The Supply and Demand for Safe Assets
There is a demand for safe assets, either government bonds or private substitutes, for use as collateral. Government bonds are safe assets, given the government's power to tax, but their supply is driven by fiscal considerations, and does not necessarily meet the private demand for safe assets. Unlike the government, the private sector cannot produce riskless collateral. When the private sector reaches its limit (the quality of private collateral), government bonds are net wealth, up to the government's own limits (taxation capacity). The economy is fragile to the extent that privately-produced safe assets are relied upon. In a crisis, government bonds can replace private assets that do not sustain borrowing anymore, raising welfare.
|Date of creation:||Jan 2013|
|Note:||AP CF EFG ME|
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