If Interest Rates Rise, We Can Plummet the National Debt!
Dean Baker makes what seems to be a stunningly obvious point, one that I haven’t seen discussed anywhere. Condensed and with emphasis added for your consideration:
…the value of our [government] debt will plummet if interest rates rise… we could buy back long-term debt issued today at interest rates of less than 2.0 percent for discounts of 30-40 percent. This would sharply reduce our debt-to-GDP ratio at zero cost.
This is not some kind of magic bullet, of course:
we would still pay the same interest
Buy back $100 billion of 2% bonds at their new market value of $66 billion. Pay for it by issuing $66 billion of 3% bonds. Either way, interest: $2 billion.
But (if we did this with all the outstanding 2% bonds) our debt/GDP ratio would plummet by 33%! That’s a magic bullet, right? Growth would skyrocket!
Read Dean’s whole piece for all the appropriate snarks on Reinhart-Rogoff, debt-kills-growth hysterians, and economists’ general financial innumeracy.
Extra credit questions: How would this future buyback-and-borrow compare to 1. Treasury, today, issuing $33-billion in platinum coins and using it to buy back (retire) 2% bonds from the Fed (with the coins sitting in the Fed’s vault…forever), or 2. the Fed just burning those bonds, and Treasury zeroing out the obligations?
Show your work, in particular specifying the balance-sheet perspective(s) you’re speaking from. Treasury (on balance sheet or unified)? Fed? Both consolidated? Private sector? Financial sector? Real sector?
Or don’t bother, because it’s a somewhat pointless set of arithmetic problems, balance-sheet prestidigitation with little ultimate import.
And even if you do think the government debt/GDP ratio is an important driver (cause) of growth or non-growth, do some more arithmetic and you’ll come to some rather striking conclusions, here courtesy of Josh Mason:
…interest, income growth and inflation rates also affect debt-income ratios, and movements in these other variables often swamp any change in …borrowing… government borrowing and government debt are not equivalent, or even always closely linked… What we have here is a kind of morality tale where responsible policy — keeping government spending in line with revenues — is rewarded with falling debt; while irresponsible policy — deficits! — gets its just desserts in the form of rising debt ratios. It’s a seductive story… But it’s mostly false, and misleading. More precisely, it’s about one quarter true and three quarters false. …if you do think debt is a problem, then you are looking in the wrong place if you think holding down government borrowing is the solution. What matters is holding down i – (g + π) — that is, keeping interest rates low relative to growth and inflation. And while higher growth may not be within reach of policy, higher inflation and lower interest rates certainly are.
Compounding interest and all that…
Cross-posted at Asymptosis.
Everyone is so obsessed with government debt. Studies have shown that large downturns like this one are tied more to private debt than public debt. And the private debt to GDP ratio in this case was much higher than that of the 1929 crash, and it still is more than the peak back then. Currently, the service costs to pay the interest on the total $56T debt is about $2.6T yearly. If the rates went up to even 2007 levels, that would be like $5T yearly. This would destroy the United States. What people need to realize is there is more debt by far than money to pay it off – this is the trouble. You cannot get ahead of things.
To Tod’s point, Art recently posted a FRED graph of public debt, private debt and base money.
It’s in this post. Private debt is about 4x public debt. Total debt is about 17x base money
Debt that people can’t pay causes crashes. The lenders take a bath, but it does not destroy the country. Only slows it down a bit until lenders recover their nerve.
Debt cannot destroy a country. As long as people are willing to work and there is earth to till. Eventually someone is going to have more money than they need to spend, and they are going to want to lend it, even if they have to lend it to the people who didn’t pay what they owed before.
But, and I hate to tell you this, one reason SS is such a good deal is because it does not depend on “debt”. It is pay as you go. The Trust Fund is debt, but SS does not depend on the Trust Fund.
Everyone, as usual, is worried about something that doesn’t matter, almost isn’t real.
This accounting sillyness actually matters because Of the debt ceiling. The face value of US debt enables the Republicans to theaten to destroy the world economy if they don’t get what they want.
There is a solution to this whole debt ceiling issue which involves only one Republican — Ben Bernanke. If the Fed announces that it will buy 1 month treasury notes issued in the first week of the month for 100 times there face value, then the Treasury will be able to finance any level of spending with an always declining face value of the national debt. Acting together, the FOMC and the Treasury can make the debt ceiling irrelevant — forever.
I thunk they should do this.
Robert Waldmann: “This accounting sillyness actually matters because of the debt ceiling. The face value of US debt enables the Republicans to theaten to destroy the world economy if they don’t get what they want.”
I agree with Coberly. Like everything else in the economy, the debt situation is cyclical and there will eventually be more lenders out which will perpetuate more and more.
I see in your comments at the link you posted that you were getting at what I was thinking with that chart: shadow banking debt. We’ve been told it’s all nominal, so don’t worry.
My other thought on debt is his issue of one dollar being booked multiple times. That’s the computer age. Has our fed and it’s calculation for need of cash not caught up with the speed of computers creating money via digital booking?
In the end it all comes down to debt and as I noted, 99%’s income being below personal consumption since 1996 (as was with the pre-depression). Nothing has been done to reverse this. Instead the push appears to be how to come up with a new way to loan to people who don’t have the money to pay it back. Because, all that matters is that it’s put on the books of the banks as an income flow to be backed by the good faith and credit of the US People as in bailouts.
Dan B –
I think the root cause of all of this is excessive capture of income by the top x percent. Over decades now, every penny of economic growth and productivity increase has been captured by the top 50%, and dramatically out of proportion as you go up the ladder. Top one much greater than top ten; top. 01 much greater than top 1.
Robert Reich points out that if wages had kept pace with productivity increases, as was the case prior to ca 1980, mean family income would be close to double, and there would be no SS shortfall problem (real or imagined.) I’ll add that common people would be able to live a bit better than hand to mouth without taking on unsustainable debt.
It’s really all of a piece. The assault on the middle class has been brutal. It was aided and abetted by first Reagan Republicans and now by rural and working class and Republicans who do not understand what has been taken from them, because — FREEDOM!!
Not to mention the foreign born, gun confiscating, socialist-fascist-commie Muslim darkie who usurped the WHITE house..
To all the idiots here:
I Love to hear Liberal arguments with all of their hypotheticals (thanks for that equation by the way…just wow, brilliant!) that “prove” that govt debt is just fine.
So, if it doesn’t impede growth in any way, then why are we not borrowing like 20 trillion a year? Everyone could have their own castle, have their golden carriage drawn by a dozen horses, and have their own personal Dr. All we would have to do is buy back our old debt at a cheaper price and no one would even have to produce anything, because hey; we have 20 trillion dollars now.
You all have heard of Greece, right? and Spain, and Portugal, and Italy. And France now. And Great Birtain now too. And now Japan (they have the biggest debt of all, with the biggest stimulus)
I’ll come back and comment when treasury rates spin wildly away from fed fund rates … and I’ll marvel at your genius.