The Wall Street Journal just published a letter of mine, Debt Bomb has Shorter Fuse Than Many Citizens Think (credit to them for the snappy title, and to my wife Corrina for invaluable editing). I respond to the Journal’s recent editorial Obama’s Debt Interest Bomb.
The editorial warned of a growing burden of interest payments on the national debt, due to rising interest rates and the anticipated drawdown of the Fed’s portfolio of Treasury securities. In my letter, I point out that the problem is exacerbated by two factors. First, the short maturity structure of the Treasury’s debt offers little protection against higher interest rates.
The second factor is the uneven composition of the securities held by the Fed. The Fed neutralizes the interest payments it receives by returning them back to the Treasury. Because the Fed tends to hold the Treasury’s higher-rate securities, the Treasury will sorely miss the Fed’s subsidy when it’s gone.