Consider the following numbers: 2.2, 62.8, 454, 5.9. Drawing a blank? Not to worry. They don’t mean much on their own.
Now consider them in context:
• 2.2 percent is the average interest rate on the U.S. Treasury’s marketable and non-marketable debt (February data).
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• 62.8 months is the average maturity of the Treasury’s marketable debt (fourth quarter 2011).
• $454 billion is the interest expense on publicly held debt in fiscal 2011, which ended Sept. 30.
• $5.9 trillion is the amount of debt coming due in the next five years.
For the moment, No. 1 and No. 2 are helping No. 3 and creating a big problem for No. 4.
In plain English, the Treasury’s reliance on short-term financing serves a dual purpose, neither of which is beneficial in the long run. First, it helps conceal the depth of the nation’s structural imbalances: the difference between what it spends and what it collects in taxes. Second, it puts the United States in the precarious position of having to roll over 71 percent of its privately held marketable debt in the next five years – probably at higher interest rates.
And that’s a problem. The U.S. is more dependent on short-term funding than many of Europe’s highly indebted countries, including Greece, Spain and Portugal, according to Lawrence Goodman, president of the Center for Financial Stability, a nonpartisan think tank focusing on financial markets.
The U.S. may have had a lot more debt in relation to the size of its economy after World War II. But the structure was much more favorable, with 41 percent maturing in fewer than five years, 31 percent in five to 10 years, and 21 percent in 10 years or more, according to CFS data. Today, only 10 percent of the public debt matures outside of a decade.
Based on the current structure, a 1 percentage-point increase in the average interest rate will add $88 billion to the Treasury’s interest payments this year alone, Goodman said. If market interest rates returned to more normal levels – well, you do the math.
Some economists have cited the Treasury’s ability to borrow all it wants at 2 percent as an argument for more fiscal stimulus. Why not, as long as it’s cheap?
Goodman said the size of the deficit (8.2 percent of gross domestic product) or the debt (67.7 percent of GDP) is only part of the problem. The bigger threat is rollover risk. That’s “the same thing that got countries from Portugal to Argentina to Greece into trouble,” he said.
The U.S. is unlikely to go from all-you-want-at-2-percent to basket case overnight. That said, policymakers would be wise to view recent market volatility as a taste of things to come.
The dangers are very real and were highlighted by Federal Reserve Chairman Ben Bernanke in a lecture to students at George Washington University. Explaining why the decline in house prices had a greater impact than the drop in equity prices less than a decade earlier, Bernanke talked about “vulnerabilities” in the financial system. Too much debt was one; a reliance on short-term funding was another.
I doubt he had the Treasury in mind when he was explaining how the subprime debacle morphed into a global financial crisis, but the U.S. government would be wise to heed his advice.