Un­cle Sam’s F-rated bonds

Only stronger growth and curb­ing en­ti­tle­ments will get the coun­try out of its mess

The Washington Times Daily - - OPINION - By Peter Morici Peter Morici is an econ­o­mist and busi­ness pro­fes­sor at the Univer­sity of Mary­land, and a na­tional colum­nist.

Were the United States any other coun­try, its bonds would have long ago been down­graded to junk. Just like Greece and other prof­li­gate na­tions, the United States suf­fers from slow growth, in­do­lence — an in­creas­ing num­ber of able-bod­ied adults not work­ing — and a bal­loon­ing gov­ern­ment deficit to sup­port them. En­ti­tle­ments and in­ter­est on the debt now con­sume more than two thirds of fed­eral tax rev­enue. Ac­cord­ing to the Con­gres­sional Bud­get Of­fice, those are on track to take it all by 2027.

Work­ing Amer­i­cans and busi­nesses save a great deal but not nearly enough to fi­nance both pri­vate in­vest­ment in new homes and busi­ness ex­pan­sion and the fed­eral ap­petite for debt. Hence, we con­sume more than we pro­duce by run­ning a large an­nual trade deficit — $500 bil­lion — and sell for­eign­ers pri­vate as­sets — for ex­am­ple, choice real es­tate in New York — and gov­ern­ment bonds to fi­nance it.

Net of what Amer­i­cans own abroad, pri­vate cit­i­zens and Un­cle Sam have about $8.5 tril­lion in IOUs out to the rest of the world. That’s 45 per­cent of GDP, and that in­debt­ed­ness should eas­ily sur­pass 60 per­cent by 2027.

In re­cent years, no na­tion has seen its in­debt­ed­ness reach that level with­out a re­ver­sal of its trade deficit — and of­ten an ac­com­pa­ny­ing fi­nan­cial cri­sis — as for­eign in­vestors lost con­fi­dence in its gov­ern­ment’s abil­ity to raise dol­lars to ser­vice its debt.

Of course, the dol­lar is the re­serve cur­rency — for­eign cen­tral banks hold dol­lars and Trea­suries to back up their cur­ren­cies — and the United States, un­like other big debtor na­tions, can print dol­lars to ser­vice its debt.

That cre­ates a false sense of se­cu­rity among politi­cians. For ex­am­ple, many Repub­li­cans talk about big tax cuts and ig­nore CBO scor­ing that would show those cuts would not pay for them­selves with enough ad­di­tional growth.

Sub­stan­tially rais­ing taxes would likely prove self-de­feat­ing too. More busi­nesses and in­tel­lec­tual prop­erty would move off­shore. GDP and tax rev­enue growth would slow, while pay­outs from fed­eral ben­e­fits pro­grams and for­eign bor­row­ing would rise even more quickly than cur­rently pro­jected.

Only stronger eco­nomic growth and curb­ing en­ti­tle­ments will get us out of this mess. Up­com­ing show­downs over Med­i­caid in ef­forts to re­place Oba­macare, to curb fed­eral spend­ing as part of a deal to raise the debt ceil­ing and to de­fine tar­gets for fu­ture spend­ing in the FY2018 ap­pro­pri­a­tion bills will truly re­veal the Repub­li­can ma­jor­ity’s stom­ach for spend­ing re­form and courage to lead the coun­try out of the fis­cal wilder­ness.

Co­op­er­a­tion will be re­quired from Democrats in the Se­nate, for ex­am­ple, to in­crease the debt ceil­ing and pass 2018 ap­pro­pri­a­tion bills—or at least con­tin­u­ing res­o­lu­tions. They will likely re­sist any cuts to en­ti­tle­ments. How­ever, now that the Repub­li­cans con­trol the Congress and the White House, they are in a po­si­tion to win out in a gov­ern­ment shut­down if they reach con­sen­sus among them­selves about spend­ing cuts and ex­er­cise party dis­ci­pline.

For­eign cen­tral banks and in­vestors do not have an in­fi­nite ap­petite for U.S. dol­lars and bonds. If the Congress and Pres­i­dent Trump do not step up, the Trea­sury will be is­su­ing many more new bonds over the next decade than for­eign pri­vate in­vestors and cen­tral banks will be in­clined to ab­sorb.

In­ter­na­tion­ally, in­ter­est-bear­ing Trea­suries func­tion much the same as cur­rency — sit­ting in bank vaults, they back up de­posits, serve as collateral for loans and de­riv­a­tives and are ac­cepted as pay­ment for goods and debts. Whether as Trea­suries or cur­rency, too many dol­lars in cir­cu­la­tion will in­sti­gate in­fla­tion now that the global econ­omy has re­cov­ered from the fi­nan­cial cri­sis.

Just the fear of in­fla­tion would cause in­vestors to de­mand higher in­ter­est rates on vir­tu­ally all dol­lar­de­nom­i­nated bonds is­sued by gov­ern­ment agen­cies, banks and cor­po­ra­tions.

As Wash­ing­ton con­tin­ues to spend and bor­row, the Trea­sury will have to of­fer much higher rates on new 20- and 30-year bonds, mak­ing com­pa­ra­ble se­cu­ri­ties is­sued in 2017 and ear­lier worth less in the re­sale mar­ket.

That in­ter­est rate risk makes long-term U.S. Trea­sury se­cu­ri­ties lousy in­vest­ments — they have no place in most re­tire­ment port­fo­lios.

For rat­ing agen­cies, Wash­ing­ton’s mo­nop­oly on print­ing dol­lars makes dif­fi­cult the work of bond rat­ing agen­cies, which as­sign grades be­tween AAA and D on sov­er­eign debt. U.S. Trea­suries can’t de­fault but in­vestors’ cap­i­tal is still at risk.

Per­haps a spe­cial grade: “F”— flee now be­fore you get stuck.

If the Congress and Pres­i­dent Trump do not step up, the Trea­sury will be is­su­ing many more new bonds over the next decade than for­eign pri­vate in­vestors and cen­tral banks will be in­clined to ab­sorb.



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