Interest Rates: A Remedy for National Debt Pt. 2

Amidst the uncertainty of a looming global economic recession, the US government’s borrowing expenses have been decreasing, as investors have been pouring money into the US treasury with the expectation of a guaranteed return. To better understand, in 1980 the US government paid 16% for a 10-year loan while currently the rate is 1.7%. However, the national debt has continuously expanded throughout the Obama and Trump administrations and is predicted to grow another $12 trillion in the next 10 years. The primary cause is the annually rising expenditure costs of the government, while tax revenue amounts to nowhere near the federal spending. The Trump administration tax cuts, which were beneficial to individuals and small business owners, drastically reduced the tax rates of large corporations as well. This has been a major factor contributing to the lack of tax revenue and growing deficit for the government.

 

To tackle the federal deficit, the US treasury could buy back securities from the investors, replacing them with securities of a lower rate (as the current trading price exceeds the face value). The Trump administration has considered maturity periods of 50-100 years for bonds, which is a gamble between the interest of investors and the risk of exacerbating the national debt. In 2010, Mexico received $1 billion by offering a 100-year bond, while in 2016, both Ireland and Belgium raised €100 million for 100-year bonds. Although the yield on US government bonds is low, it is considerably higher than the yield gained from bonds provided by governments in the EU. A 10-year yield on a bond in Germany is -0.47%, while the US yields 1.7% on the same bond. Extending the maturity period to 50-100 years would prevent the US treasury from needing to implement large tax increases in the future by expanding the duration of the national debt. Likewise, it is possible that the negative interest rate policies of the European Central Bank will increase the amount of investments in the US treasury by Europeans seeking assurance of a higher guaranteed return. Resistance in Washington DC will delay this plan for the foreseeable future, and so far, no direct action has been implemented to address the deficit.

 

The US might look to the EU for guidance. The European Central Bank plans to decrease the already negative interest rates even further, causing inflation while economic investment and growth rises. There are concerns that these measures are paving the way for another economic crisis, essentially by paying consumers to borrow money, while banks incur expenses to store excess money at the European Central Bank. In the meantime, banks are being drained of their reserves, which might eventually cause banks to drastically minimize the number and size of loans given out, removing the primary fuel for economic growth in the EU. A robust banking market is crucial to a sustainable economy.

With the steadiness of the US economy, and the uncertainty of negative interest rates (as shown in the EU), many believe that the best course of action would be to immediately address the massive federal spending and national debt. The Federal Reserve has no part to play in the excessive spending habits of the US government, who is primarily responsible for the national debt.

Charles van Burik Comment