Why Is Goofy Smarter Than the U.S. Government?
June 21st, 2012
The Wall Street Journal featured my oped urging the Obama Treasury to lock in low borrowing rates by issuing 100-year bonds. By relying on short-term debt, the administration is leaving a catastophic, exploding balloon payment for our children and grandchildren.
The Treasury should take advantage of the biggest bargain since Pope Julius got Michelangelo to paint his ceiling.
Here’s the text of the essay:
America has been the land of the game show since Groucho Marx dangled a toy duck in front of the faces of contestants. Whether watching Let’s Make a Deal, Deal or No Deal, or The Price is Right, at some point just about all of us have screamed at a contestant — “Don’t be stupid–take the money!”
That’s what American citizens should be screaming at the U.S.Treasury Department. The government has racked up $5 trillion of debt since President Obama moved into the White House. We don’t know how we’re going to pay it back. And yet the world is willing to lend us 10-year money at rates substantially below 2 percent.
So why not give our kids a break by taking a deal and issuing 50 or 100 year bonds, locking in today’s puny rates? Corporations do it. In 1993 Disney issued “Sleeping Beauty” bonds and the market scooped them up. Last year Norfolk and Southern sold $400 billion in 100-year bonds, despite the uncertainty of railroads in the future. Will railroads be spaceships in 100 years?
Other countries are issuing long-term bonds, too. In 2011 buyers grabbed Mexico’s 100 year bonds, despite a pock-marked history of devaluations and defaults that stretch from 1827 to 1994. The average maturity of U.K. debt is three times longer than ours.
Instead of taking Disney’s and Mexico’s lead, the U.S. Treasury recklessly borrows short-term funds that must be rolled over. The average maturity of UK debt is three times longer than ours. The Obama administration claims that it has taken advantage of low yields and has in fact extended the average duration of debt. But it’s a flimsy boast. Yes, duration has moved up to 63.9 months but that is still short of the early 1990s and well below the 2001 record of 70 months. And let’s put the 2001 comparison in perspective. In 2001 10-year Treasuries yielded 5.16%. Today, the 10-year is rate 1.62%. A more prudent administration would smash the 2001 record, not gaze up at it.
So why has the Administration chosen to play the role of the feeble-minded game show contestant? The answer probably does not come from feeble-mindedness. Round up the usual suspect: shrewd political self-interest. Because short-term debt yields are the lowest on the yield curve (which is typically the case, except in rare inverted markets such as 2006), borrowing short gives the illusion of a lower budget deficit, flattering President Obama’s catastrophic fiscal profile–if anything can flatter a deficit-to-GDP ratio of nearly 9%!
With a generous Federal Reserve squeezing short rates down to zero, the interest cost of existing debt looks pretty meager at 1.4 percent of GDP
But this is a terrible tradeoff that makes President Obama look better while almost guaranteeing that our children are worse off. Issuing 100 year bonds, or at least 50 year bonds, would require a higher interest rate, perhaps 3 percent. Sure, that would put more pressure on near-term deficit reports. But leaders should be willing to let their personal image accept a dent, if it clearly helps their constituents. Locking in 100 years of borrowing at a 3% rate would be the biggest bargain since Michelangelo agreed to paint Pope Julius’s ceiling.
Recently, President Obama has been invoking President Reagan’s name. Reagan’s deficit profile looked lousy in his first term, peaking at 6 percent of GDP. In his first term, pundits threw rotten tomatoes at him for explosive Pentagon spending and for gradually raising the Social Security retirement age to 67. But those two measures alone — the former by pushing the Soviet Union to bankruptcy and the latter by wiping trillions of dollars of future liabilities off our national balance sheet — created a double-barreled peace dividend and helped launch a boom that created forty million net new jobs through the administrations of Reagan, Bush I, and Clinton.
President Obama should admit that our relatively short-term debt imperils us. Former Fed governor Lawrence Lindsey calculated on these pages that if yields jumped back to normal levels, deficit estimates would soar by $4.9 trillion over the next ten years. The stakes and risks are clearly much higher than anything Bob Barker or Drew Carey ever offered on The Price is Right. One of these days when the government tries to roll over America’s paper, rates will have catapulted much higher, and the world’s financial system will look at the U.S. taxpayer and announce: “Game over. You lose.”