Treasury to re-issue 30 year
bonds, any takers?
May 5, 2005
The prospect of the U.S. Treasury returning to a more fiscally
responsible method of financing its debts has profound implications
for the U.S. budget and current account deficits. While it makes
perfect sense for the government to borrow for 30 years, I would
question the intelligence of any one foolish enough to lend.
While it is no secret that individual American debtors have temporally
benefited though the use of low-cost, short-term financing,
most notably through the proliferation of ARMs, many have neglected
to notice that the Federal Government, the world's largest debtor,
has employed the same tactics.
The reason that many individuals, and the Federal Government,
have chosen to borrow on the short end of the yield curve, is
that in so doing they temporarily reduce the cost of servicing
their debts. However, in the long run, this strategy comes at
the price of higher interest payments in the future. For the
federal government, the future has just arrived. With short term
rates now at 3%, and the yield on 30 year bonds at about 4.5%,
the savings between borrowing short and borrowing long are not
nearly as great as when short rates were only 1%. As a result,
the Treasury apparently realizes that it no longer makes sense
to keep the maturity of its debts so short.
However, the problem for the Federal government, and obviously
American taxpayers, is that the process of refinancing trillions
of dollars of short-term debt will inevitably push long-term
rates much higher. So not only will the government no longer
have the benefit of cheap short-term financing, it will also
face much higher long-term rates than would have been the case
had they acted responsibly these past several years by locking
in low long-term rates while they had the chance.
With the national debt approaching 8 trillion, every 100 basis
increase in the average rate at which that debt is refinanced
adds 80 billion in additional interest expense which the federal
government must pay annually. Since the government is already
operating in a deficit, this increase will also have to be borrowed.
My guess is that over the next several years, 100s of
billions will be added to the annual budget deficit merely as
a result of increased interest payments. Also, because a significant
percentage of those payments will flow to foreign creditors,
the current account deficit will grow significantly as a result.
Further, as higher interest rates will likely push the highly
leveraged U.S. economy into a severe recession, the structural
deficit will swell as tax revenues decline and higher expenditures
In the end, not only will the federal government be confronted
with far bigger budget deficits, but it will also need to finance
them at considerably higher interest rates. The Treasury had
better hope that Asian savers are willing to step up to the plate,
for if they balk, default or hyper-inflation will be the only
alternatives. Holders of U.S. Treasuries, or any U.S. dollar-denominated
assets, be warned.
May 4, 2005
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In addition, as the dollar's
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investors can learn strategies to protect wealth and preserve
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and subscribing to my free, on-line investment newsletter at http://www.europac.net/newsletter/newsletter.asp.
C.E.O. and Chief Global Strategist
Euro Pacific Capital, Inc.
Mr. Schiff is one of
the few non-biased investment advisors (not committed solely to
the short side of the market) to have correctly called the current
bear market before it began and to have positioned his clients
accordingly. As a result of his accurate forecasts on the U.S.
stock market, commodities, gold and the dollar, he is becoming
increasingly more renowned. He has been quoted in many of the
nation's leading newspapers, including The Wall Street Journal,
Barron's, Investor's Business Daily, The Financial Times, The
New York Times, The Los Angeles Times, The Washington Post, The
Chicago Tribune, The Dallas Morning News, The Miami Herald, The
San Francisco Chronicle, The Atlanta Journal-Constitution, The
Arizona Republic, The Philadelphia Inquirer, and the Christian
Science Monitor, and has appeared on CNBC, CNNfn., and Bloomberg.
In addition, his views are frequently quoted locally in the Orange
Mr. Schiff began his investment career as a financial consultant
with Shearson Lehman Brothers, after having earned a degree in
finance and accounting from U.C. Berkley in 1987. A financial
professional for seventeen years he joined Euro Pacific
in 1996 and has served as its President since January 2000. An
expert on money, economic theory, and international investing,
he is a highly recommended broker by many of the nation's financial
newsletters and advisory services.
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