Thursday, March 5, 2009

Refinancing our debt

A portion of our government expenses is paying interest on the debt we have incurred over time. Last fiscal year it was about $450 billion or about 13% of $3 trillion in federal spending. The usual breakdown is 8% of federal spending so there is doubtless some accounting going on that apportions these numbers in some way or another.

We have also just started to spend about $800 billion is fiscal stimulus that includes some spending on renewable energy infrastructure. The last time we looked at this sort of approach, it looked like a very good investment to make. But, we are doing it now because there is a recession on and interest rates are near zero so that it would seem that only spending can help with the economy.

But, interest rates pinned near zero mean that we can free up $450 billion a year if we just refinance our debt to zero interest. If we sell treasury securities now at zero interest and use that money to buy back outstanding securities sold at a higher interest rate, we can refinance our national debt and strongly cut expenses. This makes the stimulus spending budget neutral over two years and allows further spending if needed. We really can't do anything more productive for our future prosperity than invest in renewable energy and education. Refinancing now during a window when we can borrow at zero interest would seem to be a very prudent way to assure the ability to make those investments.


Chris Dudley said...

I've been making a few comments on Paul Krugeman's blog and opinion pieces from time to time. Not too long ago I got an Editors Choice for discussing the idea that instead of giving banks bail out money, we should just set the federal funds rate negative for a few months to get lending going again.

But, I'm now on my third try getting this idea into comments with the third attempt still held up in moderation here.

"We will almost certainly do differently than the Japanese did, better or worse, because we are quite different. When our currency goes up or down, the whole financial picture of the whole world changes. Not too long ago we were talking about petrodollars and would the China shift its reserve currency. But now people want our treasuries so badly that they’ll accept a very low interest rate. Those are considerations that Japan did not face and so we really have a different situation.

One thing that is different that I think I’ll try mentioning again, even though your moderators have dinged it twice now, is that we could cut the federal budget by perhaps a quarter trillion dollars by just refinancing our national debt at the new low interest rate that is available to us now. If we buy up 5% treasuries with money we get from selling 2% treasuries we can cut the interest that we pay on the national debt substantially. This would free up more money for economic stimulus or coming to the rescue of the FDIC when the zombies start to lie down in their graves.

Compared to the Japanese we have more options even if we also have more risks."

And the last two attempts having disappeared from the face of the earth.

Given that Krugman emphasized in his Nobel Address the need to listen to the gentiles (non-economists) this apparent censorship seems a little strange.

There may be something wrong with the idea, but would it not be better to say so openly rather than trying to suppress it?

Chris Dudley said...

I called the Senate Finance Committee at (202) 224-4515 and asked if it was legal for the US to buy its own treasuries and the answer was no. I know the Fed buys and sells those instruments but perhaps the Treasury cannot. This seems strange so I'm going to try to find out more.

Chris Dudley said...

Well, Krugman's blog did publish the comment so that is good. I spoke with the Department of the Treasury and what they had to say is that the Treasury cannot, by law, act like a financier in the open markets. So, the Senate Finance Committee is basically right. However, the Treasury has run buy back programs in the 90's when there was a surplus and it might be able to do that kind of thing again. However, the idea of issuing debt to buy debt might make some uncomfortable and could run afoul of Treasury policy. Buy backs can be initiated by the executive branch but in the present circumstances, congressional action might also be needed.

Bold, persistent experimentation!

Chris Dudley said...

It does seem to be a habit on Krugman's blog not to follow the comment procedures of the newspaper. Here is a link to what appears to be a censored post of mine. Anyone else (aside from Obama) getting picked on?

"My grandfather was a banker who helped see the Bank of New Hampshire through those times. So, I’m not going to make any claim that I understand things now better than he did then.

I am going to say that the policy response seems much quicker at present and yet there does not seem to be a response that pulls us away from the historic trajectory. Either the policy response is ineffective (or worse) or it is working but the underlying situation is worse than in 1929/30.

Eichengreen and O’Rourke say time will tell, but I think we can say this much now since monetary policy, at least, has had time to work. I’d urge looking at even stronger monetary policy such as setting the Fed target interest rate negative so that we can continue to use our most powerful tool in this situation."

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