I’m confused, and a bit frustrated. In bullet points:
- We’re barely recovering from recession, right? I mean, the press are going nuts over slow but steady progress in the US, and worse news for Europe, Japan, and the rest of the world.
- Keynes says buy and build. Perhaps my economic view is coloured by my alma mater’s famous mathematician-turned-bursar-turned-economist, but a sure-fire method to help along a country in recession is for the government to start spending like a rap star. Hire folks to do anything, but maybe something relatively useful in the long-term like repair infrastructure. The ASCE helpfully puts a $3.6 trillion price tag on getting the US infrastructure up to scratch by 2020… that’s about 20% of US GDP.
- Record low interest rates = BORROW NOW. Look, I hate the national debt as much as anyone – it does indeed steal from later generations to pay for things today. But particularly in the case of infrastructure, you’re already screwing later generations through depreciation (with crumbling roads and such, it’s literal depreciation, rather than a book entry). So today’s record low interest rates (see chart above – the same message goes for the US as many other governments), the message is clear: BORROW.
- Why are rates so low? Too much capital lying around. Though it seems to disagree with the first point, there seems to be a huge surplus of investable capital around. It’s like investors have become so risk-averse, or have such a lack of ideas, that they’d rather lock up cash for 10 years, being paid nothing (or less than nothing, in real terms) than try for ‘risky’ propositions. The triumph of return of capital over return on capital continues to reek.
- Investors: you are committing self-harm buying bonds at these rates. Yes, bonds have made amazing returns for decades. Rates could still go lower – indeed, now that the zero-bound has been shattered by the likes of Switzerland (see above), they could in theory go wherever. But remember why you are saving/investing in the first place: to generate a return on your savings. Otherwise you might as well store your currency behind a tile. Stop being fearful.
In sum: these low yields are a joke. It is implicit transfer from savers to borrowers. But instead of just being mad at the situation, I encourage the governments of the world to take advantage of savers/investors with a surplus of capital and fear, and a dearth of decent ideas. Borrow loads at these low rates, and use the proceeds to bring forward decades of investment.