What if there were no more treasury bonds?

Aubrey G. Lanston & Co., a financial boutique based in New York, has a problem.

It specializes in the purchase and sale of US Treasury securities. But those bills, notes, and bonds are disappearing. Uncle Sam is retiring debt - Lanston's "product."

"It's a new world," says David Jones, chief economist of the firm. "I didn't think we would ever reach that moment where product is contracting so fast."

In Washington last week, President Clinton said the budget surplus has grown so big that the government could erase the entire $3.65 trillion in debt owed to the public, domestic or foreign, by 2015.

That probably won't happen. Both Congress and the White House like to spend. And the Republicans are talking of a $1 trillion tax cut.

Before the debt falls to zero, "we have a long, long way to go," Gene Sperling, National Economic Council head, said at a Monitor breakfast last week.

Some Washington experts do suspect that Republicans and Democrats can agree to "lock up" a projected $1.9 trillion in surplus revenues from Social Security payroll taxes over the next 10 years.

That sum would buy Treasuries for deposit in the Social Security Trust Fund. It would mean, in effect, retiring $1.9 trillion in debt held by the public, debt that would otherwise need servicing with interest payments. The Trust Fund would use those Treasuries to draw on federal revenues only when payroll taxes don't cover benefit payments in about 2013.

Over the next decade, the non-Social Security budget will also enjoy a massive surplus - $1.1 trillion figures the administration, $1 trillion reckons the Congressional Budget Office.

But "the bulk" of those general budget surplus projections are "a mirage," says Robert Greenstein, director of the Center on Budget and Policy Priorities, a Washington think tank.

That's because the projections are based on current law and policy. And Congress will change that.

It is already clear that defense spending will be raised. Further, Congress will be unable to abide by the present "unrealistic caps" on other "discretionary spending," says Mr. Greenstein.

"Maybe there will be $300 billion left over 10 years," he says.

Still, the $300 billion plus the $1.9 trillion Social Security surplus would drastically reduce public debt in the next decade.

That has some advantages.

It increases national saving. It would reduce interest rates and encourage productive investment that could boost national living standards.

At present, the government needs $230 billion a year to service its debts. That burden would drop to less than half.

David Smith, director of public policy at the AFL-CIO's Washington headquarters, calls that "a good idea." The government will be better able to meet its Social Security and Medicare obligations when the baby boomers start retiring a decade hence.

But is zero debt even better?

"The closer we get to that goal, people will question whether the optimal debt is no debt at all," says Robert Reischauer, a budget expert at the Brookings Institution, a Washington think tank .

For David Jones, it means "declining business" for his firm. Lanston is one of about 30 so-called "primary dealers" in Treasury securities. These firms bid on new government issues, resell them, and make secondary markets in federal securities.

That's down from 44 firms when the federal budget was deep in the red and the Treasury had to make large and frequent sales of securities. Business was booming.

Aside from less trade for Wall Street, federal debt has other important uses. It provides a broad, deep, and efficient market of liquid, non-defaultable securities, notes Harvard University economist Benjamin Friedman.

In other words, Treasuries are safe investments that many retirees and others prize deeply.

Some have bought the relatively new inflation-protected Treasuries for even greater assurance.

Many small savers might miss Treasury savings bonds if there were no federal red-ink to finance.

Moreover, Wall Street uses the interest rate on Treasuries as a benchmark for interest rates on corporate and other bonds.

Those who buy futures or options based on Treasuries, hoping to hedge against losses in other interest-sensitive investments (such as mortgages), would be left in the lurch.

Finally, there are those who would rather see the surpluses used for other purposes. Some conservatives say cut taxes to stimulate growth. Some liberals urge spending to help the poor.

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