In my last article, I showed that the government is often borrowing more money in a given timeframe than it appears to be. This is because past debts incurred by the government become payable each year, and oftentimes, the government opts to delay payment by issuing additional Treasury securities (i.e., rolling the debt over). If you did not read the original article, I recommend you start there.
An important question to ask is whether or not the amount of debt being rolled over in one year has ever been this great. I would rather not compute the amount of debt rolled over every year since the numbers were first recorded (the process is somewhat tedious), but I think examining the public debt in dollar terms and as a percentage of GDP will enable me to select a few years for comparison. Please see these two graphs below.
Obviously, the best place to look is in the late 1940s/early 1950s, and the late 1990s/early 2000s. On the Treasury website, the earliest available year with January as an option is 1954 (January is the benchmark month I have been using), which I will use to compute the debt rolled over in 1954. Unfortunately, the Daily Statement of the United States Treasury for this year is somewhat confusing; my best estimate is that the amount of rolled over debt was $60b ($475b in 2009 dollars).
I have compiled the amount of rolled over debt for the years 1954 and 2000 through 2014 in a table below. Please keep in mind that the dollar amounts for the years 1954 and 2000 through 2009 are adjusted to 2009 dollars, and that the years 2010 through 2014 are in current dollars.
As one can readily see, the amount of debt to be rolled over in the years 2010 and 2011 is much greater than any of the previous years. In fact, if one were to average the amount of debt to be rolled over for the years 2000 through 2009, the percent increase in the amount of debt to be rolled over for 2010 and 2011 would be approximately 20% and 55%, respectively. The percentage increase from 2010 to 2011 is approximately 36%.
Although the amount of debt to be rolled over in the year 1954 was substantial, the government was operating with a budget deficit that was about 0.5% of GDP at the time (in contrast with nearly 11% for this year).
I should point out that the amount of debt to be rolled over drops sharply after 2012; however, the amount will increase as time progresses. After all, the Treasury will need to auction a large amount of long-term securities between now and the end of the year preceding the particular year the debt is rolled over, which will add to the amount of debt being rolled over in subsequent years. For example, one can see by looking at the Tentative Auction Schedule of U.S. Treasury Securities (for the year 2010) that several auctions of long-term securities are scheduled later this year. There are 35 long-term securities auctions in total. Here, long-term securities are those that have a maturity date (i.e., the date the outstanding balance is due) a minimum of one year past the due date.
The securities being auctioned this year that will affect the amount of debt to be rolled over in 2011 are one-year Treasury bills (since the issue date is sometime this year, the maturity date will be sometime next year); there are five one-year bill auctions scheduled. So far this year, the average auction size has been $44b; therefore, if the future auctions are of similar size, we should expect the amount of debt rolled over in 2011 to increase to $1215b from $995b.
Similarly, debt rolled over in 2012 will increase to $1026b (due to two-year note auctions this year). This estimate does not count one-year bill auctions that will occur during 2011.
With that said, I think the Chinese realize what is going to happen (as evidenced by their recent actions). According to Bloomberg, “China has been a net seller of Treasuries for three straight months.” Their “holdings [have] dropped by a net $5.8 billion to $889 billion.” China’s holdings peaked in July of 2009 at $939.9b. The most recent number of $889b means China has reduced its holdings by nearly 5.5% since July of 2009.
Although I cannot find continuous data on China’s gold holdings for 2009, the World Gold Council reported that Russia’s gold holdings increased by 22% in 2009. I suspect China is doing something similar, but is being secretive about it (they have always been secretive about investing in gold). If you would like to read more about gold statistics, please visit the World Gold Council website.
As a result, I think the United States is heading for a double-dip recession (and perhaps, a prolonged depression, depending on future government policies); the reason being, I do not think the Federal Reserve and the federal government will be able to reinflate the bubble economy before the massive amount of debt becomes due. In years past, the Federal Reserve and federal government have been able to reinflate the economy, which served to increase tax receipts and boost confidence (before the bills came due).
However, the United States is in much worse fiscal condition this go-round, and even if tax receipts were to recover, there would still be an enormous federal deficit. Furthermore, confidence is almost nonexistent (at least for those who understand what is happening). I believe it is likely that interest rates for long-term Treasury securities will begin to rise later this year, in 2011, and 2012, despite the efforts of the Federal Reserve to maintain low interest rates.
The dollar will also deteriorate sharply over this time period (at least with respect to gold). Once interest rates begin to rise, the bubble economy will burst once again, only this time, debt will have a much stronger stranglehold on us.
Back to square 1. Perhaps the Federal Reserve and federal government will do the right thing then.Published in