The U.S. dollar is a debt instrument that pays no interest – a security that you can redeem at face value, without penalty, at any time. With $1.2-trillion (U.S.) in circulation, U.S. paper money and coinage should, by rights, be counted as federal debt. Indeed, with interest rates close to zero, U.S. currency is now essentially indistinguishable from Treasury bonds.
The U.S. could theoretically eliminate its entire $15-trillion debt by printing 150 billion hundred-dollar bills and using the proceeds to pay off all its debt. It could do so, diabolically, for the cost of paper and press. Presto: no national debt, no default, no problem.
As Steve Conover noted recently, in a commentary in the online American Magazine, the problem of the federal debt now isn't necessarily the debt itself. The principal imposes no burden; it is simply a sum of money given to the government in exchange for a promise to give it back.
Meanwhile, the interest payments, at zero per cent or close to it, impose only a modest burden – as dramatically demonstrated by the portion of tax revenue that has been required, at any given time, to pay the interest on the debt. In 1998, with Bill Clinton as president, it took 14 per cent of tax revenue to pay the interest on the debt. In 2004, with George W. Bush as president, it took only 9 per cent. In 2011, under President Barack Obama, it took slightly more: 10 per cent.
In January, the average interest rate on all U.S. debt was 2.2 per cent – almost enough to compensate for inflation. The 2-per-cent average rate translates into a $300-billion annual hit on $15-trillion in debt: or, again, 10 per cent of anticipated federal tax revenues in 2012-2013 ($3-trillion).
For a dime on each taxpayer dollar, the United States gets to float $15-trillion in debt. That's leverage. (Contrast that interest charge with Canada's perilous position, circa 1990-1993, when then-prime minister Jean Chrétien put a brake on government spending. In 1990, it took 35 per cent of federal tax revenue to pay the interest on Canada's federal debt. In 1993, it took 45 per cent.)
In other words, the huge expansion of U.S. debt in the past four years has cost American taxpayers only an extra penny on every dollar of national debt. Little wonder the financial markets responded with a collective yawn to Mr. Obama's 2013-2014 budget, the fourth in a row to add another trillion dollars to the national debt. Provided interest rates remain close to zero (as the U.S. Federal Reserve has arbitrarily decreed), the financial markets could still be yawning in 2018 when U.S. national debt hits $20-trillion.
In other words, it's not the debt – yet. It's the interest rate – coming. Only when interest rates skyrocket will this debt turn cataclysmic. Meanwhile, Mr. Obama gets to borrow and spend with impunity.
Some people worry that China will stop buying U.S. debt; it could easily do so merely by allowing its different debt securities to mature. If it did so, it would essentially swap U.S. debt for U.S. dollars. As Mr. Conover sees it, the U.S. is quite prepared to make this transaction. Indeed, he says, the U.S. would be eager to make it.
"But the Chinese … debt holders have been turning right around and exchanging those dollars, in the open market, for brand new U.S. Treasury securities," Mr. Conover wrote. "In effect, we keep trying to pay them back, but they won't let us; they'd rather hold interest-bearing T-bonds than non-interest-bearing dollars." He argues that China doesn't actually hold a significant percentage of U.S. debt, at 7.5 per cent, given that the U.S government owes much of the debt (42 per cent) to itself.
How does Canada fare in these comparisons? It turns out the federal government pays $30-billion (Canadian) a year in interest charges, or slightly more than 12 per cent of tax revenue ($240-billion) – two percentage points more than the United States does. And Canada pays a higher interest rate as well: 2.8 per cent versus 2.2 per cent.
Is it possible – remotely possible – that Canada is as much at long-term risk of cataclysmic crisis as the United States? Well, yes, indeed, it is.