The National Debt: Myths and Realities The national debt dominates the news, but it is shrouded in misconceptions. A close examination of the debt as a bond portfolio can help to separate the myths from the surprising reality.

1. Win Analytics LLC
The National Debt: Myths and Realities
A Presentation to the Denver Chapter of
QWAFAFEW
by Winthrop T. Smith
January 31, 2013

2. Win Smith and Win Analytics LLC
• Win Smith
– President and Founder of Win Analytics LLC
– 30+ Years in Investment Banking and Finance
– Oxford MSc in Mathematical Finance
• Win Analytics LLC
– Financial Consulting Firm
– Research
– Transaction Structuring
– Financial Modelling
– Expert Witness
• Websites
– www.winanalytics.com
– Blog: welltemperedspreadsheet.wordpress.com
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3. Background: The National Debt
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4. The National Debt Clock
April 2008
Jesper Rautell Balle
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5. Federal Outlays
Combined On-Budget and Off-Budget
1990-2011 (Actual), 2012-2017 (Est.)
$Trillions Net interest National defense Medicare Social Security Other
$5
Estimated
$4
$3
$2
$1
$0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Fiscal Year
Data Source: White House
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6. Federal Receipts vs Outlays
Combined On-Budget and Off-Budget
1990-2011 (Actual), 2012-2017 (Est.)
$Trillions
$5
Estimated
$4
$3 Deficits
Surpluses
$2
Outlays
$1
Receipts
$0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Fiscal Year
Data Source: White House
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7. Federal Debt
Combined On-Budget and Off-Budget
1990-2011 (Actual), 2012-2017 (Est.)
$Trillions Held by Public Held by Gov't Accts Held by Federal Reserve
$25
Estimated
$20
$15
$10
$5
$0
1990 1992 1994 1996 1998 2000 2002 2004 2006 2008 2010 2012 2014 2016
Fiscal Year
Data Source: White House
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8. U.S. Treasury Marketable Debt
Outstanding Debt by Maturity Year
As of May 31, 2012
$Billions Bills Notes Bonds TIPS
$2,500
$2,000
$1,500
$1,000
$500
$0
2012 '14 '16 '18 '20 '22 '24 '26 '28 '30 '32 '36 '38 '40 '42
Maturity (Calendar Year)
Data Source: U.S. Treasury
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9. U.S. Treasury Marketable Debt
Outstanding Securities by Issue Date and Maturity Date
as of May 31, 2012
Bills Notes Bonds TIPS
Issue Date
6/1/80
6/1/84
6/1/88
6/1/92
6/1/96
6/1/00
6/1/04
6/1/08
6/1/12
6/1/12 6/1/16 6/1/20 6/1/24 6/1/28 6/1/32 6/1/36 6/1/40
Maturity Date
Data Source: U.S. Treasury
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10. U.S. Treasury Marketable Debt
Outstanding Bills and Notes by Issue Date and Maturity Date
as of May 31, 2012
Bills Notes
Issue Date
6/1/00
6/1/04
6/1/08
6/1/12
6/1/12 6/1/16 6/1/20 6/1/24
Maturity Date
Data Source: U.S. Treasury
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11. U.S. Treasury Marketable Debt
Outstanding Bills by Issue Date and Maturity Date
as of May 31, 2012
Bills
Issue Date
6/1/11
8/31/11
11/30/11
2/29/12
5/30/12
6/1/12 8/31/12 11/30/12 3/1/13 5/31/13
Maturity Date
Data Source: U.S. Treasury
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12. U.S. Treasury Marketable Debt
Outstanding Securities by Interest Rate and Maturity Date
as of May 31, 2012
Bills Notes Bonds TIPS
Interest Rate
12%
10%
8%
6%
4%
2%
0%
6/1/12 6/1/16 6/1/20 6/1/24 6/1/28 6/1/32 6/1/36 6/1/40
Maturity Date
Data Source: U.S. Treasury
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13. Historic Interest Rates
3-Month and 30-Year Treasury Yields
1975 - 2012
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14. Recent and Historic Yield Curves
8%
7%
6%
5 Years Ago
5%
4%
20 Years Ago
3%
10 Years Ago
2%
1%
5/31/2012
0%
3 mo 6 mo 1 yr 2 yr 3 yr 5 yr 7 yr 10 yr 20 yr 30 yr
Maturity
Data Source: U.S. Treasury
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15. Myth #1: The Treasury is “Going Long”
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16. Nate Silver on January 16, 2013
• “Another surprise is how little we are paying in interest on the
federal debt, even though the debt is growing larger and
larger…. How is this possible? The reason is that although the
government is borrowing a lot of money, it is doing so very
cheaply because interest rates are low.… Borrowing costs
aren’t expected to remain this low forever….Fortunately, much
of the debt we have issued has relatively long maturities,
meaning that we have locked in low rates.” [emphasis
added]
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17. From the U.S. Treasury website in June 2012:
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18. Average Maturity of Outstanding Debt and New Issuance
Fiscal Years 2009-2012
Years Months
6 72
5.39
5.21
4.88
5 60
4.39 All Marketable Debt Outstanding
4 48
4.03 3.94
3.69 New Debt Issuance
3 36
2.87
2 24
FY 2009 FY 2010 FY 2011 FY 2012
Fiscal Year Data Source: U.S. Treasury
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19. Marketable U.S. Treasury Securities
Securities Issued in FY 2012, as of 9/30/12
Principal Issued
$3T
$2T
FY 2012 (3.94 year Avg Maturity)
$1T
$0T
0-1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25 26 27 28 29 30
Years to Maturity Data Source: U.S. Treasury
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20. Marketable U.S. Treasury Securities Outstanding
at 2011 Fiscal Year End (9/30/2011)
Principal
$3T
$2T 0-1 Years to Maturity
1-30 Years to Maturity Average Maturity
Principal (date) (years)
0-1 Years to Maturity $2.67T Feb-2012 0.39
1-30 Years to Maturity 6.94T Oct-2018 7.06
$1T
Combined $9.62T Dec-2016 5.21
$0T
Maturity (Fiscal Year) Data Source: U.S. Treasury
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21. Marketable U.S. Treasury Securities Outstanding
at 2012 Fiscal Year End (9/30/2012)
Principal
$3T
$2T FY 2012 Issues Average Maturity
Older Issues Principal (date) (years)
FY 2012 Issues $3.67T Sep-2015 3.94
Older Issues/Original 6.94T Oct-2018 6.06
Older Issues/Adjustments 0.08T Jan-2026 13.34
$1T Combined $10.69T Feb-2017 5.39
$0T
Maturity (Fiscal Year) Data Source: U.S. Treasury
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22. Explaining Changes in
Weighted Average Life
Group FY 2011 FY 2012 Change
FY13-41, Issued by FY11 7.06 6.06 -1.00
FY12, Issued by FY11 -1.85 1.85
FY12 New Issues -0.73 -0.73
FY12 Adjustments 0.06 0.06
Totals
5.21 5.39 0.18
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23. U.S. Treasury Marketable Securities
All Outstanding Securities
as of September 30, 2012
Principal ($Billions)
$125
36 Month 65 Month
Median Weighted
$100
Maturity Average
$75
$50
$25
$0
9/30/12 9/30/16 9/30/20 9/30/24 9/30/28 9/30/32 9/30/36 9/30/40
Maturity Data Source: U.S. Treasury
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24. U.S. Treasury Marketable Securities
Securities Issued in Fiscal Year 2012
as of September 30, 2012
Principal ($Billions)
$125
19 Month
Median
$100
Maturity 47 Month
Weighted
Average
$75
$50
$25
$0
9/30/12 9/30/16 9/30/20 9/30/24 9/30/28 9/30/32 9/30/36 9/30/40
Maturity Data Source: U.S. Treasury
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25. Two Ways to Measure the Length of Treasury Debt
All Marketable Debt and New Issuance
Fiscal Years 2009-2012
Years Month
6 72
5 WAM: All Debt 60
Weighted Average Maturity WAM: New Debt
4 48
3 36
Median Maturity
2 24
Median: All Debt
1 Median: New Debt 12
0 0
FY 2009 FY 2010 FY 2011 FY 2012
Data Source: U.S. Treasury
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26. Myth #2: The Debt Doesn’t Matter
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27. The Debt Doesn’t Matter Because:
A. We Can Always Refinance
B. We Managed Similar Debt After WWII
C. Low Rates Mean Investors Aren’t Worried
D. We Owe it to Ourselves
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28. We Can Always Refinance, Part I
Pop Quiz:
Suppose we always refinance and never repay
the principal. If we pay interest forever, what is
the present value of $11 trillion in marketable
debt?
Assume the interest rate on each security is the appropriate
discount rate.
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29. We Can Always Refinance, Part II
Fiscal Year 2012 Debt Summary
Gross Issuance $7.6 trillion
Maturing Debt $6.5 trillion
Net Issuance $1.1 trillion
We needed more than $7 trillion in funding last year, almost 7x
the new borrowing for the deficit.
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30. We Managed Similar Debt After World War II
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31. Debt Structure: 2012 vs 1946
45%
1946 Post
40%
2012
35%
30%
% of Total Maturities
25%
20%
15%
10%
5% Today
0%
<1y 1-5 5-10 >10
Chart Provided by: Center for Financial Stability, Inc.
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32. Low Rates Mean Investors Aren’t Worried
• There is high demand for “safe” assets
• Rates have fallen around the world
• Expectations for growth and inflation are low
But What About the Fed?
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33. What is the Fed Doing?
• Quantitative Easing and Operation Twist
• Reduce Duration Held by Private Investors:
By reducing the supply of duration in the market, this action should put
downward pressure on longer-term interest rates relative to levels that
would otherwise prevail.
• Fed measures impact in terms of “10-Year Equivalents”
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34. The Fed’s Impact on the Treasury Market
in “Ten-Year Equivalents”
Chart Source: Stone & McCarthy Research Associates
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35. Marketable U.S. Treasury Securities
Annual Changes in Principal
Fed Holdings Compared to All Outstanding
$Billions
$1,600
Fed Holdings Outstanding
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
FY 2010 FY 2011 FY 2012
-$200
Data Sources: U.S. Treasury, Federal
Reserve
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36. Marketable U.S. Treasury Securities
Annual Changes in Ten-Year Equivalents
Fed Holdings Compared to All Outstanding
$Billions
$1,600
Fed Holdings Outstanding
$1,400
$1,200
$1,000
$800
$600
$400
$200
$0
FY 2010 FY 2011 FY 2012
-$200
Data Sources: U.S. Treasury, Federal
Reserve
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37. We Owe it to Ourselves
Ownership of Marketable Debt
December 2011
Federal
Reserve
Foreign 16%
Central Banks
35%
U.S.
Private
36%
Foreign
Private
13%
Data Source: U.S. Treasury
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