The Supply of Safe Assets

This chapter discusses the supply of safe assets, highlighting the non-restrictive division into global and regional providers. Additionally, it explores the concept of exorbitant privilege, which is associated with the global status of the US dollar as a reserve currency. The structure of safe asset supply is presented from historical and contemporary perspectives with the aim of pointing out the evolutionary, changing role of different financial instruments in fulfilling this function. Currently, more than half of the global supply of safe assets is made up of government bonds with the highest credit ratings. Securitised instruments are next in terms of share, followed by investment-grade corporate debt and gold. The chapter then discusses the role of debt in safe asset creation, as well as the pivotal role of public debt. Emphasis is put on the limitations of public debt in its role as a safe asset, including considerations such as the ‘safe-asset Laffer curve’ for different countries, the state of the economy, and the ‘Triffin Dilemma’. Thus, the fiscal space of the safe asset provider is influenced not only by economic factors but also by the credibility of the issuer and the rules adopted. The main result of the discussion is that the shortage of safe assets moves from one country to another through international capital flows as investors adopt a ‘quality search’ strategy. In periods of financial instability, the role of global safe asset providers should be complemented by their regional peers, for example Switzerland, Germany, Japan and the United Kingdom. It is asserted that the main advantage of a global safe asset provider over a regional one depends on its ability to supply safe instruments regardless of the economic situation.