Back to previous page


An opportunity we can’t afford to miss

By Ezra Klein,

Tobey The Washington Post This is going to be the most boring sentence I have ever included in a column, but it might also be the most important: The real yield on Treasury debt has, in recent months, turned negative. Sound impenetrably dull? Sure. But here’s what it means: free money!

Let’s start by defining some terms: The “yield” on Treasury debt is how much the government pays to borrow money. The “real yield” is how much it pays to borrow money after accounting for inflation. When the “real yield” turns negative, it means the government isn’t paying to borrow money anymore. Rather, the situation has flipped, and the government is getting paid to keep money safe.

It also means that America is facing perhaps the single greatest investment opportunity in decades. But more on that in a moment. First, I have to convince you that free money — or, in this case, better-than-free money, as real yields are negative, not just zero — is possible.

If you’re an individual investor, you can put your money in the bank and be assured of its safety. Bank deposits, after all, are insured up to $250,000. But if you’re an institutional investor — if you’re playing with millions, or billions — it’s not quite that easy. You have to put that money somewhere. And right now, there aren’t a lot of safe spaces. Europe is a mess. China is slowing down. Brazil and India remain uncertain. Corporate profits can’t outpace a sluggish economy forever.

These investments don’t just carry the potential for weak returns. They carry the potential for big losses. So does stuffing money under the proverbial mattress, where you’d lose money every year simply because of inflation.

That’s where Treasury debt comes in. You won’t make much money investing in U.S. Treasurys. But barring a catastrophic outcome to some future negotiation over the debt ceiling, you won’t lose much, either. And right now, that’s good enough for the market.

Usually, the U.S. government has to pay quite a bit to borrow money. In January 2003, for instance, the interest rate on a seven-year Treasury was about 3.6 percent, which gave investors a yield of more than two percent after accounting for inflation. Right now, the interest rate is 1.52 percent, or minus-0.34 percent after accounting for inflation.

Here’s what this means: If we can think of any investments we can make over the next seven years that have a return of zero percent — yes, you read that right — or more, it would be foolish not to borrow this money and make them.

The case is even stronger with investments we know we will need to make over the next decade. The economy will get better, and as it gets better, the cost of borrowing will rise. The longer we wait, in other words, the more expensive those investments will become.

The only reason we wouldn’t take advantage of these rates is that we have no worthwhile investments to make. But that’s clearly not true.

Our infrastructure is crumbling, and we know we’ll have to rebuild it in the coming years. Why do it later, when it will cost us more and we very likely won’t have massive unemployment in the construction sector, as opposed to now, when the market will pay us to invest in our infrastructure and we have an unemployment crisis to address?

More than 16 percent of Americans are unemployed or underemployed: This would be a good time for an employer tax cut to goose hiring, or a larger payroll tax cut to help families make ends meet.

State and local budgets are wrecked, and one casualty has been higher education. California, for instance, is hacking away at the University of California system, which is far and away the finest public higher-education system in the world. If we permanently damage our public colleges and universities, we’ll have lost a major source of economic strength. But it needn’t be that way. Kindly investors the world over are willing to pay the federal government to save our education system.

Everyone knows we have worthwhile investments to make. The real reason we won’t take advantage of this remarkable opportunity is ideology: Republicans argue that deficits are the only thing that matters for our recovery — unless anyone attempts to close them through tax increases, and then tax rates are the only thing that matters for our recovery. And Democrats have stopped even attempting to challenge them.

As an economic theory, that’s just dead wrong. Deficits matter, but in the long and medium term. What matters now is getting the unemployment rate down.

Need proof? Well, what’s worrisome about deficits? That high federal deficits will crowd out private borrowing. And how do we know if that’s happening? High interest rates. And where are interest rates now? They’re negative.

They won’t be negative forever, of course. The path forward is obvious: We should borrow now and put in place a firm plan to cut deficits later, once the economy is back on track and investors have other places to put their money. But refusing better-than-free money now in order to talk about reducing our deficit later? Well, that may be the craziest sentence I’ve ever had to include in a column.

© The Washington Post Company