Over at John Jansen's outstanding Across the Curve blog, in the comments of his closing post for August 21, was this comment from Chicken.
If you go back to FY 1998, 35% of US DEBT was long term debt(LT). Today that percentage is down to 24%, a 1% per year LT abandonment rate.
Followed by this one by Wallie.
Keen observation Chicken. The US is increasingly financing itself with an Option ARM.
I spent a little time looking for the graphs, but didn't come up with them. Having said that, it looks about right after watching this year's Treasury auctions. Lots and lots of short-term Treasuries have been sold this year that will adjust when they mature in a few years. It's practically guaranteed that they will adjust upwards as interest rates rise. That means these mountains of debt will cost us more in interest every year even if we don't keep adding to them, which of course we will given the out-of-control spending in DC.
Another idiotic aspect of the treasury's debt management is the TIPS (Treasury Inflation Protected Securities) program. That should cease immediately. I believe something close to 10% of what they are issuing is now TIPS. Eventually, we may have to borrow in foreign currencies. Then the jig will be well and truly up.
ReplyDeleteAll other things being equal, ARM funding is usually less expensive than long term debt (even in the long term), but it exposes the borrower to more risk. It is a classic trade off between risk and benefit. The federal government theoretically could manage its own risk in this regard as it has the power to keep inflation under control. From one perspective more short term debt is a rational outcome.
ReplyDeleteHowever, government is run by politicians not accountants or economists. The actual effect of the ARM financing has been to minimize the impact of the debt on the federal cash flow, thus encouraging larger deficits. As a result, we are doubling down on the risk, because high deficits lead to higher inflation risk, which in turn lead to higher risk that debt servicing will become unsustainable.
I think the bigger question is how long will it take for these monster deficits to work their way through the whole economy and re-ignite inflation. Hopefully in time to influence the 2010 elections, so that voters can feel the true consequences of stimulus and vote accordingly and perhaps put the brakes on these huge deficits. Unfortunately, the Republican party has yet to adequately re-brand itself in image and in fact as a party of smaller government and reform, so they may not reap the benefit of inflation turning the Obama presidency into Carter II.
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