Money has never been cheaper. Should Ottawa be borrowing more?

Posted on July 31, 2019 in Debates

Source: — Authors: – Opinion/Editorials
July 30, 2019.   Editorial

In May, Andrew Scheer did something remarkable for a Conservative Party leader. He announced that, if elected, he would be in no hurry to balance the budget. He promised that a Tory government would go through its entire first mandate without getting out of the red.

He did that because Mr. Scheer needs to put distance between himself and Doug Ford’s cut-happy Ontario government.

But there’s also a compelling economic reason not to balance the federal budget any time soon, although the Conservatives won’t ever acknowledge it. There’s even good reason to consider a quick shot of more borrowing and larger deficits. It’s connected to why the U.S. Federal Reserve is almost certain to lower its benchmark interest rate on Wednesday.

Governments in Canada, the United States and many other countries can borrow today at extremely low rates – interest costs that approach zero and that, when inflation is taken into account, are less than zero. Savers from around the world, worried about deflation, are paying Ottawa to take their money.

Fretting about the government of Canada’s relatively small deficit at a time such as this is like the captain of the Edmund Fitzgerald worrying about where to find a glass of water. The ship has big problems, but this isn’t it.

Why money is so cheap, and the world is awash in savings, is a bit of a riddle.

The job markets in Canada and the United States are close to full employment, yet long-term interest rates are lower than during the depths of the Great Recession.

The economy is near capacity and unemployment is extremely low – yet inflation isn’t rising.

And instead of money being expensive to borrow, as it should be at the end of a decade of expansion, and with the United States running deficits measured in trillions of dollars, it’s cheaper than at almost any time in recorded history.

The yield on the 10-year U.S. Treasury bond is just more than 2 per cent, or roughly the inflation rate. In Canada, the yield on the 10-year bond is 1.5 per cent, which is below the rate of inflation. Ottawa’s cost of borrowing is not much above nil – and if inflation remains around 2 per cent, Ottawa’s real borrowing cost is negative, at half a per cent less than nil.

In Europe, interest rates are negative in nominal terms. The German government can borrow for 10 years at minus 0.39 per cent.

The reason for this is something central bankers and economists are trying to get their heads around, and arguing over.

A little history: To get the economy moving after the Great Recession, drastic measures were taken. Deficits grew. The Bank of Canada slashed its benchmark short-term interest rate and Fed went further, buying bonds to push down long-term rates.

The economic recovery that slowly ensued is now a decade long in the tooth; at this point in past cycles, the Fed would have been raising short-term interest rates – and until recently, it was. But the market had other ideas.

This year, long-term borrowing costs have plunged. In late 2018, the yield on the U.S. 10-year bond was going up, peaking at 3.2 per cent. The Fed would have been happy to see it keep rising. Instead, the opposite happened. On Tuesday, it was 2.06 per cent. The equivalent Canadian bond was yielding just 1.5 per cent.

The market is betting on a future of too-low inflation and low or no growth. It is deeply pessimistic. The Fed and the Bank of Canada are likely to push back with lower short-term rates, even though that risks goosing asset prices more than the real economy.

Ultralow interest rates are a problem, but also an opportunity. Borrowing has never been cheaper. If the federal government were to increase borrowing, only for a short period and only to fund one-off items such as new education facilities or transit infrastructure, it could finance that at very low costs, locked in for decades.

In fact, if the Bank of Canada keeps inflation at 2 per cent, Ottawa would repay lenders years from now with less than a dollar for each dollar borrowed.

Public opinion is nervous about debt, and even more so about politicians’ capacity for self-control, so don’t expect to hear talk about this during the election. But the fact is that money is now on sale. And if all goes well, we will never see prices like this again.


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