Monday, November 23, 2009

Like a Good Squirrel the U.S. Should Have Stashed Away for the Winter

The looming fiscal crisis facing the U.S. is aptly captured in a quote from Bill Gross "“What a good country or a good squirrel should be doing is stashing away nuts for the winter. The United States is not only not saving nuts, it’s eating the ones left over from the last winter.”
The New York Times reports that a Wave of Debt Payments is facing the U.S. Government, with a staggering $1.6 trillion of short term debt maturing by March 2010 alone. The U.S. Treasury is desperately trying to roll over this debt into longer term paper without raising the cost of borrowing. However they will find the going tough, as on top of this the U.S. government has to borrow an additional $2 trillion to bridge the annual budget deficit. The Times reports that:
Treasury officials now face a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead, and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.
Even as Treasury officials are racing to lock in today’s low rates by exchanging short-term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.
Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the last two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.
“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.”
This month, the Treasury Department’s private-sector advisory committee on debt management warned of the risks ahead. “Inflation, higher interest rate and rollover risk should be the primary concerns,”
“Clever debt management strategy,” the group said, “can’t completely substitute for prudent fiscal policy.”
We agree.

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