A Penny Borrowed is a Penny Earned

Record low 10-year bond interest

Back in December I wrote about how the U.S. government was enjoying what amounted to negative interest rates on treasury bonds. That is, the rate of inflation, low as it was, exceeded the interest rate, meaning that we could make money by borrowing money. It was a case of international investors looking at the Euro crisis and other factors and paying a slight premium to safely store their money.

It is still the case. In fact, the interest rates our government pays on 10 year bonds is hovering around a record low of 1.44%. We just sold $21 billion of these bonds at 1.46% a few days ago. Inflation has been in the 2-4% range for the past year, dropping to 1.7% as of May. When we pay off that 1.46% interest with money that buys 1.7% less we are making 0.24% on every dollar we borrow. If inflation holds steady we'll make  $50 million on that bond sale over the next year, or half a billion dollars over the life of the bonds. If inflation goes up, we'll make more. It's Alice-in-Wonderland weird, but it's a good kind of weird.

The policy implication is straightforward. The government should borrow a huge whack of cash and spend it on useful things. I'd suggest repairing our maintenance-starved transportation infrastructure, especially our freight and passenger rail lines. Energy effiicency and renewable energy would be good investments, as would education at all levels. Whatever. Employ some people and get them spending. That would tend to push inflation up by a point or two, so we'd be making some real money on those 1.46% bonds. We'd also be collecting more tax revenue from all those newly employed people to pay off the loans in slightly inflated dollars. The bond market is saying "Borrow my jumper cables to restart your car and I'll give you a buck." As long as the interest rate is below the inflation rate and unemployment is unacceptably high it is idiotic not to borrow.

To the fiscally shocked I say yes, yes, of course we will have to pay it off. Right now we are looking at a federal deficit of $900 billion for fiscal year 2013. How can we deal with that? As I have suggested in the past:

Actually enforce tax laws against multi-millionaires who illegally offshore income: $70 billion a year

Close loopholes on corporate offshoring of income: $90 billion a year

 Cut the military budget so that we spend as much as the next 5 nations combined instead of the next 14 combined: $310 billion a year (I should note that 2 of the 14 are China and Russia and the other 12 are friendly countries such as the UK, France, and Japan.

Include a drug benefit in traditional Medicare and negotiate drug prices with manufacturers: $40 billion a year

Let the Bush-era tax cuts expire: $280 billion a year

There's $790 billion and I haven't even touched oil company subsidies. It is eminently doable, post campaign finance reform. Right now we can borrow at a profit and solve our unemployment problem. Later we can boot the moneybags out of our electoral system and solve our structural debt problem. The numbers speak to those not blinded by ideology.