Tags: consol | perpetual | bond | debt

Slate: Don’t Repay the National Debt, Issue Perpetual Bonds

Friday, 01 Feb 2013 08:12 AM

By Michael Kling

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Don’t repay the national debt, Slate says. Instead, we can use perpetual bonds, a British financial innovation from the 18th century.

The British in 1752 converted their national debt into consolidated annuities that became known as consols, according to the news website. The consols paid interest like regular bonds, but did not require the government to redeem them.

While the British created the bonds to reduce their annual debt service costs, the United States should use them to overcome political reluctance to take advantage of record-low interest rates, writes Matthew Yglesias, Slate’s business and economics correspondent.

Editor's Note: The Final Turning Predicted for America. See Proof.

U.S. government bond rates are so low that when adjusted for inflation, the 10-year Treasury yield is negative. Investors actually pay the government to hold their money. We should be taking advantage of low rates like that to finance public projects or to enact a large temporary tax cut to reduce unemployment.

“It’s time to take advantage of that to lock in today’s low borrowing costs. Forever,” Yglesias argues.

Despite low rates, worries about the deficit persist. A common argument is that no matter how low the interest rate, the principal must eventually be repaid.

Not with perpetual bonds, Slate argues.

Without offering a perpetual bond, there’s no way to know what rate people will pay for it, but with rates for 30-year bonds at record lows, it would not entail unprecedented borrowing costs.

We wouldn’t have to worry about hypothetical future refinancing issues.

“Instead,” he says, “we’d have a straightforward value question: Are the social and economic merits of additional borrowing worth the market interest rate or not?”

Paying higher yields that current Treasurys, the bonds would offer a needed option for investors who must now choose between low-yield bonds and higher risk investments, he says.

Keith Fitz-gerald, chief investment strategist for Money Morning, argues that Treasury rates are low only because of the Federal Reserve’s aggressive bond buying.

“As for low interest rates,” he writes, “bear out the presumption that more spending is okay, that notion too is badly flawed.

“Spending more money perpetuates the illusion of wealth by fueling borrowing. Borrowing, particularly at the government level, in turn strips capital from private markets and further bloats the public sector.”

Editor's Note: The Final Turning Predicted for America. See Proof.

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