A funny thing happened on the way to the bond sale. It was naturally controversial when Minnesota’s bond rating was lowered. Undoubtedly the state will pay higher interest rates on its bonds as a result, with the new 20-year bonds carrying a 2.82% interest rate. Here’s the funny bit: a year ago, with the higher rating, Minnesota paid 4.3%. Have investors lost so much faith in the ratings agencies that they treat them as a counter-indicator? That would have been a smart investing strategy during the housing bubble, but no. Interest rates have just fallen that low. Even downgraded as a consequence of the shutdown and kicking the fiscal can down the crumbling road we can’t afford to fix thanks to GOP taxophobia, Minnesota spays a lot less interest than just last year.
What prompted this post was actually something Paul Krugman wrote on his blog yesterday. He was actually writing about Japan and Japanese bonds having higher yields than ours when he wrote, “If you look at the Treasury real yields, the interest rate on US 5-years indexed to inflation is now around -.5, that’s right, minus 0.5.” The link is Krugman’s. It points to the Treasury Department web site list of bond yields. “Yield” is the difference between interest on the bond and projected inflation. If the interest rate was 10%, and inflation was 8%, the yield would be 2%. A negative number means Treasury is offering an interest rate on five and seven year bonds so low, that it’s less than projected inflation — and investors are STILL buying them! Yes, after factoring in inflation, investors are losing money on the shorter term bonds, and not making much on the longer term bonds. Is inflation that bad? On the contrary, it’s dinky, and we should be more worried about deflation.
So the state can borrow very cheaply, and the feds are essentially getting paid to safely hold on to bond buyers’ money. Unemployment remains high, contractor bids have been low, and there’s plenty of work to be done. we’re nowhere near “pay people to dig holes and fill them up again” time. We already have the holes. We need them filled. What I hope is screamingly obvious by now is governments should be borrowing heavily right now. The state needs a huge bonding bill next session, and the federal government needs another recovery Act. Obama’s proposed jobs bill will help, but it suffers from the same problems as the recovery Act: too small, too large a proportion is tax cuts. Probably that’s to make it more politically palatable, which maybe is the tragedy of it. It had to be weakened below effectiveness in order to please the people who don’t understand it and don’t want to.
The state bonding bill last session too, great as it was Gov. Dayton managed to get the Republicans in the legislature to accept an extra bill, it was half the size he originally proposed, and an opportunity is being thrown away because of Republicans who don’t get how bonding works.
Just to hit it again: we can borrow money just about for free at a time when unemployment is high, bids are low, and plenty of work needs to get done. How much clearer can the case be?