The United States’ Treasury Inflation-Protected Securities (TIPS) – bonds that are indexed to inflation – are one of the primary mechanisms for the US to finance its debt. And right now their five, ten and twenty year rates are all negative. The US can borrow money for free – actually, for a profit. Investing in US debt is so attractive, and interests rates are so low, that investors are essentially saying, “We’ll give you $100 now if you give us $99.20 in 10 years.” Investors are paying the United States Government to watch their money. Why is that?
This chart offers an explanation. The US is the safest investment of the major economies right now. The EU economies haven’t grown on aggregate in over a year; Britain might finally be getting out of recession; Japan is slowly sinking. Paul Krugman offers an explanation:
What accounts for the differences? The most obvious culprit is austerity, which has been much more marked in Europe and the UK than in the US. Here’s the IMF’s estimate of the cyclically-adjusted primary balance — what the budget balance excluding interest payments would be if the economy were operating at full employment. Europe and the UK have fully reversed any stimulus introduced during the crisis; America has not.
The US should not be pursuing policies of austerity; we should not be slicing spending. Through borrowing free money, and spending it on infrastructure, education, research and development, or insuring that if workers lose their jobs they won’t lose health coverage – a social safety net is vital for a functioning capitalist economy – we can continue the recovery. Austerity and budget cuts are not the answer right now. Prudent legislation that responsibly curbs spending in the long-term, like in our broken, increasingly expensive health care system, would be a good start.