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.