EXTENDING TREASURY MATURITIES: A BIGGER STRETCH THAN COMMON SENSE WOULD INDICATE

3/4/13

The Opinion section of the today’s (i.e., 3/4/13’s, page A15) Wall Street Journal features an attention grabbing article entitled “Treasury Needs a Better Long Game” by Professor John H. Cochrane of the University of Chicago Booth School of Business.  One could certainly nit-pick at the article; for example, in his major calculation of the impact of rising interest rates on the federal deficit, Professor Booth seems to assume that the Treasury (Being an older guy not given to fashionable trendy piffles, I insist on calling that department “the Treasury,” as we did when America was great.   This latest moniker “Treasury,” seems to be grounded in the hopeless cutsey-pieness that seems to have high-jacked our language, but I digress.) pays 0% interest on it debt load currently and that it finances everything over night, or nearly over night.   Despite its mechanical flaws, though, the article makes a compelling argument, i.e., that the Treasury should take advantage of the currently prevailing near record low yields by substantially extending the maturity of its liabilities.

The real problem with Professor Cochrane’s argument, though, is not its mechanical shortcomings; the real problem is that Mr. Cochrane is applying common sense and reasoned analysis.   He is thinking like a responsible person rather than like a Congressperson.

The typical bloviating, self-aggrandizing Congessperson does not give even a hair on a rat’s hindquarters about what is good for the future of the Republic or the prospects for its long run fiscal soundness.   The typical politicaster in Washington cares only about continuing the ceaseless ego trip s/he calls a career, i.e., about getting reelected.  Since the voters, to the extent they take time off from engaging in such intellect enriching pastimes as watching situation comedies, “reality” shows, and such drivel as “Dancing with the Stars” and “American Idol,” are clamoring for deficit reduction, the typical politician is looking for ways to reduce the deficit painlessly for the only time period that matters, i.e., the period between now and reelection, which ranges from, at this juncture, about a year and a half to about five and a half years.   If the politician were to do the right thing, i.e., extend the Treasury’s liability maturities out to 10 or 30 years, that would involve moving out the curve and thus paying more interest as long as the curve has even a measure of steepness to it. 

Right now, the curve is neither inordinately steep nor inordinately flat, but refinancing three month bills with 30 year bonds would involve paying an additional 299 basis points, or just short of 3%, in additional interest.    If the Treasury were to do so with the 40% of its debt that it rolls each year (according to Mr. Cochrane), admittedly an extreme case, that would cost the Treasury an additional $216 billion per year.   This would increase the projected deficit of about $950 billion by about 23%.  What self-serving politician (Yes, I know; “self-serving politician” is perhaps the ultimate redundancy.) in either the executive or legislative branch would sanction a 23% increase in the deficit in the only time frame that matters—before his or her campaign for reelection—even if doing so is in the long run interests of the nation?   To ask the question is to answer it.

One could almost legitimately argue that decisions on the length of the Treasury’s maturities are not in the hands of the politicians but rather in the hands of career people at the Treasury.   This is true to a certain extent.  But those career people serve not at the pleasure of but almost at the whim of the elected politicians.   If the career people were to embark on the sensible course that Professor Cochrane prescribes, folks in the White House and especially in Congress would be screaming the Washington equivalent of “bloody murder,” if bloody murders, having become rather commonplace of late, still drew the attention they once did, but again I digress.   There would be investigations and hearings into the “gross irresponsibility of the bureaucrats” who would only be trying to do the right thing but, in so doing, imperiling the lifelong sinecures to which our elected “public servants” feel entitled.