Courtesy of Dr. Paul Price, Beating Buffett
The official national debt figure is widely trumpted as a bit over $14 trillion. If that were not bad enough the currenty historically-low effective interest rate on the debt service has come as a result of shifting more and more of the total debt to short-term maturities.
Noted economist David Malpass noted in a recent Forbes article that the average maturity on U.S. debt has dropped from 70 months in the 1980’s to less than 60 months today. More ominously, the Federal Reserve’s large buyback of longer-dated bonds has turned the effective maturity to under 40 months!
America now must roll over the entire national debt every three and quarter years making taxpayers the holders of what is essentially the largest ‘adjustable rate mortgage’ in the history of the world.
Any number of events could cause interest rates to surge sending our debt service costs quickly spiraling to unsustainable levels 5 – 15x what we are currently paying. This could crowd out virtually all other federal spending making today’s budget talk look like a joke compared to the problems we’ll face when this occurs. See the chart below for a preview of what a rise to only 30-year average rates would do to our debt service costs.
The percentage of our debt held by foreigners skyrocketed from 18% in 1989 to about 46% in 2010. Should China or Japan decide to stop, or simply cut back on their purchases of our debt, there will likely be a much larger spike in our interest rates and debt service costs than projected above.
Unfunded mandates for Social Security, Medicare and Medicaid dwarf the substantial debt that our leaders fess up to having incurred already. Immediate and substantial changes are needed if we are to avoid looking like Iceland, Greece or Ireland yet our president actually proposed a budget that would increase our deficits dramatically rather than doing what is hard and necessary.
Every dollar of illusory deficit reduction is scheduled to occur after the next presidential election- when the pain of the necessary austerity measures can’t hurt Obama’s chances for another four years of financial mismanagement.
Dr. Paul Price
