US paying extra to finance huge deficit

The US Treasury will borrow a record $96 billion this week, $1 trillion for the rest of this year, and pay rates below 4 percent. Bloomberg story here.

That sounds cheap. But it disguises a big price hike in the cost of financing the federal deficit: The real yield on our debt - the difference between what taxpayers are paying investors for U.S. debt, and the rate at which dollar buying power is changing - now stands at over 5 percent - since prices actually fell over the past year. That means we're paying over double the Treasury premium the U.S. used to have to pay before the credit markets blew up last year.

Federal Reserve Chairman Bernanke is making this easy, for now, because he's keeping the price of money from the Fed at nearly zero. So 3.7% Treasury doesn't look all that expensive.

But when the economy does speed up, he'll have a tough balancing act: If the Fed keeps money cheap, people and business will borrow so much of it that prices are going to zoom. Major inflation. But if the Fed boosts rates, driving up borrowing costs, the economy will slow again, plus the cost of financing the gigantic deficit will go way up. Tough job for Bernanke and the Fed.