The Ultimate Refi Risk: US Govt

In a case of be careful what you ask for, Bloomberg looks at US Treasury yields, the government’s borrowing cost, running at record lows: Deficits Don’t Matter as Geithner Gets Lowest Yield.

I am reminded of the famous Eagles song, “Hotel California” and the line about checking out but never leaving. But perhaps the more illustrative example would be the adjustable-rate mortgages that helped inflate the housing bubble.

Remember as long as the US deficit is not reduced, in effect, it is constantly being rolled over, i.e. refinanced. Thus record low yields on the 2 year and 10 year Treasurys could allow the feds to gorge on debt today only to face higher yields when the debt matures tomorrow, much as the subprime borrower used ARMs to buy more house than they could afford, eventually losing the house once the rates reset and they were unable to refinance.

Bernanke, Geithner and their cohorts are making a massive bet that deficit-financed stimulus will allow the economy to grow into its ability to pay for this debt. However, nearly two years after TARP and direct economic intervention, true economic growth has yet to occur, as evidenced by stagnant wages, high unemployment and anemic spending — key drivers for a 70%-consumer driven economy.

Is the US at risk of a market “margin call”, a la Greece? After all, Japan has managed to deficit spend for decades (to little avail) without having interest rates spike. Greece is now experiencing social unrest amidst harsh austerity measures while Japan’s lost decade is often a reference point for the current US economic plight. While major differences exist between our situation and theirs, neither outcome looks promising.

However, the key quote from the article comes from Geithner:

“If you look at financial markets, say, look at how much the Treasury is paying to borrow today, there is a lot of confidence, not just of Americans but investors around the world, that we’re going to find the political way to do it,” Geithner said. “There’s no alternative for us. We’ll be able to do that.”

Any observation of the American political landscape throws much doubt onto this statement. Washington has never been more polarized, despite the election (or perhaps because) of Obama. When the time comes, the political will and reconciliation needed to accomplish “austerity” measures most likely won’t exist.

After all, if the Euro crisis has shown us anything, it is that markets enforce discipline, not politicians and bureaucrats.

Who can forget Bernanke’s infamous assertion that the “subprime contagion is contained”? Now his partner-in-crime wants us to trust potentially the largest subprime borrower of them all, the US Government?

Heed Bernanke and Geithner at your own peril.

4 Responses to “The Ultimate Refi Risk: US Govt”

  1. Turniptruck Says:

    As an avid DavyB reader, I’ve a question:

    You mention that record low yields on Treasuries allow the Fed to gorge on debt today only to (possibly) face higher yields tomorrow, yet also mention that Japan has run deficits for decades without having an interest rate spike.

    So, what’s different about Japan that allows yields to remain low?

    I note in this chart at Pimco:
    Japan is in debt (as a percentage of GDP) way, way far and above any other major nation on Earth.

  2. Davy Bui Says:

    Hey Thomas,

    This illustrates the problem of trying to predict macro consequences on such a large scale — the current state of affairs must lead to ruin but when and how is not as easy as what.

    As for your specific question, a main reason is that Japan’s consumers/savers, the fabled “Ms. Watanabe”, can finance the govt’s spending by buying domestic bonds whereas the US is more dependent on foreign capital to finance the debt. There are many other reasons specific to that country & I would recommend reading “The Lost Decade” for a more thorough discussion of Japan’s situation.

    Also, this post @ Big Picture is interesting.

  3. Turniptruck Says:

    Ah… D?mo arigat?

  4. Bob Carver Says:


    You don’t understand the difference between the debt of a sovereign country in a fiat money system and private sector debt. The Treasury and the Fed can buy back all of the bonds outstanding at any time they wish to simply by moving a few electrons around in a computer. However, that would not be a good idea because it would collapse the private sector, which depends upon the government running a deficit.

    I suggest you need to educate yourself. Then, you’ll know more than Obama about how the government is financed.

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