Dogma of Stupid: The US Short Term Debt Fail

Next year's US Economy as seen by the Chinese

I am sure you remember them: "0% Interest for 6 Months!"

They used to arrive in the mail regularly - begging you to convert you credit card debt from your current "high interest" accounts to this great new "teaser" rate.  Of course, after the first six months the interest rate jumped to 21%.  Generally these cards were a lesson in stupid because unless you rolled your debt over again in six months (and made sure not to forget to do it) you'd be caught.

Getting caught seemed easy enough to avoid because there would always be more companies looking for your credit card business.  Until, of course, you discovered that you could be denied for a credit card because you already had to many.

It used to be that those running these deals were simply unscrupulous criminal enterprises disguised as credit card companies.

But today that's no longer true - instead its the US Government - running the deal on US, the US taxpayer.

Here's how it works.

Right now, today, we pay about $225 billion (with a "B") USDannually in interest on a US debut of some $11 trillion (with a "T") USD in US Treasury debt.

A mere five years ago we were paying about $250 billion annually in interest on only $5.5 trillion USD in debt.

That's right - it cost us a little more to cover the interest on on half the total borrowed.

And all the while we're on an epic debt binge (see "Epic Debt Fail" which I wrote a while back).

Our current President, along with Ben Bernanke and the US Congress and Senate, are really clever guys after all.  They've managed to leverage our debt to twice what it was four and a half years ago but pay less!

But are they really all that clever?

Is this really good public policy?

In fact what they've all done is really just started rolling new borrowing into "teaser rate" 0% debt.

This makes the interest rate appear to remain very low despite irresponsibly high levels of borrowing.  After all - if I am paying 5% on my $1,000 in debt and I can borrow another $1,000 for 0% for six months my books show that I am now paying $2.50 on $2,000.

At least as long as the credit card companies Ben Bernanke at the US Federal Reserve keep the rates near zero.

I look like a genius.

At least until someone starts nosing around the fine print or interest rates goes up.

The US government did exactly this - but instead of short term "0%" credit cards to build up debt they simply sold short term US Treasury's at the Fed's low, low 0% rate.  So this worked for long enough for the US government to double its debt to some $11 trillion.

But when interest rates go up the real problem appears.

First of all, there are no more "0%" credit offers to old debt that's maturing has to be rolled over into more expensive debt.

Now we are getting close to this point because right now several things are happening.

One - the Chinese are bailing out of US debt.  Why?  Because, though they may be evil communists they are not stupid, at least with their money.

Two - foolish investors are offering to pay, that's right "pay," the US Treasury to hold its debt (see this).  While this may seem counter-intuitive its not.  Imagine the alternatives - say investing in Libian bonds, for example.  Higher rate of return but much, much higher risk.  If I don't want risk then I go with US debt...

At least until now.  But what about those pesky Chinese - they're getting out of US debt?

I think they see what's about to happen.

Bernanke can keep debt rates low only so long.  Because low rates attract businesses that borrow money to expand their businesses.  And as businesses expand they hire.  And as they hire the economy heats up.  And as the economy heats up and expands there is more consumption.  So more businesses borrow. And so on, and so on, ...

Interest rates act like a governor to slow down this expansion.  With the current 0% rates the economy will expand out of control and carry prices hire creating inflation.

So at some point interest rates have to go up.

But when they do the US government is hit by the second problem: the cost of this ridiculous amount of debt.

Interest rates at the still remarkably low rate of 5% or 6% will cause old Uncle Sam's annual debt payment to rise to some $600 or more billion dollars annually - more than its obligations to, for example, Medicare.

The Chinese are bailing out because they know that the US cannot sustain its less than stellar credit at higher rates because it simply cannot afford to.

We cannot control out borrowing and soon interest rates will take our ability to support the existing debt out of our hands.

Little wonder the rats are fleeing the sinking ship.

What you see here is the classic example of "living beyond your means."

In personal bankruptcy where a debtor cannot face living the lifestyle he can actually afford running up huge amounts of "0%" debt were common.  Kind of like check kiting but using credit cards - I guess like debt kiting.  You keep rolling debt over to new cards - borrowing extra where ever you can - until there's no more to borrow...

Then off to bankruptcy...  oh wait... There's no bankruptcy court this big...

Oh oh...