Friday, August 12, 2011

Dumb Decisions - Congress Continues to Ignore Cheaper-Than-Free Money

It's official - the U.S. government can make more money by borrowing than the average person can by saving.

Wait ... what?

Let me repeat myself:

The U.S. government can make more money by borrowing than the average person can by saving!

The 5-year TIPS rate crossed -1% on August 10:

This chart only goes until August 8 or so, but you see where it's headed. Source.

Meanwhile, only the highest-yielding savings accounts pay 1% at the moment:


In similar news, real interest rates on U.S. Treasuries are negative out to 10 YEARS:


There have been times in the past week when even nominal interest rates on short-term U.S. debt have been negative.

If you're interested, here's an interesting, non-technical explanation of how something like this even happens.

I, of course, am more interested in the economic and policy ramifications of this extraordinary situation than in the technical details, however.

The fact that the U.S. government can borrow money for cheaper-than-free, even after the ratings downgrade, comes about from a combination of two factors (and no, I have no idea what the relative strength of each factor is in the mix):
  1. There is not enough U.S. debt to satisfy the market's appetite for U.S. debt. Since there's not enough supply to meet demand, the price of U.S. debt (which is inverse to the interest rate) increases.
  2. The market thinks that the long-term growth prospects of both the U.S. and world economies are dismal. A negative real 10-year interest rate says that investors are expecting a "lost decade."
So, what should the U.S. be doing? As I said in a previous post, the U.S. should be borrowing and spending a lot more money than it currently is (in the short-term).

The utterly bizarre thing about this situation is that, from the perspective of economic efficiency, the money doesn't even have to be spent on anything productive - it just needs to be spent on something that's not destructive:
The bad thing about cutting the federal deficit is that unemployment is very high and interest rates are very low. Given that, taxing productive activity to pay down debt is really obviously the wrong thing to do, and borrowing money to employ currently unemployed resources is really obviously the right thing to do.
Obviously, I would advocate putting money towards productive uses (rebuilding infrastructure, research and development, etc.) and towards programs that have large economic multiplier effects (food stamps, unemployment benefits, WIC, etc.), since those activities would stimulate demand and the economy now, while also laying the foundations for increased growth in the future. But, from an economic point of view, the government should just be borrowing and doing ANYTHING with the money, since it's cheaper-than-free - right now, borrowing money to give huge (temporary) tax refunds to everyone or even just hiring unemployed people to dig holes and fill them back up again would be a net economic gain.

The bottom line is, the U.S. should be borrowing and spending way more money in the short-term in order to boost growth and decrease unemployment, but both Congress and the White House are focusing on the totally wrong issues (i.e. cutting spending). And the most frustrating thing is that at least the White House knows better - Robert Reich, talking to people in the administration, says that there has been a deliberate decision to focus on the wrong issues, knowing that they’re the wrong issues:
So rather than fight for a bold jobs plan, the White House has apparently decided it’s politically wiser to continue fighting about the deficit. The idea is to keep the public focused on the deficit drama – to convince them their current economic woes have something to do with it, decry Washington’s paralysis over fixing it, and then claim victory over whatever outcome emerges from the process recently negotiated to fix it. They hope all this will distract the public’s attention from the President’s failure to do anything about continuing high unemployment and economic anemia.
I am deeply disappointed by the cynicism of the White House and the lack of imagination, will, and leadership in Congress. Once again, our elected representatives never miss an opportunity to miss an opportunity.

1 comment:

  1. The 9th of August

    The price of Gold

    See for yourself: One day before Debt Ceiling decision the price of gold was 1620 $. One week after it raised to 1740$.


    Now you really see for yourself that the Debt Ceiling raised did not pass the Real Economy Test.

    Extended promissory note from Federal Reserve: Interest rate next to zero until mid 2013.

    The Federal Reserve cut its benchmark rate to the historic low of 0 per cent to 0.25 per cent in December 2008, claiming that it is in response to the financial crisis. The hope was that the low rates would foment a sustained recovery by making it cheap to borrow money to go shopping or build a new factory.

    It did not work at all, and I am asking myself: Do “they” imagine that it will work from now on?

    Why it did not worked ?

    Because what the Fed generated indeed in December 2008 was a policy of cheap money to borrow.

    It means that those who are making economies, have the power to not to spend all they gain, decided to make bank deposits and did not use at once all the resources they have at once, got very little for the value of their work by depositing it in banks.

    And it means that those who have not purchasing or investment power used and can use also from now on the resources of others for almost nothing.

    Frankly speaking, those how are not able to make money can use money for almost noting.

    Now the question is: if this extended policy is going to strengthen the economy?

    NOT AT ALL. None can build healthy economy with unfair rules at the expense of others.

    So, the bad decision regarding the Debt Ceiling generated another bad decision: cheap money to borrow.

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