In debate over nation's burgeoning deficit, a surplus of worry
Tuesday, December 8, 2009
The boiler room of the ship of state is a sterile chamber on the ninth floor of an unremarkable office building in downtown Washington. Half a dozen staffers sit at computer monitors, staring at incoming data. A voice with a Brooklyn accent squawks over an intercom: "Five minutes to go!"
This is the auction room of the Bureau of the Public Debt. On this particular morning -- Tuesday, the first day of December -- the United States is going to borrow $31 billion.
The instrument in play is a four-week security. It's a Treasury bill that gives investors a place to park some money briefly with minimal risk and minimal return.
At 11:30 a.m., precisely, the bidding closes. The deal is done, instantly, electronically.
"It happens in seconds. Boom. We have 31 billion, they have their securities," says Keith Pallas, the auction manager.
Debt is the essential fuel for a superpower that every day spends billions of dollars more than it receives in tax revenue. The job of the debt auctioneers is to keep things humming smoothly. It's a bloodless, dull process, but that's a virtue. No one here wants drama. Boring is beautiful.
But it may not be boring forever. The United States owes investors nearly $8 trillion. That number could more than double in a decade. The projected growth of the federal debt is widely viewed as unsustainable. It's unlikely that the nation will ever default, but neither is that any longer unthinkable.
President Obama is expected to address the burgeoning debt in a major economic speech Tuesday in Washington. He inherited a huge deficit, and there's nothing but red ink as far as the eye can see. The administration has estimated that there will be $1 trillion-plus shortfalls through 2011, followed by $700-billion-plus shortfalls through 2019.
Whopper budget deficits for so many years will mean that the cumulative debt will creep up as a percentage of the nation's gross domestic product. How much debt the country can handle is debatable. The problem is that, if investors think the United States isn't fiscally responsible, they could start demanding much higher interest rates when they bid on Treasury securities. The feedback loop could get ugly. The nation could have to borrow hundreds of billions just to pay interest on what it owes. This has been touted as a classic path to irreversible national decline.
"Right now, this year, we have 1.6 trillion in debt coming due. That's roughly twice individual income tax revenue. Our only plausible strategy for paying that back is to borrow more money," says Leonard Burman, an economist at Syracuse University.
Under some grim scenarios, the cumulative debt of the United States could rise to several times the nation's annual GDP by mid-century. David M. Walker, a former U.S. comptroller who has long thundered about unfunded government obligations running to the tens of trillions, recently testified before Congress that because of long-term entitlement obligations, "our total federal financial hole is about $10 trillion more than the current estimated net worth of all Americans and the gap has been growing."
But there are those who say such fears are wildly overblown. Investors across the planet still consider the United States a safe bet. The collapse of the market in exotic derivatives, such as mortgage-backed securities, has made dishwater-dull Treasury instruments all the more attractive. On one wall near the auction room, someone has framed the results of an auction last December when Treasury offered a four-week bill that would pay zero interest. Even with a guarantee of a nil return, investors eagerly bid on it.