The Safe-Debt Laffer Curve

Safe public debt can become a drag on aggregate demand even while the sovereign remains solvent. Its safety requires rollover support, market-making, and balance-sheet capacity. As these resources become scarce, the marginal cost of producing safe Treasury claims rises. The resulting fiscal adjustment reduces aggregate expenditure and can eventually outweigh the expansionary effect of increasing the supply of safe assets. Debt’s stationary contribution to aggregate demand then peaks, and the equilibrium safe rate reaches its maximum at the same debt stock. Beyond this point, further issuance lowers aggregate demand and the safe rate even though the debt remains safe. Empirically, I combine cash- Treasury and real-duration premia with estimates of how additional private supply reprices the outstanding Treasury stock. Over the past decade, the benchmark marginal cost more than doubled, rising from about 80 basis points in 2015Q1 to 187 basis points in 2026Q1. Using a 330-basis-point benchmark for the rate-equivalent wealth benefit, the safe-debt margin—the difference between this benefit and marginal cost—fell from about 250 to 143 basis points. At the CBO’s 2026 borrowing pace, the remaining safe-debt margin shrinks by about 18 basis points in one year, with further erosion accelerating as debt rises relative to financial capacity.