Being able to borrow money at less than 2% annually for 10 years is great deal. Who would pass up this opportunity to borrow? Certainly, our government, politicians, and treasury department aren’t resisting the urge to borrow. Lenders are plentiful due to the low risk and safe haven aspects of U.S. treasuries and the uncertainties of other investments and economies. Based on the volume of new treasuries, the win-win seems obvious. However, here are four irrational effects with this borrowing:
Creates a bubble and ponzi scheme
The interest on the 10 year note is less than 2% which is less than inflation. Who is going to hold for 10 years? When the selling starts, it could be a wild fire. The last one holding will get burnt.
Sucks capital out of the global recovery
U.S. treasuries have about the lowest interest rates globally. The rate is inversely driven by demand; the higher the demand, the lower the rate. The [perceived] low risk of treasuries (safe haven) is creating demand from worldwide sources . Another demand is created by our government and Federal Reserve purchase of treasuries; many of these are in our Social Security trust fund. This high demand and borrowing cheapens the dollar and keeps money (capital) out of Europe, Brazil, and other countries that need it for growth. For example,
“Brazil complains that low U.S. interest rates amid a sluggish recovery are hurting foreign trade partners” (CNN, April 9, 2012).
“He [President Obama] seemed to bristle when she [Brazilian President Dilma Rosseff] expressed concern that America’s ‘monetary expansion policy’ could impair growth in emerging economies like Brazil’s” (New York Times, April 9, 2012).
Takes capital out of the U.S. markets
Capital in the form of loans is needed by the business community especially small businesses. Capital in the form of loans is desperately needed to get a recovery in the housing market. The capital shortage caused by government borrowing is compounded by banks being forced to increase their retained capital levels. The lack of capital slows business expansion, inhibits the housing recovery, and contributes to anemic job creation.
Contributes to increased U.S. debt levels and security problems
Borrowing at 2% is a hay day for spend-side politicians. 42 cents of every dollar that the government spends is borrowed. Without a budget and deficit ceiling, this ratio will increase. Could your business or family sustain this debt payment ratio? Short term treasuries need to be refinanced and refi rates could be significantly higher due to inflation and better investment opportunities; thus increasing the ratio. And don’t we a security problem with the huge Chinese and other foreign holdings?
Our U.S. Treasury “promotes economic growth through policies to support job creation, investment, and economic stability” (U.S. Treasury). Seems like the expertise is in borrowing money.