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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 2012  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.  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 economy’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.”


Enjoy and share:


Comment from Darwin O’Connor
Time: June 4, 2012, 10:57 am

What about supply and demand? Presumably there is not an unlimited demand for these low interest long term bonds. Is the government’s moves based on their estimate of demand for these things?

Comment from Michael Boudreau
Time: June 4, 2012, 11:13 am

There was good support from Krugman in a BBC interview about the long term damage of youth unemployment. I tend to agree with him that worrying about debt for left for the next generation should be far less of a concern than what we are not doing for them now. Then again, I don’t worry so much about the debt of a stable sovereign nation like Canada. With Ottawa being the issuer of Canadian dollars, I don’t get all this fuss about who we borrow from and at what rate.

Comment from Doc Manderly
Time: June 4, 2012, 8:14 pm

The national debt is only a red herring…

This is a 4 alarm fire!

we need to ramp up spending massively…

A la post ww I I

Comment from Piccolo Economista
Time: June 5, 2012, 6:39 pm

There are a couple subjects that need to be addressed with our current “money” system:

1) The Federal Government is NOT a household. They do not have the same constraints on the issuance/creation of “money”.
I found this video from Mark Thoma to be rather interesting in its seeming validation of Post-Keynesian/Chartalist ideas surrounding how Federal Gov’ts are NOT limited by this false notion. And he’s not even that sympathetic to the Chartalist ideas!!!

2) Why are so many economists absolutely myopic in the sense they only try to find solutions within the current Monetary Monoculture? The Club of Rome just published a report (co-authored by Bernard Lietaer) on the subject of “Complementary Currencies” and their potential efficacy is solving a myriad of problems regarding funding for “currency users” (i.e. Provinces, Municipalities, etc). Why are we not looking at more heterodox solutions? How many times do we need to go through crises before the “shocks” broaden our horizons sufficiently to get out of this anachronistic paradigm?

Any input (especially critiques) would be appreciated.

Comment from Larry Kazdan
Time: June 7, 2012, 1:07 am

Extract from Modern Monetary Theory blog:

An important point to be made regarding treasury operations by a sovereign government is that the interest rate paid on treasury securities is not subject to normal “market forces” unless the government voluntary chooses to do so (as in Australia with its auction system – more about which later).

The sovereign government only sells securities in order to drain excess reserves to hit its interest rate target. It could always choose to simply leave excess reserves in the banking system, in which case the overnight rate would fall toward whatever rate the central bank offers to pay commercial banks for excess overnight reserves. If the RBA decided not to pay any support rate (it currently pays commercial banks just below the official rate) then the Treasury could always offer to sell securities that pay a few basis points above zero and will find willing buyers because such securities offer a better return than the alternative (zero).

This accentuates the point that a sovereign government with a floating currency can issue securities at any rate it desires – normally a few basis points above the overnight interest rate target that the central bank has set. There may well be economic or political reasons for keeping the overnight rate above zero (which means the interest rate paid on securities will also be above zero). But it is simply false reasoning that leads to the belief that the size of a sovereign government deficit affects the interest rate paid on securities.

Bill Mitchell

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