Exorbitant Privilege Gained and Lost Fiscal Implications

We study three centuries of U.K., U.S. and Dutch fiscal history. When a country is the dominant safe asset supplier, it can issue more debt than what is justified by its future primary surpluses. This pattern holds for the Dutch Republic in the 17th and 18th, the U.K. in the 18th and 19th, and the U.S. in the 20th and 21st centuries. When the Dutch Republic’s and the U.K.’s fiscal fundamentals deteriorated, they lost their dominant position as the safe asset supplier. After losing their exorbitant privilege, their debt became fully backed by primary surpluses. These results support theories of safe asset determination in which investors concentrate extra fiscal capacity in a single safe asset supplier based on relative macro fundamentals, allowing its debt to exceed its fiscal backing.