I haven't been writing anything here for awhile. The people we rail against don't care what we have to say. The people we hope to reach are not listening to us because it's clear the people we put in power don't listen to us.
Just because I don't have anything to say doesn't mean I am not listening with great interest to the president's next "big" speech. However, there is only one thing I want to hear from the president. If I don't hear this, I'm convinced we're toast. That may seem extreme, but if you can't sell the following idea, you couldn't sell life jackets on the Titanic: We are going borrow money for free and invest it in something that has a guaranteed rate of return -- jobs.
You read that right. Here's what I'm talking about.
The other day, Ezra Klein wrote a column in the Washington Post that received very little attention. People have mentioned it here and there, but what he is pointing out should be headline news. The earth-shattering point of his column is this:
The real yield on Treasury debt has, in recent months, turned negative. Sound impenetrably dull? Sure. But here’s what it means: free money!
Sounds too good to be true, right? Well, it's not. As Klein succinctly explains:
Let’s start by defining some terms: The “yield” on Treasury debt is how much the government pays to borrow money. The “real yield” is how much it pays to borrow money after accounting for inflation. When the “real yield” turns negative, it means the government isn’t paying to borrow money anymore. Rather, the situation has flipped, and the government is getting paid to keep money safe.
In other words, people are willing to accept a rate of return on government debt that is LOWER than the rate of inflation. (Suck on THAT, Standard & Poor!) Here's how that translates into "free money" for the US Treasury:
If you are an individual looking for a "safe" investment, you put your money in a savings account that is FDIC insured. As long as you have less than $250,000... you're insured and nothing can hurt you. However, if you are an institutional investor, say a pension fund, you may have millions, even billions of dollars you need to keep in a "safe" investment. Right now, there aren't a whole lot of those for large investors. Keeping the money in cash isn't a good idea, either. That guarantees you will lose money just due to inflation. That is where US Treasurys come in. The graph that accompanied Klein's article (shown below) is a record of the real yield of Treasurys for the last 8 years. There are three different maturities being tracked here, 10 year, 7 year, and 5 year. What these numbers show is that after you factor in inflation, the rate people are getting on the 5 and 7 notes is lower than inflation, the 10 year notes are not far behind.
Why would anyone invest in something that is losing money? Klein explains:
That’s where Treasury debt comes in. You won’t make much money investing in U.S. Treasurys. But barring a catastrophic outcome to some future negotiation over the debt ceiling, you won’t lose much, either. And right now, that’s good enough for the market.
In other words, institutional investors are protecting their down side. And willing to pay a bit for the privilege. Think of it as a type of insurance and it makes sense. So how does this relate to what I want to hear in Obama's "jobs speech" next week? If the US is borrowing money it has choices about how to use it. Let's consider the options.
Option 1) Take the money and pay off the debt. Sounds prudent, until you realize you are just borrowing money to pay off previous debt. There's no multiplier there. You are lucky if you tread water.
Option 2) Take the money and invest it in something with a rate of return. Any rate of return. Remember this is FREE money. Any rate of return means you are making money with this so you can pay it back and keep a little for yourself. If you want, use the winnings to pay off other debt.
So what might be a good investment? How about rebuilding infrastructure? How about modernizing the power grid? How about expanding WiFi? How about anything that creates jobs and leaves behind useful stuff in its wake? Now you have a multiplier effect, because all those jobs means people are spending their earnings on things like food, clothing, transportation, entertainment, technology, education and health care. That's the kind of stuff that leads to economic growth. That's the kind of stuff that leads to MORE revenues. That's what a virtuous cycle looks like.
And here's the best part ... you get all of this with money that you get to borrow for FREE. So you don't have to listen to Ron Paul and his crowd screaming about "fiat currencies" and "printing money" or "debasing the currency" to fund all of that growth. Gold bugs like Glenn Beck shrivel up and die in that sort of scenario. Republicants who scream about the threat of deficits can't make a case against this because you aren't increasing the deficit so long as you invest in something with at least a zero rate of return.
So what I am looking to hear is going to be a more politically nuanced version of the following:
"My fellow Americans, in spite of what you have been led to believe about the credit worthiness of the United States, I am pleased to report that someone much bigger than Standard & Poor has weighed in. The marketplace has voted and it says the US debt is worth paying to hold, even if it means the rate of return is less than the rate of inflation.
That's right. As we speak, billions of dollars of institutional funds are flowing in to the US Treasury even though we are offering historically low rates. This money could go anywhere in the world, but it is coming here. Why? Because professional investors know this is the safest haven for their money in these uncertain times. This means we have an historic opportunity to borrow money for less than it costs to pay it back.
As long as we invest that in the one resource we know always yields returns, we can finance economic growth without increasing our debt by one red cent. What should we invest in? The same thing the wizards of Wall Street are investing in. The same thing institutional fund managers are investing in. The good old US of A. All we have to do is put that money to work by putting Americans to work, because everyone knows when you bet on the American worker, everyone wins. Starting tomorrow, that's what we're going to do. Thank you, good night and God bless the working men and women of this great nation."