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How Close to Fiscal Meltdown?

November 23, 2011

Kevin Williamson did two nice posts at NRO today, and I’d encourage you to go read both.  I’m espeically intrigued at his analysis of debt and the potential need to raise interest rates to get buyers for our debt:

In the United States, we have historically low interest rates right now. We’re also monetizing a great deal of debt, which is an invitation to inflation, and governments also raise interest rates to fight inflation. So there is good reason to suspect that interest rates will go up in the future. (No, I’m not guessing when or by how much. If I could forecast that with any accuracy, I’d have Lloyd Blankfein skimming the bubbles off my Moët-filled swimming pool.) But we do have some historical precedents to consider. As recently as June of 1984, interest rates on 30-year Treasury bonds went to 13.44 percent. To do a little thought experiment: What would happen if it suddenly cost Washington 13.44 percent to finance our deficit spending?

At an interest rate of 13.44 percent, it would cost just a little over $2 trillion a year to finance our current $15 trillion or so in debt — not counting future borrowing. Total federal revenue in 2010 was also just over $2 trillion. Which is to say that if financing costs should return to what they have been within recent memory — hardly a historically unprecedented level — then the cost of financing our debt could equal or exceed all federal revenues combined…

Ouch.  But this is the truth in the tenuousness of our national financial system.  I don’t think anyone believes that we’ll have to go to double-digit percentages for interest anytime soon, but how do we avoid it long-term unless we do a better job of financial management today?

I don’t think I’ve mentioned lately a solid business strategy that I often recommend that really matters in this environment.  The goal in the case of debt servicing is to suck less than everyone else in terms of maintaining our finances.  Sure, we might be spiraling out of control, but do we get people to buy our bonds merely because we’re in better worse standing than Europe?  How about Japan?  The game here seems to be to be better… and yet we can’t even find ways to cut a trillion or so in the next ten years.

Sucking less sometimes means you still suck.  Let’s watch that.

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