Lawrence J. Kramer
Alan Mulally is credited with saving Ford Motor Company (
) by borrowing as much as he could - $23 billion - in 2006, before
the credit crunch hit other U.S. businesses, to fund a major
turn-around of the company's business. Uncle Sam needs to take a
page from Mr. Mulally's book.
Because our private borrowers cannot absorb all the risk-averse
capital our massive trade deficit brings in, the Treasury has an
opportunity to borrow long-term at rates that seem ridiculously low
in light of our national debt and continuing deficits. The money is
just lying there. All the Treasury has to do is pick it up.
The biggest obstacle to this tactic is the skepticism of
Republicans and their supporters, skepticism that is not entirely
unwarranted (even if to some extent disingenuous) but is in any
event ill-timed. Yes, w aste has been the hallmark of Congressional
spending over the years, and conservatives do not want to give the
liberal Congress another nickel to squander. But I think we need to
think long and hard before passing up a borrowing opportunity this
Let me make clear that I'm not advocating purely Keynesian
deficit spending, at least not as I use the term "deficit." I am
advocating issuing a ton of long-term notes and bonds. The use is a
separate matter, although I've got some thoughts on that, too. I am
proposing three uses of the funds, only one of which is spending of
any sort, and that's on investments that add more value to our
national balance sheet than they cost.
1. Extend Maturities.
Low-rate, short-term debt is riskier to issue than low-rate,
long-term debt. Short-term debt has to be rolled over and can
become high-rate short-term debt if the market refuses to roll it
over and the Fed is not willing or able to buy it. If we can get
out of this recession, the Fed will want to raise short-term rates
in order to prevent the economy from overheating. Hopefully,
depression-expert Bernanke will show more restraint than Marriner
Eccles did in 1936, but at some point, the Fed must tighten, and
when that happens, the Treasury should not be caught with a ton of
T-bills to roll over.
There are about $2 trillion in T-Bills now outstanding. So,
every 1% increase in the T-Bill rate adds $20 billion to the
deficit. The increase in pay-out seems inflationary even as the
increased cost of borrowing is anti-inflationary. And 5-6% is not
an unusual T-Bill yield when the Fed is tightening. That's $100
billion in additional deficit relative to today just to service
T-Bills, if we still have $2 trillion outstanding.
If the need to roll over a large amount of bills will hamper the
Fed's efforts to slow the economy when it needs to be slowed, one
of the best things that we could do with long-term borrowing would
be to retire a significant amount of short-term debt, even at the
3-4% difference in interest that would apply right now. And
long-term debt can be "repaid" in part by inflation.
Inflating away the debt is a time-honored strategy. See Aizenman
and Marion, "
Using inflation to erode the US public debt
," 2009.) As this table (Joshua Aizenman and Nancy P. Marion ©
voxEU.org) shows, the U.S. has, until recently, matched the
maturity of its debt to the magnitude of its debt: The more we owe,
the longer-term we have borrowed, and the more inflation has done
to repay it.
Click to enlarge:
With our public debt now approaching 90% of GDP, history
suggests that we should be at an average maturity of 100 months or
so, not the 50 months currently applicable. Whether we
issue enough long-term debt at reasonable rates remains to be seen,
but we can certainly issue more than we have, and we should at
least be working our way out the maturity curve as far as we can
I should add that inflation works to devalue debt only to the
extent that inflation is not priced into the bonds in the first
place. When the real rate of return on the debt is below the real
growth rate of GDP, inflation hurts the bondholder. Otherwise, the
inflation premium the investor demanded can be added to principal
to offset inflation. But there are times when the market
under-prices long-term debt, and when that happens, issuers should
move quickly to exploit the arbitrage maturities. I believe that
now is such a time.
2. Get Rid of TIPs.
As of November, 2009, the Treasury had issued
worth of Treasury Inflation-Protected bonds, a/k/a "TIPs," perhaps
the dumbest idea anyone in government has ever had. That's about 8%
of the outstanding Treasury debt. What, really, were they thinking
when they came up with this monster? How are we ever going to
inflate our way out of debt that is inflation-protected? (I know
what they were thinking - a low coupon in a period of
low-inflation.) But still. What hubris to think we would never need
to monetize our debt, when our very willingness to issue this
financial accelerant shouts from the rooftop that we haven't the
brains or will-power to escape that fate.
TIPs put us in a bind like that created by short-term bills: the
rate of return is adjusted semi-annually and is beyond the
Government's control. Thus, despite their nominal maturity, the
economic maturity of TIPs is zero. (I assume - but cannot say with
authority - that the nominal maturity of TIPs is reflected in the
table above, which distorts the maturity upward without providing
an enhanced opportunity for monetization.)
So long as raising interest rates depresses inflation, then TIPs
aren't a problem. But, if raising short-term rates proves
inflationary because so much of our debt is short term, TIPs will
only make matters worse. Thus, along with taking advantage of
current low long-term rates to move the nation's debt out the yield
curve, the Treasury should buy back TIPs. That way when the time
comes to raise short-term rates, the Fed will actually have the
flexibility to do so.
3. Upgrade the Infrastructure.
Not all of the money borrowed should be used to replace existing
debt. After all, re-funding debt requires no new money, so it
shouldn't put much of a dent in the demand for Treasury paper. The
whole point of the exercise is to borrow as much
money as possible at these low rates. That new money should be put
to work putting people to work - on rebuilding our obsolete and
decrepit infrastructure. Roads, bridges, aqueducts, power grid,
high-speed rail, air-traffic control, alternative energy all need
With so many unemployed workers, especially in construction,
infrastructure projects are the perfect Keynesian antidote to what
ails us. We just need the smarts to use long-term borrowing now
(when the money is cheap) to fund the work, even the longer-term
projects that won't be done until later.
And we need to get cracking, because Medicare is preparing to
swallow all of our cash as fast as we can print it. Indeed, one of
the best things we can do for our infrastructure would be to
upgrade our healthcare delivery systems in advance of the coming
crunch. But more about unfunded obligations later. For now, our
leaders need to recognize that the infrastructure needs work, and
our workers need work. And money is cheap, so if not now, when?
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