One wonders how Treasury Secretary Timothy Geithner can sleep soundly at night with the knowledge that more than 60% of America's sovereign debt is set to mature within the next three years. To be precise, $5.2 trillion of U.S debt comes due in the next three years out of $8.3 trillion outstanding. The weighted average cost of U.S sovereign debt is an astoundingly low 1.21%, about the same as the current yield of the five-year Treasury note.
But if the Treasury had to pay the equivalent of the 10-year average of five-year government yields of 3.77%, it would incur additional interest costs of $133 billion annually. A rise in five-year yields to the 20-year average of 4.87% would increase the additional interest expense cost by 43% or an additional $190 billion annually.
Some might ask why the U.S. should increase the deficit at all. But the time to secure long-term funding is when you can and it is mildly expensive, not when you have to and the costs are exorbitant.
The U.S. government's financial flexibility is both a blessing and a curse—a blessing because it allows the country to use deficit spending to smooth out business cycles, a curse because this has only reinforced government profligacy. America's deficit problem, as everyone knows, is not pretty. Treasury debt issuance increased by a remarkable $1.9 trillion in fiscal year 2009 and the deficit is projected at $1.3 trillion (9% of GDP) and $1.1 trillion (7% of GDP) for fiscal years 2010 and 2011, respectively.
While some may claim these deficits are cyclical and are inflated by the Troubled Asset Relief Program and other supposedly short-term fiscal programs, it is difficult to describe deficits approaching 10% GDP as anything other than structural.
Ultimately, if America is going to dissave to this extent, there are only a few ways to make the equation work—we will either need to accept a lower level of investment or rely on an increase in personal savings, higher levels of retained earnings by corporations, or greater foreign purchases of our debt.
And so we are left with the question we started with, why is the Obama administration content to use short-term borrowing to fund its long-term liabilities? There are only two plausible explanations for this precarious funding plan—one cynical, one practical.
On the cynical side, the choice to keep the average maturity short may be an attempt to keep interest expenses, and consequently the current budget deficit, as low as possible, regardless of the danger this could present for the long-term fiscal health of the country.
More practically, short-term funding may simply be a function of the fact that the marginal buyers of America's debt are growing uneasy with its profligacy. The Treasury Department announced last month that China reduced its holdings of U.S. Treasurys for the second straight month through June.
While the chances of China completely walking away from our debt markets are low given its dependence on the American consumer, there is little question that the U.S. is surrendering a portion of its sovereignty by relying on foreign creditors and "the kindness of strangers."
In this context, it might be wise to remember Hemingway's Mike Campbell from "The Sun Also Rises," who, when asked how he went bankrupt, responded, "Gradually, then suddenly."
Mr. Trennert is managing partner of Strategas Research Partners.
The Wall Street Journal Op-Ed: Treasurys and the Danger of Short-Term Debt- September 10th, 2010
He Talks to Taxi Drivers and Bartenders for Research. Here Are His Stock Picks
The Wall Street Journal Op-Ed: The Stock Market and the ‘Tina’ Factor- April 3rd, 2013
The Wall Street Journal Op-Ed: Modern Monetary Theory Is Ancient- August 14th, 2019
The Wall Street Journal Op-Ed: Remembering the Reagan Bull Market- August 13th, 2009