As I have argued (repeatedly, endlessly, ad nauseam, I know!), our real national debt is not that $14.3 trillion we always hear about, but more like $140 trillion. Another thing to keep in mind: That $14.3 trillion is not just one national debt, but four of them.
There are two flavors of national debt: debt held by the public and intragovernmental debt. The first category — securities held by investors, basically — is the one we mostly worry about. (I worry about the other one, too, but that’s another story.) If I may be permitted to express it in its full glory, the debt held by the public as of April 15 amounts to $9,679,202,714,701.01. (Love, love, love that penny on the end — can’t say Treasury isn’t minding the details! Wasn’t it Ben Franklin who said, “Mind the pennies and the trillions will take care of themselves”? Or something like that?)
That debt held by the public is really four debts, because we have four main ways of financing our borrowing: Treasury bills, Treasury notes, Treasury bonds, and Treasury Inflation Protected Securities (TIPS). Bills are the shortest-term security, the attention-deficit-disorder case of the U.S. sovereign-debt world, maturing in one year or less. Notes, like liberal-arts graduates, mature in one to ten years, and bonds, like a mortgage (remember mortgages?), go from 20 to 30 years. TIPS are a mixed bag, in five-year, ten-year, and 30-year versions. TIPS are a relatively new thing, having been introduced in 1997. They’ve grown popular, from accounting for $33 billion of the national debt in their first year to $640 billion as of March 2011.
Now, when you’ve got $9,679,202,714,701.01 in debt floating around out there in the marketplace, and you’ve got S&P sort of frowning in a meaningful way at your ledger, and bond funds are wishing you the very best of British luck as they dump your debt and refuse to buy any more, but you just can’t help yourself and have to buy a shiny new windmill whenever you see one — in that sort of a situation, you might be keenly interested in how much of your debt is financed through short-term bills vs. how much is locked into 20- or 30-year rates with the long bond. We are starting to have that discussion just now. And it ain’t pretty: The average maturity is 59 months, and about $1.7 trillion of the publicly held debt is in short-term notes, which presents real, sobering risks of the standing-on-a-ledge variety should interest rates spike up.
Here’s the thing: It costs more to finance your debt with 30-year bonds than with 30-day bills. (Yeah, I know, they’re 28-day bills, but cut a poet some slack.) That’s because investors, like men with options, are commitment-shy. If you’re going to lock your investment down for 20 or 30 years, you want a pretty high rate of return. But for 28 days? Less so. But there’s a tradeoff: Interest rates change, sometimes dramatically and often unexpectedly. When the 28-day bill comes up and you still haven’t balanced the budget, you have to refinance that debt. Ben Bernanke and Ramesh Ponnuru are working hard to keep Washington’s short-term borrowing rate at basically zero right now, so there’s a lot of incentive to use short-term rather than long-term financing. Sometimes that works out well: The Clinton administration pushed a lot of our debt into shorter-term instruments back in the 1990s and helped save a bundle on borrowing costs. (The other way to save a bundle on borrowing costs: Stop borrowing.) But sometimes taking the short-term deal and leaving yourself open to unexpected changes in debt-service costs is really, really stupid: Ask somebody who signed up for one of those brilliant adjustable-rate mortgages that take you from free money to pawn-shop rates overnight. A lot of people, myself included, worry that we’ve got too much short-term debt and should use more long-term financing to protect ourselves from interest-rate risk, even if it costs more to do so. Why? Because debt service is one of those checks the government absolutely has to write, and you don’t want surprises. That’s how you get the sort of fiscal crisis that leaves you with banana-republic finances while the Canadians laugh at you.
Incidentally, the Obama administration may be the world-champion deficit spenders, but maturity rates actually hit their low during the Bush administration: In 2008, average maturity was only 48 months. In 2000, long-term bonds accounted for 21 percent of the total debt; by 2009, bonds were down to just under 10 percent of the debt. They’ve climbed a bit since then, up to 10.3 percent. (If you want to check my math, there’s a spreadsheet o’ Treasury figures here.)
The real action seems to be in the medium range, in the notes: In 2008, we owed about $2.8 trillion on those; by 2010 it was $5.6 trillion, and it was $5.8 trillion as of March 2011. Let’s hope we get our finances in order before those come due.
— Kevin D. Williamson is a deputy managing editor of National Review and author of The Politically Incorrect Guide to Socialism. You can buy an autographed copy through National Review Online here.
I have nothing really to say other than my captcha text was nest egg. Very weird in context.
Reply to this commentLinkReport AbuseThanks Mr. Williamson.
Certain once again that you'll be ready for the lib-progressive thiefs who visit NRO that will bash your effort!!!
Reply to this commentLinkReport AbuseDo the disillusioned progressive liberals like Michael Moore read this and dispute it still believing that we have plenty of money to pay off our debt?
Do ignorant progressive liberals that listen to other progressive liberal dopes like Michael Moore really believe we don't have a problem?
The problem with this article is that it will never make it into the media outlets that need to get this across to readers that need to understand this the most.
Regardless Kevin, keep up the good work.
Reply to this commentLinkReport AbuseIs there any way we can hold a gun to the head of every member of Congress and make them read every single word Kevin D. Williamson writes? I learn something from every single one of his articles, and the fact that he manages to write about complex financial ideas without making me lose consiousness or put a gun to my own head is truly a remarkable achievement.
Reply to this commentLinkReport AbuseThe bottom in maturity rates may have been hit under Bush, but It was Clinton who refused to lock in more of our obligations at the longterm low interest rates available to him beginning this trend.
Reply to this commentLinkReport AbuseHypothetical:
I have a mortgage, I have a student loan, I have a canceled credit card with a back balance. It all totals, lets say, $80,000. Three debts.
But "what is your debt?" does not get answered "Well, see here, I have four debts, each roughly $20,000." No - my DEBT totals $80,000.
And when we are dealing with enterprises even 1/50 the size of the US government, it makes a conversation about debt a little muddy to begin by counting each individual debt as a separate conversation piece.
By the way, on that $140 trillion figure:
Kevin Williamson (and the rest of us who earn income) has future tax liabilities, his assumption of which is more certain than his own death (and which perhaps will increase upon such unfortunate event), and the value of which I AM SURE he is approximating in present dollars when determining his debt load!
RIGHT MR. WILLIAMSON?
ALL future liabilities get counted in present debt load? Apparently, that applies only to governments.
We can all assume a marginal federal income tax rate of at least 10%, and we can assume stagnant wages moderately increased as a periodic COLA, to get a low-ball estimate of our ACTUAL debt RIGHT NOW to the federal government.
Or, we can scrap talk of $140 trillion. If more than one person picks up on this "four debts" lexicon, I'll take aim at that when the time comes.
It'll be a sort of future liability - of mine to Mr. Williamson!
:)
Reply to this commentLinkReport AbuseThis article describes a problem which became apparent in the NYC situation in the mid 1970s when the City was not able to "roll over" (refund) it short term notes. The City kept its financings in notes for which interest rates were under 2% rather than bonds for which rates were in the 4% range. If market rates had stayed at those levels the City financings would possibly not had any problems absent other concerns. The feds had been trying to shorten their debt for several administrations.
Reply to this commentLinkReport AbuseI have a thought experiment and you guys can chew me up here. What if we took all the gold and silver we supposedly have in our collective national possession and said that whatever debt we have divided by grams of gold or silver is what the dollar is worth($/gm), pay off our debt with the gold and silver on hand, end the Feds monopoly on legal tender, and then start trading gold or silver equivalent notes. Everyone gets paid and we have no debt. How great would that be?
Why won't that work? I mean really - can we think outside the debt box we're in?
Reply to this commentLinkReport AbuseRelated but OT:
Tax revenues and federal expenditures should be discussed in terms of aggregate personal income, not in terms of GDP, because the government collects taxes from individuals, not from the GDP.
Based on the WSJ piece from Monday (External Link
), the total adjusted gross income in 2008 for the population of the US was $5.65T.
Federal revenues from the Government Printing Office website for 2008 were $2.52T (External Link
), and federal expenditures were $2.93T.
About 80% of federal revenues are taken directly from the $5.65T of AGI in the form of income tax and payroll taxes. Another 15% are taken indirectly from the $5.65T of AGI via corporate income taxes, customs duties, and excise taxes. For the sake of simplicity, I'm going to say that all federal revenues come from taxation of the AGI, even though it's arguable that 5% are taxes on wealth.
$2.52T is 44.6% of $5.65T.
$2.93T is 51.9% of $5.65T
It is clear from the collected tax revenue that the federal government confiscated over 40% of all taxable income in 2008. It spent about 50% of all taxable income that year.
That's your real tax rate.
GDP went from $14.3T in 2008 to $14.6T in 2010. For argument's sake, assume that the entire $300B increase was money in people's pockets, and call the 2010 aggregate AGI $6T even.
The fed collected $2.16T in taxes in 2010. Whoo-hoo! Yay! The national tax rate dropped to only 2.16 / 6 = 36%!
It spent $3.72T. Oh, dear. The national spend rate -- the real tax rate, since all this has to be paid back sometime -- was 3.72 / 6 = 62%.
How is this related to the OP? If I can do the math, then the bond market can, too. Ratios such as these do not inspire confidence that their loans will be repaid.
Reply to this commentLinkReport Abusemadisonian, your hypothetical has no relationship at all to Mr. Williamson's post. You have three debts. Two are long term at fixed rates; you know what their cost will be until they are paid off. Your third is fixed amount short term & I assume has a higher interest rate.
Mr. Williamson's concern is the ratio of long term debt to short term debt, where the total debt keeps growing. In your hypothetical, all of your debt is fixed and interest rates are known. For the USA, not only is the debt growing, but because more & more is short term and is continuously rolled over we are exposed (at risk) to higher interest rates.
Ask any businessman the difference between his mortgagge and the 90-day note he gets from the bank to fund inventory expansion.
Debt service is a scary percentage of the budget. Having that number at risk of increasing dramaticly should be a major concern.
Reply to this commentLinkReport Abuse@MarathonMan: While the US has the world's largest gold reserve at somewhere around 9,000 tons that is a pittance compared to the debt.
Market rate for gold is currently about $1500.
Reply to this commentLinkReport Abuse9000 tons * 2000 pounds per ton * 16 = 288,000,000 ounces
That's a lot of gold, but at $1500 per ounce only works out to about $432,000,000,000 or only 1/22 of the $9,679,202,714,701 cited above.
rasputin is being too polite. The truth of the matter is that the Fed gov't is insolvent. And since the Feds have no source of revenue other than us taxpayers, we are doomed, or more precisely, our children are doomed to a fate of paying off the Peoples' Army, Russian gangsters and Gulf oil Sheiks plus a lot of union pension funds who are the bondholders. That is the result of crazy debt, caused by profligate spending. Thank you barry, harry, Nancy, George W. et al.
Reply to this commentLinkReport AbuseMarathon man has an accounting question: what is a liability? A liability is an unavoidable future obligation based on a past event. Future taxes are based on future income so they are clearly not a liability to the tax payer nor an asset to the government.
Reply to this commentLinkReport AbuseThe government's liability for Social Security etc. is a more interesting question because of the question of avoidance as shown in the Supreme Court case.
Of course, often these liabilities are often improperly inflated by conservatives who compute them with low interest rates rather than a market rate like, say, 8%.
I'm afraid KW is only looking at this from the government's perspective.
Reply to this commentLinkReport AbuseSuppose, to keep it simple, all of the federal debt is either in 30 day bills or 30 year bonds.
If it's all in bills and interest rates shoot up then it's expensive to roll over, as KW describes, and the federal budget is in trouble. But the owners of the bills are ok. They get their money back within 30 days and can reinvest it at the new higher rates.
If it's all in bonds and interest rates shoot up it's the mirror image. Now the feds are ok - they've locked in the low rate for 30 years. But the owners of the bonds are screwed. No one wants a 30 year bond paying 4% when market rates are 10%, so the price of the bond plummets. The bond owner takes the hit instead of the bond issuer.
TANSTAAFL - when interest rates rise someone is going to get hurt. The shorter term the debt is the more the government takes the hit. The longer term the debt the more the owner of the debt takes the hit. If all debt was owned by US citizens, then lengthening duration means citizens suffer more when rates rise. (Of course if it's short duration and the government takes the hit that just means more debt which citizens have to cover with taxes. Either way we can't escape the consequences of our fiscal irresponsibility.)
Gersen:
You're absolutely right, of course. But my worry here is about a possible crisis in government finance; if some bond investors make bad investments . . . haven't we all? (Those of us who are not Too Big To Fail, anyway.)
Tangent: A very nice reader ordering a copy of my book last week asked that it be inscribed: "TANSTAAFL." Made me happy.
Reply to this commentLinkReport AbuseAll this discussion about bonds and maturity remind of the scene in Gone With the Wind. Scarlet is talking with her father and he's going on about how much money they have in Confederate Bonds. The look Scarlet gets on her face is the one you see on many faces when the subject of government spending/borrowing is raised. They are shocked at the cost but they'll think about the consequences later.
Reply to this commentLinkReport AbuseTomorrow is another day? I'd say that most Americans are Scarlet. Part of them is shocked at where we are and want to blame someone. A few might even understand that they are partly responsible for asking for the Free Lunch but they are not going to think about what it takes to remove the problem.
I am smarter for having read this.
Reply to this commentLinkReport AbuseGold is in troy ounces, so the calculation of US reserves is off by about 10%, but we get the idea
Reply to this commentLinkReport Abuse"...the Obama administration may be the world-champion deficit spenders".
Makes those Bush tax cuts look bad, doesn't it?
Reply to this commentLinkReport AbuseEven if the budget is balanced, you will still have to refinance that note when it matures. It's just that you won't be buying new notes.
It's only when the budget is in surplus that you have money to retire old debt without taking on new debt.
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