Federal Addiction to Short-Term Debt Will Not End Well

Short-Term Debt Means a Sudden Rise in Interest Rates Will Crush Us.

money swirl

The short-term picture looks deceptively stable. The long-term picture is not so good.

On David Stockman’s website: “Uncle Sam’s $8 Trillion Annual Debt Churn: Why Washington Is Pertrified Of Honest Interest Rates.”

When discussing the national debt, most people tend to only focus on the amount that it increases each 12 months.  And as I wrote about recently, the U.S. national debt has increased by more than a trillion dollars in fiscal year 2014.

But that does not count the huge amounts of U.S. Treasury securities that the federal government must redeem each year.  When these debt instruments hit their maturity date, the U.S. government must pay them off.  This is done by borrowing more money to pay off the previous debts.  In fiscal year 2013, redemptions of U.S. Treasury securities totaled $7,546,726,000,000 and new debt totaling $8,323,949,000,000 was issued.  The final numbers for fiscal year 2014 are likely to be significantly higher than that.

So why does so much government debt come due each year?

Well, in recent years government officials figured out that they could save a lot of money on interest payments by borrowing over shorter time frames.  For example, it costs the government far more to borrow money for 10 years than it does for 1 year.  So a strategy was hatched to borrow money for very short periods of time and to keep “rolling it over” again and again and again.

This strategy has indeed saved the federal government hundreds of billions of dollars in interest payments, but it has also created a situation where the federal government must borrow about 8 trillion dollars a year just to keep up with the game.

In one brief essay, Michael Snyder provides a mind-numbing list of the mathematical crises facing the United States economy. Medicaid, Medicare, Social Security… all on the road to insolvency. Forty-nine percent of American households get government checks. It is unsustainable.

At this point, the primary function of the federal government is taking money from some people and giving it to others. In fact, more than 70 percent of all federal spending goes to ‘dependence-creating programs’, and the government runs approximately 80 different ‘means-tested welfare programs’ right now. But the big problem is that the government is giving out far more money than it is taking in, so it has to borrow the difference. As long as we can continue to borrow at super low interest rates, the status quo can continue.

But a Ponzi scheme like this can only last for so long.

[See also, “Barack Obama Has Added $6 Trillion to the National Debt.”]

Note well: we would not survive even 4-5% rates with the amount of debt we have, and how much rolls over each year. It would consume the entire budget, leaving nothing for national defense, or transfer payments.