When the government borrows money, it has to pay it back someday. Back in the old days, the federal government used to issue lots of debt that would not mature for a very long time. But in recent years things have been very different...
In order to fund the government, the Treasury Department periodically auctions Treasury securities with various maturities ranging from 30-day Treasury bills to 30-year Treasury bonds, with 2-3-5-7-year and 10-year Treasury notes in between. It used to be that the bulk of Treasury borrowing was done in the longer-term instruments with maturities of at least 10 years.
In more recent years, however, this trend has shifted more toward shorter-term Treasury securities. There are pros and cons to both strategies. Generally speaking, the shorter maturities are considered more risky since short-term interest rates can vary frequently. Shorter-term maturities obviously have to be rolled over much more often. That raises the risk that there might not be enough buyers when the government needs them.
At this point, the average maturity of outstanding government debt is only 65 months, and only about 10 percent of all Treasury debt matures outside of a decade.
So what does that mean?
It means that the federal government must constantly roll over massive amounts of debt. Once again, this is not too much of a problem as long as interest rates stay super low, but as John Cochrane pointed out, if rates start rising back to "normal" levels things could get quite hairy very quickly...
Here’s the nightmare scenario: Suppose that four years from now, interest rates rise 5 percent, i.e. back to normal, and the US has $20 trillion outstanding. Interest costs alone will rise $1 trillion (5% of $20 trillion) – doubling already unsustainable deficits! This is what happened to Italy, Spain, and Portugal. Don’t think it can’t happen to us. It’s even more likely, because fear of inflation – which did not hit them, since they are on the Euro – can hit us.
Sadly, those running things appears to be quite clueless. For example, retiring U.S. Representative Michele Bachmann recently asked Federal Reserve Chairman Ben Bernanke why the national debt has remained frozen in place for 56 straight days even though we have been borrowing lots of money. Bernanke seemed to have no idea how to answer that question...
As Federal Reserve Chairman Ben Bernanke testified before the House Financial Services Committee Wednesday, Bachmann asked how there could be no increase reported in the total debt when the government is racking up about $4 billion a day in new debt.
“After nearly 10 years as the head of the Federal Reserve, Chairman Bernanke could not answer my question today in Financial Services Committee,” Bachmann told WND.
She wondered if there’s a political motive.
“I asked whether the Treasury Department was cooking the federal government’s books as it was reported that the Feds debt balance sheet remained at $16,699,396,000,000 for 56 days straight, presumably so the Treasury Department wouldn’t officially register that once again the Congress had exceeded its legal borrowing limits.”
For the moment, the federal government is able to recklessly borrow and spend money and investors are rewarding this behavior with super low interest rates.
Unfortunately, this state of affairs is completely and totally unsustainable. At some point global financial markets will begin to behave rationally, and when that happens it is going to mean a tremendous amount of pain for the United States.
Over the past decade, the U.S. government has added more than 11 trillion dollars to the national debt at a time when the U.S. economy has been steadily declining. Anyone that thinks that we can continue to pile up more debt like this indefinitely does not know what they are talking about.
The following are some more statistics about the U.S. national debt for you to consider...
-Back in 1980, the U.S. national debt was less than one trillion dollars. Today, it is rapidly approaching 17 trillion dollars.
-During Obama's first term, the federal government accumulated more debt than it did under the first 42 U.S presidents combined.
-The U.S. national debt is now more than 23 times larger than it was when Jimmy Carter became president.
-If you started paying off just the new debt that the U.S. has accumulated during the Obama administration at the rate of one dollar per second, it would take more than 184,000 years to pay it off.
-If right this moment you went out and started spending one dollar every single second, it would take you more than 31,000 years to spend one trillion dollars.
-If you were alive when Jesus Christ was born and you spent one million dollars every single day since that point, you still would not have spent one trillion dollars by now.
-Some suggest that "taxing the rich" is the answer. Well, if Bill Gates gave every single penny of his entire fortune to the U.S. government, it would only cover the U.S. budget deficit for 15 days.
-If the federal government used GAAP accounting standards like publicly traded corporations do, the real federal budget deficit for 2011 would have been 5 trillion dollars instead of 1.3 trillion dollars.
-The United States already has more government debt per capita than Greece, Portugal, Italy, Ireland or Spain does.
-At this point, the United States government is responsible for more than a third of all the government debt in the entire world.
-The amount of U.S. government debt held by foreigners is about 5 times larger than it was just a decade ago.
-The U.S. national debt is now more than 37 times larger than it was when Richard Nixon took us off the gold standard.
-The U.S. national debt is now more than 5000 times larger than it was when the Federal Reserve was first created.
-Boston University economist Laurence Kotlikoff is warning that the U.S. government is facing a gigantic tsunami of unfunded liabilities in the coming years that we are counting on our children and our grandchildren to pay. Kotlikoff speaks of a "fiscal gap" which he defines as "the present value difference between projected future spending and revenue". His calculations have led him to the conclusion that the federal government is facing a fiscal gap of 222 trillion dollars in the years ahead.
For the moment everything is fine because interest rates are incredibly low and the mockers in the "deficits don't matter" fan club are having a field day.
But what is going to happen when interest rates return to rational levels?
How will the U.S. government be able to borrow the trillions of dollars that it needs to borrow every single year?
That is why it is so important to watch interest rates. When they start skyrocketing, big trouble is ahead.