Friday, September 2, 2011

I'll Pay You to Take My Money

Both Drum and Yglesias have continued to point out the singular fact that, unlike you and me, the federal government can currently borrow money at negative interest rates. This reminds me that some of my readers said that they didn't understand my previous post about negative interest rates. My response: sure you do.

Say you buy a sofa for $1000, and borrow the money to do so at 5% interest. That means buying the sofa on credit will cost you an extra fifty bucks, so you're really spending $1050.

But if you can borrow the money at negative interest rates, my friend, you've got a better deal. If that rate is negative five percent, then when you pay back the loan, you've got yourself that same sofa for $950.

In effect, the lenders are paying you to take their money! This is the situation your Uncle Sam finds himself in these days. It's a historically unique situation, but it would be bonkers not to take advantage of it, because... wait, wait. You still don't get it?

You say that nobody in their right mind would lend money at negative interest rates. Well, if you're selling a sofa, sure. Nobody's giving you that deal. But that's what kind of deal the bond market is giving Uncle Sam.

Stay with me! I know that some of you just clicked over to fluffy animal videos when I mentioned the bond market, but I know you can get this.

To borrow money, a government issues bonds, like T-bills, war bonds, savings bonds, municipal bonds, and so on. You park your money in their account, and eventually, the government will pay you back with interest.

Now, if very few people are buying bonds, then the interest rates automatically go up, to attract more buyers. So the government's cost of borrowing also goes up. But if lots of people are buying bonds, the rates go down, and so do Uncle Sam's borrowing costs. You with me so far?

Right now, so many people are buying US government bonds that the rates have gone below zero. They're negative interest rates. And people are still buying them, because they think parking their money with the US government is so safe (compared to say, the stock market) that they're willing to take a slight loss in order to do so. Maybe you don't think so, but the bond market – people who buy lots of bonds – do think so. And in a market economy, the markets set the prices.

Okay. Back to the sofa. I'm too lazy to look it up right now, but a month ago, the five-year yield on US bonds was negative 0.72 percent. The seven-year yield was negative 0.18 percent, and the ten-year yield was just barely above zero, at 0.38 percent.

What this means is that at the ten year rates, buying the sofa would cost you an extra $3.80, and at the seven-year rates, you would be saving a dollar and eighty cents. And if you borrowed money to buy the sofa at the five-year rate, you'd save seven dollars and twenty cents. So the sofa would really only cost you $992.80. And if you really really need a sofa, there is never gonna be a better time to buy, my friend.

Well right now, there are a lot of things that the government really really needs to do. There are fourteen million people out of work, and we have crumbling roads and bridges and schools and power lines, and we're killing our planet with our oil addiction. Why not borrow some money to put those people to work fixing those things?

Instead, we just spent months in a debilitating battle, inflicting considerable political damage to both sides, over how we can cut spending so we don't borrow so much and keep adding to the debt. Except that borrowing money right now adds less debt than you're borrowing! People will pay us to take their money.

Specifically, if Uncle Sam borrowed a trillion dollars to buy the world's largest sofa, he'd be saving seven point two billion dollars! That's real money, even in Washington DC! You could hire a lot of teachers with that.

So why don't we? Because our political system is completely dysfunctional, utterly broken, and batshit crazy. And everybody can understand that.

UPDATE: Edited to fix my bonehead math. 7.2 billion, not 720 billion. That's why I'm not OMB Director.

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