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.
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.
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?
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.
WAKE UP PEOPLE!!
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.
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.
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??
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Breaking up big banks is an untested solution to the too big to fail problem that attempts to isolate and dismantle large, troubled institutions while protecting the rest of the economy.
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