Judd Gregg: The dangers of ultra-long-term bonds

Judd Gregg: The dangers of ultra-long-term bonds

There is a lot of talk right now about having the Treasury issue 50- or 100-year bonds.

Considerable discussion should be required before the nation embarks on this course.

Treasury bonds are essentially used to paper over the deficit spending to which the federal government is addicted.

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In other words, when the president uses a pen to sign a piece of legislation sent to him by Congress, the money used to buy that pen is borrowed. Under today’s practice, the debt incurred to pay for the pen may take as long as 30 years to pay back — with interest of course.

 

Now it is being suggested that we might want to take 50 or 100 years to pay for the pen, with interest accruing and being paid each of those 50 or 100 years.

It will become a pretty darn expensive pen.

One of the arguments advanced for pursuing this path is that other nations have issued 50-year bonds. The other nations include France and Iceland, which are hardly synonymous with fiscal restraint. Their currency is not the standard used by the rest of world as a backstop. 

The dollar, on the other hand, is the key to world commerce. It is used by most nations as their reserve currency. It is essentially other countries’ insurance against their governments pursuing profligate fiscal policy. 

This fact would possibly make the sale of 50- or 100-year U.S. bonds acceptable in the world market. But it should also give us significant pause.

If we want our currency to be the reserve currency of choice around the world, then we need that currency to be respected. 

If we start issuing general obligation bonds that have 50- or 100-year terms, we will inevitably call into question the long-term integrity of our nation’s fiscal house. Financing current expenses for 5, 10 or even 30 years may be an accepted practice, but to go out 50 or 100 years is not. 

We are about to cross the threshold of $20 trillion in public debt. It is only the tip of the iceberg.  

The unfunded liability of Medicare, Social Security and Medicaid is approximately $80 trillion. Thus the real debt of our nation — the amount that is owed to fund the operation of our government over the predictable future — is over $100 trillion.

If a large portion of the debt to fund the costs of everyday government is pushed out 50 or 100 years, it means that we are essentially abandoning any attempt to bring our fiscal house into order. We are sending part of the cost of today’s government — and the question of how to pay for it — into the next century. 

Those who lend us money will most likely put a fairly steep charge onto such debt before risking what amounts to a roll of the dice as to their chances of being repaid in dollars whose value resembles those they lent.

The argument in favor of this idea revolves around the fact that we are in a period of historically low interest rates. Therefore, if 50- or 100-year bonds are issued, they too will be purchased at historically low interest rates. 

This may be true, but that interest rate, because of the length of the bonds, will definitely be much higher — probably at least twice what a 5- or 10-year bond now costs us. This higher rate will be with us for decades and will compound. It will inevitably become very expensive debt.

There is also the issue of liquidity. U.S. treasury notes are a crucial element of a fluid and expanding domestic and world economy. If funds start to be locked into 50-or-100- year notes, this liquidity will have to contract to some degree. This could be detrimental to capital flows and the expansion that comes with liquid markets.

Michael Santoli, the effusive and thoughtful commentator on CNBC, made a telling point recently. He said, “It’s hard to envision a situation where it would be smart for Treasury to issue enough half-century bonds to make a decisive difference in the government’s long-term financial security. In which case, why spend much time pushing the idea?”

As he often does, he hit the nail on the head.

It is possible, as was suggested by Trump adviser Gary Cohn, that super-long-term bonds specifically tied to some definitive types of capital expenditure such as infrastructure construction might make sense. Such bonds would have to be separate from general obligation bonds and would need to have their own dedicated funding mechanism, such as an increase in the gas tax, to be sound and appropriate.

But buying a pen today to let the president have a nice ceremonial signing and paying for it over 50 or 100 years? 

That will put a lot of red ink on the federal books and on everyone’s faces.

Judd Gregg (R) is a former governor and three-term senator from New Hampshire who served as chairman and ranking member of the Senate Budget Committee, and as ranking member of the Senate Appropriations Foreign Operations subcommittee.

The views of contributors are their own and are not the views of The Hill.

This column was updated at 10:55 a.m. to reflect that a quotation from CNBC's Michael Santoli was originally misattributed to the same network's Rick Santelli.