The incredibly low rates on long dated debt allows the US Treasury to fineness some of these problems by affordably issuing long term bonds. If debt is long dated this reduces the rollover risk (US Govt wanting funding in excess of capital markets willingness to supply that funding) and makes it possible to inflate away some of that debt if inflation rises. With short term debt almost all the inflation risk is held by the issuer (the Treasury).
the Treasury has lengthen the Weighted Average Maturity of Marketable Debt Outstanding from about 55 months pre-financial crisis to 67 (5.5 years) months today. Lengthening that to 30 years would cost about 1.9% instead of 0.7% per year. Of course, we don't have to go all the way to 30 years to get significant and inexpensive insurance here.
I have pre-ordered the book “The Debt Trap” by Josh Mitchell that will be circulated tomorrow. I read a review praising the book for the description of how this huge debt has been accumulated by many thousand students in your country. I believe it’s important to understand how politicians are planning to deal with this private debt because as of today the barbarians intend to bail the debtors out with the expectation that most will vote for them in future elections and the opposition to the barbarians look weaker each day. It doesn’t matter if the bailout is over $1.0 trillion, or just under it. It’s large enough to signal what may happen with other huge debts and entitlements. Sooner or later the federal government will have to deal with total debt much larger than the $30 trillion you mention in your column because nobody should expect an “automatic” increase in tax revenue from investments financed with that huge borrowing. You can bet that most “additional” spending financed by that borrowing was on consumption of all sorts of goods and services, mainly by the constituencies that benefited from income redistribution. Don’t trust people that entertain the idea that at least a significant part of that spending was on productive investments. Please, make clear this point any time you write about the debt: it implies that Federal Government is running the largest Ponzi game in history, meaning that “new” and “old” savers/lenders expect that the FG will continue to find other “new” savers/lenders to pay for both the increasing redistribution and the increasing interest burden (even assuming that the rates remain at the current level).
At this time, the bailout of the students’ debt may trigger the crisis. It’s not the only trigger, however. One may argue that all nominal interest rates may suddenly increase as they did in response to Paul Volcker’s policies in 1980, but today the world’s financial markets are quite different, and I suspect that any disruption will be on the savers/lenders’ side as a result of a sharp change in their expectations about the U.S. government’s ability to refinance the huge debt without accepting some serious conditionality. Although lenders may not be prepared to negotiate and impose conditionality, the main problem is that American politicians will be quite reluctant to accept any conditionality because “the U.S. is not Argentina”. As Sebastián Edwards shown in his American Default, it’d not be the first default, but this time the defaulting debtor is the FG. Since 1933, lenders have been able to learn to negotiate with small governments but not with large ones. The FG may have the power to impose its solution as in 1933, but the proposed solution would have to be negotiated within the FG (meaning both the President and the Congress and therefore both parties) and then accepted by the lenders without challenge it before courts. Any serious solution will involve some conditionality, meaning a serious fiscal adjustment (it will affect future flows of tax revenues and their spending and therefore the careers of all the politicians involved), something that American politicians have evaded for a long time. To make matters worse, now the barbarians are part of FG and fighting for consolidating and expanding their power.
Good luck. Please don’t focus on prices and interest rates (they are endogenous). Focus on politics and government and try to explain the behavior of all factions involved and the bureaucrats.
The incredibly low rates on long dated debt allows the US Treasury to fineness some of these problems by affordably issuing long term bonds. If debt is long dated this reduces the rollover risk (US Govt wanting funding in excess of capital markets willingness to supply that funding) and makes it possible to inflate away some of that debt if inflation rises. With short term debt almost all the inflation risk is held by the issuer (the Treasury).
As we can see in the Treasury's most recent Treasury Presentation to TBAC, (https://home.treasury.gov/system/files/221/TreasuryPresentationToTBACQ22021.pdf),
the Treasury has lengthen the Weighted Average Maturity of Marketable Debt Outstanding from about 55 months pre-financial crisis to 67 (5.5 years) months today. Lengthening that to 30 years would cost about 1.9% instead of 0.7% per year. Of course, we don't have to go all the way to 30 years to get significant and inexpensive insurance here.
I have pre-ordered the book “The Debt Trap” by Josh Mitchell that will be circulated tomorrow. I read a review praising the book for the description of how this huge debt has been accumulated by many thousand students in your country. I believe it’s important to understand how politicians are planning to deal with this private debt because as of today the barbarians intend to bail the debtors out with the expectation that most will vote for them in future elections and the opposition to the barbarians look weaker each day. It doesn’t matter if the bailout is over $1.0 trillion, or just under it. It’s large enough to signal what may happen with other huge debts and entitlements. Sooner or later the federal government will have to deal with total debt much larger than the $30 trillion you mention in your column because nobody should expect an “automatic” increase in tax revenue from investments financed with that huge borrowing. You can bet that most “additional” spending financed by that borrowing was on consumption of all sorts of goods and services, mainly by the constituencies that benefited from income redistribution. Don’t trust people that entertain the idea that at least a significant part of that spending was on productive investments. Please, make clear this point any time you write about the debt: it implies that Federal Government is running the largest Ponzi game in history, meaning that “new” and “old” savers/lenders expect that the FG will continue to find other “new” savers/lenders to pay for both the increasing redistribution and the increasing interest burden (even assuming that the rates remain at the current level).
At this time, the bailout of the students’ debt may trigger the crisis. It’s not the only trigger, however. One may argue that all nominal interest rates may suddenly increase as they did in response to Paul Volcker’s policies in 1980, but today the world’s financial markets are quite different, and I suspect that any disruption will be on the savers/lenders’ side as a result of a sharp change in their expectations about the U.S. government’s ability to refinance the huge debt without accepting some serious conditionality. Although lenders may not be prepared to negotiate and impose conditionality, the main problem is that American politicians will be quite reluctant to accept any conditionality because “the U.S. is not Argentina”. As Sebastián Edwards shown in his American Default, it’d not be the first default, but this time the defaulting debtor is the FG. Since 1933, lenders have been able to learn to negotiate with small governments but not with large ones. The FG may have the power to impose its solution as in 1933, but the proposed solution would have to be negotiated within the FG (meaning both the President and the Congress and therefore both parties) and then accepted by the lenders without challenge it before courts. Any serious solution will involve some conditionality, meaning a serious fiscal adjustment (it will affect future flows of tax revenues and their spending and therefore the careers of all the politicians involved), something that American politicians have evaded for a long time. To make matters worse, now the barbarians are part of FG and fighting for consolidating and expanding their power.
Good luck. Please don’t focus on prices and interest rates (they are endogenous). Focus on politics and government and try to explain the behavior of all factions involved and the bureaucrats.