Triffin’s Dilemma Again and the Efficient Level of U.S. Government Debt

The amount of outstanding U.S. sovereign debt has become a reason for worldwide concern especially after S&P downgraded it on August 5, 2011. The underlying analysis con-ducted by that rating agency followed the same methodological approach it applies to any other country’s sovereign debt sustainability, ignoring the special role played by U.S. official debt in the world economy. In fact, that debt is not in the interest of that country alone, but also of governments, private investors and the public in general all over. The U.S. prints the world’s most important reserve currency, and its debt provides a most valuable safe-haven asset capable of stimulating real economic activity everywhere and not only in the U.S. Con-sequently, it is important that the U.S. issue debt not taking into account its intertemporal budget constraint alone, but also the needs of the world at large on the grounds of an efficient world allocation of resources. U.S. government debt generates positive externalities to a vast number of economic entities not directly engaged in its transactions, for which reason the usual sovereign debt intertemporal budget constraint equilibrium solution is not Pareto efficient. The Pareto efficient solution should be larger and achieved through appropriate mechanisms including Pigou subsidies.