Uncle Sam’s F-rated bonds
By Dr. Peter Morici
As the Republicans write their $1.5 trillion tax cut legislation, they would do well to stay inside their budget. Even factoring in dynamic gains, the Treasury will suffer some revenue loss, and without cuts in federal spending be forced to borrow more—something it can scarcely afford to do.
Just like Greece and other profligate nations when they approached credit crises, the United States suffers from slow growth, a ballooning welfare state — in the particular case of the United States, a terribly inefficient health-care system — and growing public debt to support them.
Households and businesses save a great deal but not nearly enough to finance both private investment and the federal appetite for debt. Consequently, the nation consumes more than it produces through a $500 billion annual trade deficit and by selling foreigners private assets — for example, choice real estate in New York, equities and corporate debt — and government bonds to finance it.
Net of what Americans own abroad, private citizens and Uncle Sam have more than $8.3 trillion in IOUs out to the rest of the world. That’s about 45% of gross domestic product, and it should easily surpass 60% by 2027.
In recent years, no nation has seen its indebtedness reach that level without a reversal of its trade deficit — and often an accompanying financial crisis and wrenching internal adjustments — as foreign investors lost confidence in its government’s ability to raise money to service its debt.
Of course, the dollar is the reserve currency — foreign central banks hold dollars and Treasuries to back up their currencies — and the United States, unlike other big debtor nations, can print dollars to service its debt.
This has created a false sense of security among politicians and most economists. Many conservative Republicans and pundits talk about big tax cuts and ignore CBO and private scorings that show those could not possibly be financed solely by the additional growth generated.
The concerted opposition from rural states like Maine, West Virginia and Alaska has corrupted even Republican Senators like Collins, Capito and Murkowski to the Democratic model of “cash for votes.”
Foreign central banks and investors do not have an infinite appetite for U.S. dollars and bonds—or such political corruption which will become apparent when things start to unravel.
Savings in other parts of the budget will be difficult. Administration officials like Secretary Tillerson have been greeted with hostility, even among Republicans on Capitol Hill, about cutting out wasteful duplication and outdated and ineffective programs and the defense budget must be increased to update and recoup years of neglected maintenance for the Navy and all the services’ aircraft.
If President Donald Trump and more responsible members of the GOP do not step up to call out cashier based campaign strategies and effect entitlement, the Treasury will be issuing many more new bonds over the next decade than foreign private investors and central banks will be inclined to absorb.
Too many dollars in circulation may not cause inflation immediately, but it will stoke fears that long term, prices could get out of control.
As Washington continues to spend and borrow, the Treasury will have to offer much higher rates on new 20- and 30-year bonds, making comparable securities issued in 2017 and earlier worth less in the resale market.
That interest rate risk makes long-term U.S. Treasury securities lousy investments — they have no place in retirement portfolios for younger Americans.
Washington’s monopoly on printing dollars makes difficult the work of bond-rating agencies, which assign grades between AAA and D on sovereign debt. U.S. Treasuries can’t default but long term, investor capital is still at significant risk.
Perhaps a special grade is needed: “F” — flee now before you get stuck.
Peter Morici is an economist and business professor at the University of Maryland, and a national columnist.