Flood of New Debt Tests Bond Market and our National Security and Leadership
Economics Without The B.S.**:
[** Double entendre intended.]
Wall Street Journal article --
The increasing debt load of the U.S. is changing the composition of our debt -- and will likely result in its being of longer duration than the average of five or six years as it has been for about twenty years now.
We used to have longer duration on our debt prior to Bill Clinton's Administration -- more of our debt was held in 30-year bonds. Back then as we had budgets that were more in balance, we converted some of that long-term debt (30-year bonds) for shorter-term debt (2-year, 5-year, 10-year notes) when we turned over our debt for refinancing. The shorter term of our debt composition makes it less subject to risk for investors -- and that has made it attractive to investors to take on that debt.
With an average duration of five to six years for our debt composition/portfolio -- we turn over about half of our debt every two or three years. If we lengthen that duration past six years, it will add more risk for investors -- and we could wind up financing our debt at higher rates of interest, and become more of an expense in our annual budget.
The way to avoid this additional cost is for the U.S. to raise its level of productivity -- which has been at historically low levels for about twenty years now. Something to watch in the news over the next several years. Our ability to sell our debt to investors (domestic and foreign) depends on how competitive we are with other investment opportunities in the international marketplace.
Also note the chart with the Fed taking more our debt onto their balance sheet. This is what is giving the Fed leverage in the international markets during times when it intervenes at times when the international markets are not functioning well. The Fed uses these treasuries to swap with foreign central banks (the Fed gives them our treasuries, highly valued, for their currency, less valued) and the foreign central banks make loans to their businesses, during times when credit/funding/liquidity is tight. [It is illegal for our Fed to loan to foreign businesses; but this is how our Fed gets around this. This is an indication of how screwed up our international market system has become, and what the U.S. has to do to stabilize the system we created and take responsibility for since WWII.]
So our Fed bails out the rest of the world during periods of instability -- in order to avoid downward deflationary spirals, which are bad for investment, growth, and lead to long periods of panic/depressions like we had in the 19th Century. We had frequent deflationary periods during our history through the 19th Century right on up to the Great Depression. We have only had three deflationary years since WWII -- 1949, 1955, 2009.
These continued bailouts are an indication our reliance on markets to self-correct are not working. Some think (me included) this instability causes imbalances in our globalized economic system and contributes to inequality.
And the consequences for the United States, since this is a system we created and take responsibility for maintaining, is that this inequality, both globally as well as domestically, hinders our ability to spread our democratic values, highlighting the contradictions in our stated objectives of trade/commerce and pursuing our foreign policy, and therefore is a major obstacle in our national security strategy.
Human progress depends on economic development, which is furthered by broad-based growth and a democratic system of governance.
