Bond markets boom – time to borrow
In both the USA, and the UK, investors are rushing into government bonds. Scared by the turbulent stock market, those with money are desperate to lend money to governments rather than risk buying shares. And so, only a few days after the American government had its credit rating downgraded, its ten year bonds now have a yield of less than 2% – its lowest ever rate. In other words, it is cheaper for the US Treasury to borrow than it has ever been.
In the UK, Government borrowing isn’t quite the cheapest it’s ever been. But they are getting the best rate on their 10 year gilt since the 1890s: only paying out around 2.24%. So it’s the cheapest in, well, quite a while.
We shouldn’t be surprised about this – as I wrote here after the downgrading, this was always quite likely. Similarly, borrowing has in general been very cheap throughout the downturn. But it does say something important. People who have money aren’t investing in anything productive. They want safer bets, and so they are putting it in things which are lower risks. Other places receiving investment are gold, and currencies like the Australian dollar (Australia had a stimulous package rather than cutting (so far), so its economy isn’t screwed).
Neither gold nor currency speculation do anything productive – they don’t deliver new activities that anyone finds useful, and they certainly don’t create new jobs. And so there’s a real risk to the economy – if no one invests in productive activity, then we risk a downward spiral.
Now, there is one way out of that spiral. And let’s talk in the language of the right for a minute. If it becomes cheaper for the government to borrow, that’s because demand for bonds has gone up: the number of people wanting to keep their money in Treasury bonds is high. The way out of the death spiral is for the government to let them lend this money. The state then takes the risk of investments in productive activities off individuals, and spends the money into the economy – investing it in the productive activities that can’t get money from risk-shy private investors. This makes sense because the risk to individuals if investing in a given activity may be high, but the risk to the state if everyone stops investing is higher.
Of course, I would rather they didn’t just lend willy nilly to corporations whose main business is trashing our planet and people’s lives. I would much rather that they use the money to buy up those big companies and then co-operativise them, to invest in renewable energy, and to invest in people through education and other public services. But even if all we want to do is keep our capitalist economy afloat, then it is vital that the government listens to the market, accepts the money it wants to lend them, and then re-invests that in productive activities creating jobs, rather than allowing that money to instead be used to buy up gold – which doesn’t do anyone any good.
Investors are looking for safe havens. They are not financing activities which will help us out of our economic crash. They want instead to lend money to governments. UK & US governments can therefore borrow at only around 2%. So long as the government’s investments yield a higher return (compared not with now, but with the death spiral of them not investing) then we make money. In the US and the UK, the government has a chance to prevent a death spiral. But they must forget their bizarre deficit fetishism, and borrow, and spend to build a new, better economy.