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Real Interest On Government Debt Is Negative

By Matthew Yglesias on July 11, 2011 at 5:30 pm

"Real Interest On Government Debt Is Negative"

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Karl Smith observes that the flight to quality has become so severe that the real interest rate on some classes of government debt is negative:

Suppose the government had two choices. It could either pay for infrastructure improvements as it went along out of tax revenue or it could borrow money build the infrastructure now and then repay the money with tax revenues. Ordinarily the question would be, does the advantage of building quickly outweigh the cost of the interest. However, right now the interest cost is negative. The government saves money by borrowing now rather than waiting and paying cash. Let me say again because I have noticed that this goes against so much intuition that its hard for many people to wrap around when I first say it.

In a sane political environment, Washington would be obsessed with the question of how much can get done within this window. How many projects is it logistically possible to complete quickly enough to take advantage of the cheapness of debt. Instead, we’re attempting to resolve thorny and ideologically freighted questions about the long-term trajectory of the welfare state even though resolving these issues won’t change anything about the present environment. It’s weird. It’s sad.

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