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America’s Looming Debt Decision

BOGOTÁ – Should the US government lock in today’s ultra-low borrowing costs by issuing longer-term debt? It’s a tough call, but with overall debt levels already high (not to mention unfunded pension and medical insurance liabilities, which are both likely to rise), perhaps the time has come.

Until now, the US Treasury and the Federal Reserve Board, acting in combination, have worked to keep down long-term government debt, in order to reduce interest rates for the private sector. Indeed, at this point, the average duration of US debt (integrating the Fed’s balance sheet) is now under three years, well below that of most European countries, even taking into account their own central banks’ massive quantitative-easing (QE) programs.

The tilt toward short-term borrowing as a way to try to stimulate the economy has made sense until now. Given that the interest rate on 30-year US debt is roughly 200 basis points higher than on one-year debt, short-term borrowing has saved the government money as well.

But the government should not operate like a bank or a hedge fund, loading up on short-term debt to fund long-term projects. It is too risky. With net US government debt already running at 82% of national income, the potential fiscal costs of a fast upward shift in interest rates could be massive.