A friend recently sent me something he had seen about the stimulus that was sure to come to support the economy as the US, and the world, tries to navigate the COVID-19 pandemic. It went, as these things often do, something like ‘a sustainable debt-to-GDP ratio is X, and we are Y, which is much larger than X, so we’re headed for a collapse’.
This debate is OLD. It was old before Carmen Reinhart and Kenneth Rogoff made their spectacular Excel error, and we certainly had enough words spent on it after that. Borrowing money scares some people. A lot. In my Intro to Business class nothing made the students as uncomfortable as the part where we discussed opportunity cost, and how sometimes borrowing is good, if there is a net positive return.
Which brings us to the question of stimulus in the face of a looming economic disaster brought on by pandemic. Assume we don’t have buckets of money lying about to spend, because we don’t – every year the US spends more than it takes in. That’s the budget deficit, which you may have heard of, which each year adds to the national debt mentioned above in the context of ‘debt-to-GDP’. This probably means we’ll have to borrow to spend – stick it on the nation’s credit card, as it were. And we know for sure that carrying a balance on a credit card is bad.
Except.
The US borrows money by selling treasuries. We’ll give you this piece of paper and you give us cash. The interest rates on those pieces of paper are set when they are sold – and right now that interest rate is nearly zero. People want a safe investment, because stocks are clearly not that, so they give their money to the US government for next to nothing. The US, right now, can borrow virtually infinite amounts, for what is effectively free. In fact, if things keep up there’s a chance we’ll see negative interest rates, where people pay the government to hold on to their money, rather than needing to be paid.
This means all the government has to do is invest in something that brings any return at all and it will make money by borrowing. In fact, we could even roll over the debt we already have and save a bundle. But in addition, we could fix our infrastructure, educate our children, etc. etc. All the things that we know will pay a return on investment. And we can even do things that don’t have that much bang for buck, because the bucks are free. Early childhood education pays high dividends – there’s plenty of research showing it's a good investment. But fixing high schools and colleges has a much lower return, which might be part of the reason we haven’t. But right now we could.
So if this were just a normal everyday year, and interest rates were at zero, we’d have a chance to make some good investments. But that’s not what this is.
Right now the alternative isn’t status quo, it’s economic Armageddon. People have already lost jobs, and many more will. They have probably stopped buying unnecessary things, and soon they’ll stop buying necessary ones. They’ll stop paying their rent and their mortgage. The banks holding those mortgages will start to fail (stop me if you’ve heard this one about twelve years ago). Businesses will close, so people out of work won’t be able to find new jobs. The economy will seize for years. The negative effects are myriad, and well documented. And although we know things are going to be bad, nobody is really sure how bad it’s going to be.
The example I gave on my tests was a choice between paying down a loan at 5%, or investing in something that paid 10%. Easy. But this is even easier, because the loan interest rate is nearly zero percent – we don’t care at all when it gets paid. We could pay it today. We could pay it in a year. Or in a decade. There's even talk of 'century bonds' that don't get paid for 100 years. It all costs exactly the same. Zero (or near enough). And the return on investment looks to be much, much larger.
And here’s where things take a turn for the truly weird – because the US isn’t a household – a person eventually has to pay their debt. But with the US, so long as investors are willing to lend us money, we don’t. Even if that’s a century. Or a millennium. The argument, of course, is that if we borrow enough people will get scared and stop lending. But if we borrow, and then make money with it, we’re not debtors, we’re investing geniuses. We’re Warren Buffett, and not only will people lend us the same amount, they’ll lend us more. Forever - or long enough that the world will have changed enough that the question is no longer relevant.
So even if we pursue some stupid policy like a supply side stimulus that Marco Rubio wants us to do, we’ll probably come out ahead with a stimulus. Something a surprising number of people are acknowledging.
What that should look like, and what that will look like, I'll leave for another day.