Alan Blinder wrote in the Wall Street Journal last week:
Right now, the U.S. government can borrow for 10 years at under 2% per annum. At these super-low interest rates, you don't have to be a genius to find many public infrastructure projects with strongly positive net present values. Borrowing to make such investments will enhance long-run growth, not retard it. And I can't, for the life of me, understand why we are not doing more of it.Similar sentiments have been expressed recently by other credentialed luminaries in the economic firmament. Perhaps I can explain to the former vice chair of the Federal Reserve, in terms even he can understand, why it would be brain dead stupid to pursue his idea. Of course, given that the idiotic cash-for-clunkers disaster was his brain child, I'm not sure my powers of explication are up to the task.
Let's start with the end in mind and proceed. Blinder's argument simply boils down to Pogo's admonition as edited by me -- we have met the sucker and he is us. He says that the US government should borrow lots more money because we have found a sucker willing to lend to us at really low rates. The problem with that is the identity of the sucker. He's the US government.
As Blinder knows full well, the Fed is bidding down interest rates on Treasury debt by bidding on it with massive quantities of printed money. That is, not money that has been raised by taxes and not money that has been borrowed from actual lenders, but rather money simply created from thin air by strokes on a computer keyboard. In the old days, it would have been wheelbarrows full of printed green paper. Currently, most of the debt sold by the Treasury is being purchased by the Federal Reserve. The government is lending to itself. In essence, it is paying its bills by simply printing more and more new dollars. The fact that Ben Bernanke has chosen to bid rates under 2% has no particular significance. He could just as easily bid them down to zero, if he chose. Doing so would clue in more people that the current market is a scam, so he doesn't. But he could. He simply prints all the money that he needs to buy up all the debt the Treasury cannot sell.
Blinder knows this. He has to. So why does he think it is such a great idea for the govt to spend lots and lots of monopoly money? He knows that such a policy will produce very high inflation. He knows that if the US ever gets back to a normal market for Treasury debt, all that added debt will require extremely high interest rates to find genuine buyers.
I can only think that he is trying to fool the American public with an argument he knows is utter crap. Either that, or he's an idiot.
UPDATE -- reading this post this morning, I think I could have made the point a little more clearly by simply saying this -- the government isn't actually borrowing money at these low rates. It can't. That's why the Fed has to print money to take care of the increasing Treasury debt.