How Not To Cut The Debt Load, For Crying Out Loud
If any chief financial officer of a company proposed replacing 7.7% 30-year debt with one-year debt--no matter what the current one-year rate--he would be put into restraints ("Let's start the new year by cutting the debt load," Economic Viewpoint, Jan. 13). The same demand for ordinary prudence applies to the U.S. government, too. Carrying a lot of short-term debt is dangerous, in case you've forgotten. There are so many objections to such a plan: short-term rates would rise; long-term bonds could only be bought at a substantial premium; when all this new one-year debt has to be refinanced, rates would soar. All of this, and more, would eat up any imagined savings to the Treasury.
The real objection to such a refinancing plan, however, is that such a drastic change in Treasury borrowing habits would create uncertainty! There is one thing we know about capital markets--uncertainty means higher rates. Besides Gresham's law this may be the mnly economic rule always true.
The hidden assumption in Blinder's argument is that the current long-term rates are irrational, and that the current short-term rates are logical. The reverse is almost certainly true.
Mean inflation at 4% to 5% (I know it's 3% at present, but that's an artifact of the 1990 run-up and 1991 run-down in oil prices due to the Gulf war) precludes stable short-term rates at 3.5% to 4%. When the day to refinance comes, all these chimerical savings would vanish.
Thomas J. Rieger
Interest rates, which are at a ten-year low, will inevitably rise again. Now is the time to lock in at 7.5% for the next 30 years. In two or three years this rate will be a bargain. If the Treasury were to follow Blinder's advice, we'd be refinancing every year at higher and higher interest rates.
Professor of Economics
Union County College
The objectives of debt management by a corporation and by government differ significantly. To carry Blinder's idea to its logical conclusion, the government could simply print money or borrow at zero interest rate from the Federal Reserve System.
Monetizing the debt is inflationary. Short-term advantages are offset by long-term destabilization.
Rolf A. Weil
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