Rather than issuing 50- or 100-year bonds when interest rates were at rock-bottom, the US Treasury dismissed this option and simply continued to borrow on a short-term basis. Now that US interest payments are ballooning, the scale of this blunder has become apparent, as have the implications for future generations.
SAN DIEGO – A controversial new book by psychologist Jonathan Haidt laments The Anxious Generation. The number of sleep-deprived high schoolers has climbed 13% in the United States, and young people do indeed have reasons to be jittery. While Haidt blames social media, members of Gen Z must also worry about the irresponsible debt levels that Baby Boomers and Generations X and Y (Millennials) are foisting onto their narrow shoulders.
As a proportion of GDP, US debt is rapidly shooting past the record levels of World War II. Interest payments this year will eat up 13.5% of the federal budget, a 2.6-fold increase from 2021. Half of young adults don’t think they will ever afford a home, yet they will be asked to pay for their grandparents’ profligacy. Even now, CNBC reports that one-quarter of Gen Z say they need a therapist to deal with tax-filing anxiety.
A dozen years ago – when rock-bottom interest rates prevailed – some of us started urging the US Treasury to lock in those favorable borrowing terms by issuing superlong 50- and 100-year bonds. That would have helped to prevent today’s spending from crippling future generations. But the Treasury mostly stuck to short-term borrowing, with the average duration of bonds at just five years. As a result, it is rolling over maturing debt at a steeper cost.
In March 2021, when Treasury notes still yielded about 1.5%, Secretary of the Treasury Janet Yellen made it clear that President Joe Biden’s administration had no interest in locking in those terms for generations to come: “Treasury has been looking at this question and has no current plans to do that.” One can only wonder whether the department was really “looking” at it or merely gave it a scoffing glance. Since the time of that statement, rates have tripled, leading the seasoned hedge fund manager Stanley Druckenmiller to declare Yellen’s decision the “biggest blunder” in Treasury history. The ghost of Alexander Hamilton is grimacing.
We all know the damage that short-term borrowing can cause. Many commercial real-estate companies are now suffering – facing $2 trillion in refinancing at higher rates – because they mimicked the Treasury playbook. Of course, these landlords could do what the owners of San Francisco’s largest hotel, the 1,900-room Hilton Union Square, did: simply walk away from their empty buildings and mail the keys back to the mortgage holder.
But the federal government has no such option. It is not like a landlord who can duck statutory and moral obligations, which include sending Social Security checks to senior citizens and providing military personnel with health care and weapons that fire when launched. Instead, taxpayers will have to mop up all the red ink that the federal government has spilled.
It didn’t have to be this way. While the US ignored pleas to lock in low borrowing rates, several other countries apparently read our memos. At least 14 countries – including Austria, Belgium, and Ireland – have issued superlong bonds, as have dozens of private companies and universities, including Disney, Norfolk Southern, Coca-Cola, IBM, Ford, Federal Express, Yale University, the University of Pennsylvania, Ohio State University, and the University of Southern California.
The Treasury’s blunder looks even worse when one considers that the yield curve has inverted multiple times over the past 20 years (including today). That means the US had multiple opportunities to borrow at lower rates on superlong debt than on short-term bills. Locking in those rates would have created some level of certainty, while mitigating the impact of future financial disasters.
But it is not too late. On the contrary, the Treasury can still take advantage of superlong bonds. We recommend that the Treasury funding algorithm be revised to include a trigger to issue such bonds whenever the yield curve inverts. If the department wishes to override this mechanism, the secretary should be obliged to show that it would not be in the interest of future generations.
Historical studies show that over the past 200 years – since around the time of Hamilton – real (inflation-adjusted) interest rates have averaged about 1.55%. Today, they hover around 2%. Whenever real yields drop below the historical average, the Treasury should unleash superlong bonds in force. Of course, the fundamental budget problem is too much spending. President Ronald Reagan once joked that the government is like a baby: it has a big appetite at one end, and no sense of responsibility at the other. That quip is as true today as it was a half-century ago.
Future generations, whether anxious or not, can’t vote. We need to build in mechanisms to give them a voice. The US Declaration of Independence promises life, liberty, and the pursuit of happiness. A good night’s sleep would help.
SAN DIEGO – A controversial new book by psychologist Jonathan Haidt laments The Anxious Generation. The number of sleep-deprived high schoolers has climbed 13% in the United States, and young people do indeed have reasons to be jittery. While Haidt blames social media, members of Gen Z must also worry about the irresponsible debt levels that Baby Boomers and Generations X and Y (Millennials) are foisting onto their narrow shoulders.
As a proportion of GDP, US debt is rapidly shooting past the record levels of World War II. Interest payments this year will eat up 13.5% of the federal budget, a 2.6-fold increase from 2021. Half of young adults don’t think they will ever afford a home, yet they will be asked to pay for their grandparents’ profligacy. Even now, CNBC reports that one-quarter of Gen Z say they need a therapist to deal with tax-filing anxiety.
A dozen years ago – when rock-bottom interest rates prevailed – some of us started urging the US Treasury to lock in those favorable borrowing terms by issuing superlong 50- and 100-year bonds. That would have helped to prevent today’s spending from crippling future generations. But the Treasury mostly stuck to short-term borrowing, with the average duration of bonds at just five years. As a result, it is rolling over maturing debt at a steeper cost.
In March 2021, when Treasury notes still yielded about 1.5%, Secretary of the Treasury Janet Yellen made it clear that President Joe Biden’s administration had no interest in locking in those terms for generations to come: “Treasury has been looking at this question and has no current plans to do that.” One can only wonder whether the department was really “looking” at it or merely gave it a scoffing glance. Since the time of that statement, rates have tripled, leading the seasoned hedge fund manager Stanley Druckenmiller to declare Yellen’s decision the “biggest blunder” in Treasury history. The ghost of Alexander Hamilton is grimacing.
We all know the damage that short-term borrowing can cause. Many commercial real-estate companies are now suffering – facing $2 trillion in refinancing at higher rates – because they mimicked the Treasury playbook. Of course, these landlords could do what the owners of San Francisco’s largest hotel, the 1,900-room Hilton Union Square, did: simply walk away from their empty buildings and mail the keys back to the mortgage holder.
But the federal government has no such option. It is not like a landlord who can duck statutory and moral obligations, which include sending Social Security checks to senior citizens and providing military personnel with health care and weapons that fire when launched. Instead, taxpayers will have to mop up all the red ink that the federal government has spilled.
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It didn’t have to be this way. While the US ignored pleas to lock in low borrowing rates, several other countries apparently read our memos. At least 14 countries – including Austria, Belgium, and Ireland – have issued superlong bonds, as have dozens of private companies and universities, including Disney, Norfolk Southern, Coca-Cola, IBM, Ford, Federal Express, Yale University, the University of Pennsylvania, Ohio State University, and the University of Southern California.
The Treasury’s blunder looks even worse when one considers that the yield curve has inverted multiple times over the past 20 years (including today). That means the US had multiple opportunities to borrow at lower rates on superlong debt than on short-term bills. Locking in those rates would have created some level of certainty, while mitigating the impact of future financial disasters.
But it is not too late. On the contrary, the Treasury can still take advantage of superlong bonds. We recommend that the Treasury funding algorithm be revised to include a trigger to issue such bonds whenever the yield curve inverts. If the department wishes to override this mechanism, the secretary should be obliged to show that it would not be in the interest of future generations.
Historical studies show that over the past 200 years – since around the time of Hamilton – real (inflation-adjusted) interest rates have averaged about 1.55%. Today, they hover around 2%. Whenever real yields drop below the historical average, the Treasury should unleash superlong bonds in force. Of course, the fundamental budget problem is too much spending. President Ronald Reagan once joked that the government is like a baby: it has a big appetite at one end, and no sense of responsibility at the other. That quip is as true today as it was a half-century ago.
Future generations, whether anxious or not, can’t vote. We need to build in mechanisms to give them a voice. The US Declaration of Independence promises life, liberty, and the pursuit of happiness. A good night’s sleep would help.