Treasury Wants More Credit

Imagine maxing out your credit card, and then asking your bank to raise your spending limit.

That's essentially what the Treasury Department will have to do now that the U.S. has bumped up against its legislated national debt limit. This week the country's maximum credit limit, $8.18 trillion, was reached. That breaks down to nearly $30,000 for every person in the nation.

"It is imperative that Congress raise the debt ceiling by the middle of March," says Treasury spokeswoman Brookly McLaughlin. Congress and the Bush administration have been negotiating a roughly $781 billion extension for the current limit. If it passes, it will be the fourth increase since 2002 and bring the total amount of additional government borrowing authority to more than $3 trillion since President Bush took office.

The Treasury has sought increases before, but this time it has given economists another matter to consider as they debate the real impact that deficit spending will have on the economy going forward.

For starters, one effect that can be measured right now is that of the high cost of interest payments the government has to make. The U.S. will spend $217 billion this year to pay interest on the publicly held portion of the debt, according to the Congressional Budget Office, and that is more than will be spent on homeland security, education and transportation combined.

Because of the debt accumulation, "over the next five years ... interest costs will increase by 57%, compared with 23% for noninterest outlays. Interest payments are projected to grow from $184 billion in 2005 to $289 billion in 2010," the CBO says in its budget report.

Increasing the nation's credit limit should affect its favorite form of IOU, government Treasuries.

"When you flood the market with Treasury supply, that asset class has to cheapen compared with other asset classes," says Bulent Baygun, head of U.S. fixed-income strategy at Barclays Capital. "When it cheapens, it means tighter spreads."

In laymen's terms, this means that a flood of supply will eventually make U.S. government bonds less valuable. Prices and yields move inversely. If government debt prices fall and yields rise, the quality of other bonds and investments, relative to Treasuries, will start to look comparatively attractive to investors, and the government could lose lenders.