4 numbers add up to American debt disaster

The next time someone says the US Treasury can borrow all it wants at current low rates, say that's true -- until it can't.

By MSNMoney partner Mar 29, 2012 2:57PM

http://www.bloomberg.comBy Caroline Baum, Bloomberg


Consider the following numbers: 2.2, 62.8, 454, 5.9. Drawing a blank? Not to worry. They don't mean much on their own.


Now consider them in context:


1) 2.2 percent is the average interest rate on the U.S. Treasury's marketable and non-marketable debt (February data).


2) 62.8 months is the average maturity of the Treasury's marketable debt (fourth quarter 2011).


3) $454 billion is the interest expense on publicly held debt in fiscal 2011, which ended Sept. 30.


4) $5.9 trillion is the amount of debt coming due in the next five years.


For the moment, Nos. 1 and 2 are helping No. 3 and creating a big problem for No. 4. Unless Treasury does something about No. 2, Nos. 1 and 3 will become liabilities while No. 4 has the potential to provoke a crisis.


In plain English, the Treasury's reliance on short-term financing serves a dual purpose, neither of which is beneficial in the long run. First, it helps conceal the depth of the nation's structural imbalances: the difference between what it spends and what it collects in taxes. Second, it puts the U.S. in the precarious position of having to roll over 71 percent of its privately held marketable debt in the next five years -- probably at higher interest rates.


And that's a problem. The U.S. is more dependent on short- term funding than many of Europe's highly indebted countries, including Greece, Spain and Portugal, according to Lawrence Goodman, president of the Center for Financial Stability, a non- partisan New York think tank focusing on financial markets.


The U.S. may have had a lot more debt in relation to the size of its economy after World War II, but the structure was much more favorable, with 41 percent maturing in less than five years, 31 percent in five-to-10 years and 21 percent in 10 years or more, according to CFS data. Today, only 10 percent of the public debt matures outside of a decade.


Based on the current structure, a 1 percentage-point increase in the average interest rate will add $88 billion to the Treasury's interest payments this year alone, Goodman says. If market interest rates were to return to more normal levels, well, you do the math.


Some economists have cited the Treasury's ability to borrow all it wants at 2 percent as an argument for more fiscal stimulus. Why not, as long as it's cheap?


Goodman says the size of the deficit (8.2 percent of gross domestic product) or the debt (67.7 percent of GDP) is only part of the problem. The bigger threat is rollover risk: "the same thing that got countries from Portugal to Argentina to Greece into trouble," he says. "It's the repayment of principal that often provides the catalyst for a market event or a crisis."


The U.S. is unlikely to go from all-you-want-at-2-percent to basket-case overnight. That said, policy makers would be wise to view recent market volatility as a taste of things to come.


Talking to Goodman, I was reminded of the Treasury's standard sales pitch before quarterly refunding operations during periods of rising yields. Some undersecretary for domestic finance would be dispatched to tell us that Treasury expected to have no trouble selling its debt.


I had an equally standard response: At what price?


That seems particularly relevant today. The Federal Reserve purchased 61 percent of the net Treasury issuance last year, according to the bank's quarterly flow-of-funds report. That's masking the decline in demand from everyone else, including banks, mutual funds, corporations and individuals, Goodman says.


Of course, Fed chief Ben Bernanke might look at the same numbers and see them as a sign of success. His stated goal in buying bonds is to lower Treasury yields and push investors into riskier assets.


Then there's the distortion in the relative value of stocks versus bonds to worry about. Using the 10-year cyclically adjusted price-earnings ratio and the inverse of the 10-year Treasury yield, Goodman says the relationship hasn't been this out of whack since 1962.


The Treasury isn't unaware of the rollover risk. At the same time, it's trying to accommodate the increased demand for "high-quality liquid assets," such as Treasury bills, as required under new international capital-and-liquidity standards, says Lou Crandall, the chief economist at Wrightson ICAP in Jersey City, New Jersey.


In fact, when Treasury bills carry a negative yield -- when investors are paying the government to hold their money for three, six or 12 months -- borrowing "more is better," Crandall says.


Still, the dangers are very real and were highlighted by Bernanke himself last week in the second of four lectures to students at George Washington University. Explaining why the decline in house prices had a greater impact than the drop in equity prices less than a decade earlier, Bernanke talked about "vulnerabilities" in the financial system. Too much debt was one, and a reliance on short-term funding was another.


I doubt he had the Treasury in mind when he was explaining how the subprime debacle morphed into a global financial crisis, but the U.S. government would be wise to heed his advice. Currently its demand on the credit markets for annual interest and principal payments is equivalent to 25 percent of GDP, Goodman says, 10 percentage points higher than the norm. That's real money. And with the federal budget deficit projected to top $1 trillion for the fourth year running, the funding pressure is bound to increase.


So the next time you hear someone say the Treasury can borrow all it wants at 2 percent, tell him, that's true -- until it can't.

More from Bloomberg

Apr 2, 2012 6:52AM
The math is bad, but as long as the American voters cannot do math- they will vote for the President again and keep adding to the debt until it all comes tumbling down.  At that point we can blame George Bush.
Mar 30, 2012 11:20PM
1 trillion debt  for the 4th year running.... and that correlates to what world leader?
Apr 1, 2012 9:14PM
One of our great republican presidents had teh same problem , his name was IKE . The military kept telling him we need to spend billions on missles because the USSR was building huge amounts of them ? Ike found out they were lying and built the interstate road system we have across this country today! But then their are no more republicans like IKE any more!
Mar 30, 2012 11:04PM
By the time the FEDs , Ben and the boys get done the US dollar will no longer be the benchmark of the world! All this free money like  i have been saying at the FED window is doing nothing but inflating the stock market  . And if they come out with a QE3 LOL Lets devalue the dollar even more ! There are no sound investing principals from the FEDs and wall street any more! The rules of supply and demand do not exist any more!Theire is no risk in investing any more we have socialized wall street and banks now ! If you make a bad investment the US treasury will give you a bailout! Thats not CAPITALISM folks ! So i say once more int rates need to rise to at least 1.5 % NOW... TODAY !!! The DOW will take a hit ! And a big one ! But once the investors see the FEDs is not backing down and they  will no more give bailouts , it will stablize . The to big to fail mantra needs to go BYE BYE. and they should be left to FAIL Thats CAPITALISM folks !... But like i said republicans have no problem with big government as long as it goes to wall street and big oil !!! Brought to us by the best congress money can buy!!
Apr 1, 2012 1:55PM

Someone, that is blatantly false ont he face of it.    The annual defense budget is int he neighborhood of 880 billion.  This includes pensions and war spending.  At no time during the last 10 years did War Spending add more than 144 billion in any single year.  Total war spending the last ten years has yet to exceed 1.2 Trillion (with 300 billion of that coming on Obama's watch).


Last year, with war spending declining (Libia and Iraq being over) this spending accounted for less than 100 Billion, out of a budget deficit that exceeded 1.6 trillion.  So clearly your comment is false.


Now we can agree that a lot of defense spending is wasteful and UNNECESSARY.  We can also also agree that the War were not necessary either...


The deficit was 10.2 Trillion the day Mr. Obama took Office and today it is 5.3 trillion higher...

This debt was not war spending, but stupid domestic spending used to reward his policital cronies and supporters...  He blew a half billion on Solyandra alone... This defciit is entirely being fueled by stupid spending of this failed administration.  Facts speak for themselves.   So I ask you what is your political agenda?   Are you justa  shill for the DNC or re-elect "57 States" campaign?

Apr 1, 2012 12:59AM
In fact, when Treasury bills carry a negative yield -- when investors are paying the government to hold their money for three, six or 12 months -- borrowing "more is better," Crandall says.

So why do that?  Why would you just not stay in cash, or buy another asset?  A negative yield??? --------- No wonder they call them muppets.
Mar 30, 2012 6:41PM
Apr 2, 2012 1:19PM
Children, the poor, the old, and the disabled- these are the people who will suffer the most when our once mighty nation is as poor as a church mouse.
Apr 2, 2012 2:09PM

Don't the American voters and (gulp!) our politicians realize that we are spending our future generations into poverty? Everyone feels like 'I'm entitled to it, because they promised!'


I hope someone soon sees that they were empty promises made to get you to vote for them. I, for one, do not want to see my children burdened with excessive taxes and reduced services all because I wasn't willing to face reality.


I say we need to cut spending (by at least 20%) and increase income (corporate, individual, IDK) by at least 10% over current levels. Only then will we even be near a balanced budget. Then if (and that's a might big IF) Congress can manage to hold the line on spending, the economic recovery might provide some surplus to help pay down the accumulated National Debt.


Just remember, if we managed to average a federal surplus equal to Clinton's best year, it would take over 50 YEARS to pay off the current national debt. We're talking about impoverishing not only our children but theirs as well.



Mar 31, 2012 12:10AM
YO Pat , Take a civics class . In the US constitution the congress has the check book! And the president can only make it law or VETO it all ! No line item VETO . 50 US govs have this but not POTUS. Please read the US constitution . This has been in the making for a long time . So your opinion is not supported by facts ! Like i said , big government is ok with the GOP as long as its goes to wall street and subsidies for big oil ! You need to direct your thoughts to the US congress and the lobbyist ! You elect them in November and the lobbyist OWN them the rest of their terms ! Ever since the SCOTUS ruled that money is freee speech and corporations are people like you and me , its the best congress money can buy!
Mar 31, 2012 1:49AM
The US Congress raises the debt limit every year ! Why ? Lets default and get it over with ! Its not the President that has that power pat ! You need to take your beef up with the US treasury , the Federal reserve and the US CONGRESS for this mess! The US Congress must raise revenue and cut spending ! You cannot do one without the other or the USA will never get out of this debt! BOTTOM LINE ...
Apr 2, 2012 5:31PM
the 1% increase adding 88 Billion is an interesting number.  Does this create a conflict of interest for the Fed.  I realize that they are independent form congress and the executive branch and their focus is on employment and inflation.  But they would have to start factoring in the increase of rates would have on our ability to finance future debts and the related economic implications, a difficulty to repay debts could lead to market uncertainty which will lead to increased speculation and transfer over into the real economy (the stock market is not the real economy).   It seems like this could create a huge issue in the future if we don't have the ability to get ourselves in order. 

I'll say that I'm and independent and blame both the democrats and the republicans.  Republicans need to realize that independent experts say revenue has to be increased and the bush era tax cuts need to end, also defense spending needs to be cut.  Democrats have to come up with reasonable ways to cut health care costs.  Both parties need to come up with a reasonable jobs plan, infrastructure investment, and energy policy (drill baby drill is a joke and republicans have to start being honest).  Both have to give in towards their rigid ideologies and need to do whats best for the country. 
Apr 2, 2012 1:45PM
To Tom Johnson: The military doesn't "wage" wars in the way you used the word.  The military doesn't decide that they are going to war against someone.  The civilian leaders decided whether to "wage" (ie: go to war).  Only then does the military "wage" (fight) the war.
Apr 3, 2012 9:56AM
Much of the five trillion dollars which has been added to the national debt during the Obama Presidency is the direct result of polices of the previous administration or the direct result of the financial crisis & the Great Recession(12/2007-6/2009) and it's aftermath. During Pres. Bush's administration almost five trillion dollars was added to the national debt.

Since Pres. Obama took office, the continuation of previous policies, including unfunded wars in Iraq and Afghanistan, the unfunded income tax cuts(2001-2011) which were to expire in January 2011, the unfunded Medicare prescription drug benefits program of 2003, debt service on these unfunded endeavors and etc. have added an additional 1 trillion dollars to the debt. At the same time the the financial crisis and the Great Recession and their aftermath for the years 2008, 2009, 2010, 2011 & 2012 have cost or will cost the federal government at least 2.5/3 trillion dollars in lost tax revenue, most of this has also been added to the debt since Pres. Obama took office. In addition, more than 1 trillion dollars has been added to the national debt to combat the effects and aftermath of the financial crisis and the Great Recession and to prevent a second Great Depression, such as, the American Recovery and Reinvestment Act(the stimulus), the renewal of the income tax cuts(01/2011), the payroll tax cuts and expanded unemployment benefits.

So policies and events which began during the previous administration and which have continued to the present time have added about 4.5 trillion dollars to the budget deficits and national debt since Obama took office.

President Obama has not been on a spending spree at all, he has been making the best of the bad situation, which, by fate he inherited.
Apr 2, 2012 12:54PM
Check it in real time.  at us debt clock. orq 

Apr 5, 2012 2:11PM
Someone , The next time the DEBT ceiling comes up to get raised ! I say lets default ! The US congress needs to live within its means ! That means if they have to shut down parks  their perks and all the subsidies to oil companies and the sorts lets do it! SCREW Moody's and the other rating houses ! Let them use another currency as the BENCHMARK of the world if they do not like the US dollar! That will force the FEDs to do what is right ! Raise int rates ! And the US congress needs to balance the budget with TAX INCREASES and CUTTING subsidies to anything anywhere any how! We need to cut aid to other countries ! We need to CUT THE US MILITARY and get the hell out of AFGHANISTAN
Apr 7, 2012 1:31PM
Unfortunately the only "politically palatable" solution is inflating away the debt, eventually.The only reason this is true is because people are just too stupid to realize they are being robbed by inflation, while they go ballistic if taxes are raised or programs and benefits are cut. This robbery is silent, destroying everyone's savings and earning power (usually wages do not rise as fast as inflation, and sometimes not at all--witness the last few years!). But when people oppose both raising taxes and cutting spending (and we need to do both!) they are voting directly for inflation.
Apr 7, 2012 11:19AM
There's no two party system. That's why candidates change parties to get reelected. It's all propaganda.
Apr 5, 2012 11:56PM

There are some good comments here from the left and right concerning the national debt. Face it!! Both parties have FAILED at balancing the checkbook.


That is why I support the Tea Party! We need RADICAL CHANGE to turn this around.


O'bummer's tax and spend policies have failed and you can count on him not running for re-election on his record. It will be a billion dollar smear campaign against Romney.


Ever wonder why O'bama has spent big bucks to have his past hidden from the public??

Saph500............You are correct concerning who holds the checkbook. I would like to add another comment concerning the time period of the checkbook. The checkbook period starts October 1 (first fiscal year after taking office) the year after election. Let's use the example of election day, the first Tuesday of November 2006. The new Congress takes office in January 2007 and are responsible for the checkbook for the new fiscal year starting October 1, 2007. Now let's review the US debt and the DOW from October 2007 through September 2011. How does the DOW and the national debt look for that 4 year period? Also who controlled the checkbook the last 6 years of the Clinton period in office? It might also pay to look up who controlled the checkbook for Reagan.
Please help us to maintain a healthy and vibrant community by reporting any illegal or inappropriate behavior. If you believe a message violates theCode of Conductplease use this form to notify the moderators. They will investigate your report and take appropriate action. If necessary, they report all illegal activity to the proper authorities.
100 character limit
Are you sure you want to delete this comment?


Copyright © 2014 Microsoft. All rights reserved.

Fundamental company data and historical chart data provided by Morningstar Inc. Real-time index quotes and delayed quotes supplied by Morningstar Inc. Quotes delayed by up to 15 minutes, except where indicated otherwise. Fund summary, fund performance and dividend data provided by Morningstar Inc. Analyst recommendations provided by Zacks Investment Research. StockScouter data provided by Verus Analytics. IPO data provided by Hoover's Inc. Index membership data provided by Morningstar Inc.




Quotes delayed at least 15 min
Sponsored by:


There’s a problem getting this information right now. Please try again later.
There’s a problem getting this information right now. Please try again later.
Market index data delayed by 15 minutes

[BRIEFING.COM] The stock market finished an upbeat week on a mixed note. The S&P 500 shed less than a point, ending the week higher by 1.3%, while the Dow Jones Industrial Average (+0.1%) cemented a 1.7% advance for the week. High-beta names underperformed, which weighed on the Nasdaq Composite (-0.3%) and the Russell 2000 (-1.3%).

Equity indices displayed strength in the early going with the S&P 500 tagging the 2,019 level during the opening 30 minutes of the action. However, ... More


There’s a problem getting this information right now. Please try again later.