Joseph Miller’s secretary buzzed him a couple of minutes before noon. He had just been thinking about heading over to the Hay-Adams for lunch, alone this time because he had a lot on his mind after his chat this morning with Bob Nichols.
He answered. “Yes.”
“Mr. Nichols wishes to have a word with you, Mr. Chairman.”
“Put him on.”
“No, sir, he’s here in person.”
Miller was flustered for just a moment. This wasn’t good. “Send him in,” he said.
Nichols barged in, out of breath, his face red. He tossed a sheaf of papers on Miller’s desk and sat down across from him. “It looks like it might be starting sooner than we thought.”
Miller held up a hand for him to stop as he scanned the papers, which appeared to show the early result of an auction in progress of $50 billion in ten-year notes.
He looked up. It was unusual enough for the secretary of the Treasury to show up unannounced, but what he had brought with him was over the top. “Can this be accurate, Bob?”
“I’m afraid it is. But it just came out of the blue.”
“Isn’t this what we talked about this morning?”
“Yes, but goddamnit, that was theory, this is fact, and it’s happening a lot sooner than I’d feared.”
“Not enough bidders,” Miller said half under his breath. “Has anything like this happened before?”
“No, Mr. Chairman, not even during the Great Depression. Our bond auctions have always been oversubscribed, never under.”
“Well you wrote the definitive work on depressions. So what do you suggest? Do we call off the auction?”
“It’s in progress, no way to stop it now. But no matter what, it’s going to be a major embarrassment for us. You never see undersubscriptions except in small, emerging-market nations. Places like Tanzania, Ghana, or lately, even Greece.”
At that moment Treasury was auctioning off the block of bonds, the money from which was needed to finance the operation of the U.S. government. In the past such offerings had never failed to attract hordes of bidders from around the world—including China, which was the largest holder. But now, if Miller was reading the preliminary summary report correctly, only half the usual number of bidders had made offers, which was depressing the value so seriously that it seemed unlikely the auction would raise the $50 billion needed.
It was a clear signal that investors no longer accepted the full faith and credit of the American government, of the largest economy on earth. They didn’t trust the U.S. to pay the interest on the bonds, much less repay the debt when the bonds came due.
U.S. securities were issued for terms ranging from four weeks to thirty years, with higher interest paid the longer the maturity stretched. The ten-year Treasury note was the linchpin of the entire debt market. Corporate bonds, city and state municipal bonds, home mortgages, and many others used the ten-year as a benchmark. And many employed the T-note as collateral for other borrowings.
The secretary of the Treasury and the chairman of the Federal Reserve looked at each other, each wanting the other to say something. But nothing was to be said. The situation was what it was—unprecedented.
Miller’s secretary buzzed him. “President Farmer has asked that you speak with him on video.”
“Me?” Miller asked.
“No, Mr. Chairman, you and Mr. Nichols.”
Miller and Nichols went into the adjacent conference room, which was also used for video links, a large flat-screen monitor on the wall facing the head of the table with seating for twelve. The image of the president’s study came up, and Sam Kolberg, his chief of staff, came in view.
“Is there any truth to what we’re hearing over here?” he asked.
“Afraid so,” Nichols said.
Kolberg moved away as President Farmer, in shirtsleeves, showed up and sat down behind his desk. “Glad I caught the two of you together. So what the hell is going on with our market?”
“To this point only half the number of bidders we needed to sell out the bond issue have shown up.”
“Are you suggesting I’m going to shut down the government because we’ve run out of cash?”
“No, Mr. President,” Nichols said. “We’re good for several months yet. And our revenue stream from payroll withholding is steady.”
“Give me the long run.”
“We could be in trouble, Mr. President,” Miller said. “But we’ve weathered other storms, and I expect that we’ll weather this one, if it comes to that.”
“I’m up for fucking reelection in sixteen months; what do you want me to tell the good people of Iowa? That I’ve bankrupted Washington?”
“We’ll sell what we need to sell if we offer higher interest rates,” Nichols said. “Right now the ten-year is at three percent. We can bump it to four.”
“Maybe even five percent, if need be, Mr. President,” Miller said.
“We kick the can down the road, and pay the piper later,” Farmer said, his voice rising. “Is that all you guys can come up with? You want us to start acting like some fucking banana republic?”
“It may be our only recourse at this point, Mr. President,” Nichols said.
Farmer looked away for a moment, and when he turned back to the camera he had visibly calmed down. “How did this happen to us?”
“Our debt, which used to be around seventy-five percent of our gross domestic product, has doubled in recent years,” Nichols said. “Investors are becoming concerned.”
“We’re the richest, most powerful nation on the entire planet.”
“Yes, sir, but a huge number of baby boomers are retiring. They’re starting to draw on Social Security, which ran out of money last year. We used to be able to pay it from payroll deductions, but the boomer generation is so large that its need for Social Security is overwhelming the system. Added to that, Medicare is in the same boat, and there’s no end in sight.”
“Maybe we should start killing off our senior citizens,” Farmer said, but then he passed a hand across his forehead. “It’s a goddamn joke.”
“Used to be that we could count on a demographic of age expectancy,” Nichols said. “But modern medicine is keeping people alive much longer so that they can continue collecting Social Security and Medicare.”
“Maybe we should start killing the doctors instead,” Farmer said half under his breath, but he waved that away too.
“That’s not the problem right now, Mr. President,” Miller said.
“I’m listening.”
“The word is circulating that the Chinese might start dumping the two trillion in our bonds they’re holding to bail out their commercial banks if Liu and the PBOC refuse to do so.”
“Liu is a power-mad son of a bitch. And trust me, I can spot one a mile away. He’d throw his country, not to mention the entire world, in front of the bus. Marcus is trying to make contact with Hua in Beijing, plus Liu, but there’s been no response so far.” Marcus Conwell was the U.S. secretary of state and a tough but respected negotiator.
“We’re in a serious situation, Mr. President, there’s no doubt about it,” Miller said. “But I think we can manage through.”
“How, Joe?” Farmer asked. “We’re playing with boys who don’t give a damn about anyone except themselves.” He looked off-camera for a moment. “Spencer is up in New York. I’m getting him back down here pronto, and the four of us are going to put our heads together to figure a way out of this mess. A shit train is coming down the tracks, gentlemen, and we need to stop it before it gets here.”