Measuring the Government's Borrowing Costs: A Case for Adjustable (Variable) Interest Rates

This article, which appeared in the GAO Review, Vol. 20, Issue 1, Winter 1985, described how the government borrows money and the rationale for the measurement of borrowing this cost. As of September 30, 1983, public debt borrowings totalled about $1.4 trillion. The debt consists primarily of marketable interest-bearing obligations which are borrowed for relatively short periods. The preferred way to measure the government's borrowing cost is to base the cost on prevailing market rates for the time period in question. However, in recent years, few investors have been willing to buy long-term, fixed interest rate securities. Adjustable or variable rate mortgages have helped alleviate financial problems incurred due to increasing inflation and highly volatile interest rates. Since some form of variable interest rate approach could better account for, measure, and recover the government's borrowing cost; using the prevailing market rate approach to measure the federal borrowing cost may need to be reconsidered.