With short-term interest rates near 0 percent in early 2014, suppose the Treasury decided to replace maturing notes and bonds by issuing new Treasury bills, thus greatly shortening the average maturity of U.S. debt outstanding. Discuss the pros and cons of this strategy.

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One of the potential benefits to replacing mature bonds and notes with Treasury bills is a decrease in long-term interest payments because the Treasury has a lower T-bill rate. This would reduce the government’s debt service costs, and could even stimulate growth. This could have other advantages, such as greater liquidity on the market and more opportunities for investors to invest their money.

There are also some drawbacks to this strategy. Shortening the maturity average of U.S. outstanding debt means servicing costs will remain at close to 0 percent even if short-term rates rise again. This could be a problem if inflation is high. Investors may be forced to leave their comfort zone and less inclined to invest in government securities. This could complicate the economic recovery by decreasing interest rates for bonds/notes. This strategy can have both positive and negative effects depending on factors such as inflation and investor sentiment.

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