This terrible trade-off made President Obama look better while almost guaranteeing our children would be worse off…
I’d like to think that God greeted Monty Hall after his death in late September by asking whether he’d like to choose the gift behind Pearly Gate No. 1 or Pearly Gate No. 2…
Monty was the game show host who taught Americans to dress up like chickens on TV – no doubt leading the way to reality television and modern presidential campaigns. At some point, all of us have watched Let’s Make a Deal or a similar show and screamed at the contestant: “Don’t be stupid – take the money!”
That’s what American citizens should have been screaming at the U.S. Treasury Department for the past 10 years.
Even though interest rates have hovered at historically low levels, the U.S. government has refused to issue super-long-term debt and lock in the remarkable low borrowing rates.
The U.S. government borrows money by issuing bonds, bills, and notes. Lots of them.
Between 2009 – when President Barack Obama moved into the White House – and 2017, the federal government racked up more than $9 trillion of debt. Prior presidents had together amassed about $10.6 trillion. We do not know how we are going to pay it back. And yet the world has been willing to lend us 10-year money at rates substantially below 3%, in some years, as low as 1.6%. And the average duration of government IOUs is far shorter… 70% of U.S. debt has a duration of less than five years.
So why doesn’t the U.S. Treasury give tomorrow’s children a break by taking a deal and issuing 50- or 100-year bonds, locking in those puny rates for a lifetime?
You might think that in a world of “Brexit” votes and separatist movements in Catalan and Kurdistan, no one would trust that any government will be around in 50 or 100 years. But last year, Spain auctioned 50-year bonds.
Private corporations have pulled off the trick, too, including Coca-Cola, IBM, and Ford. Disney issued 100-year “Sleeping Beauty” bonds, and according to the Los Angeles Times, “demand proved greater than the company had anticipated.” Railroad operator Norfolk Southern enjoyed a similar reception in 2010. CBS News reported that “institutional investors bought them like crazy, leading Norfolk Southern to more than double the issue.” Imagine, buying 100-year bonds from a railroad? Will rails even exist in the 22nd century? Remember the line from Back to the Future: “Roads? Where we’re going we don’t need roads.”
Universities from the Ivies to the Big 10 to the Pac 10 have issued 100-year bonds. It may be the only thing other than avocado toast and faded Bernie Sanders stickers that unite fractured campuses from Yale to Ohio State to USC.
Even governments with shaky financial histories have grasped the concept. In 2010, buyers grabbed Mexico’s 100-year bonds, despite a pockmarked history of devaluations from 1827 to 1994. In June, Argentina which wrecked lenders and citizens in 2002 and has defaulted six times in 100 years – held its own well-attended, well-bid 100-year auction. More stable countries like Japan, France, and the United Kingdom issue bonds with durations of 40 years or more.
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 U.K. debt is three times longer than U.S. debt. President Obama’s Treasury department claimed that it had taken advantage of low yields – and did extend the average duration of debt. But it was a flimsy boast. Yes, duration moved up to just about five years, but that was still short of the early 1990s and well below the 2001 record of about six years. And let’s put the 2001 comparison in perspective. In 2001, 10-year U.S. Treasury securities yielded 5.16%. In 2012, the 10-year hovered just above 1.6%, before making its slow and erratic crawl to 2.35% today.
If policymakers were more prudent and more committed to future generations, they would have smashed the 2001 record, not gazed up at it.
According to the minutes of the Treasury Borrowing Advisory Committee, the acting director of debt management stated that the U.S. Treasury wants to “remain flexible.” Sometimes flexibility is good, if for example, you are a clown at the Big Apple Circus. But if you’re a debt manager with the opportunity to lock in borrowing rates that will help avoid a financial catastrophe, it’s better to be firmly in place.
Last spring, President Donald Trump’s Treasury Secretary Steven Mnuchin said that he was studying the idea. But studying for too long has its risks. The longer the U.S. Treasury waits, the more likely longer-term rates creep upward.
So why do presidential administrations choose to play the role of the feebleminded game show contestant? In my book, The Price of Prosperity, I suggest that we round up the usual suspects: shrewd political self-interest and a bias toward the short term.
Because short-term debt yields are typically the lowest on the “yield curve” (a graph that usually shows that it costs more to borrow for a longer term), borrowing short gives the illusion of a lower budget deficit, flattering the president’s fiscal profile. With the Federal Reserve squeezing short-term rates down to zero, the interest cost of existing debt looks meager at 1.3% of gross domestic product.
But this was a terrible trade-off that made President Obama look better while almost guaranteeing that our children would be worse off.
Issuing 100-year bonds, or at least 50-year bonds, would have required a higher interest rate, perhaps 3% or 3.5%. Sure, that would put more pressure on near-term deficit reports. But leaders should be willing to let their personal image take a hit, if it clearly helps their constituents. Our relatively short-term debt imperils American citizens. If yields jump back to normal levels, deficit estimates would soar by $4.9 trillion over the next 10 years.
Locking in a hundred years of borrowing at a 3% rate would be the biggest bargain since Michelangelo agreed to paint Pope Julius’ ceiling.
Would you advise a friend who’s buying a home to accept an adjustable teaser-rate mortgage that could catapult higher in a few years? In today’s low-rate environment, teaser rates are for fly-by-night salesmen. The United States should not be a fly-by-night country.
The stakes and risks are clearly much higher than anything Monty Hall ever offered on Let’s Make a Deal. Someday 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.”
Todd G. Buchholz has served as White House director of economic policy and managing director of the legendary Tiger hedge fund. He was awarded Harvard University’s annual teaching prize in economics and is the author of The Price of Prosperity. He tweets @econTodd and can be contacted at www.econTodd.com.