Financing costs for the U.S. Treasury are projected to go from $202 billion now to $700 billion or more in the next ten years. As this New York Times article points out, the additional $500 billion is more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.
One complicating factor is that the rapid increase in debt service payments is coming at exactly the same time the Treasury is trying to finance giant increases in Medicare and Social Security as a result of the baby-boomers reaching retirement age.
One consequence of this debt buildup is that credit default swap volume against sovereign debt default for industrialized countries has doubled over the past year, while the swap volume to insure against default in emerging markets has dropped. Investors are increasingly betting that the debt wave will be unsustainable and may result in defaults in large economies.
The growth in debt service costs is already running at a much higher rate than growth in GDP, which means it is no longer possible to grow our way out of the problem. We are headed toward an inevitable showdown between Congress’ propensity to spend and the bond market’s reluctance to finance all of that spending. The investment environment could change radically and it will be important to have a flexible investment policy that can adapt.
