Tuesday marked a chaotic day in international bond markets, in which most of the world’s richest countries saw investors eager to snap up their debt, which pushed interest rates to some historic lows.
Here’s the Financial Times’s roundup:
German 10-year Bunds traded at interest rates below zero for the first time after Japan’s benchmark fell to a new low of minus 0.185 per cent. As the 10-year gilt yield recorded a new low, 30-year UK government debt dropped below 2 per cent for the first time.
In Switzerland almost the entire market for Swiss government debt had fallen below zero, with 30-year debt offering an annual yield as low as 5 basis points. The US 10-year Treasury note yield at 1.6 per cent was on course for its lowest close since 2012.
The FT attributes this to investor worries about the UK potentially leaving the European Union, possibly unleashing some kind of international economic catastrophe. That might be right, though it’s a little hard to see why the consequences would reach as far as Japan.
But if the exact cause of the bond boom is a little unclear, the right course of action is really pretty obvious: If the international financial community wants to lend money this cheaply, governments should borrow money and put it to good use. Ideally that would mean spending it on infrastructure projects that are large, expensive, and useful — the kind of thing that will pay dividends for decades to come but that under ordinary times you might shy away from taking on.
But if you don't believe there are any useful projects or if your country’s political system is simply too gridlocked to find them, there are easy alternatives. Do a broad-based tax cut, for example. In the United States, that would be a cut in Social Security taxes that are paid by every single worker in the country. In Germany or the UK, it would be a cut in the value-added tax that’s paid by everyone who buys anything. Either way, it would mean higher real incomes and real consumption and hopefully an increased pace of business investment.
The opportunity to borrow this cheaply (probably) won't last forever, and countries that boost their deficits will (probably) have to reverse course, but while it lasts everyone could be enjoying a better life instead of pointless austerity.