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Tuesday, June 05, 2012

Surely the Government Should Be Borrowing Much More Right Now, Correct?

As Brad Delong notes, a business offered the sort of interest rates that the governments of the US, Germany, and Japan are being offered right now would be nuts not to borrow money and buy most every single thing they are now renting or leasing. The debate about the size of the government is an entirely separate issue: right now, at these interest rates, government of whatever size you prefer should be funded more through debt and less through taxes.

15 comments:

  1. As Brad Delong notes, a business offered the sort of interest rates that the governments of the US, Germany, and Japan are being offered right now would be nuts not to borrow money and buy most every single thing they are now renting or leasing.

    So businesses should be piling on debt right now? Are they in fact doing that, or are they trying to get out of debt? Haven't they consulted DeLong and Callahan? What's wrong with them? What could possibly go wrong with taking on more debt and buying something outright, that you currently are renting?

    The debate about the size of the government is an entirely separate issue: right now, at these interest rates, government of whatever size you prefer should be funded more through debt and less through taxes.

    If DeLong calls for the government to cut taxes $1 trillion, hold spending constant, and let the deficit grow $1 trillion, I will link to him and applaud.

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    1. Perhaps this part was skipped in your reading, Bob:

      "a business offered the sort of interest rates that the governments of the US, Germany, and Japan are being offered right now"

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    2. Oh, and starting in 2010, US businesses DID begin taking on more debt, which they have been doing ever since. So I guess they HAVE consulted Callahan and DeLong!

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  2. Just because you can get a cheap loan, should you take it? I don't think so, especially if you had doubts about your own ability to repay the loan. Or, if the loan had a variable rate, and you expected rates to increase beyond your ability to repay them in the future.

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    1. "Just because you can get a cheap loan, should you take it?"

      Of course, it depends on circumstances.

      "I don't think so..."

      Strange thing to say: as though it does NOT depend on circumstances!

      "especially if you had doubts about your own ability to repay the loan."

      There are no such doubts vis-a-vis the governments of Japan or the US: they are sovereign issuers of their own currencies, and the only default risk is when one party decides to try to embarrass the other by playing around with default.

      "Or, if the loan had a variable rate..."

      US treasuries, in general, do not. (TIPS are an exception, of course.)

      Recall that right now, the US government can borrow at NEGATIVE real rates. One should almost always take any loan offered that has a negative real interest rate. Just invest it in something that moves with inflation, and you have a pure arbitrage opportunity.

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    2. "Strange thing to say: as though it does NOT depend on circumstances!"

      I think you misunderstood me, so let me try to be more clear: by "I don't think so," I meant "It depends". Or maybe I'm misunderstanding your response.

      "There are no such doubts vis-a-vis the governments of Japan or the US: they are sovereign issuers of their own currencies, and the only default risk is when one party decides to try to embarrass the other by playing around with default."

      Of course, but there is an alternative to default: seigniorage. Do you think this is a better or worse alternative?

      "Just invest it in something that moves with inflation, and you have a pure arbitrage opportunity."

      Hmm. I think this is easier said than done.

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  3. I agree that DeLong (really Larry Summers) has a point. However, I don't think there is much more worthwhile for the federal government to spend money on (ironically Larry Summers also seems to agree with this). So I would propose taking advantage of the low interest rates by cutting taxes, specifically employer-side payroll taxes.

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    1. Cutting taxes is a good idea. Also, though, there is a lot of crumbling infrastructure around.

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  4. All right Gene let's be a little more precise. I took you to be saying a more general principle, along these lines:

    "With interest rates at extraordinary low levels, governments should behave like a business would, and be much more willing to ramp up debt than these politicians are in fact behaving. This is presumably because in politics, decisions as to debt financing aren't made on a cost/benefit basis, but something else."

    Are you willing to endorse that? Because I think the evidence shows *that* is totally wrong, that governments since the crisis began have been far more willing to take on debt, than private business, even though both of them are facing historically low interest rates.

    And also, please elaborate on your "no risk of default if you can issue your own currency" point. Do you really mean to say that there is something qualitatively different about a government, that should make it more willing to take on debt than a giant corporation in that country would be?

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  5. The whole point of negative real interest rates is to reduce the government debt level. That’s the way governments “pay back” their debt. But it is not really working at the moment, is it? The FED would need to create negative real rates of over 8% to achieve this to reduce the debt level. This is not remotely possible for a significant amount of time. The only reason there is at least this amount of negative rates is because of high uncertainty in the markets. People don’t know where to go with their money. Does the Market Crash? Does Bernanke let it? So some chose to lose a little for sure over the risk of losing a lot or even all! But this can only go to a certain point. It’s a game of Chicken. Someone has to blink at some point, and that ain’t gonna be pretty. And for sure it will damage the credit worthiness of the US, except you think people are just brain dead idiots who love to be fooled with negative real interest rates for ever, and say in 10 years “Saving in Bonds is great. I bought a 10 year T-Bond in 2012 for 1.5% interest so I lost a lot of purchasing power due to inflation, can I have another one?”

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    1. "The whole point of negative real interest rates is to reduce the government debt level."

      Why is this the "whole point"? It's certainly not why the Fed is holding rates low. How do low rates help the government pay back debt, unless they borrow at those low rates to pay back earlier debt?

      "The only reason there is at least this amount of negative rates is because of high uncertainty in the markets."

      Wait, I thought the reason was to let the government pay back its debts!

      "And for sure it will damage the credit worthiness of the US, except you think people are just brain dead idiots who love to be fooled with negative real interest rates for ever..."

      Who is being fooled?

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    2. „Why is this the "whole point"? It's certainly not why the Fed is holding rates low. How do low rates help the government pay back debt, unless they borrow at those low rates to pay back earlier debt?“

      Do you really ask how low rates help you to pay back debt easier? You answer this yourself. That is exactly what they do. They roll over debt with lower rates.

      “Wait, I thought the reason was to let the government pay back its debts!”

      No with “the only reason” here I am not referring to why they want negative real rates but why they are possible now. It’s due to the circumstances of an economy still in shambles, due to the fact that people are uncertain what is going to happen next, what is Bernanke going to do next. If there was a normal humming economy nobody would accept T-Bonds with these rates.

      “Who is being fooled?”

      All people with money in savings accounts, with money in life insurance and pension plans especially government sponsored plans like the Riester Rente in Germany. What do you think is an artificially low interest rate environment kept over 4 years now (with no end in sight, at least another 2 years projected) doing to them? Don’t you think some people will feel fooled?

      I am a savings guy, I was lucky to get out of these products at the right time, and as long as these mess isn’t cleaned up I won’t enter again.

      Another point: When Merkel said in 2008 (or was it in 2009) that she will guaranty for all deposits unlimited, wasn’t she fooling their citizens? What she was really saying was that she will guaranty for all deposits of all the citizens with the deposits of them. Sounds a bit circular to me…

      Or if I may cite Jean Claude Juncker: “When it becomes significant, you have to lie”

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    3. "Do you really ask how low rates help you to pay back debt easier? You answer this yourself. That is exactly what they do. They roll over debt with lower rates."

      Then they should be borrowing now. QED.

      "It’s due to the circumstances of an economy still in shambles..."

      Right. Because we are in a liquidity trap. So the government should borrow more and reduce taxes.

      "due to the fact that people are uncertain what is going to happen next, what is Bernanke going to do next..."

      But uncertainty about the central banker is a constant: it can't explain our circumstances now.

      "All people with money in savings accounts..."

      They are not aware rates are low? Banks here seem to post these low rates right in their window.

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    4. "Then they should be borrowing now. QED."

      Are you referring to normal people? No, too risky, this entirely depends on what Bernanke and the government are going to do. This can break you.

      "Right. Because we are in a liquidity trap. So the government should borrow more and reduce taxes."

      Please explain how this liquidity trap should be resolved? Do you even still stand by your essays about ABCT? How can you be so sure that when one day the economy really seems to be fine and government needs to reduce borrowing and increase taxes, that this will not push the economy right back into a liquidity trap?

      "But uncertainty about the central banker is a constant: it can't explain our circumstances now."

      Really? So you think it is just a media hype at the moment which tomorrow can be just as over? As if things always matter with the same degree at all times..

      "They are not aware rates are low? Banks here seem to post these low rates right in their window."

      First you leave out conveniently things like pension plans, which you just cannot quit so easily.
      Secondly, because of the uncertainty people don't know what else to do, they don't see alternatives. And the FED takes away the only quite safe savings method without having to suffer automatic losses, due to intentionally creating an extreme low interest environment. People get forced to speculate. I am sure that will lead to a sustainable growing economy..

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  6. Isn’t it every time so exciting when one central bank board after another meets to decide about interest rates and money supply adjustments? It’s like in a Poker game; Raise Call or Check? (Just (de)fold is not an option). It seems the ECB just checked to the FED.

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