Yesterday’s decision by the Federal Reserve to raise its benchmark interest rate by a quarter-point -- likely the first of three this year -- served as a reminder that when it comes to financing America’s long-term debt, the U.S. is doing it all wrong. Even worse, the time to correct these errors is slowly slipping away.
As we should have learned during the financial crisis, matching the maturities of the U.S.'s funding requirements and its credit sources is crucial. Rolling over low-interest short-term loans every 90 days to fund longer-term liabilities seems like a cheaper financing method -- right up until the moment where short-term credit is no longer available. That’s when, as we saw in late 2008, companies such General Election Co. and Ford Motor Co. suddenly realized that they might not make payroll.
It isn't just the private sector that engages in this financial myopia; the U.S. Treasury does as well. The long-term financing obligations of the country include infrastructure projects that are designed to last a century (assuming they receive proper maintenance), as well as entitlement programs like Social Security and Medicare.
These safety-net programs were built on the assumption of an ever-increasing work force, where more people are paying into the system than are drawing benefits. And no, this isn't a Ponzi scheme, as some have claimed. Rather, the system is built upon the premise that the next decades will look pretty much like the past.
That expectation is increasingly unlikely to be met, as the ratio of workers to beneficiaries decreases and longevity rises. We have discussed this before (see this, this, this, this and this), and it's frustrating to watch the country miss the opportunity for what should be an easy fix.
There may, however, be some hope: Treasury Secretary Steve Mnuchin has repeatedly said that “he’ll explore issuing debt maturing in more than 30 years to cushion the effect of rising interest rates.”
As my Bloomberg Gadfly colleague Lisa Abramowicz wrote:
Mnuchin's willingness to consider ultra-long-term debt is sensible, especially considering the next administration's ambitious spending plans. The idea of 50-year U.S. debt isn't new, nor is it a bad one.
No -- in fact, at this moment it's a very good one. And keep in mind that this isn't some sly way to increase the country’s debt load, as some critics have claimed. Rather, it is a responsible way to fund the long-term obligations we already have.
Many other countries, including Canada, Spain, France, Switzerland, Britain, Italy, Ireland, Belgium and Mexico, already do this and fund their debt with 50- and 100-year bonds.