ECONW Shop Talk: Brother, can you spare 18,000,000,000,000 dimes?


Economists struggle to get people to understand really big numbers, so we like to find fun ways to explain them. So it is with the upcoming $1.8 trillion dollars our government will have to borrow next year.

$1.8 trillion is 18,000,000,000,000 dimes. Piled together they would weigh as much as 100 Empire State Buildings! Now imagine you had to borrow those dimes, just as in the Depression Era song, “Brother, can you spare a dime?” Because we will have to and here is the story.

We are 107 months into the second longest economic expansion in a hundred years. Jobs are plentiful. Shortages prevail. It is times like this we should pay down our debts. Save our credit worthiness for when we really need it. So what did Congress do? They did the absolute opposite. They passed a tax cut at the same time we are running big budget deficits. The resolution to all this could be ugly–very ugly indeed. Tax cuts compound an already troubling situation.

Think of the money we have to borrow. Start with a deficit we inherited for the next year.[1] That’s $700 billion. Add to that the tax cut Congress just passed. We have to borrow another $280 billion to cover that. Then throw in the latest extras from defense spending and disaster relief to extra funding for domestic programs and Obama Care. That brings us to $1.2 trillion in deficit spending. Now count the $600 billion in bonds that the Federal Reserve will not roll over.[2]

All told, it means the federal government has to find investors willing to buy $1.8 trillion more Treasury bonds. And that is just in the next year. It is equal to 9 percent of the entire economy. So what will happen?

Well, anything can happen but one way, and I believe the most likely way, it will resolve itself is by interest rates rising. To convince people to buy those bonds, the government will have to offer more attractive interest rates.

It started already. Treasury bonds that mature in 10 years paid 2.40 percent at the end of December. You could have bought one then for $1,000. Interest rates rose. A month later they were paying 2.72 percent. That may look like small potatoes, but that $1,000 bond you bought on New Years is now worth only $880. Bond investors got killed in January.

In February the carnage continued. In just the first two days yields rose to 2.85 percent. Now your bond is worth only $840. It took a while, but stock markets finally responded. Stock prices fell, although nowhere near as much as bond prices.

So now that you lost 20 percent of your money on that bond, would you like to buy another? We need to sell $1.8 trillion of them. We need all those dimes. What interest rate would they have to offer you to get another $1,000 from you? I am betting it is a heck of a lot more than the current rate. Maybe they will have to offer 3 percent, 4 percent, or 5 percent?

So think about this. If they offer 5 percent bonds, will people trade in stocks to pay for the bonds? Some will. After all, stocks are yielding only 1.8 percent. Why not, if you are a pension fund for example, lock in a 5 percent yield knowing you are guaranteed to get your entire investment back in 10 years?

Therein lies the ugly situation ahead.

Rates look like they are headed higher. That is bad for the stock market. It is bad for the housing market. That probably is bad for the exchange rate, which affects things you may not think of … like tourism, exports, and inflation. None of this would be good for the Northwest.

Can the situation resolve itself without causing big rate increases? Sure it can, but it does not look good. I’m nervous about it and I lived through 9 recessions. Be cautious.

If Congress does nothing different, the government would have to sell $1.8 trillion in bonds. Somebody has to buy that debt. The question is; how much would they want? Brother, if I offered you 5 percent, would you spare 18,000,000,000,000 dimes?


[1] The federal fiscal year starts on October 1, 2018 and ends September 30, 2019.

[2] For the last 10 years the Federal Reserve Bank has been buying government bonds with money they basically printed as a way to get cash into the economy. Now that the economy has recovered, they stopped buying and are taking cash out of circulation. So as those bonds mature, the federal government has to find investors to buy new bonds.