Record Low Interest Rates Mean Governments Can Save By Borrowing More
Today’s record low interest rates on long term Canadian government bonds present a fantastic opportunity to save money by borrowing more.
Back last December I wrote a post pointing out that the federal government could and should be much more aggressive in locking in low interest rates by shifting new borrowing to long term bonds and away from T Bills. The logic is pretty unassailable – the spread between short and long term interest rates is very narrow, and the odds are that ultra low short and long term interest rates will not last indefinitely. Borrowing long today should thus cut the cost of financing the public debt in the medium and long term .
I won’t take credit – especially since I stole the idea from Bill Robson – but the government has moved. The latest Debt Management Strategy in Budget 2012Â announces plans to issue up to $32 Billion of thirty year and long term real term bonds this year, plus $10-14 Billion of ten year bonds.Â Looking forward, the share of very long term bonds will increase significantly.
Meanwhile Larry Summers makes a solid argument in today’s Financial Times that low interest means that accelerating planned future spending can yield big savings.
“At a time of negative real rates, accelerating any necessary maintenance project and issuing debt leave the state richer not poorer; this assumes that maintenance costs rise at or above the general inflation rate.” The same principle applies to buying office space that is currently leased.
He goes on to make my favourite point that we are basically nuts not to undertake today the many possible debt-financed public investment projects which have positive real rates of return.
” It would be amazing if there were not many public investment projects with certain equivalent real returns well above zero. Consider a $1 project that yielded even a permanent 4 cents a year in real terms increment to GDP by expanding the economyâ€™s capacity or its ability to innovate. Depending on where it was undertaken, this project would yield at least 1 cent a year in government revenue. At any real interest rate below 1 per cent, the project pays for itself even before taking into account any Keynesian effects.
This logic suggests that countries regarded as havens that can borrow long-term at a very low cost should be rushing to take advantage of the opportunity. This is a view that should be shared by those most alarmed about looming debt crises because the greater your concern about the ability to borrow in the future, the stronger the case for borrowing for the long term today.”