Over the last 10 years (since year-end 2002), profligate spending in Washington has resulted in a staggering $6.9-trillion increase in debt held by the public. That’s $22,000 for every man, woman, and child in America. A family of four is looking at an $88,000 increase in their debt burden. How generous of those folks in Washington to rack up 88 grand in debt on your family’s behalf. Be sure you send a thank-you card.
The median family income in the U.S. is about $60,000. That means that in only 10 years, Washington has raised the average family’s debt burden by 146 percentage points relative to income. If you had that much credit card debt relative to income, there isn’t a bank in America that would lend you money. I guess we are all subprime now.
But for $88,000, surely the government bought something profound on your behalf, no? If you’re like me, all you have to show for $88,000 in new liabilities is some fresh yellow paint on your street and a sidewalk to nowhere. Who knew how expensive paint and concrete could be?
With the federal government racking up so much debt, it is hard to believe that Treasury rates are at or near record lows. When households and businesses borrow too much, they pay a higher rate or the bank cuts them off. Why haven’t Treasury rates risen as the government’s debt burden has skyrocketed?
The Federal Reserve’s 0%-interest-rate policy and a soft global economy of course have a lot to do with today’s low Treasury rates, but there is another factor that may be repressing interest rates. In the chart below, I show the increase in federal debt held by the public and the increase in the Treasury float since year-end 2002. What is the Treasury float? I define it as the amount of federal debt held by the public, less Treasury holdings by the Federal Reserve and foreign central banks. The Fed and foreign central banks don’t have a profit motive—they buy Treasuries for monetary policy reasons or to accumulate foreign-exchange reserves. And they pay for their securities with printed money.
When you back out the holdings of the nonprofit players, you find that since year-end 2002, the float of Treasury securities has increased by a much lower $3.3 trillion. That is less than half of the $6.9-trillion increase in government borrowings and less than the increase in national income over the same time period. What happens if (“when” is not a guarantee, but that is a topic for a different post) the Fed and foreign central banks become less active in the Treasury market? Or better yet, what happens when the market starts to price in a less active role for the Fed and foreign central banks? It ain’t gonna be pretty. Investors buying long Treasuries today are taking on a massive amount of risk. Keep your Treasuries short.
Jeremy Jones, CFA
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