Negative Interest

For those of you who may have been losing sleep about the U.S. government deficit, I have a glass of warm milk for you. The esteemed Nobel laureate Paul Krugman has pointed out that we are now living in a financial bizarro world.

How would you like to take out a 5-year loan and have the bank pay you interest? Read that again. Sounds like insanity, doesn’t it? Well, things in Europe and elsewhere have gotten so shaky that this is exactly the situation in which the U.S. Treasury finds itself. Investors all over the world are looking for a safe haven, and America’s credit rating is so good that they are willing to pay for the privilege of storing their money here.

Treasury Real Yield Curve Rates, which translates as actual inflation adjusted interest when our government borrows money, have gone negative. Five-year Treasury Notes are paying something around -0.75 percent as of December 9^th. Seven year T-Notes are around -0.4% and ten year T-Bonds are hovering around zero. Free money, in other words. Beyond ten years the interest rates are soaring as high as 0.92%. That’s right, stop gloating about your 4% mortgage. Uncle Sam is borrowing at less than a quarter of that on a 30-year loan and making more money than your savings account on short term loans.

Interest rates aside, our debt to GDP ratio is 90%. That’s like someone with a $100,000 annual income having a $90,000 mortgage. It’s not an emergency, and the financial world recognizes this. We can tell that from the negative interest rates.

We are like a fisherman, in debt, with a leaky boat. Do we borrow more money and fix the boat so we can earn our way back into the black? Or do we stand on principle, refuse to borrow, and let our livelihood sink? When our fisherman can make money by borrowing money the answer is obvious.

Update on Monday, December 12, 2011 at 9:38PM by Minor Heretic

I received a correction from my friend The Broker, to wit: "Minutiae from the Peanut Gallery: Treasury Bills are obligations less than one year, Treasury Notes are one year to ten years, and Treasury Bonds are ten years and up (to thirty at present), although all of these are generically bonds."

Noted and corrected, with thanks.