The U.S. Turns Down Free Money
The U.S. government can borrow money right now at essentially no cost. But for political and ideological reasons the government is leaving what is essentially free money on the table.
The government borrows money by issuing treasury bonds, which are essentially a promise to pay the buyer the purchase price back after a certain period of time with interest on top. Since July the amount of interest the federal government has to offer to get people to buy its bonds—the so-called “yield” of the bonds—has fallen dramatically. The nominal yield on treasuries has fallen so far that for 5- and 7-year treasuries it is now actually less than the expected rate of inflation. That means that the real yield of those bonds—the interest rate the bonds return minus the inflation rate—is now negative. Adjusted for inflation the federal government has to pay less money back to bond buyers than they originally lent the government. In other words, instead of the government paying bond buyers to lend it money, bond buyers are actually paying the government to borrow their money.
Bond buyers aren’t buying treasuries out of charity, of course. Even with treasuries’ low yield, it makes sense for investors to buy treasuries because with a weak global economy and a sovereign debt crisis in Europe, there aren’t many safe alternatives. And in issuing the bonds, the federal government does bear the risk that inflation could be lower than expected. Treasury buyers are essentially paying the government to insure that their money doesn’t depreciate more. But while the government does bear a small amount of risk—there’s is always some risk—the fact is that it is a fantastic time for the U.S. to borrow money.
As Ezra Klein says, this may represent the country’s “single greatest investment opportunity in decades.” Normally, if someone would essentially pay you take their money, you’d be crazy not to do it. The U.S. could certainly use the money. America’s infrastructure system is falling apart, and will have to be repaired sooner or later. Education budgets are being slashed around the country. And millions of Americans are out of work and struggling to make ends meet. It may not make sense for private investors to rebuild the country’s bridges or provide low-cost education or even hire more employees right now. But for the national government addressing these issues now would represent a smart long-term investment in economic growth.
As Klein argues, the reason we’re not taking more advantage of this cheap money is the widespread belief that the deficits we are running are too large. In the long run, of course, they are unsustainably large. The U.S. won’t be able to continue to borrow money at the rate we’ve been borrowing it indefinitely once treasury yields return to their normal levels. But the truth is that deficits aren’t a problem when money is so cheap that the government is actually being paid to run them.
Photo credit: Loren