Chance for Smart U.S. Debt Funding Is Slipping Away
Interest rates are rising and the country should act now to lock in cheap financing.
Bloomberg, March 16, 2017
Yesterday’s decision by the Federal Reserve to raise its benchmark interest rate by a quarter-point — likely the first of three this year — served as a reminder that when it comes to financing America’s long-term debt, the U.S. is doing it all wrong. Even worse, the time to correct these errors is slowly slipping away.
As we should have learned during the financial crisis, matching the maturities of the U.S.’s funding requirements and its credit sources is crucial. Rolling over low-interest short-term loans every 90 days to fund longer-term liabilities seems like a cheaper financing method — right up until the moment where short-term credit is no longer available. That’s when, as we saw in late 2008, companies such General Election Co. and Ford Motor Co. suddenly realized that they might not make payroll.
It isn’t just the private sector that engages in this financial myopia; the U.S. Treasury does as well. The long-term financing obligations of the country include infrastructure projects that are designed to last a century (assuming they receive proper maintenance), as well as entitlement programs like Social Security and Medicare.
These safety-net programs were built on the assumption of an ever-increasing work force, where more people are paying into the system than are drawing benefits. And no, this isn’t a Ponzi scheme, as some have claimed. Rather, the system is built upon the premise that the next decades will look pretty much like the past.
That expectation is increasingly unlikely to be met, as the ratio of workers-to-beneficiaries decreases and longevity rises. We have discussed this before (see this, this, this, this and this), and it’s frustrating to watch the country miss the opportunity for what should be an easy fix.
As my Bloomberg Gadfly colleague Lisa Abramowicz wrote:
Mnuchin’s willingness to consider ultra-long-term debt is sensible, especially considering the next administration’s ambitious spending plans. The idea of 50-year U.S. debt isn’t new, nor is it a bad one.
No — in fact, at this moment it’s a very good one. And keep in mind that this isn’t some sly way to increase the country’s debt load, as some critics have claimed. Rather, it is a responsible way to fund the long-term obligations we already have.
Many other countries, including Canada, Spain, France, Switzerland, Britain, Italy, Ireland, Belgium and Mexico, already do this and fund their debt with 50- and 100-year bonds.
Of course, all of this assumes a rational electorate and leaders who can look beyond tomorrow’s headlines.
On that count, I’m concerned. Consider, for example, the user tax for maintaining the U.S.’s system of interstate highways, bridges and tunnels: It hasn’t been raised since 1993. The tax of 18.4 cents a gallon now — thanks to inflation — is only worth 10.9 cents. To not have at least raised the tax to keep up with inflation is an unfathomable failure of the body politic. If you break an axle on America’s potholed roads, my suggestion is to submit the bill to Grover Norquist, head of Americans for Tax Reform. By insisting that politicians (almost all of them Republican) pledge to never raise any tax, he has single-handedly helped make the roadways of the U.S. comparable to those in developing countries (see this, this, this, this, this, this and this).
The U.S. government’s debt now has an average weighted maturity of about 5.8 years. The country spends almost a quarter-trillion dollars a year to service that debt. With the Fed poised to raise rates, it will soon become much more expensive to carry that load.
The obvious solution beckons.
There’s an old Wall Street proverb that says, “When the ducks are quacking, you have to feed them.” And when it comes to issuing ultra-long bonds, the time is now.
Time for a 50-Year U.S. Treasury Bond (May 19, 2016)