By Joel Achenbach
Washington Post Staff Writer
Tuesday, December 8, 2009; A01
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."Nothing new
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.
The country had greater debt, as a ratio to its economy, at the end of World War II, and rather than being crippled dug itself out of the fiscal hole and firmed up its status as a global superpower.
Indeed, federal debt is nothing new. Along a hallway at the bureau are framed Treasury bonds and notes going back as far as 1799, when a certain John Clarke of Yorkshire, England, bought a $5,000 bond from the former British colony. In July 1864, President Abraham Lincoln invested $100 in a bond that had his picture on it. Foreign investment has always been the norm: A handwritten ledger from 1818 shows that of the $99,106,825.58 in national debt, foreigners owned $25,444,047.75 of it, or about a quarter.
Liberal economists, most prominently Nobel laureate and newspaper columnist Paul Krugman, have contended that budget deficits at the moment are actually too small. The first stimulus package was too stingy to make much of a difference, they say, and the country needs another spending kick to get the economy out of second gear. All this talk of fiscal doom and gloom, they say, is a conservative technique to scare people and undermine social programs, including Social Security and Medicare.
Conservative economist Kevin Hassett, however, says that government spending has skyrocketed under the Democrats and that he doesn't take the president seriously when he says he wants to be fiscally prudent.
"They're attempting to achieve every agenda on the Democratic wish list and then after they've done that, worry about deficits," Hassett says.
To keep the debt machinery humming, Congress must raise the statutory debt ceiling within a few weeks. But 13 Democrats in the Senate have vowed that they won't vote to increase the limit unless Congress creates a bipartisan commission that would find ways to cut the debt.
"The longer you wait, the more you diddle, the more draconian the solutions are going to have to be. That's just a mathematical certainty," says Sen. Kent Conrad (D-N.D.), a leading advocate for the debt commission.
Congressional leaders and committee chairmen, however, don't want their spending and taxing authorities usurped by a commission. One possible outcome of negotiations between the administration and Conrad's group is that Obama could appoint an advisory panel with no statutory power. Whether that would satisfy the fiscal hawks remains to be seen.
The administration has signaled that it believes the economy comes first, deficits second.
"Right now it's all about growth and jobs, has to be about growth and jobs," Treasury Secretary Timothy F. Geithner said in a recent interview on CNBC. "And that's the best way to make sure we have the ability to shift to going back to living within our means, bringing down these long-term deficits. That's the basic strategy."
As William Gale of the Brookings Institution put its, "Saving the budget but killing the economy in the process is a pyrrhic victory."
Timing is everything. The administration will have to perform one of the great fiscal pirouettes of all time. In the same way that the president has ordered an increase of troops in Afghanistan while also setting a date for the start of withdrawal, he must use the spending power of government to juice the economy while vowing fiscal discipline as soon as possible.
If deficits can become small enough over time -- less than 3 percent or so -- the natural growth of the economy will make the debt more manageable. No one knows how robust the economy will be in the future, or what kind of crises might drain Treasury resources. Then there's the quirky nature of debt itself: It is not as inert as one might think, but rather exists in a riotous ecosystem of high finance, a tangled network of bills, notes, bonds, fluctuating interest rates, percolating inflation, rising and falling currencies. Any sudden shock to the system can have cascading effects.
Burman, the economist, says he has developed a computer model that shows that a "catastrophic budget failure" is a possibility.
"I try not to get too depressed, because if I really thought it was going to play out the way this model works, I would just move to a cabin in Montana and stockpile gold and guns," he says.The pain of discipline
Fiscal calamities in the past have been solved or moderated. But often the politicians who tried to fix the problem were booted from office. When President George H.W. Bush broke his no-new-taxes pledge in 1990, he torpedoed his reelection chance. Bill Clinton raised taxes in 1993, and the Democrats quickly lost control of Congress. Clinton left office with the nation showing a budget surplus, but that vanished with the George W. Bush tax cuts, two wars and a new entitlement program, the Medicare prescription drug benefit, that Congress and the White House decided didn't need to be paid for.
Fiscal discipline means pain in a political culture that has shown itself to be pain-averse.
"It's kind of an ouchless society. In other words, nothing's supposed to hurt," says Robert Bixby of the Concord Coalition, a deficit watchdog group. "We can have new spending programs, but nobody's supposed to pay for them. We can have a war, but nobody pays for it. Tax cuts pay for themselves. You're not supposed to ask for any sacrifice."
Back at the boiler room, in that faceless downtown office building, the Bureau of the Public Debt is getting ready for more auctions. There must be a continual churn as new debt helps pay off old debt. Bonds, notes and bills mature at different rates, and the bureau officials have to spread things out in an orderly fashion so they don't discover one morning that the Treasury is stone-cold broke.
The staffers here don't advocate for one fiscal path or another any more than the gasoline in a car decides whether to drive to the supermarket. But their pride is palpable.
"We're deep and liquid," says Karthik Ramanathan, acting assistant secretary for financial markets at the Treasury Department. "There's no other market in the world that can accommodate billion-dollar-type trade sizes with the snap of a finger. There's no other market that does 600 billion-dollar trades in a given day."
On Monday, the bureau offered 13-week and 26-week bills, $61 billion between them. On Tuesday, the government has scheduled three auctions, totaling $81 billion. On Wednesday, the Treasury plans to borrow $36 billion, and on Thursday, $13 billion.
Which is $191 billion for the week, if anyone's counting.