Monday, September 13, 2010

The Danger of Short-Term Debt

Jason Trennert's column in the Wall Street Journal last Friday points out 60% of America's debt matures in three years or less.

Recently, we've seen the kind of crisis that occurs when leveraged institutions can't "roll over" debt. I can think of a few that seemed just fine under this kind of financing arrangement for many years until hitting the wall in 2008.

There are huge differences, of course. The U.S. has huge advantages having all its debt in its own reserve currency. That's not a small differentiator. Nor is how productive the country is.

As a reserve currency, the financial flexibility of the U.S. cannot be compared to a large financial institution or some other financially weaker sovereign nations. That doesn't make the excessive use of short-term funding wise. The U.S. has the flexibility now -- and just might be better off -- to move toward more long-term borrowing. From the column:

...it might be wise to remember Hemingway's Mike Campbell from "The Sun Also Rises," who, when asked how he went bankrupt, responded, "Gradually, then suddenly."

Too much short-term financing can unexpectedly lead to serious problems down the road. It seems to work (maybe for decades) just fine until it doesn't.

Adam

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