Wednesday, July 25, 2012

Time to spend big


US 10 year Treasury bond yields are at decadal lows.  Forget that, they are at century lows.  Hard-headed investors are saying that they will lend money to the US government for just 1.4% per annum interest.  For CPI linked bonds, the interest rate is negative, in other words, investors are willing to pay the Federal Government to lend it money.  Bit like working as a waiter at a grand resto: you pay for the privilege (because it's assumed you'll make more than that in tips).

As Paul Krugman says, now would be a splendid time for the US government to build needed infrastructure: roads, schools, high-speed trains, airports, green power stations, ports, etc, etc.  This would add dramatically to demand in the economy but would also increase supply.  Eisenhower's interstate highway construction program is estimated to have added 1.2% per annum to the growth rate ( a huge increase when growth is around 3 or 4%) because of its impact on the overall capital stock.

Instead, the tea-party numpties are planning to cut spending drastically in the new year, the so-called "fiscal cliff", which will contract demand sharply precisely at the time when it's not a good idea.

We need a new FDR.   The collapse in bond yields is a splendid opportunity to transform America.  But it won't happen, because conservatives have gone from being pragmatic to true believers, and the US (and the world) is worse off because of it.

Click on chart to enlarge

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