Paying down the debt should lower interest rates

OUTLOOK

Breaking the trend of deficit spending

January 30, 2000|By Mara H. Gottfried and Amanda J. Crawford

LAST WEEK, President Clinton, seeking to take command of the debate on how to use rapidly mounting federal budget surpluses, said his long-term budget proposal would pay off the U.S. national debt by 2013, two years earlier than previously planned.

The national debt totals about $5.6 trillion, of which about $3.6 trillion is publicly held in the form of U.S. Treasury bonds and other securities held by investors. The White House projections use only the publicly held figure. About $2 trillion of the remaining debt is owed by the government to the Social Security retirement benefit fund.

The Treasury Department is preparing to buy back debt through reverse auctions in which it will pay investors cash to turn in their securities. What impact would such a move have? Will it free up more money for the capital markets? Does paying down the debt matter?

David Elias

President, Elias Asset Management, Williamsville, N.Y.

It sends a loud signal to the marketplace that the government is serious about reducing the debt. Short term, it might not be a major impact, but long term it's a highly bullish and positive sign for both the stock and bond markets. It means that the long-term bond in the next five to seven years should be yielding below 4 percent.

This is probably one of the most significant turns in U.S. financial instrument history since World War II because we are finally breaking the trend of deficit spending and excessive borrowing.

Bill Cheney

Chief economist, John Hancock Financial Services, Boston

It will tend to drive down interest rates with other things being equal. Basically, running a surplus and using the money to buy back debt will push down Treasury rates. It doesn't really make any difference how the government runs the surplus. It's the fact that they are running a surplus that's freeing up more money for capital markets.

I don't think paying down the debt matters in the way politicians describe it. It's not like paying down your Visa balance, but it does make a difference to the economy and represents additional national savings.

In general, it's probably a good thing because it increases resources available for investments in the future.

Richard O'Brien

Senior vice president, Folger Nolan Fleming Douglas Inc.,

Hunt Valley

It would have to be positive because you're reducing the amount of the revenue that accrues to the federal government that was spent on debt service. It would make room for other borrowers. I think with all other things being equal, it should tend to lower rates.

What we will see happen is the federal agencies will be offering more debt, and those securities will become more liquid and the spread in yield between the U.S. Treasury securities and other agencies' securities should narrow.

Scott Brown

Chief economist, Raymond James & Associates, St. Petersburg, Fla.

The reason they're doing this is to maintain a high degree of liquidity in markets by replacing off-the-run securities with newer issues. We're not talking about paying down the debt. We're talking about shifting down the maturity. It shouldn't really have that much impact on the level of interest rates or the economy.

The issue is that it should make the Treasury market more liquid. What it would be doing is perhaps freeing up more capital than would have existed otherwise.

Paying down the debt is important because it will help us better prepare for the substantial burdens we're going to get from entitlements as the baby boomers start to retire. All those programs are set to explode 30 years from now.

Robert Sweet

Chief economist, Allied Investment Advisors, Baltimore

It will contribute to keeping rates subdued for the time being. As issues are taken off the market and demand stays the same, the price will stay up and yields should remain subdued. It will free up more money for the capital markets. It's similar to what the Fed does when it carries on its open market activity.

We've had a budget deficit for a number of years and it really hasn't had much of an impact. Where this surplus will come into play will be political.

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