Cheaper Than Cash: or why the US government should borrow more, right now

[muriel_volestrangler]

What this highlights is that real rate of return on government 5 year government securities is now negative. You want to stop and absorb that because I think it’s a bigger deal than most people realize.

Suppose the government had two choices. It could either pay for infrastructure improvements as it went along out of tax revenue or it could borrow money build the infrastructure now and then repay the money with tax revenues.

Ordinarily the question would be, does the advantage of building quickly outweigh the cost of the interest.

However, right now the interest cost is negative. The government saves money by borrowing now rather than waiting and paying cash. Let me say again because I have noticed that this goes against so much intuition that its hard for many people to wrap around when I first say it.

http://modeledbehavior.com/2011/07/10/cheaper-than-cash/

via Balloon Juice

So the government should save money in the long run if it borrows more, now (ie raises the debt ceiling). If it does any immediate good with that borrowed money, like fixing infrastructure, keeping government employees in jobs, etc. that's a big bonus.

[PoliticAverse]

1. What if the Federal Reserve doesn't want to add to the $1.6 trillion in bonds it already bought?

http://www.bloomberg.com/news/2011-06-27/fed-seen-buying-25-billion-a-month-in-treasuries-after-qe2-comes-to-end.html

[muriel_volestrangler]

4. Don't know - other demand seems OK

From your link:

So far, there’s been no lack of demand for government securities even as public Treasury debt has grown to $9.26 trillion from $4.5 trillion at the start of the financial crisis in August 2007, and $5.75 trillion when Obama took office in January 2009.

Investors have bid a record $3.01 for every dollar of debt sold by the Treasury this year, compared with $2.99 last year and $2.50 in 2009. The average 10-year yield this year of 3.32 percent compares with a 20-year average of 5.17 percent.

[PoliticAverse]

5. Bernanke is hinting there's gonna be a Q3, so looks like low interest rates for a bit longer... n/t

[dkf]

2. Except we have to pay it back.

This is like the 0% teaser rate on credit cards...its cheap for now but when rates go up it will be an increasing cost. And it's kind of like an adjustable rate mortgage where rates go up and up and up.

We have $91 billion in TBills maturing in early August and an additional $500 billion maturing in August. if rates go up, we will need to reissue those bonds with higher rates, not now but certainly a few years from now. In the future we will see crowding out of other expenses as interest expenses go up.

What is amazing is our interest rate costs are so low now and our budget is still significantly in the red. When those interest costs go up it will not be pretty, especially as we borrow more and more each year our expenses exceed our revenues.

Does any other entity plan this way? Never ending deficits with perpetually increasing debt loads? Certainly I wouldn't want to invest in that company or loan to that individual.

We just think because we are the worlds super power we can do this forever. That is why we spend so much on the military.

[muriel_volestrangler]

3. For spending you can choose to do now or later, it's better now

and if the spending now boosts the economy, and decreases unemployment, then you will need to borrow less in the future - when the higher interest rates you fear may come around.

This is not saying "have never ending deficits". It's saying "this is the one time when a deficit is affordable, and a good thing, if the money is used productively". Fix your house while there's a sale on at the builder's yard.

Talking of spending on the military, did you see the second link from the Balloon Juice post?

China says US is spending too much on its military amid its financial woes

The chief of the General Staff of the People’s Liberation Army, Chen Bingde, told reporters he thought the U.S. should cut back on defense spending for the sake of its taxpayers. He was speaking during a joint news conference in which he traded barbs with visiting U.S. counterpart Adm. Mike Mullen.

“I know the U.S. is still recovering from the financial crisis,” Chen said. “Under such circumstances, it is still spending a lot of money on its military and isn’t that placing too much pressure on the taxpayers?

“If the U.S. could reduce its military spending a bit and spend more on improving the livelihood of the American people ... wouldn’t that be a better scenario?” he said.

http://www.washingtonpost.com/world/asia-pacific/top-us-military-official-meets-chinese-counterpart-in-beijing/2011/07/10/gIQAb8z57H_story.html?wprss=rss_world

There's a sign of the times - the chairman of the Joint Chiefs of Staff visits Beijing, and gets advice on economic policy from his Chinese counterpart.

[Thav]

6. Is this the reason some people are shorting treasuries?

That's kinda scary, though. Even if the debt ceiling were raised, if our creditors figured out they weren't making any money, why would they lend to us?

[muriel_volestrangler]

7. They make no money relative to US inflation

So if you're a government with, say, a choice of borrowing $1 billion now to employ people to fix some bridges now, and paying some interest on the borrowed money, or waiting 5 years and doing it then, it's be cheaper to do it now - and you'll have the bridges fixed 5 years earlier, and some extra people employed now rather than later (which gets more money circulating in the economy, which will help it recover, so hopefully they'll move on to other jobs after that - or the better economy will mean more government revenue, so you can keep some of them on, and fix more ...)

The creditors lend to the US government because they can't find better places and entities to lend to - the US government is still a safe investment (if it isn't screwed up by a Republican-induced default). If they're from abroad, they may have less inflation, so may be making money anyway (though the future value of the US dollar comes into the equation then).