Political Animal


August 31, 2011 11:20 AM Hey look, free money

By Steve Benen

With the yield dropping below zero on U.S. Treasury debt, it doesn’t really cost the federal government anything to borrow money. Sure, we have to pay the money back eventually, but as Ezra Klein explained very well yesterday, as a practical matter, the United States is being offered “free money.”

To put it mildly, this realization offers an extraordinary opportunity for federal officials to make necessary investments at a very low cost. We haven’t seen in a chance like this in a long while, and we won’t see it again anytime soon.

Usually, the U.S. government has to pay quite a bit to borrow money. In January 2003, for instance, the interest rate on a seven-year Treasury was about 3.6 percent, which gave investors a yield of more than two percent after accounting for inflation. Right now, the interest rate is 1.52 percent, or minus-0.34 percent after accounting for inflation.

Here’s what this means: If we can think of any investments we can make over the next seven years that have a return of zero percent — yes, you read that right — or more, it would be foolish not to borrow this money and make them.

The case is even stronger with investments we know we will need to make over the next decade. The economy will get better, and as it gets better, the cost of borrowing will rise. The longer we wait, in other words, the more expensive those investments will become.

In a sane political environment, this would be perceived as extraordinarily news. Indeed, policymakers should be pinching themselves with the good fortune — they know the nation has important investments to make; they know they’d prefer to keep borrowing costs to a minimum; and they know they’re effectively being offered free money. Washington can use that free money to create jobs and improve crumbling infrastructure, with the satisfaction of knowing it’s never been more cost effective to do so.

And yet, this won’t happen, for the same reason worthwhile measures nearly always don’t happen — Republicans have a direct role in the policymaking process, and their philosophy tells them public investments are “bad.” What matters, the GOP says, isn’t putting free money to good use, investing resources we’re going to have to spend eventually anyway; what matters is tackling the fiscal mess Republicans are largely responsible for creating.

And why does the GOP believe deficit reduction matters? Because their ideology tells them larger deficits lead to higher interest rates, which hold back the economy. This might be slight more coherent if interest rates weren’t below zero.

This is why we can’t have nice things.

Steve Benen is a contributing writer to the Washington Monthly, joining the publication in August, 2008 as chief blogger for the Washington Monthly blog, Political Animal.


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  • c u n d gulag on August 31, 2011 11:35 AM:

    Picture this country if we had Republicans like this right after WWII.

    Our returning veterans would have been living in updated "Hoovervilles."

    Most of "The Heartland," without highways, would take Conastoga wagons to cross from St. Louis to LA or SF. "Westward, HO!"

    And we wouldn't have airports.

    And now, that the things we built from 1933 to 1980 need to be REbuilt, we have our "Just Say No to Deficits" Republicans in control of the House.

    America, thanks to "The Reagan De-evolution" went from "CAN DO!" to "Nope, can't do THAT! But how about tax cuts for the rich, and beefing up our military?"

  • howard on August 31, 2011 11:35 AM:

    just so we keep the record straight, the gop currently claims to believe that deficits are bad; a mere decade ago, the gop thought that deficits were certainly less bad than lower tax rates on upper-income households, and indeed, in 2000, the gop position was that running a surplus during a period of strong economic growth meant that the government was "overcharging" us.

    which is to say, the gop doesn't really believe in anything other than lower tax rates (see ryan plan) and using whatever is handy as a cudgel to keep democratic policies from being implemented.

  • DAY on August 31, 2011 11:39 AM:

    This is old news, but worth repeating.
    Indeed, several of our regulars commented about this opportunity last year.

    But, as Steve says, it ain't gonna happen, because the GOP House no longer hosts town hall meetings, and theTea Party seems to have not only a selective memory, but selective anger.

    America has become J. Alfred Prufrock.

    (Let us go then, you and I
    When the evening is spread out against the sky
    Like a patient etherized upon a table)

  • zeitgeist on August 31, 2011 11:47 AM:

    maybe I'm missing something, but in terms of pure debt reduction -- and better yet, debt reduction that can be done without Congress being involved -- why can't we take a bunch of the free money and buy back the higher-rate debt that is outstanding? Essentially a massive refinancing program to reduce our interest payments?

    sure, infrastructure would be better, but if Congress wont do that, at least Obama can make the debt numbers look much improved by election time, or use the dropping debt as a stronger argument for more stimulus spending.

    i understand some of that is in instruments that guarantee payment over time to the holder and may not be able to be accelerated or called, but surely a fair amount of the U.S.' debt is in forms that can be paid down at any time?

  • sapient on August 31, 2011 12:25 PM:

    Howard is correct. Deficits still don't matter to Republicans. The only thing that matters to them is redistributing wealth to the rich.

  • paul on August 31, 2011 12:30 PM:

    Howard is right. the GOP couldn't care less about debt reduction, they're about killing social services, and they'll use whatever argument is handy. If they ever get the tax rates sufficiently restructured so that the tax burden falls primarily on the middle and lower classes, watch them agitate for additional borrowing, confident that our grandchildren will be paying the costs and their grandchildren will be collecting the payments.

  • Matt on August 31, 2011 1:34 PM:

    I've posted this many, many times elsewhere, but anyone who thinks this is a bad idea is welcome to lend me any amount of money at negative real rates.

    I will put my forehead up as collateral for pro-GOP tattoos, along with every scrap of property I own for such a loan. I'll enter into an agreement where I agree to work off any default at minimum wage as Bill O'Reilly's loofah cleaner. There's nothing I wouldn't risk to be able to borrow money over ANY time horizon at negative real interest rates.

    I know I'm wasting my time looking for someone to bite here, but I also post it on neutral and right-wing sites. In a month of doing this, no takers. Which is a shame, because I really only need a few rich, stupid teabaggers with the courage of their convictions. Well, you know, that and whatever the second-safest investment in the world is, after US debt.

  • Josef K on August 31, 2011 1:57 PM:

    I recall during the whole debt ceiling idiocy an idea was floated whereby the President could direct the US Mint to produce platinum coinage of any conceivable denomination; while he can't direct more paper money be printed and there are fixed guidelines on gold, silver and every other conceivable precious metal, there's nothing holding him back on coinage or platinum.

    The idea then was that he have two (count 'em: exactly two) platinum coins minted, each given a value of $1 Trillion USD, which would then be deposited in the USG account at the Fed and provide all the borrowing authority required to meet the immediate needs of the budget. Granted, the Republicans would've had a fit, but their legal authority there was nonexistent.

    I can't think of any reason (beyond the difficulty explaining this procedure to the public) that the White House couldn't pursue the same course now, when interest rates are close to nonexistent and the GOP's ability to interfere is minimized. What are they going to do? Try to set the international price of platinum? Good luck getting that past the President's veto stamp.

    Perhaps I've gotten some of the procedure and statutory allowences wrong. If so, can someone more knowledgable please speak up? I'm not norally inclined to do such and end-run about Congress, but these idiots are just pushing it past the point of sanity.

  • j_h_r on August 31, 2011 3:09 PM:

    And why does the GOP believe deficit reduction matters?

    They believe "deficit reduction" matters because they believe that government spending benefits the underserving, and so government should spend as little as possible. To Republicans/conservatives, everybody but them is a welfare queen who will steal all your hard earned money that they can carry the moment they get a chance, and "the government" (minus those heroic Republicans who have the courage to oppose the evil government) is a willing accomplice or a weak, ineffectual paper tiger that allows the evil nigg-oops, UNDESERVING-to take your money.

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