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Falling for Teasers and Not Squirreling Away Our Nuts

November 23rd, 2009 . by economistmom

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I like Ed Andrews’ New York Times article on how we’re running out of ways to cheaply finance our federal debt.  Ed explains:

The White House estimates that the government will have to borrow about $3.5 trillion more over the next three years. On top of that, the Treasury has to refinance, or roll over, a huge amount of short-term debt that was issued during the financial crisis. Treasury officials estimate that about 36 percent of the government’s marketable debt — about $1.6 trillion — is coming due in the months ahead.

To lock in low interest rates in the years ahead, Treasury officials are trying to replace one-month and three-month bills with 10-year and 30-year Treasury securities. That strategy will save taxpayers money in the long run. But it pushes up costs drastically in the short run, because interest rates are higher for long-term debt.

Adding to the pressure, the Fed is set to begin reversing some of the policies it has been using to prop up the economy. Wall Street firms advising the Treasury recently estimated that the Fed’s purchases of Treasury bonds and mortgage-backed securities pushed down long-term interest rates by about one-half of a percentage point. Removing that support could in itself add $40 billion to the government’s annual tab for debt service.

Why have we been living with a false sense of security about the seemingly-low costs of borrowing?  Because, as my boss puts it:

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

And Ed’s quote from Bill Gross is I believe the first time I’ve seen fiscal irresponsibility described in squirrel’s terms:

“What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William H. Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”

And another problem:  our government’s largest lender, China, might also be starting to worry we’re not such good squirrels, a la this past weekend’s opening sketch on Saturday Night Live (warning: not totally “G rated” so I’m not embedding it).

6 Responses to “Falling for Teasers and Not Squirreling Away Our Nuts”

  1. comment number 1 by: murf

    That was a fascinating article from Ed Andrews; however, he totally missed the most important thing: growth. If we do not encourage fiscal policies that promote growth, nothing we do will have much effect. Growth is the key.

  2. comment number 2 by: govt commentor

    What Bill Gross doesn’t mention is that we’re in the middle of the worst “winter” in decades. Yes, we should have been saving more before the recession, but now there’s 10 percent unemployment, so it’s not a time to skimp on nut-eating.

  3. comment number 3 by: SteveinCH

    So let’s create a structural obligation of more than $150 billion a year in perpetuity. Makes sense to me.

  4. comment number 4 by: Jim Glass

    In that SNL sketch, “How exaxctly is extending health care to 30 million more people going to save you money?” is no joke.

    Lee Kuan Yew, long time president of Singapore, was on Charlie Rose a couple weeks back and raised this exact point. Rose asked him about China and Japan and the Asian countries holding so many dollars and T-bonds, and what they thought about their exposure in doing so and the future of investing in the US.

    LKY answered (I’m paraphrasing, look up the interview, LKY was interesting on lots of things) by explicitly citing the health care reform proposal and saying: The Asians are watching this. You can’t insure 30 million more people and add a lot more benefits for the rest without spending a whole lot of money. If the govt pretends it can — by saying health reform will save money to pay for itself and/or resorting to gimmicks to push a big part of the cost down the road instead of facing it up-front — the Asian dollar-holders will take this as a very bad sign that the US govt is politically unable to be fiscally responsible.

    And as to what’s happening in that regard, we have former CBO head Douglas Hotlz-Eakin in more detail than before, and former CBO head Dr. June O’Neill (1995-9) in a new video message.

    Not so encouraging.

  5. comment number 5 by: Jim Glass

    “…the most important thing: growth. If we do not encourage fiscal policies that promote growth, nothing we do will have much effect. Growth is the key.”

    Growth is the most important thing for the economy over the long run surely — but alas, we have put ourselves in such a fiscal hole that growth cannot possibly pull us out of it.

    Looking at all the options to just stabilize the deficit (not close it, just keep it from growing) — i.e: raise taxes, cut spending, 50-50 tax increase/spending cut, grow the economy faster — I’ve estimated the
    actual numbers needed for 2030, to a rough first order, using 2007 as a base year. (Of course, things have gotten much worse since then.)

    As to growth, we’d need 60% greater annual growth than the long-term historical norm just for a first-order solution — meaning, *not counting* how entitlement liabilities would grow as well (e.g., SS is wage indexed, so if the economy grows X% so do wages and owed benefits, plus Medicare/Medicaid spending would surely zoom up with the economy) and how Congress would doubtless find all kinds of new things to blow its windfall on.

    A 60% increase in the annual growth rate is just not credible — nobody really knows how to increase the growth rate at all — *especially* in light of how the future growth rate is projected to *fall* from the long-term 3% to about 2% with the retirement of the baby boomers, due to the decline in the size of the work force.

    So at best growth is not the answer. And realistically, all the new taxes and regulations that are going to get slapped on the economy by the politicians to deal with the fiscal crisis when it arrives will do nothing but slow growth.

  6. comment number 6 by: Jim Glass

    No trust fund is left unraided!

    From Andrew Biggs, who previously reported how the Senate bill raids the Social Security trust fund…

    …it seems that no entitlement is left un-raided: the legislation put forward by Senate Majority Leader Reid, which contains the raid on the Social Security trust fund, would also impose some accounting tomfoolery on Medicare.

    It’s well-known by now that Reid’s plan would increase the Medicare payroll tax to help offset the costs of the plan.

    What I didn’t know, though, is that these new taxes would first be laundered through the Medicare trust fund, creating an entirely fictitious improvement in Medicare’s financial health.

    The new taxes are credited to the Medicare trust fund, creating an entitlement to new revenues from the rest of the budget. But the actual revenues will immediately be used to cover non-Medicare health costs. Looks like double-counting to me.

    Then general revenue taxes will have to be raised later, after the 10-year scoring period, to cover the expense “paid for” today, to redeem the new Medicare TF bonds issued today, which are scored as an “asset” to Medicare.

    My word, with all this budget gaming and gimmickry they’re whipping up to cover the cost of this program these Dems are making the Bushies look like a bunch of no-imagination nerds.

    The guys in the Enron cell block could only dream of pulling off accounting like this.