Paul Krugman points out again that interest rates have failed to rise despite heavy borrowing by the Treasury. He uses nominal rates but I think the point is better made using real rates and bar graph.
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.
The government will wind up paying more if it decides to pay cash for a project than it will if it decides to borrow. This is irrespective of the return on the project itself or the advantages of avoiding delays or anything like that. It is simply that the cost of borrowing is negative.
It is cheaper than paying cash.
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Sunday ~ July 10th, 2011 at 7:01 pm
foosion
With real interest rates negative and substantial unused capacity, it’s absurd that the govt isn’t doing more. Do we rebuild infrastructure while everything is on sale or wait until everything is more expensive?
Sunday ~ July 10th, 2011 at 10:35 pm
Khal Mojo
That’s not much of a question when it’s already been answered. We’re going to wait.
Sunday ~ July 10th, 2011 at 10:37 pm
Bobby
So I have several 0% APR credit cards that I should max out now, since that is cheaper than cash….
Monday ~ July 11th, 2011 at 9:33 am
Th
Yes. Remember to spend the money on things you will need to buy in the next few years anyway and go for the double bonus of things that will save money in the future (high-efficiency HVAC system or water saving toilets or better accounting software for your small business).
Monday ~ July 11th, 2011 at 5:49 pm
Charles Ford
This is silly advice. (Well, not the part about spending the money on items that will purchase later savings, but the part about maxing out a credit card to do it). A credit card is not the same thing as issuing Treasury debt. A credit card will eventually turn into high interest. A Treasury is initially issued by the government, but any changes to the price are a result of secondary trading. Point being, the government is ‘locking in’ a rate at the time of issuance.
Sunday ~ July 10th, 2011 at 10:45 pm
CaC
Could someone please let the Congress know?!
Monday ~ July 11th, 2011 at 1:23 am
Maybe the only thing ever to challenge my priors on fiscal policy « Increasing Marginal Utility
[...] challenge my priors on fiscal policy Leave a Comment Posted by rhmurphy on July 11, 2011 This makes absolutely no sense to me, but I don’t dispute Smith’s data. However, right now the interest cost is negative. [...]
Monday ~ July 11th, 2011 at 6:55 am
Monday 7atSeven: macro malaise | Abnormal Returns
[...] The five-year Treasury note is trading at a negative real yield. (Modeled Behavior) [...]
Monday ~ July 11th, 2011 at 6:57 am
Monday 7atSeven: global macro blues | Abnormal Returns
[...] The five-year Treasury note is trading at a negative real yield. (Modeled Behavior) [...]
Monday ~ July 11th, 2011 at 7:59 pm
oaklandsfinest
I’m sick of hopeless idealist talking about these wonderful infrastructure projects. Really? Borrow more money we don’t have so congress can blow it? News flash, they won’t allocate it efficiently and there is little reason to think they will. Are there any consequences to running 1.4 trillion deficits ands borrowing 42cents on every dollar of goverment spending in you guys’ world? How about we not borrow anything and start paying down our credit cards. Do you not see Greece and others blowing up because of debt? No infrastructure project is going get them out their selfmade hell. Their going to default or roll back to the nearly third world in terms of goverment services. There is no reason to think that can’t happen to us.
Monday ~ July 11th, 2011 at 11:49 pm
Jamey Roberts
Do you even understand what you’re saying? “Borrow more money we don’t have” Well, isn’t that the way it usually works. People, corporations, governments, borrow money they don’t have from people, corporations, governments that have an excess of savings. Would you have those savers wallpaper their house with it? Sometimes I don’t know if conservatives are radical capitalists or just economic Luddites. They seem to alternate back and forth depending on who is being shafted and who is benefiting from various policies.
Tuesday ~ July 12th, 2011 at 12:14 am
John
I’m with Jim Rogers on this one; at some point shorting treasuries is gonna be one of the best investments of the century, the only question is when.
Tuesday ~ July 12th, 2011 at 12:49 am
Hal
These comments are pure gold, Jerry. Pure gold.
Wednesday ~ July 13th, 2011 at 7:10 am
Past the US debt singularity « Salty hair
[...] the faith so far (pushing US bond prices near all-time highs, such that some people are actually paying money for the privilege of lending to the US government) will continue to keep the faith, more or less, [...]
Wednesday ~ July 13th, 2011 at 8:55 am
Government Debt is Currently Cheaper Than Cash
[...] graph above, which I snagged from Karl Smith, illustrates the point that concern for the deficit at this point in time is simply absurd. This is [...]
Wednesday ~ July 13th, 2011 at 9:19 am
Balloon Juice » Some Should-be Front Page News
[...] the beltway media missed this in the discussion of the debt ceiling, but right now, the real rate of return on government debt is negative [...]
Wednesday ~ July 13th, 2011 at 5:32 pm
Derek van Dam
I see this chart is for the five year year Treasury. Do you have a chart on the 30 year T-Bill? Is that also negative?
Saturday ~ July 16th, 2011 at 1:56 pm
Comrade Bernanke on Gold » ∅ empty set
[...] Cheaper Than Cash – The real rate of return on government 5 year government securities is now … Posted by Garbagemin Franklin at 12:55 pm [...]
Monday ~ July 18th, 2011 at 12:10 pm
Keith
Businesses borrow money to invest in something that will generate a return higher than the cost of borrowing. If they do not, they go out of business very quickly. What is the government ‘investing’ in? What social security check do they send out, expecting that the person on the other end will return it for a profit in in the future? Can you point to the medicare payment that generates a positive return on investment?
The government is not like a business. The “investments” (payments) the government makes are not necessarily used to make something productive, but are used to garner votes and favors to remain in power.
Debt has its advantages, and when used effectively allows for investments and productivity. However, if used poorly, is a constraint that limits ones mobility and options in the future.
It’s the difference between taking a loan to buy equipment for your business, vs taking a loan to go on a vacation. Both result in the same debt level, but one gives you the tools to repay the loan…the other is consumed and provides you with no future income.
The government is borrowing money from the future and spending it on consumables today. This is not sustainable.
Sunday ~ July 24th, 2011 at 12:26 pm
The Insanity of the Deficit Debate
[...] It is simply idiotic that we are even talking about reducing the deficit right now, when it is cheaper to borrow than to pay cash. Here’s Karl Smith: [...]
Friday ~ July 29th, 2011 at 11:28 pm
Balloon Juice » And Now, An Update From Reality
[...] write home about. Karl Smith reminds us that the US is borrowing money at a rate that amounts to a negative real return—which is to say that right now it is cheaper for the US to borrow than to pay cash for what [...]
Friday ~ July 29th, 2011 at 11:31 pm
The Inverse Square Blog
[...] to write home about. Karl Smith reminds us that the US is borrowing money at a rate that amounts to a negative real return — which is to say that right now it is cheaper for the US to borrow than to pay cash for what [...]
Saturday ~ August 6th, 2011 at 2:52 pm
Charles Hill (@charleshill)
Following this logic to its extreme, all our spending should come from borrowing as long as the rate is negative. That means a moratorium on taxes while the real rates are negative is in order to maximize the borrowing. That would make hiring in the US very attractive, and would spur massive job growth. Consumer spending would be through the roof, since earners would net more of their pay.
Tuesday ~ September 27th, 2011 at 11:31 am
Christina Romer on Fiscal versus Housing Policy | Rortybomb
[...] will have a payout years down the road that will make this an even better investment, but with real interest rates negative we should be getting as much of it out the door until output returns to [...]
Tuesday ~ September 27th, 2011 at 11:54 am
No More False Choices: Christina Romer on Fiscal vs. Housing Policy » New Deal 2.0
[...] will have a payout years down the road that will make this an even better investment, but with real interest rates negative we should be getting as much of it out the door as we can until output returns to [...]
Thursday ~ September 29th, 2011 at 11:14 am
Dan Thompson (@thompsondan)
Can anyone explain to me why gov’t issuance of a bunch of t-bills for infrastructure spending won’t drive the govt’s cost of borrowing back up along with the interest on t-bills and raise nominal interest rates during a period of possibly inflationary monetary policy?
Saturday ~ October 1st, 2011 at 3:00 pm
I’ll Be Moderating a Firedoglake Book Salon on “Lost Decades” This Evening, 5pm to 7pm ET. | Rortybomb
[...] find the most creative way of describing to a general audience how low interest rates actually are (Karl Smith is winning with pointing out negative rates on 5-year reals). Has the current account deficit actually [...]
Friday ~ October 21st, 2011 at 12:21 pm
No deficit problem? « Jonathan R. Walton
[...] sense for the federal government to borrow money than to spend cash. He explains further in another post: Suppose the government had two choices. It could either pay for infrastructure improvements as it [...]
Sunday ~ October 30th, 2011 at 9:31 pm
CBO Scoring, Deficit Reduction, and Bad Assumptions: Why Most Economic Projections Are Flawed | Mike the Mad Biologist
[...] rates on short- and long-term bonds). But in the 2000s, real rates of return dropped, and today, public debt is actually a money-losing proposition (tangential aside: If you’re wondering why anyone would buy U.S. debt in that case, U.S debt [...]
Tuesday ~ November 29th, 2011 at 3:28 pm
Cheaper to borrow than spend the cash on hand
[...] as they continue to attempt to justify their reckless endangerment of our economy, nobody is giving you the relevant facts on deficit spending. It’s not always bad. For instance this is material to the [...]
Wednesday ~ April 11th, 2012 at 1:22 pm
Loans Payday, Payday Loans , Cash Payday Advance loanspaydayproe.us | How You Say “Broke” in T-Bills – Harvard Crimson
[...] so it’s worth driving home for a while. When Treasury interest rates are negative, it is cheaper for the federal government to pay for its programs by borrowing money than it is for it to pay for [...]
Wednesday ~ January 2nd, 2013 at 9:01 pm
Deconstructing the debt | Brown Politics Memo
[...] trust also allows the US government to go into debt at a negative real interest rate: We will pay back less than we borrowed. Normally, one of the costs of going into debt is paying [...]
Thursday ~ April 11th, 2013 at 1:46 pm
why kids love cats
Heya! I realize this is kind of off-topic however I had to
ask. Does running a well-established blog such as yours require a large amount of work?
I’m brand new to writing a blog however I do write in my journal daily. I’d like
to start a blog so I can easily share my personal experience and views
online. Please let me know if you have any kind of ideas or tips for brand new aspiring bloggers.
Thankyou!