U.S. Treasury

In the mid 1990s, when I was working as a U.S. Treasury advisor to Croatia, I met with the managers of the U.S. Treasury's debt.

In what would turn out to be terrific advice, the Treasury officials suggested that we extend Croatia's debt maturities so the Central European country wouldn't have to refinance too often.

So in gratitude, I offered the U.S. officials some counsel of my own.

I told them they should follow their own counsel and lengthen the U.S. Treasury's average debt maturities, then about six years.

The Treasury officials should have taken my advice. But instead they ignored me and did the exact opposite.

The upshot: Today the United States' debt maturities are among the shortest in the Organization of Economic Cooperation and Development (OECD), and U.S. refinancing costs are exceptionally large.

So if you're already worried about soaring budget deficits and the solvency of the United States, brace yourself - it's only going to get worse.

Refinancing Risks

The U.S. Treasury had more than one opportunity to follow my advice. At the time we opted to extend Croatia's debt maturities, other countries went the other way - with devastating fallout.

For instance, the Ukrainian hryvnia Treasury bill program - where the vast public deficit was financed with 18-month T-bills sold to greedy Merrill Lynch and other foreigners at interest rates above 15% - was one of the major disasters of the 1997-98 crash.

In spite of that outcome, and despite my advice, the U.S. Treasury took the opposite tact by abolishing the 30-year bond issue in 2001. The belief at the time was that Treasury surpluses were so assured that there was no longer any need for 30-year money.

There are two problems with this: First, when interest rates rise, their additional cost will feed through to the budget remarkably quickly, making the financing problem even worse. Second, it increases the risk that at some stage, the U.S. Treasury may not be able to raise the money.

Average Treasury bond maturities reached a low of 50 months in 2009. They've since been lengthened a bit to 62 months, but that still leaves the U.S. Treasury with a major refinancing risk. The Treasury will have to refinance some $2 trillion of outstanding debt in the next year - and that's in addition to the $1.5 trillion of new debt it's going to have to issue in that time.