Do you prefer to lend to those who will pay you back? No need to answer.
As repeated with great regularity in my upcoming book, The Deficit Delusion, money is ruthless. It must be since the genius of compounding is so substantial.
The truth about money speaks to how backwards the dollar, inflation, and government spending analysis is not just of former OMB director Peter Orszag, but also his opponents on the right. In a recent piece for the New York Times, Orszag wrote that “the almighty dollar isn’t looking quite as almighty these days, in part because America’s fiscal situation deteriorated significantly.” Without disagreeing with Orszag about dollar weakness shamefully desired by President Trump, Orszag’s analysis implies that investors go out of their way to get negative returns on their money.
How else to explain his assertion that the dollar is losing value because of a significantly deteriorated fiscal situation? If Orszag is to be believed, investors purchased Treasury debt that increased the national debt so that they could lose money. Not very likely.
As the genius of compounding yet again reminds us, a depreciating currency is much more likely to associate with less government borrowing, not more. If money is ruthless, and it is, it must be brutally ruthless when big amounts of it are at stake.
We saw this in the 1970s. While economists and pundits of the various religions continue to cling to the mythical notion of “exorbitant privilege” related to the dollar, in the 1970s those with actual dollars substantially raised the cost for Treasury to borrow them. This resulted in less, not more borrowing by the U.S. Treasury.
Total national debt in 1980 was $900 billion. Treasury paid 11 percent on 10-year Treasury notes for the privilege of borrowing. Add “exorbitant privilege” to the long list of myths promoted by economists.
Since 1980, U.S. borrowing has soared. And at lower and lower rates of interest. This runs counter to Orszag, and economists of the various religions in general. That’s why it’s so logical. As market trust in the dollar rose, so increased investor willingness to purchase income streams paying out dollars. In short, a vastly improved fiscal situation paradoxically (but also logically) revealed itself with more borrowing from the U.S. Treasury.
To be clear about the borrowing, none of it is an endorsement of government spending enabled by taxes, borrowing or both. Government spending is the biggest tax on freedom and prosperity of all. At the same time, it’s just a reminder to readers that when Orszag et al claim that rising debt weighs on the currency that the debt represents, they’re claiming ferocious amounts of market stupidity.
In response, Orszag will perhaps point to the recent increase in the yield on the 10-year Treasury. He does in his opinion piece, and it’s certainly true that in the past two weeks the rate on the 10-year has risen to roughly 4.5% from 4.3%. A market comment on fiscal deterioration as Orszag claims? Not likely both logically and empirically. Lest Orszag forget, as recently as January of this year, the yield on the 10-year was 4.7 percent.
It’s a fool’s errand to comment on near-term movements in the rates on the most owned income streams in the world. No one knows anything, or something like that…
All we know is that money is once again ruthless. Since it is, we know that contra Orszag and his opposites, government borrowing is a signal of reduced inflation pressures alongside improving fiscal conditions.
