Tuesday, June 05, 2012

Lawrence Summers: The Business of America is borrowing

Here's a startling headline for you:

It is time for governments to borrow more

Our loan salesman is Larry Summers, whose CV includes a stint as Buraq's director of the White House National Economic Council.

His argument can be summed up as: interest rates are so low you need a microscope to see them; governments, especially the United States government, should take advantage of it by -- wait for it -- continuing their borrowing binge. (Our current national debt is -- well, I can't give you a precise figure, because its continuous increase outruns my ability to type, but call it $15.79 trillion, or $138,000 per taxpayer.)

Summers writes:
These low rates on even long maturities mean that markets are offering the opportunity to lock in low long-term borrowing costs. In the United States, for example, the government could commit to borrowing five-year money in five years at a nominal cost of about 2.5 percent and at a real cost very close to zero.
No, the real cost may be close to zero in the cloud-cuckoo land of the economists, but the real real cost is another step toward fiscal apocalypse. He wants the government to emulate the sucker who gets a new credit card at an ultra-low teaser rate and runs up a new batch of debt after he's maxed out the other cards. 

Ah, but the difference is, the government can issue its own credit cards to itself at a very attractive rate, and as many as it wants, at least till the whole house of credit cards collapses.

Summers seems to concede that minuscule interest rates have not motivated business to do much that would benefit the economy, like hiring people. So governments should use borrowed money for projects that money-grubbing capitalists don't believe are profitable.
Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more, not less, and investing in improving their future fiscal position, even assuming no positive demand stimulus effects of a kind likely to materialize with negative real rates. They should accelerate any necessary maintenance projects — issuing debt leaves the state richer not poorer, assuming that maintenance costs rise at or above the general inflation rate.
 Let's see. In the Through the Looking Glass world, borrowing more increases creditworthiness (as long as you're a government). It improves a country's future fiscal position, even assuming no positive demand materializes. Issuing debt leaves the state richer not poorer. 
Alice laughed: "There's no use trying," she said; "one can't believe impossible things."

"I daresay you haven't had much practice," said the Queen. "When I was younger, I always did it for half an hour a day. Why, sometimes I've believed as many as six impossible things before breakfast."
What will this credit-improving borrowing be in aid of? Maintenance. Shovel-ready projects -- where have we heard that before? "Expanding the economy’s capacity or its ability to innovate." The last borrowed-money dump on the economy, the stimulus packages, got the machine firing on all one half cylinder. Hey, Joe, where you goin' with that gun in your hand? Here's a few billion bucks, go back to your garage and innovate!

Who, by the way, will buy this el cheapo debt? Not me, for a return of 0.001 percent. Probably not you. Suicidal financial institutions. Other countries, especially the ones like Greece and Spain that are being measured for the coffin. Let me introduce you to Uncle Sam, the loan shark.

Prosperity isn't just around the corner. It's ahead. Dead ahead.



YIH said...

Over at Stuff Black People Don't Like the current topic is blacks and noise, and the fact they love to be as loud and obnoxious as possible.
That brought to mind the living nightmare that was the 2010 World Cup and your comments about it. Re-reading it I did indeed laugh!
I was visiting a friend at the hospital, a huge sports fan, a watched one game of it. A grate(ing) experience, the noise even drowned out the announcers. They continually struggled to 'call the game' over the horrible buzz.
The silver lining of course, is the obvious fact that this fiasco will likely never be repeated.

YIH said...

Re-reading your actual post, the problem is that the Fed is not only the lender but the borrower as well. Literally buying it's own debt! In the past the Chinese, Japanese and Germans were the purchaser of T-bills. Now it's the Fed, not unlike the scene in a Cheech and Chong movie where Chong is selling his pot to his own best (and safest) customer, himself.
But of course, in the comedy Chong isn't growing his own stash, he's buying it from another dealer.
And that's what will bring on that fiscal apocalypse, the inability to actually produce anything to exchange.
Look at all the fuss over Facebook and it's IPO what does Facebook produce? Absolutely NOTHING not even ad revenue.
Google dominates the online ad market and that's what 'pays the rent' for them (and Blogger, YouTube, ect.).
That's why Greece is in the trouble it's in, all it has to exchange is agricultural products and tourism and it's hardly a major player in either one. There's no blood to be squeezed from that turnip. The US is ''eating it's seed corn'', that it has a lot of ''seed corn'' to eat isn't the issue, eventually that ''seed corn'' will run out.
And what happens after that? Detroit. Writ large.