The Looming Debt Rollover Regime

The economy has been humming since the election a year ago. GDP growth has hit 3 percent in back-to-back quarters, unemployment is way down, the stock market averages are at all-time highs, wages are growing, consumer confidence is up, and sales of new homes are the highest in a decade. Maybe -- just maybe -- it’s Morning in America again.

But just when you think that Congress might be able to finally close the gap and get back to a balanced budget, along comes a string of natural disasters that lays waste to much of Texas, Florida, Puerto Rico, and California wine country, and which will cost taxpayers billions. In addition to that, we’ve just learned that for fiscal 2017 the federal deficit was $666B. That’s not only above what had been estimated, but $228B more than the 2015 deficit (Table 1.1). By 2015, Congress had made nearly a trillion dollars of progress in reducing the deficit from its record high in fiscal 2009, but now they’re going in the wrong direction again.

Even more sobering is that FY 2018 marks 10 years since Nancy Pelosi’s first budget. It is sobering because most of the federal debt is in notes, not bonds. Notes have a maximum term of 10 years. So, the feds are now going to start rolling over the bulk of the debt incurred in the Obama era, during which time Pelosi and the Democrats ran trillion-dollar deficits.

One might think: So what, the feds are always rolling over debt. Yes, but never on this scale. One problem is that with better returns in stocks, interest rates on the U.S. securities may rise. And inasmuch as interest is an item in the federal budget, Congress may spend more than ever. Of course, they almost invariably spend more than ever, (except when Andrew Jackson was president).

Each November, the Government Accountability Office publishes the annual Financial Audit. At TreasuryDirect’s  Schedules of the Federal Debt, one can find the last 20 of these annual reports. I’ve been waiting for this year’s report for the last few days and it came out on Nov. 14 or 15. Each year’s report goes over the same material and even uses the same language, but the numbers change. In the report for November 2017, the numbers loom much larger and the lines on the charts are even steeper.

Let’s look at the Financial Audit for November 2017 that just came out. In the chapter “Debt Held by the Public” on page 21 (pdf-25), we read: “Of the marketable securities currently held by the public as of September 30, 2017, $8,388 billion, or 59 percent, will mature within the next 4 years (see Figure 3).”

Now let’s look at the Financial Audit that came out in November 2007. In the chapter “Debt Held by the Public” on page 13 (pdf-16), we read: “Of the marketable securities currently held by the public as of September 30, 2007, $2,838 billion or 64 percent will mature within the next 4 years (see Figure 3).”

So in 10 years, the amount of debt that the feds must roll over in a 4-year period has gone from $2.8T to $8.3T; it’s gone up by a factor of nearly 3, or 2.955 to be more precise. And my screengrab of Figure 3 looks ominous.

But despite the pressure on rolling over our debt from our recent profligacy and the fact that the deficit is again growing, Congress is not cutting spending. Not only that, they’re pushing for income tax rate cuts. And the rate cuts will not be totally offset with cuts in deductions. In fact, they want to enlarge deductions. The tax legislation under consideration cuts what income earners would actually pay, (at least for the short run before supply-side effects, if any, kick in). The bill the House just passed is not revenue-neutral, so deficits will get worse.

When it comes to the Simpson-Bowles idea of “cutting the rates and broadening the base,” Congress is only doing half of it. Indeed, the rate cuts and higher deductions in the bills under consideration would knock yet more Americans off the personal income tax rolls.

With the coming rollover regime, Treasury will be flooding the market with more U.S. securities than ever. Congress should not make that any worse by floating new debt to continue their profligate spending. In other words, now is the time for moving towards a balanced federal budget. The feds would have fewer securities to have to peddle if they run a balanced budget. But in D.C. it never seems to be the right time to live within our means.

When the next fiscal year commences on Oct. 1, 2018, we will be celebrating the 10-year anniversary of FY 2009 and Pelosi’s first trillion-dollar deficit. And in November of 2018, we’ll see the next Financial Audit. The numbers in that audit should be even more interesting than in this year’s audit. Our fiscal chickens are coming home to roost; it’s time to pay the piper. If a “debt crisis” is ever to occur, the next five years seems like the time for it; look at Figure 3 again. The economy is not in recession -- now is the time for Congress to cut the deficit.

Jon N. Hall of Ultracon Opinion is a programmer/analyst from Kansas City.

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