We were struck by the following quote in Monday’s NY Times story about the wave of debt repayments facing the US government:
“The government is on teaser rates,” said Robert Bixby, executive director of the Concord Coalition, a nonpartisan group that advocates lower deficits. “We’re taking out a huge mortgage right now, but we won’t feel the pain until later.”
The irony of Mr Bixby’s analogy, of course, was that a not insignificant portion of that debt was incurred as a result of spending on various efforts to save the US financial system. And why did the US banks need saving? Because of their considerable exposure to structured financial products backed by US mortgages, and to the collapsing housing market more broadly.
These structured products — now broadly considered “toxic” — included collateralised debt obligations which bundled pools of mortgages of varying duration, type and quality. Among those were so-called adjustable rate mortgages, which featured attractive teaser rates that would ultimately move higher — leading to what is known as “payment shock“.
And payment shock, if not exactly surprise, describes precisely what is in store for the US government, per the NY Times (emphasis FT Alphaville’s):
With the national debt now topping $12 trillion, the White House estimates that the government’s tab for servicing the debt will exceed $700 billion a year in 2019, up from $202 billion this year, even if annual budget deficits shrink drastically. Other forecasters say the figure could be much higher.
In concrete terms, an additional $500 billion a year in interest expense would total more than the combined federal budgets this year for education, energy, homeland security and the wars in Iraq and Afghanistan.
Some US homeowners responded to payment shock by defaulting on their newly unaffordable mortgages.
It remains to be seen how the federal government will respond to its own mortgage crisis, but walking away is not an option. The Chinese will not accept the US equivalent of jingle mail.
Related links:
The US debt buildup – NY Times graphic
Could sovereign debt be the new subprime? – Gillian Tett / FT
Debt and the dollar’s demise, a compendium of concerns – FT Alphaville
On the not-unlimited investor appetite for government bonds – FT Alphaville