April 13, 2016

The current low interest rates on public debt are completely artificial.

Sir, again, for the umpteenth time, Martin Wolf finds it “hard to understand the obsession with limiting public debt when it is quite as cheap as it is today” “Negative rates are a symptom of our ills” April 13.

But again he refuses to delve into why public debt is “as cheap as it is today”. Where would interest rates on public debt be without central banks buying public debt; or without regulators allowing banks to hold much less capital against the debt of the monarch, than against all other debts?

Wolf also brings up a frequent ritornello of his, namely that “The world economy is suffering from a glut of savings relative to investment opportunities.” But he does not ask himself where that saving glut could be had it not been for QEs.

Wolf informs us that higher interest rates, “would force borrowers into bankruptcy”. Yes but is that not a natural and necessary element of how savings glut are reduced? In a letter titled “Long-term benefits of a hard landing” that FT published in 2006, I wrote: “the hard truth… gradualism could create the most accumulated pain… [do not] ignore the value of pruning or even, when urgently needed, of a timely amputation.”

Wolf’s standard suggestion for how to eliminate the savings glut is having government investing in infrastructure. Nothing’s wrong with that, good infrastructure is always useful, though any waste building it, is just that, waste.

But building bridges does not mean these will be used. And how are we to make sure we get the new investments that will use the infrastructure built, with risk weighted capital requirements that make banks stay away from what perceived as risky? What we now have is a banking system fully dedicated to solely financing what is perceived, decreed or concocted as safe.

For a government to take on public debt should be a delicate matter, knowing that it is our children and grandchildren who will have to service that debt. To do so based on some artificial current low rates is not something I can support.

PS. With a $2 per gallon gas tax the US could pay each American citizen about $900 per year. Good for the fight against climate change and inequality, and fairly decent for the economy. That would be a good start for a Universal Basic Income scheme, which I much prefer over Helicopter money, first because it is duly funded, and second since I do not fully trust the helicopter pilots  J     

@PerKurowski ©