Wed 3/14/12 5:58 PM The Ticking Debt Time Bomb

I heard a supposedly independent analyst on NPR last night talking about why Republicans think this election is so critical. His take was that people are getting more educated and the Hispanic population is increasing so Republican voters are worried they only have a brief window to get into office. What baloney! No one I know has said anything like that.

That just typifies my love/hate relationship with NPR, the only radio channel with in-depth coverage on stories but always slanted to the liberal side.

Look at the top graph below.Here is the financial reason that Republicans are so afraid of another 4 years under President Obama. The chart shows the increase in the national debt since 1997. The increase from 2001-2008 was obviously George Bush’s two wars. I think both wars were mistakes.

George Bush increased the publicly held national debt by 75% over 8 years, from $3.3 trillion to $5.8 trillion. That’s bad. But, President Obama, in barely over three years has pushed publicly held national debt from $5.8T to $11.5T, an increase of nearly 100% in 3 years.

But wait, the big drop in revenue from the economic downturn has a lot to do with that right? It has something to do with it. But, despite a campaign promise to cut the deficit in half by the end of his first term, every budget the president has proposed has been higher than the one before.

His first proposed budget that for FY 2010 was $3.55T in spending versus $2.4 in revenues. That compares with George Bush’s final budget for 2009 of $3.1T. So President Obama’s first proposed budget was 14.5% higher than Bush’s last one. It ended up enacted at $3.7 with actual revenues of $2.1T for a deficit of $1.6T.

For FY 2013 President Obama has proposed spending of $3.8T. That is an increase of 22.6% from the budget in place when he took office. This has everything to do with buying votes by the president that has made more campaign appearances by far than any previous president and nothing to do with fiscal responsibility. Cutting the deficit in half turned out to be 2008 campaign gibberish.

What I want to focus on is the rise in Treasury bond rates today. As you can see, in the bottom graph, the interest on the federal debt is 10% less than it was when Obama took office. How is that possible when debt has doubled during the same period?

The answer is that the Treasury department has been financing the debt with very short term bills and notes, thanks to Ben Bernanke’s nearly 0% interest rate policy.

Even counting all the long term debt in place before Obama the average maturity on Treasury debt is now only 3.4 years with an average interest rate of 2.4%. The Treasury should have been doing the exact opposite – locking in historically low long term rates. But, 20 year Treasury rates are 3% and one year rates are 0.2%, about 1/15 of the interest cost.

That keeps interest payments low for now. But, what it does is plant an enormous ticking time bomb on interest. The average rate on federal debt in 2007 was 5%. What happens when interest rates return to normal? The obvious implication is that interest costs on the debt will double without adding more debt.

If debt continues to increase at the rate of President Obama’s first three years, that is doubling, then you can multiply double the interest rate times double the debt and come up with interest on the federal debt costing 4 times what it is today just 3 Obama years from now.

That assumes rates return to normal in 3 years but actually, I think it will take longer than that. Still, the Obama legacy, should he be re-elected very could be a debt burden that in a few years will be truly overwhelming. We would be paying far more in debt service than on Medicare.

Note: all the statistics in this article were from the OMB: Office of Management and Budget and/or from the Wall St. Journal article Uncle Sam’s Teaser Rate April 12, 2012 page A4. The graphs are from the same article. You can read it at: