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Sunday, January 24, 2021


Biden wants to spend $1.9 trillion to address a variety of problems caused by the vaccine. Needless to say, Republicans are now objecting to spending so much money that the federal government does not have. It is worth asking what such an expenditure will actually cost the government.


Since the government does not have the money, it must borrow it. It does this by issuing IOUs which are called treasury bills and treasury bonds. In order to entice people with money to lend it to the government, the government must offer to pay them. Since the gimlet eyed wonks who handle these matters are constitutionally stingy, they pay as little as they can get away with. Currently the U.S. Treasury is paying a rate of 0.13% on two year treasury notes. That means that to borrow $1 trillion, it must promise to pay back $1,001,300,000,000 in two years.


However, there is a catch. The treasury borrows the money in January 2021 dollars, but it does not pay the lender back two years from now in 2021 dollars. Instead, it pays the lender back in 2023 dollars. So we have to factor in the rate of inflation to see whether those future dollars are worth more or less than current dollars and if so by how much.


Well, as Yogi Berra noted wisely, it is difficult to make predictions especially about the future but we can at least ask what the current rate of inflation is. That is something we know, and with a little searching around on the web we find that the current rate of inflation is 1.4%.


This means that lenders around the world are actually paying the U.S. Treasury 1.27% of their money for the privilege of being permitted to lend it to the United States! Unless the United States goes into a serious depression economically (I am of course not speaking about emotions) and suffers a negative rate of growth, the United States can make out like gangbusters by borrowing money at these rates.


We have not yet asked what the US government plans to do with the money it is being paid to borrow. If it invests that money productively by giving it to individuals who will go out and spend it or to small businesses that will use it to generate revenue by staying open, then some of what the government spends will come back to it in the form of tax revenues. It is above my pay grade to figure out how much that is likely to be, but since the government is already been paid to borrow, any tax revenues that are generated by its expenditure of the money it has borrowed is just gravy.


I know next to nothing about these matters and yet even I can figure this much out, so why is Mitt Romney, who made a fortune at Bain Capital, complaining that it is too soon for the federal government to undertake such large expenditures as those proposed by Biden?


David Palmeter said...

Your not-so-favorite economist, Paul Krugman,has been making this argument for a long time. I especially like the fact that the stimulus, by creating jobs, will create income, which will be taxed and the taxes will more than pay the interest. Keynes would love it.

Anonymous said...

I have a stupid question, because economics is not my area.

If another country asked the United States to lend it some $1 trillion, the U.S., I assume, would reply, “We currently don’t have that kind of money to lend.” So where can the U.S. go to borrow that kind of money? The economies of other countries are suffering just as much, if not more, than the U.S. Can they get this kind of money from banks or hedge funds at such a low interest rate, if it means, as you say, that the banks would essentially be paying the U.S.? That would be a bad investment. Would the World Bank led the U.S. this kind of money at that rate? What am I missing?

Robert Paul Wolff said...

It is not a stupid question at all. The answer is that there is an enormous amount of money washing around the world looking for a place to go, by some estimates as much as $30 trillion. People or governments, for that matter, with that kind of money looking for a home are actually willing to pay something for the security of knowing that when they want it it will be there. The United States, as the richest country in the world, offers that sort of security.

Anonymous said...

Here’s a follow-up question. If the appeal of lending to the U.S. is that they know it will be there when they need it, why don’t they just keep it, and then they’ll know it will be there when they need it? Is the answer that, if they keep it, due to inflation it will be worth less, and that by lending it, with the interest they are receiving more than if they just kept it? But since they are being paid back with inflated dollars, they still wind up paying the U.S. for the privilege of knowing that it will be there when they need it. You can see why I economics is not my area.

Anonymous said...

Sorry, one more follow-up question. Is the U.S. competing with other countries to borrow these amounts of money, which perhaps pay a higher interest rate than the U.S., e.g., how much do Great Britain, France, Germany pay to borrow money, or don’t the borrow money? If they do, then wouldn’t the lenders prefer to lend to countries which pay a higher interest rate than the U.S., and which they know are stable enough that these countries will also be there when they need it? (This is my last question, I promise.)

Robert Paul Wolff said...

All good questions, no apologies necessary. Huge amounts of the money are in private hands, often in countries with unstable polittical or economic regimes. Security counts for a great deal. I do not know how much Great Britain, France or Germany pays to borrow money but "stable enough" is very often not stable enough for the holders of these large sums of capital. Obviously the most rewarding thing to do with the money is to invest it in productive enterprises but if there is a shortfall of effective demand – if people are not buying enough stuff – then that is not an attractive option. The central problem is that capitalism, as I have frequently observed, exists for the purpose of extracting a surplus from economies and it is enormously effective at that fundamental task. The problem is that the owners, once having extracted their profit, have to find someplace safe to keep it and when you are trying to find someplace to put half $1 trillion, the mattress on your bed is probably not going to suffice. Capitalism is quite efficient at generating surplus but nobody except its apologists ever claimed it was rational

marcel proust said...

One key point is left out of all these questions. When the US government borrows the money, officially it borrows it from the Fed. The Treasury department sells bills or bonds to the Fed and the Fed, acting as a bank, credits the Treasury's account at the Fed. Then the Fed turns around and either sells the bills/bonds on the open market or holds onto them, collecting the (eventual) interest.* Because these bills/bonds are denominated in dollars, which the Fed creates, it is difficult to imagine how the US government could become bankrupt.** This is a very different situation from when the dollar was tied to gold and government debts had to be repaid in gold if the borrower insisted on that.

Other countries are in a similar situation, if/when they borrow in their own currency. However, because the dollar plays a unique role in the international economy, it is commonly the case that they can borrow only in dollars, which for them plays much the same role as gold once played for all.

When the Euro was established, it was imagined that it would compete with the dollar before too long, that much of finance would be conducted in Euros and that European countries, or at least the EU itself, would have many of the same advantages that the US has. The track record of the EU and the Euro following the GFC of 2008 has put that dream on hold. I believe that the Chinese Yuan is widely thought to be the next competitor currency on the horizon, but that the legal and financial systems have to become more robust and durable before that actually happens.

*Some of that interest it uses to fund its own activities. The remainder it turns over to the Treasury!

**Well, we can easily imagine how it can become bankrupt morally or intellectually, but not so much financially.

Anonymous said...

Prof. Wolff,

Good answers. Thank you.

Your answers provide another reason for despising Trump (as if there were not already enough). By instigating his supporters to mount an insurrection on our government, this financial genius compromised the U.S.’s ability to borrow the amounts of money it needs, since the insurrection could have raised doubts regarding the stability of the U.S. government, making it less attractive to lenders to believe that if they lend us the money, it will be here when they need it.

Anonymous said...

Marcel Proust,

This stuff is so complicated.

You state that it is the U.S. Fed. which lends the money to the U.S. Treasury, and then sells the bonds on the open market. But what is the Fed. lending to the Treasury? If it already has the money, and the Fed. is part of the U.S. government, then the U.S. does not have to borrow the money. Does the Fed. just print the money? I assume not. But then the Fed. does not have the money to lend to the Treasury until it finds buyers for the bonds. But then you say that the Fed. may just hold onto the bonds. But still, where is the money coming from to lend the to the Treasury?

This is all starting to make my head spin. (George Soros is obviously a very shrewd guy, since he seems to understand all of this and has turned it to his advantage.)

s. wallerstein said...

Trump did not do any permanent damage to the ability of the U.S. government to borrow money because 0.13% is a very low interest rate. The markets trust Biden, that's for sure.

One reason for an investor to accept a very low interest low, say, 0.13%, is because he or she is gambling on the exchange rate. Let's say that I'm fairly sure that the value of the dollar will appreciate relative to the Chilean peso during the next two years. So I exchange my Chilean pesos for dollars, park them at 0.13% for two years and then rebuy Chilean pesos at an exchange rate which will give me many more Chilean pesos for my initial investment in dollars plus 0.13% interest on that. By the way, 0.13% isn't so bad these days for an interest rate in a stable currency: interest rates are negative for the Swiss franc.

marcel proust said...

Yes. This is not the place for a lecture on money and banking, but effectively, the Fed just prints the money. In reality, that is not quite what it does, but that is a simple and (very) rough approximation of what it does. And it can do this in our economy because of the dollar's central role in the international economy. Unlike the currency of nearly every other country, the demand for dollars (or rather dollar based assets like US govt. bonds and bills) far outstrips the need for them in our economy. People, firms (both non-financial and especially financial) and other governments wish to include dollar denominated assets in their portfolios.

marcel proust said...

(my last comment was in response to Anonymous at 10:48 AM).

Ridiculousicculus said...

Anonymous - you might be interested in the late David Graeber's Debt: The First 5,000 Years. Economists quibble with various elements of the book (it's written for a general audience) but it lays out a historical/anthropological argument that puts lots of your questions in a helpful context and offers answers for them.

Anonymous said...

s. Wallerstein,

Interesting. But what you have pointed out indicates that there are two counter-forces at work regarding the future value of $1.00. Due to inflation, at the rate of 1.4%, $1.00 in the future may only have the value of $.989 today. At the same time, as you indicate, the value of the $1.00 as against other currencies may increase. Which force is greater?

For example, the U.S. wishes to borrow $1 trillion. Let’s say it wishes to finance the entire transaction via the Chilean peso. I do not know what the current exchange rate is, but, for the sake of argument, lets say the exchange rate is 2 to 1 – each U.S. $1.00 is worth 2 Chilean pesos. So, in order to borrow $1 trillion dollars from Chile, the U.S. has to borrow 2 trillion pesos and the U.S. issues Treasury bonds to Chile worth $1 trillion, at 0.13% interest. If the value of the U.S. dollar increases in value as against the Chilean peso when the payment comes due, if that value exceeds the 1.4% rate of inflation hypothesized by Prof. Wolff, then the U.S. loses the benefit of the inflation rate by virtue of which, according to the hypothesis, Chile would wind up paying the U.S. for the opportunity to lend it money. So, for each dollar borrowed, the U.S. now has to repay Chile something in excess of the $1.00/2 peso exchange rate. Suppose the exchange rate has increased to $1.00/2.5 pesos, plus interest. In exchange for the 2 trillion pesos, the U.S. has to repay Chile 2.5 trillion pesos, plus interest, resulting in the U.S. having to repay its lender more than if only the inflation rate were a factor. Is what I am suggesting the equivalent of Voodoo economics and is this a consideration which would possibly be what concerns someone like Mitch Romney?

This is a problem with so many variables that it would require integral calculus to come up with the solution.

s. wallerstein said...

One more clarification.

Traders generally don't buy bonds and hold on to them for 2 years. They may not even hold on to them for 2 hours. They gamble on very small variations in the bond's price, because they handle sums of millions of dollars and so if a bond goes up 10 cents, they may make a million dollars. So for a trader the fact that a bond pays less than the inflation rate has no importance.

Anonymous said...

Marcel Proust,

But if the Fed. can just print the money to meet the U.S. finance needs, why does this transaction have to be clothed in the form of the U.S. borrowing money? If the U.S. dollar is such a reliable currency, why doesn’t the Fed. print the money without the appearance of borrowing the money?

s. wallerstein said...

One more variable is the rate of inflation of the Chilean peso. Traders work with computer programs these days.

marcel proust said...

In response to anonymous @ 1:19 PM.

historical reasons, I imagine. During the gold standard years, before the era of the dollar's supremacy, the Fed actually did have to borrow (or the dollar would likely lose value against gold, something the Fed was not supposed to allow happen).

Eric said...

I have not read Graeber's Debt: The First 5,000 Years, but skimming a Wikipedia article discussing it, I read that Graeber said (in the Wikipedia editors' words):
When the great empires in Rome and India collapsed, the resulting checkerboard of small kingdoms and republics saw a gradual decline in standing armies and cities. This included the creation of hierarchical caste systems, the retreat of gold and silver to the temples and the abolition of slavery.

I had not previously heard of the abolition of slavery occurring during those periods, so I'd like to find out more about that. (Although I suppose that being relegated to a Dalit-level caste might in some regards have been as bad or worse than being a slave in some societies.)

Eric said...

Since the government does not have the money, it must borrow it.
We have not yet asked what the US government plans to do with the money it is being paid to borrow.

The government does not have the money because the people who are the government refuse to tax the wealthy to whom they are beholden at a level that is sufficient to meet the people's needs. Far better to starve the government of funds so that it must borrow ... from those same wealthy.

Of course, the government could just cut expenditures on things like the Space Force; the 800 military bases scattered across 80 countries around the world; the thousands of US military personnel based in the Middle East; the numbers of bombs and missiles and fighter jets that are ordered each year. Each of those Tomahawk missiles Trump fired at Syria was estimated to cost $1.4 million.

But neither the Democrats nor the Republicans seem to be interested in any of those kinds of cuts. Tax cuts, yes. Military expenditure cuts, no. Majorities of both parties in Congress voted a few weeks ago against proposals to reduce the military budget by a mere ten percent; and Democrats just led the charge to block Trump from being able to reduce the levels of troops deployed in Iraq and Afghanistan.

All of the people making these decisions are themselves very wealthy. (Janet Yellen has made at least $7 million from speaking fees) They are so far removed from the worries of the masses of citizens who struggle to make ends meet day to day that there is no reason to expect the goal of the Biden admin or the Congress will be to enact policies to meet the needs of the masses rather than the desires of their own class.