The developed countries should seize the opportunity of low interest rates
Recently, the dismal U.S. jobs data, the European financial pressures rising, the news from China is frustrating, these are global economy is to return to healthy growth path of the view looks extremely untenable.
With declining revenues led to growing confidence in the doldrums, which led to the decrease in expenditure, which in turn caused a further decline in income, the pessimists may again prevail. Financial pressure will damage the real economy (especially in Europe) and exacerbate the existing pressure. With the contraction in the economy of the industrialized countries, the export-dependent emerging markets will suffer.
The problem is not the current path of policy is acceptable, but rather what measures we should take. To find a feasible solution, first consider what a number of industrialized economies of the unusual level of interest rates. The U.S. government on behalf of the five-year borrowing rate was 0.5%, the 10-year 1.5%, and 30-year 2.5%. Germany’s interest rates much lower than the United States, Japan is lower.
Even more noteworthy is the interest rate of inflation-indexed bonds. The effective interest rate calculation, the market is willing to pay more than 100 basis points to the United States to buy five-year debt, pay more than 50 basis points to buy the 10-year bonds. To this index bond interest rates become positive, and its duration must be more than 20 years. Similarly, in Germany and Japan, real interest rates even lower. It is noteworthy that, last week, the British 50-year bonds, the actual interest rate of 4 basis points.
Low interest rates mean of the long-term bonds, the market is to provide a long-term cost of borrowing for the opportunity to lock in low. For example, in the United States, the government can promise to issue 5-year bonds in five years to about 2.5% of the nominal interest rate, real interest rates very close to zero.
All of these macroeconomic policies What does it mean? Europe and the United States many people are supported to continue to introduce quantitative easing to push down longer-term interest rates. In view of the current economic weakness, the policy response to the risk is much higher than overreact, this may be a reasonable move.
However, people have to consider how much investment enterprises are unwilling to start in the current low interest rates, but if interest rates drop by 25 or 50 basis points on its willingness to initiate. In addition, we have reason to doubt that the companies believe that in the real interest rate by 60 basis points of profit, but will choose to start the project in the interest rate is lower the quality of what. Another problem is that the ultra-low, it seems safe real interest rates will act as a catalyst foam.
In addition, the market is once again concerned about quantitative easing is quite weird. The main purpose of these policies is to shorten the duration of the bonds, including bonds held by the public, as well as bonds issued by the consolidated public sector (government and banks). Chief financial officer of any one of the private sector will now regarded as the moment to extend the debt maturity and lock the low interest rates and the central bank’s actions to the contrary. For example, in the U.S. Treasury, the discussion on debt management policies to emphasize is that this However, when the Bank of positive action in all the bond market, the Ministry of Finance alone can not control the duration of the bonds.
So, we have to take what measures? Its concern in a very low level of interest rates in the down, to enjoy such a low cost of borrowing for the government would be better by increased borrowing to improve their reputation. They can also invest in improving the future financial situation, even if unlikely to produce any positive effect of demand stimulus. Real interest rates negative times, assume maintenance costs rising speed equal to or higher than the overall inflation rate, then speed up all the necessary maintenance projects and to issue bonds to make this country has become richer rather than poorer.
This principle applies to accelerate the replacement cycle of munitions, as pointed out by my colleagues, Harvard University (Harvard) economist Martin Feldstein, Martin Feldstein,. Similarly, if the Government decided to issue bonds, and then buy the currently leased space, will improve the government’s fiscal position. In other words, as long as the bond interest rate is lower than the rent relative to the ratio of building value, you can achieve this effect. In less than two percent of the government borrowing rate case, this condition will almost certainly meet.
From these examples we can learn by analogy, which is actually composed of arbitrage in this kind of arbitrage, the government can use its credit to more low-cost basic service. If the actual rate of return is much higher than zero public investment projects are not many words, that was surprising. Suppose there is a $ 1 item, and by expanding economic capacity or ability, it can permanently each year so that real GDP increased by 4 cents. This project will at least annually for the government a cent of income, depending on the host country. The project would also be able to recover the cost in the real interest rate is less than 1%, if not included in any Keynesian effect.
This logic suggests that, as a risk haven to very low-cost long-term funds borrowed countries should “seize this opportunity. Looming debt crisis, most countries of concern should also hold this view, because the more you worry about the future ability to borrow, borrow long-term funding of the reason the more persuasive.
Of course, more borrowing will exacerbate the concerns of the people on the credibility of a government problem persists. Long as the borrower income or used to reduce future expenditure, or used to increase future income, this problem should not exist.
Any rational business leaders will take advantage of this opportunity, the short-term debt into long-term debt. Industrial countries, the Government should also do so.
The writer is the Charles W. Eliot University Professor, Harvard University (Harvard University) (Charles W. General Eliot University, Professor), former U.S. Treasury Secretary
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