April 12, 2024

The interest on the debt miracle



Today’s Events in Historical Perspective

America’s Longest-Running Column, Founded 1932

By Douglas Cohn and Eleanor Clift

WASHINGTON – The Tea Party was founded on the premise that the federal government’s budget deficit is out of control and is unconscionably passing along huge amounts of debt to our children and grandchildren – fears that are powerful motivators in politics, yet they are based on myth.

It’s true that the national debt today is dramatically higher than it was in the 1980’s when President Reagan was in the White House. Yet the cost of that money to taxpayers is roughly the same. The reason is the miracle of low interest rates. They were 6.4 percent in Reagan’s day; they are now at 2.4 percent, and that’s after averaging current borrowing with carry-over borrowing from the past. In fact, new borrowing is running around 1.5 percent.

If the Chinese and the rest of the world are willing to lend the U.S. government money at 1.5 percent interest, the Obama administration should take all they can get. This is cheap money, and it’s a good deal for the American people.

Besides, much of the debt the Tea Partiers worry about is phantom debt. The Federal Reserve prints money and lends it to the government by buying Treasury bills, which makes the purists nervous. But there’s nothing wrong with the Fed creating new money as long as it doesn’t cause inflation. Further, the government is, in effect, borrowing from itself when it borrows from the Social Security Trust Fund and other such U.S. funds.

Inflation has been kept at bay, and the infusion of the Fed’s money into the marketplace helped save the global banking system and spur an economic recovery, which, while not great, is better than anything Europe is experiencing. Europe, to its chagrin, went the austerity route.

It’s not magic, but it’s close to it in monetary terms. Here’s how it works. In times of crisis, money moves to a safe haven. The safe haven in the past has been gold, but the return on gold is down. Instead, money is pouring into Treasury bills, which only bring an average of 1.5 percent return, but they’re seen as safe. And in a world as chaotic as the world is today, safety and stability are the keys to attracting investors.

The more T-bills investors buy, the more the interest rate goes down. The Fed had been putting in $85 billion a month into the economy (about half in T-bills), but it’s been tapering down $10 billion a month, and says it could be done by October, and still interest rates keep falling.

Progressive economists think the tapering is premature, that the economic recovery is still fragile, and without even a hint of inflation, there’s a case for continuing to pump this “free money” into the economy. But the worldwide demand for T-bills continues to increase, so why not take advantage of this confluence of events and keep borrowing?

Taxpayers today are getting more money for less interest. Whether the politicians as stewards of the people’s money have done as much as they should with this cheap money is another issue. It is too bad the politicians didn’t take advantage of the inexpensive money to rebuild crumbling highways and bridges, and build new infrastructure appropriate for a 21st century super power. Instead, the wars in Iraq and Afghanistan have had the priority, but at least the nation hasn’t been hurt by the borrowing.

The Tea Party is right about the government’s wasteful spending. All that borrowed money could have been spent better. People of all ideological stripes agree with that. But how the money is spent is a separate issue from how it is acquired. Borrowing money when interest rates are at bargain-basement lows is not reckless. The failure to use that money to fund the nation’s essential needs is where the politicians have let us down. But there is time. The money remains cheap and available.

Twitter @WMerryGoRound

© 2014 U.S. News Syndicate, Inc.

Distributed by U.S. News Syndicate, Inc.



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