National Debt Gets More Expensive
Taxpayers to pay more for the pleasure of borrowing foreign money.
Over the past 15 months, Federal Reserve Chairman Ben Bernanke and Treasury Secretary Hank Paulson have unleashed a litany of programs aimed at averting wide-scale collapse of the American -- and indeed the global -- financial system. They go by the acronyms we've all come to know and love: TARP, CPFF, TAF, PDCF, TSFL, etc.
For all their nuances and complexities, the aim of each is to pump more cash into the American economy. Many of these programs are financed with Treasury debt, which is sold on the open market to domestic and international investors alike.
Bloomberg reports that, despite aggressive interest-rate cuts, the cost of US debt is rising - and will likely continue to do so.
Recently, as markets swooned, investors flocked to Treasuries as a safe haven. Yields -- which move in inverse relation to prices -- became almost non-existent as protecting capital trumped earning returns. Now, as credit markets slowly heal and the appetite for risk cautiously returns, many doubt existing demand will be enough to sop up the massive supply of American debt set to be issued in coming months.
Bureaucrats and regulators have pledged billions in support for our struggling economy: The money has to come from somewhere.
Foreign investors -- particularly Japan and China -- are the largest holders of our government-backed debt, and, as their economies stumble, federal budgets will become strained. Lower tax receipts and mounting costs means these countries will demand a higher return on their investments abroad.
This dynamic, coupled with increasing supply, is likely to push up yields on US Treasury debt. That means American taxpayers, gazing down the double barrel of the $700 billion bailout package and a likely second round of stimulus checks, will see their debt costs rise.
Credit costs throughout the economy are similarly moving north. Credit card companies like American Express (AXP) and Capital One (COF) are slashing lines and hiking up interest rates. Mortgage rates stubbornly continue to move higher, and corporate borrowing is as expensive as it's ever been. That's all after more than 400 basis points in Federal Reserve easing in less than a year-and-a-half.
Meanwhile, taxpayers wait eagerly to see if this increasingly expensive debt will be put to good use. In the past week, both Bank of America (BAC) and JPMorgan (JPM) have announced plans to step up efforts to modify troubled mortgages. This is encouraging - but with 1800 banks lined up at the government trough, that $700 billion isn't likely to last long.
For a group that would implore their fellow Americans to get out of debt and live within their means, Congress and their regulatory counterparts certainly don't set a very good example.
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