Barry Ritholtz writes: Every once in a while, there is a way to resolve a host of problems that is so obvious it gets overlooked.
With that in mind, let’s have a look at four big problems: crumbling U.S. infrastructure; federal budget deficits; normalizing U.S. monetary policy; and the shortage of investment-grade debt.
There is a single solution to all of them: Issue more long bonds, preferably 30- to 50- year securities.
Any rational, intelligent and prudent person would of course take advantage of prevailing ultralow rates to refinance this financial obligation. It’s fiscally conservative, it will save trillions of dollars, and it will allow the U.S. deficit to get paid down that much faster.
The main obstacle is the U.S. Congress, a collection of preening peacocks who really don’t care about the deficit.
How do we know this? Have a quick look at their past votes. Look at how they voted for unfunded tax cuts in 2001 and 2003. Tally their votes for an expensive war of choice in Iraq. Look at how they cast their votes for unfunded entitlements such as Medicare Part D. These votes reveal that most of the people currently complaining about the deficit have no interest in reducing it. They are merely using the deficit as a tool to pursue their partisan ideology.
You can do this with any issue — from Barack Obama’s stimulus plan in 2009 to George W. Bush’s Medicare Part D.
Placing political party over country is standard operating procedure; it is unacceptable.
There is a widespread belief that the Fed can achieve the same result by simply selling the $4.18 billion fixed-income securities on its balance sheet. But that would be potentially disruptive, possibly causing an economy-crushing spike in rates. The more prudent approach is to simply let those holdings — with an average duration of about seven-years — run off as they mature. That would be the least disruptive method for the Fed to unwind the bond purchases stemming from its program of quantitative easing.Hence, we see that a variety of serious issues can be resolved by simply refinancing the country’s debt, issuing more paper and maintaining and rebuilding the U.S. infrastructure.
