American Consequences - November 2017

Borrowing Advisory Committee, the acting director of debt management stated that the U.S. Treasury wants to “remain flexible.” Sometimes flexibility is good, if for example, you are a clown at the Big Apple Circus. But if you’re a debt manager with the opportunity to lock in borrowing rates that will help avoid a financial catastrophe, it’s better to be firmly in place. Last spring, President Donald Trump’s Treasury Secretary Steven Mnuchin said that he was studying the idea. But studying for too long has its risks. The longer the U.S. Treasury waits, the more likely longer-term rates creep upward. So why do presidential administrations choose to play the role of the feebleminded game show contestant? In my book, The Price of Prosperity , I suggest that we round up the usual suspects: shrewd political self-interest and a bias toward the short term. Because short-term debt yields are typically the lowest on the “yield curve” (a graph that usually shows that it costs more to borrow for a longer term), borrowing short gives the illusion of a lower budget deficit, flattering the president’s fiscal profile. With the Federal Reserve squeezing short-term rates down to zero, the interest cost of existing debt looks meager at 1.3% of gross domestic product. But this was a terrible trade-off that made President Obama look better while almost guaranteeing that our children would be worse off. Issuing 100-year bonds, or at least 50-year bonds, would have required a higher interest

rate, perhaps 3% or 3.5%. Sure, that would put more pressure on near-term deficit reports. But leaders should be willing to let their personal image take a hit, if it clearly helps their constituents. Our relatively short-term debt imperils American citizens. If yields jump back to normal levels, deficit estimates would soar by $4.9 trillion over the next 10 years. Locking in a hundred years of borrowing at a 3% rate would be the biggest bargain since Michelangelo agreed to paint Pope Julius’ ceiling. Would you advise a friend who’s buying a home to accept an adjustable teaser-rate mortgage that could catapult higher in a few years? In today’s low-rate environment, teaser rates are for fly-by-night salesmen. The United States should not be a fly-by-night country. The stakes and risks are clearly much higher than anything Monty Hall ever offered on Let’s Make a Deal . Someday when the government tries to roll over America’s paper, rates will have catapulted much higher, and the world’s financial system will look at the U.S. taxpayer and announce: “Game over. You lose.”

Todd G. Buchholz has served as White House director of economic policy and managing director of the legendary Tiger hedge fund. He was awarded

Harvard University’s annual teaching prize in economics and is the author of The Price of Prosperity . He tweets @econTodd and can be contacted at www.econTodd.com .

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