Greenspan's 1987-2006 Rate Cuts Institutionalized Liquidity Backstops That Expanded US Public Debt from 50% to 120% of GDP

Greenspan's 1966 essay 'Gold and Economic Freedom' argued gold convertibility blocked deficit monetization. As chair he executed the opposite: after Black Monday he cut the federal funds rate 200 basis points within weeks, establishing the pattern repeated in 1998, 2001 and 2003. FOMC transcripts show explicit discussion of 'asymmetric risk' that favored easing over tightening. Public debt rose from 49.5% of GDP in 1987 to 63% by 2006 while household debt-to-GDP climbed from 48% to 92%.

The two-sided ledger shows short-term output stabilization traded against long-term leverage incentives. Treasury data record average maturity of marketable debt shortened while foreign official holdings of Treasuries grew from $200 billion to $1.5 trillion, creating a structural bid that lowered term premia. Primary dealer balance sheets expanded to intermediate the new volume, shifting bank business models from deposit-funded lending to repo-funded securities holdings.

Current 10-year yields above 4.2% expose the accumulated stock: interest costs now exceed defense outlays. CBO baseline assumes rates normalize to 3%, yet realized path since 2022 has already added $1.2 trillion in cumulative interest through 2025. Any sustained 4%+ regime forces either primary surplus or further monetization, both of which contradict the post-1987 operating framework.

Next threshold is the 2025 debt-ceiling negotiation. Treasury's quarterly refunding statement shows $7.6 trillion in maturing notes and bonds through 2026; failure to raise the limit before March 2025 would trigger across-the-board sequestration under the 2011 Budget Control Act, testing whether the Greenspan-era backstop still holds.