Touch the Soil News #425
(An Editorial by Benjamin Gisin)
In celebration of the 4th of July, 2016, we can be thankful as we look around the world – chaos in Great Britain (EU exit issues) and Brazil, a nation of 210 million on the edge of economic calamity. Out of the chaos in Great Britain comes an idea on how the U.S. might pay off the national debt.
On the heels of the UK vote to exit the European Union, two financial rating agencies (Fitch and Standard & Poor’s) proclaimed the UK is now a higher credit risk. As punishment for being a higher credit risk, Fitch and Standard & Poor’s said the UK should have to a pay higher interest rate on its national debt.
The first thing any citizenry should do is ask the question: Who do Fitch and Standard & Poor’s think they are in proclaiming the UK citizens should have the burden of their debts increased?
In a classic victory for UK citizens, Fitch and Standard & Poor’s proclamation turned out to be nonsense. Given the uncertainty surrounding the UK exit from the EU, investors with billions at stake, fled to invest their money in a safe place – the UK government. With more dollars wanting to lend to the UK, the interest rates the UK government has to pay actually went down.
Governments who historically have borrowed money have, since 2008, often been called on to be a safe haven for investors. Providing a safe haven for investors may be a service the government can charge for in future times of uncertainty. Instead of governments paying to borrow money, investors might pay to keep the principal intact.
Yes, the government does need money – often times beyond budget revenues. However, since 2008, the world has had to face the fact that there are more investment dollars out there than there are adequate safe investments. This “state” of overcapitalization (more capital than economies can absorb) creates a landscape of excess investment dollars – an oversupply the nation should assess. Generally, an oversupply of investment dollars is an indication there is an undersupply of dollars for economic spending by consumers.
Should the U.S. Government capitalize on this “state” of overcapitalization? For this service, the money given to the U.S. government earns no interest and – for extended periods of time, might well be at a negative interest. This is a door of opportunity to get the national debt under control. This action should not be confused with actions on the part of the Federal Reserve adopting a negative interest policy. This action is simply a supply and demand situation – more investment dollars to lend than what borrowers need.
In the past, the U.S. Treasury experienced the same thing as the UK is experiencing now – large volumes of money looking for a safe haven. Between 2009 and 2011, the U.S. Treasury (via 4-week Treasury Bills) borrowed over $1 trillion at zero percent interest. Even today, there are often more than three (3) dollars willing to lend for every one (1) dollar the government need (see Info Graphic #1).
For every dollar the U.S. Government needs to borrow, often times there are more than three (3) dollars willing to lend it.
The U.S. Treasury might test the waters (as might other governments) and create a product for “principal protection” and begin helping investors – for a charge, of course – in keeping their principal intact. In times of economic uncertainty – when investors flee the private sector and seek a governmental safe haven, the public should be paid for it- not punished. It’s just good business.