Fast Action on U.S. Debt <br>Could Reap Trillions <br>In Savings Over Long Term
This article is from the archive of The New York Sun before the launch of its new website in 2022. The Sun has neither altered nor updated such articles but will seek to correct any errors, mis-categorizations or other problems introduced during transfer.
If President-elect Donald Trump’s economic growth plan — slashing business and personal marginal tax rates and rolling back costly business regulations — is achieved next year, the economy could break out with growth between 4% and 5%. That means much higher interest rates.
This rate rise will be growth-induced, a good thing. Higher real capital returns will drive up real interest rates. And inflation will likely remain minimal, around 2%, with more money chasing even more goods alongside a reliably stable dollar-exchange rate.
We’re already seeing some of this with the big post-election Trump stock rally occurring alongside a largely real-interest-rate increase in bonds.
However, looking ahead, 4% real growth plus 2% inflation could imply 6% bond yields in the coming years. That’s a big jump from the 2% average of most of the past ten years.
What that says is the time to act is now.
The average duration of marketable Treasury bonds held by the public has been five years for quite some time. Almost incredibly, Treasury Department debt managers have not substantially lengthened the duration of bonds to take advantage of generationally low interest rates. Hard to figure.
Treasuries held in public hands have moved up to 74% of GDP today from 32% of GDP back in 2008. Interest expense for fiscal 2016 is nearly $250 billion. So if Treasury debt managers had significantly lengthened their bond maturities, they would have saved taxpayers a bundle.
Now, with new economic-growth policies poised to drive up average Treasury rates to perhaps 6%, the Treasury folks better get moving fast to capture today’s historically low yields. Up to now they’ve been sleeping at the switch.
The key point? Start issuing much longer bond maturities. Much longer. If possible, America should experiment with 50-year debt issuance, and maybe go out as long as 100 years.
And this better happen fast.
Other countries have been smarter than us. Ireland and Belgium issued 100-year debt. Austria issued 70-year debt. Italy, France, and Spain issued 50-year debt. Japan pushed out a 40-year maturity with rumors that it’s considering 50 years.
Mexico, incredibly enough, has done three 100-year issues since 2010. The sizes were small, and the bonds were sold in foreign currencies. But it can be done.
Britain is probably the best benchmark. (The Brits are a lot like us, speaking even the same language!). The United Kingdom Treasury has issued 40- to 50-year bonds seven times. The latest auction was October 2015, with the issuance of 50-year debt with a coupon of 2.5%. (Thanks to economist Conrad Dequadros for this great debt info.)
Some more numbers. The CBO estimates that interest costs over the next ten years total $4.8 trillion, with the debt rising from the current $14 trillion to $23.1 trillion in 2026. They estimate the 10-year Treasury rate will average 3.3%. And the average rate on all debt increases to 4%.
Now, with some rough back-of-the-envelope calculations, under President-elect Trump’s growth program, suppose 10-year Treasury rates rise to average 5% over the next ten years, rather than the CBO’s 3.3% guess? The average interest rate for all debt would increase to 4% over that period rather than CBO’s 2.6%. The total interest-rate expense would be around $7 trillion rather than the CBOs $5 trillion.
However, if the U.S. issued 50-year debt, with the same rate as Britain’s 2.5%, by front-loading some longer-term issuance to hold the average interest rate to 3.5%, there would be a $1 trillion savings on budget-interest expense over the ten-year horizon.
That’s not chump change.
Skeptics will ask who exactly will buy 50-year U.S. paper. It’s a good question. But remember, insurance companies and pension funds need long-dated liabilities to match long-duration assets. And foreign institutions might also be interested in ultra-long American Treasuries, provided the American dollar is reliably stable.
This is entirely new ground for American debt management. But since a lot of foreign countries have successfully sold 50-year paper, we know it can be done.
And for America it must be done.
And if we sell out a bunch of 50-year offerings, why not try 100-year paper? A century bond. The budget savings would be incalculable. And under new policies, if the United States returns to its long-term annual growth trend of 3.5%, which prevailed in the prior century, America’s debt-to-GDP ratio could plunge to 30% or 40% instead of skyrocketing to 150% or more.
Stronger growth and much longer bond-maturity issuance will snatch fiscal victory from the jaws of defeat.