An interesting thing happened last Monday. The yield on 3-month Treasury bonds went negative. For most people, that statement is basically meaningless as bonds are pretty much black art. The simple explanation is:
People are paying the US government to take their money.
Usually, it’s the reverse. The US and other governments need to pay interest on money they borrow from people, usually at a rate higher than inflation. Rates are usually priced so that they are sure to sell, but, in this economic climate, they are essentially priced at zero, less than zero if you take inflation into account. Having the yield go negative, however, means a lot more than being priced at zero.
Yields go up and down over time as bonds are traded on markets. A negative yield, which had never happened before, basically means that people are more interested in a safe place to park money than on any return. Fair enough. But there is another strange side effect to this. Bonds, and their market values, also reflect relative trust in an institutions future viability. Viewed in that way, bond markets are saying that they have full confidence in the future of the US government, and, by extension, the United States.
So much so that they are willing to pay us to spend money.
Think about that notion. The United States, like most governments, has two basic ways of meeting budgetary obligations: taxes and currency inflation. Taxes are obvious, and government debt is used to fill the gap between current expenditures and future revenues. But currency inflation (eg. printing lots of money) is virtually unknown in the US, partially because our currency management institution (the Federal Reserve) is independent from the government. Generally, currency inflation is really bad, it typically leads to things like Zimbabwe’s 8 quintillion inflation rate. However, if people are paying you to take their money, well…. maybe currency inflation is not so bad. You could actually profit from it, in theory.
Which makes for an interesting conundrum. It would be possible, give all this, to have both deficit spending and tax cuts without a hugely negative impact. And what if the US government refinanced all future debt under these terms? What would that do to underfunded future obligations and the current deficit? And where does it leave traditional political arguments from both the left and right?
Who knows? But, we sure do live in interesting times.