Talking about wanting to lock in those low rates while you still can?!
The U.S. government is considering the development of a 50-year bond…so it can ensure it can borrow money cheapy for the next half a century.
That’s right. Half a century. 50-years.
Introducing the 50-Year LONG Bond
At Janet Yellen’s Senate confirmation hearing Tuesday, the soon-to-be Treasury Secretary got Wall Street talking after she sounded receptive to the idea of a 50-year debt instrument.
According to the former Fed Chair,
“there is an advantage to funding the debt, especially when interest rates are very low, by issuing long-term debt, and I would be very please to look at this issue and examine what the market would be like for bonds of this maturity.”
It’s kind of like a homeowner “locking-in” a 30 year mortgage. Only, in this case, the U.S. government is the homeowner, the loan is a a very long one, and the “bank” is made up of the investors that purchase the securities notes.
Sure, the government will have to pay a little more in interest (just like when a homeowner opts for a 30-year-fixed instead of a 15-year mortgage) but, the advantage is: these extraordinarily low interest rates will gets locked in for an additional 20 years.
How A 50-Year Treasury Bond Would Work
If implemented, the 50-year note would mean the U.S. government would borrow money from investors (including countries like China) at theoretically very low rates for half a century. While the U.S. would be responsible for the interest on the loans (minimal given the already low rates) the total bill of the amount borrowed wouldn’t come due for FIFTY YEARS.
This will enable our government to borrow even MORE money in the coming years…without the threat of having to pay it back for half a century!
More Spending, More Debt
On the one hand, it’s smart. Hey, if you’re Janet Yellen–and you know the U.S. needs money–why not lock in the low rates while you can?
Nonetheless, one must consider the unintended consequences of such a set-up…and ask: is this really the best idea for the American people?
If we had a government that was disciplined and actually planned to pay down our existing debt levels, then I’d say, “Go for it! Lock in these rates!”
But… let’s face it. Our government has NO discipline. And, no plan to pay off the already $27 trillion in debt. As contributing economic columnist Neil Grossman writes, we run the risk of turning into Japan. Low rates forever…and low growth FOREVER.
As such, there’s a certain danger in empowering Washington with the ability to borrow more money– it’s like giving the kids the keys to candy store. There will literally be NO incentive to enforce any fiscal restraint because the bills won’t come due for 50 years! So, we keep kicking the can down the road, as they say.
Politicians Have No Incentive to Slash Spending
From politicians’ viewpoint–the more cash you can flush through the system, whether it be through direct payments or massive government programs like student loan forgiveness, the more votes you can buy.
Meanwhile, I don’t know about you…but, I wouldn’t be too happy about purchasing a 50-year fixed vehicle in my portfolio right now. Afterall, the more money they print, the more our U.S. dollar declines in values.
Inflating Our Way Out of Debt?
But, perhaps that’s the idea. MAYBE, just maybe, there’s a method to the madness?
A private equity investor told me years ago he thought the U.S. would try to INFLATE its way out of debt.
The 50 year vehicle, combined with massive money printing, could be just the beginning.
If that’s the case, all of us… as well as our biggest bondholder–China—may ultimately realize that in 50 years, $27 Trillion just ain’t what it used to be.
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