The concept of "trillions" has always eluded my comprehension. The picture shows how physically large a stack of a trillion one dollar bills is, which helps a bit. Now try to imagine a stack eleven times as large. That would represent the present amount of US Treasury debt. As of June 30, the US Treasury owed the public—defined as all foreign and domestic individuals, corporations, state and local governments—exactly $11,072,381,954,476.80. This amount has increased by $1,330,158,589,630.22 just in the last year. It has increased 220% or $7,608,234,581,695.98 in the last ten years. But, as I say, such numbers are incomprehensible. I expect you didn't really read them; your eyes just glazed through them.
The average interest rate for all US Treasury debt, again as of June 30, was 2.651%. This means that the annual cost to the Treasury of its current debt is $293,528,845,613.18. This is a bit more comprehensible; to put it in perspective, it is less than five times Bill Gates' net worth.
It is also significantly overstates the true cost to the Treasury.
A few weeks ago , The Oregonian published a piece by an economics professor named Eric Schuck correctly pointing out that the inflation rate must be subtracted from the nominal rate of 2.651% to determine the Treasury's real interest cost. The year-over-year increase in the consumer price index—a common proxy for inflation—is 1.7%, Taking 1.7% from $2.651% leaves 0.951%, which results in a real annual interest cost to the Treasury of a rather paltry $105,298,352,387.07.
But, from the Treasury's vantage point, it's much better than that. Since 2003, the Treasury has published a daily calculation of real inflation-adjusted yields on its debt. These yields reflect the earnings investors demand to buy Treasury securities on the open market. At the beginning of 2003, investors required a real yield of 2.43% to buy ten-year US Treasury Notes. A year ago, the yield had fallen to 0.74%. On June 30, 2012, investors were willing to buy 10-year Treasury debt at a negative yield of 0.46%. To quote Professor Schuck, "Effectively, people buying US Treasury bonds are paying the government to borrow money from them."
Why would anyone do something so crazy? The answer is… safety. The US Treasury will repay its debts. As I discussed last month, this is the power of the rule of law. But today, I am more interested in the implications of such astonishingly cheap debt.
America is suffering from any number of infrastructure deficiencies, from crumbling bridges, to a fragile power grid, to chronically underfunded schools. Federal government investment in infrastructure is the greatest job-creation machine ever invented, the Interstate Highway system being Exhibit A. Properly funding education not only creates jobs directly, but it creates jobs for the future.
President Obama is only one among many who have acknowledged the critical role of community colleges in practical and vocational job creation. Where I live, in northwest Oregon, the one institution beyond the high school level is Clatsop Community College. It provides an affordable start to recent high school graduates, vocational training to local residents of all ages, and continuing education for those needing to improve or maintain their current positions. In the 2011-12 school year, CCC enrolled 5,980 students, of whom 454 were seeking vocational certificates or degrees. In addition, the college enrolled 386 apprentices in training. Programs leading directly to employment opportunities include nursing, automotive repairs, and office skills.
CCC's 2012-13 operating budget is $10,068,296 or 0.000091% of outstanding Treasury debt. Student tuition and fees cover 42% of the college's operating budget, despite the fact that 61% of credit students receive income-dependent financial aid. Another 43% comes from property taxes from a tax base whose average per capita income is less than $40,000.
The chart shows the amounts Clatsop receives from the State of Oregon in dollars and as a percentage of its total revenues. Because of these drastic cutbacks, the college has reduced its staff by 30.5 full- time-equivalents, eliminated the criminal justice program, and raised tuition.
The State of Oregon's revenues are stretched thin everywhere, and it is constitutionally prohibited from issuing debt to cover operating deficits.
The Treasury Department is under no such restraints. Borrowing just the $1,471,773 to bring Clatsop's government support back to the 2009-10 level would add a mere 0.000013% to the national debt.
And the public would pay the Treasury $6,770.16 a year for the privilege of borrowing the money. Now that's a number I can comprehend.