On July 27 ,2012, New York Times columnist and Nobel Peace Prize economist Paul Krugman writes:
For years, allegedly serious people have been issuing dire warnings about the consequences of large budget deficits — deficits that are overwhelmingly the result of our ongoing economic crisis.
The failure of deficits to produce the predicted rise in interest rates is telling us something important about the nature of our economic troubles (and the wisdom, or lack thereof, of the self-appointed guardians of our fiscal virtue). Before I get there, however, let’s talk about those low, low borrowing costs — so low that, in some cases, investors are actually paying governments to hold their money.
For the most part, this is happening with “inflation-protected securities” — bonds whose future repayments are linked to consumer prices so that investors need not fear that their investment will be eroded by inflation. Even with this protection, investors used to demand substantial additional payment. Before the crisis, U.S. 10-year inflation-protected bonds generally paid around 2 percent. Recently, however, the rate on those bonds has been minus-0.6 percent. Investors are willing to pay more to buy these bonds than the amount, adjusted for inflation, that the government will eventually pay in interest and principal.
So investors are, in a sense, offering governments free money for the next 10 years; in fact, they’re willing to pay governments a modest fee for keeping their wealth safe.
So what is going on? The main answer is that this is what happens when you have a “deleveraging shock,” in which everyone is trying to pay down debt at the same time. Household borrowing has plunged; businesses are sitting on cash because there’s no reason to expand capacity when the sales aren’t there; and the result is that investors are all dressed up with nowhere to go, or rather no place to put their money. So they’re buying government debt, even at very low returns, for lack of alternatives. Moreover, by making money available so cheaply, they are in effect begging governments to issue more debt.
And governments should be granting their wish, not obsessing over short-term deficits.
Obligatory caveat: yes, we have a long-run budget problem, and we should be taking steps to address that problem, mainly by reining in health care costs. But it’s simply crazy to be laying off schoolteachers and canceling infrastructure projects at a time when investors are offering zero- or negative-interest financing.
You don’t even have to make a Keynesian argument about jobs to see that. All you have to do is note that when money is cheap, that’s a good time to invest. And both education and infrastructure are investments in America’s future; we’ll eventually pay a large and completely gratuitous price for the way they’re being savaged.
Investors are essentially sitting on trillions of cash and essentially urging the government to issue more debt. And the government should be granting their wish, not obsessing over short-term deficits. At a time when investors are offering zero- or negative-interest financing we should be focused on economic growth on the part of companies that will use it to expand operations to produce marketable products and services while simultaneously expanding private, individual ownership in those companies. Let the gamblers on Wall Street play all they want, just as long as they use their own money, not something for which the taxpayer is eventually on the hook. (See http://www.cesj.org/homestead/index.htm)
http://www.nytimes.com/2012/07/27/opinion/money-for-nothing.html?_r=1&ref=unitedstateseconomy
