auction day. There are two types of bids: competitive and non-competitive. Luna: Break those down. What’s the difference? Lucas: A non-competitive bid is simple: you say 'I want to buy one million dollars worth of the 10-year note, and I agree to accept whatever interest rate the auction determines.' This is how individuals buy Treasuries through TreasuryDirect. You get the full amount you asked for, but you don’t get to choose the yield. Luna: Okay. And competitive bids are the opposite. Lucas: Right. A competitive bidder says 'I’ll buy 100 million dollars worth, but only if the yield is at least 4.35 percent.' If the auction clears at a lower yield, that bidder might get nothing or only a partial allotment. So competitive bidders are essentially trying to guess the clearing yield. Luna: And the Treasury’s goal is to borrow at the lowest possible cost. So they set the yield at the highest rate that still attracts enough bids to cover the auction amount. Lucas: Bingo. That’s called the stop-out yield. Every competitive bid that came in at or below that yield gets filled. But here’s the key: all filled bidders — competitive and non-competitive — pay the same price, which is derived from the stop-out yield. That’s why it’s called a single-price auction. Luna: So if I submit a non-competitive bid and the stop-out yield is 4.30%, I get that yield. And if Goldman Sachs bids competitively at 4.25%, they also get 4.30% because it’s single price. They don’t get penalized for trying to get a lower rate? Lucas: That’s right. The single-price format encourages aggressive bidding because you’re not punished for bidding below the clearing rate. If you bid too low, you just don’t get any bonds. But if you’re within the accepted range, you get the same yield as everyone else. Luna: That actually makes a lot of sense. It maximizes participation and keeps the government’s borrowing costs low. Lucas: Exactly. And it works. The average auction is oversubscribed by a factor of two or three. Meaning there are often two to three times as many bids as there are bonds available. That’s a sign of a healthy market. Luna: But what happens when an auction goes poorly? Like, what if there aren’t enough bidders? Lucas: That’s called a failed auction. It’s extremely rare for Treasury auctions, but it has happened in the past — most notably during the 2008 financial crisis for some short-term bills. When demand is weak, the Treasury may have to accept a higher yield than expected, which increases borrowing costs. In extreme cases, the government can even postpone or cancel an auction. Luna: And when an auction fails, that sends a signal to the entire bond market. It’s like a vote of no confidence. Lucas: Exactly. That’s why the Treasury and the Federal Reserve watch auction data very closely. The bid to cover ratio — that’s total bids divided by the amount awarded — is a key indicator of demand. A ratio above 2.5 is considered healthy. Below 2.0 starts to raise eyebrows. Luna: And the auction also determines the yield that sets the benchmark for everything else — mortgages, corporate bonds, even car loans. So the process really does ripple through the entire economy. Lucas: It’s the bedrock of global finance. And it’s happening every single week, like clockwork. The Treasury auctions off roughly 150 to 200 billion dollars in new debt on an average week. Multiply that over a year, and you get close to that eight trillion number. Luna: And the scary thing is, most people don’t even know this exists. But it’s one of the most consequential financial processes in the world. Lucas: Yeah. And it’s not just the U.S. — every government that issues debt uses some version of this. The European Central Bank auctions German bunds, the Bank of Japan auctions JGBs. The mechanism is remarkably similar across countries. Luna: But the scale of the U.S. Treasury market is unmatched. About 25 trillion dollars in marketable debt outstanding, and the auctions are the primary way it’s distributed. Lucas: Right. And that market is what allows the U.S. to run large deficits without crashing the dollar or spiking interest rates — because the world trusts the process. Luna: So the next time you hear about the federal deficit, you can picture these auctions. It’s not abstract — it’s a weekly event with real mechanics. Lucas: Exactly. And the next time you buy a Treasury bond through your brokerage, you’re participating in that same system — either through the auction or the secondary market. It’s a machine that mostly runs in the background, but it’s worth understanding. Luna: And now I know what a Dutch auction is. One concrete thing to mention at dinner. Lucas: Exactly. And maybe you’ll think twice about the next headline about the debt ceiling — because now you know how the borrowing actually happens.