Introduction to Finance

defi cit fi nancing 
borrowing of 
funds by selling Treasury securities 
to meet revenue shortfalls relative 
to expenditures 
crowding out 
occurs when there 
is a lack of funds for private 
borrowing due to the sale of 
Treasury securities to cover budget 
defi cits
national debt 
total debt owed by 
the government
debt management 
involves 
funding budget defi cits and 
refi nancing maturing Treasury 
securities used to fund the national 
debt.
4
Historical budget results are available at www.whitehouse.gov/omb/budget/.
5
Historical data about the levels of the national debt are available at www.treasurydirect.gov/.
6
Debt management goals are stated in, “The Meaning and Implications of ‘Regular and Predictable’ (R&P) as a Tenet 
of Debt Management,” (August, 2015), https://www.treasury.gov.

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C H A PT E R 5 Policy Makers and the Money Supply
government securities that were previously issued to fund prior levels of the national debt. The 
Treasury set a formidable goal of conducting these new fi nancing needs and the refunding of 
existing Treasury securities while attempting to minimize the interest costs on the national debt.
The Treasury’s second debt management goal involves effi
ciently managing the Treas-
ury’s cash fl ows associated with its fi nancing and refunding activities in an uncertain environ-
ment. Debt management operations have to be conducted within an environment where there 
are uncertainties relating to the size of net fi nancing needs, auction market demand conditions, 
fi nancial market liquidity, economic conditions, and Fed monetary policy actions.
Market interest rates on Treasury securities fl uctuate, or change over time, with changes 
in economic conditions and expectations, and with the Fed’s monetary policies. The Treasury 
could adjust the size and timing of its auctions to attempt to mitigate this economic/monetary 
policy risk. Market interest rates, at a point in time, are generally lower for shorter-maturity 
Treasury securities and higher for longer-maturity Treasury securities. In essence, the longer 
the maturity of a debt security, the greater the uncertainty the investor will feel concerning 
future economic and fi nancial market conditions at maturity. As a consequence, investors 
require a higher expected return for investing in longer-maturity debt securities. This is some-
times referred to as term structure, or maturity risk. Furthermore, the values of longer-maturity 
debt securities will change more (relative to shorter-maturity securities) given changes in mar-
ket interest rates. We explore the term, or maturity structure, of interest rates in Chapter 8 and 
the impact on bond values given changes in market interest rates in Chapter 10.
The Treasury must continually make the trade-off decision of whether to issue shorter-
maturity Treasury securities at generally lower interest rates and accept more frequent refund-
ing of these securities at times when the then-existing market interest rates may be at higher 
levels due to changing economic conditions and Fed actions. The alternative would be to issue 
longer-term Treasury securities at relatively higher interest rates in exchange for not having to 
refund these securities until much further in the future. 
The Treasury has benefi tted in its eff orts to manage its fi nancing budget defi cits and the 
national debt in recent years due to the unusually low interest rates that are the result of, in 
part, the Fed’s easy money and quantitative easing eff orts initiated in late 2008. However, as 
interest rates move back to more “normal” levels, and given the current size of the national 
debt, concern is being expressed about how very large annual interest payments on the national 
debt will impact on economic activity and the fi nancial markets.