01.31.2011 0

Generational Theft On a Scale Never Seen

  • On: 02/04/2011 09:23:26
  • In: Fiscal Responsibility
  • By Robert Romano

    100-year Treasury bonds? Sooner or later, this may turn out to be reality, as it becomes increasingly clear that the U.S. never has any intention of paying its $14 trillion national debt off.

    As reported by Reuters, at a recent Treasury meeting discussing financing options for U.S. debt, “The Treasury also disclosed that it had discussed with big bond dealers the possibility of an ‘ultra-long’ bond with a maturity of 40, 50, or 100 years, as one of several options to broaden the investor base for Treasury debt.”

    This is the ultimate “kick the can” strategy. Overall, doing this would be a strategy to put off refinancing U.S. debt as far into the future as is possible. Since the Treasury would be selling bonds, the interest owed would be paid at fixed intervals.

    So, if all of today’s $14 trillion debt was refinanced 50 years into the future at 5 percent annually (their historic norm), taxpayers would owe $38.1 trillion in principal and interest. That averages $482 billion in interest owed every year, or $24.1 trillion over 50 years.

    Which is about what we’re paying now. According to the Treasury, total interest owed in 2010 was about $413.9 billion, $217 billion paid to so-called “intergovernmental holdings” (i.e. the Social Security and Medicare trust funds and other accounts), and $197 billion to “debt held by the public” (treasuries held by individuals, financial institutions, and central banks).

    So, there really would not be any apparent savings via interest payments. So why do it? Three reasons: 1) the Treasury may be estimating that interest rates will actually be far above their historic norms in the future, meaning they want to lock in the lower rates now; 2) It guarantees that the national debt will never be repaid; and 3) Doing so would free up the Treasury to focus its auctions solely on financing current budget deficits.

    Which, if Congress cannot find a way to balance the budget, will increasingly become a problem in the first half of this century. By 2020, the national debt will total over $25 trillion. By 2030, it will be more than $40 trillion. There’s barely enough paper right now to refinance the current debt and borrow $1.5 trillion for the budget deficit.

    But, if the Treasury can push all current debt owed 50 years into the future, or even a substantial portion of it, it would only need to worry immediately about financing new debt.

    Unfortunately, this is nothing more than a very costly mortgage, which today’s Baby Boomers will never have to bear in their lifetimes. Instead, it will be borne by their children and grandchildren.

    This strategy is fatally flawed because it assumes that the national debt can continually be refinanced as it reaches the catastrophic levels of 100 percent, 200 percent and 300 percent of the entire domestic economy. The further down this road we go, the greater the risk of default becomes.

    When the day comes that the U.S. must actually pay principal owed on the debt without a credit card, taxpayers will be buried. Therefore, the real reason to stretch the debt out 40, 50, or 100 years is to transfer that burden to future generations that we know will not be able to pay.

    But, hey, they’re too young to understand or are not yet born. So, who cares? Certainly not the government.

    The American people, on the other hand, know this is generational theft. That it is forcing tomorrow’s taxpayers to pay for today’s governmental excesses. And that it will destroy the fabric our nation when the bill comes due.

    Congressional Republicans should take a very close look at any Treasury plans to make it impossible for Congress to engage in debt repayment any time in the near future. We owe it to our children and grandchildren that they are not left with the bill for all of government’s empty promises.

    Robert Romano is the Senior Editor of Americans for Limited Government.


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