If you are a borrower seeking a loan from a lender‚ you might want to secure a loan as far out in time as is prudent‚ given the nature of what the borrowed money will be used for. If you are a lender extending credit to a borrower‚ the further out in time the credit is extended‚ the more carefully the creditworthiness of the borrower is examined. In other words‚ making a 10-year loan is a higher risk than a three-month loan. The lender can assess the risk over three months more accurately than over 10 years. Typically‚ when a borrower has lost access to long-term financing and must resort to short-term financing it’s a signal that the creditworthiness of the borrower has significantly deteriorated‚ which is why in most bankruptcy settings there is usually a large amount of short-term debt that cannot be rolled over. The lenders simply refuse to lend. That moment comes suddenly — with it comes bankruptcy. (READ MORE: Why Keep Worrying About Debt?: Speculation vs. Reality) Unfortunately‚ that description of borrowing and lending seems to fit the current state of financing for the U.S. Treasury. Can Governments Declare Bankruptcy? It was Walter Wriston‚ former chairman of Citibank‚ who famously declared that “Governments don’t go bankrupt.” What he meant was that a government always has‚ as a last resort‚ a Central Bank that will provide mouse-click fiat money for whatever financing is required when alternative sources of financing are tapped out. Non-government enterprises‚ away from a bank‚ do not have the luxury of that financial backstop to avoid bankruptcy. But here’s the bad news for Uncle Sam: In the current fiscal year‚ the U.S. Treasury needs to roll (that is‚ refinance) about $9 trillion of the current $34 trillion national debt and also finance an additional current deficit of $2 trillion. The puzzle is this: How will the U.S. Treasury structure this financing need that amounts to a staggering $11 trillion? The structuring that seems to be unfolding is perhaps very telling. In a recent ZeroHedge article penned by contributor Anthony Trevison‚ there was this lead quote: “In 2023‚ the Treasury added $2.6T to the national debt. While that number alone should be enough to scare anyone‚ the details reveal something even more concerning. $2T of it‚ or 77%‚ was financed entirely with short-term Treasury Bills maturing in less than a year.” (READ MORE: Congress Should Apologize to Drunken Sailors) The article goes on to speculate as to why the Treasury went to the very short end of the Treasury market (under one-year maturity) to finance its debt. It should be noted that the short end was also the most expensive way to finance the debt. Two possible reasons are offered in the article: Intermediate and long-dated Treasury maturities (five to 30 years) simply could not handle the volume of securities. Stated another way‚ there was insufficient liquidity available to finance the Treasury’s needs in that market space. The Treasury Secretary is making a bet that in an election year interest rates would be coming down and future financing needs could be rolled at significantly lower interest rates than those that prevail today. Both of those potential reasons have merit. In either case‚ by loading the short end of the Treasury market with the Treasury’s debt issuance‚ a potential for a U.S. Treasury funding catastrophe is being created. Anyone who survived the 1974-75 “stagflation” experience knows exactly what could potentially go wrong. Briefly stated‚ the U.S. economy in that period went into a hard-landing recession‚ unemployment rose‚ and so did intermediate and long-term interest rates and inflation. Yes‚ interest rates and inflation rose in a recession. The 10-year Treasury bond yields rose from 6.76 percent in November 1973 to 8.48 percent in August 1975. That span of time captured the full effect of the recession. Repeating Stagflation Should there be a repeat of the 1974-75 stagflation in the future‚ there is a clear vision of what could potentially happen. U.S. Treasury funding could be locked into the front end of the Treasury market. Any effort to extend the maturity of the national debt structure would be near impossible as the rise in intermediate-term and long-term interest rates‚ coupled with rising federal deficits and the attendant debt roll‚ would immediately translate to an accelerated exponential rise in federal interest expense. The 1974-75 rate rise was primarily driven by inflation expectations. This time‚ intermediate and long-dated Treasury yields could have the same inflation expectations problem‚ plus an additional problem that will eventually force yields higher. That second problem is an enormous one: a staggering‚ estimated $150 trillion of unfunded federal liabilities attached to many federal programs that are not currently funded. To repeat: $150 trillion. (READ MORE: Cold War With China Requires Mercantilism 2.0) The full force of this future funding requirement is imminent and is ominously hanging over the Treasury bond market. The only future source of funding for these liabilities will be via an expansion of the Federal Reserve balance sheet. The bottom-line problem here is this: if the Federal Reserve becomes trapped into providing the funding needs of the federal government‚ using the short end of the Treasury market‚ then the Fed will be significantly restricted in its ability to raise interest rates to deal with any inflation issues that result from the mouse-click fiat money being printed to keep the government financially solvent. Stated simply another way‚ the Federal Reserve can either fund the federal government or it can attempt to control inflation‚ but it can’t do both at the same time without declaring bankruptcy. That movie was played out in post-World War I Germany in 1922-23 — and we know how that movie ended. The post Is a Great American Bankruptcy Coming? appeared first on The American Spectator | USA News and Politics.