Thursday, November 6, 2008

Federal Debt Could Constrain Obama's Plans

From the WSJ:

The Treasury Department laid out near-term borrowing plans Wednesday, saying it expects to tap financial markets for $550 billion in the final three months of 2008 and another $368 billion in the first three months of next year by issuing Treasury securities with a wide range of maturities.

Economists project that total government borrowing could pass $1.5 trillion in the fiscal year, which ends next September, pushing up the government's total debt burden by more than 25% in one year.


The sharp rise poses a potential dilemma for Mr. Obama's ambitious agenda. Few economists believe the Treasury will be constrained in the next year in its ability to manage its rising borrowing needs or in advancing another fiscal stimulus program. But in the long run, rising government debt could make it harder for Mr. Obama to pursue new spending and tax-cut programs aggressively.

"I don't think that anything on the stimulus end will be constrained by these deficits," said David Greenlaw, a Morgan Stanley economist. "But if you're talking about health-care reform and some of these longer-term programs, there is some constraint there."

Let's get some political baggage out of the way before we go forward.

I've been complaining about the deficit for the last 4 years. And I will continue to complain about the deficit for one primary reason: as a country we have to make choices. Some things are more important than others. Those things we find important we should spend more money on.

Over the last 8 years we have not made any choices. Instead we have funded, well, everything that has come down the pike. In addition, we cut taxes, further exacerbating the problem of deficit financing. As a result, we have issued mammoth amounts of public and intra-government debt. Here's a reading of the last 8 years from the Bureau of Public Debt:

09/30/2008 $10,024,724,896,912.49
09/30/2007 $9,007,653,372,262.48
09/30/2006 $8,506,973,899,215.23
09/30/2005 $7,932,709,661,723.50
09/30/2004 $7,379,052,696,330.32
09/30/2003 $6,783,231,062,743.62
09/30/2002 $6,228,235,965,597.16
09/30/2001 $5,807,463,412,200.06
09/30/2000 $5,674,178,209,886.86

The current total is $10,566,146,196,490.58

From a debt as a percent of GDP perspective we have increase from 57% in 2001 to 73% at current levels. Now -- it's entirely possible for the US to issue more debt. I would become extremely concerned at the 85% and higher level. That means we have some way to go. But there are other problems involved with that development.

1.) Interest rates. Here is a chart of the 10 year CMT's interest rate for the last nearly 40 years.

Click for a larger image

Clearly rates have been heading lower. Will the issuance of all this debt finally break this cycle? Will the US finally start having to pay for a higher rate of interest to attract purchasers?

2.) The dollar. While the dollar has enjoyed a rally recently more debt could kill that pretty quickly.

Click for a larger image

While a drop in the dollar would be great for exports it would also be stoking commodity based inflation because most of the world's commodities are priced in --- dollars.

In other words -- there are a lot of policy angles we need to consider going forward.