Politics

U.S. government faces tsunami of debt payments

WASHINGTON — The U.S. government is financing its more than trillion-dollar-a-year borrowing with IOU’s on terms that seem too good to be true. But that happy situation — a result of interest rates dropping to extraordinary lows even as the government has had to borrow more and more — may not last for long.

“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”

Treasury officials are facing a trifecta of headaches: a mountain of new debt, a balloon of short-term borrowings that come due in the months ahead and interest rates that are sure to climb back to normal as soon as the Federal Reserve decides that the emergency has passed.

Even as Treasury officials are racing to lock in today’s low rates by exchanging short- term borrowings for long-term bonds, the government faces a payment shock similar to those that sent legions of overstretched homeowners into default on their mortgages.

With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will top $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.

In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.

The potential for rapidly escalating interest payouts is just one of the wrenching challenges facing the United States after decades of living beyond its means.

Long-term outlook grim

The surge in borrowing over the past year or two is widely judged to have been a necessary response to the financial crisis and the deep recession, and there is still a raging debate over how aggressively to bring down deficits over the next few years. But there is little doubt that the United States’ long-term budget crisis is becoming too big to postpone.

Americans now have to climb out of two deep holes: as debt-loaded consumers, whose personal wealth sank along with housing and stock prices; and as taxpayers, whose government debt has almost doubled in the past two years alone, just as costs tied to benefits for retiring baby boomers are set to explode.

The competing demands could deepen political battles over the size and role of government, the trade-offs between taxes and spending, the choices between helping older generations versus younger ones, and the bottom-line questions about who should ultimately shoulder the burden.

So far, the demand for Treasury securities from investors and other governments around the world has remained strong enough to hold down the interest rates the United States must offer to sell them.

Indeed, investors have been so hungry for the relative security of Treasury bills and bonds that the government’s average interest rate on new borrowing last year fell below 1 percent. For short-term IOUs such as one-month Treasury bills, its average rate was only sixteen-hundredths of a percent.

Administration officials and many economists contend it would have been a mistake to prevent the deficit from surging last year.

If the government had not tried to rescue the economy with higher spending and tax cuts, they say, the economic crisis and the budget damage would have been far worse.

The problem, many analysts say, is that record government deficits have arrived just as the long-feared explosion begins in spending on benefits under Medicare and Social Security. The nation’s oldest baby boomers are approaching the age of 65, setting off what experts have warned for years will be a fiscal nightmare for the government.

“What a good country or a good squirrel should be doing is stashing away nuts for the winter,” said William Gross, managing director of the Pimco Group, the giant bond-management firm. “The United States is not only not saving nuts; it’s eating the ones left over from the last winter.”