Right Time to Improve Infrastructure
The United States better get up off its fat duff right now if it wants to create jobs affordably through national infrastructure investments.
Its like the weather, everyone talks about national infrastructure projects as a primary solution for our economic ills, but nobody does anything about it.
There is no time left to waste. Either do it now or get off the pot!
Fifteen days ago, London’s Financial Times reported that investors are lining up to dump U.S. Treasuries in favor of more lucrative investments.
“Scramble to Sell US debt as yields hit record lows”
– Financial Times, Nicole Bullock and Vivianne Rodrigues, 3/5/2012
The effects of that stampede are already beginning to be felt.
Invest right now because U.S. Treasury bond yields are at or near all-time lows.
Back in 1990 yields were at almost 9%. The federal government had to pay 9% interest on money borrowed to finance its debt. Today that interest rate is at around 2%. Thats a bargain. Borrowing is never gonna get cheaper!
This is the perfect moment to make desperately needed repairs to this nation’s aging 20th century national infrastructure. Doing so could create millions of jobs and leave us with support and delivery systems fit to energize a 21st century economy.
How Bond Interest Rate Yields Normally Work
One measure of the strength of a nation’s economy is the interest yields paid on securities bid on by investors that finance a nation’s debt.
The benchmark standard is usually the nominal yield paid on 10-year bonds as shown above.
Under normal conditions, economic strength is inversely proportional to yields. That is, the stronger a nation’s economy the lower the yields it has to pay on its bonds. Low yields means investors are very confident that a country is stable and will easily pay its bills.
Nobody has confidence in Greece so their bond yields are bid up higher than Mt. Everest.
Its just like high-risk home buyers who have to pay a higher mortgage interest rate than someone with better credit. Its one of those free market thingys.
An Economic Oddity
Though showing weak vital signs, the U.S. economy is still on life support and in the ICU. We are in terrible shape. So why are U.S. Treasury yields at all time lows? They shouldn’t be.
That, folks, is the global economic oddity of our time! Here are some precarious reasons why:
- The U.S. dollar is the currency of world exchange
- Europe’s economy tanked even worse than ours
- There is nowhere else for large investors to park money
As the currency of world exchange the dollar has special advantages over other currencies. The world is vested in maintaining the dollar as a stable and strong currency. Europe is in chaos. With the EU itself threatened, nobody wants to rely on the Euro for anything. Asian economies, though strong, are still chaotic and unreliable.
Europe’s economy is worse off than ours so nobody sees it as a safe place to invest. Japan is still reeling from last year’s tsunami. China and east Asian economies are strong now but notoriously volatile and dependent on the the United States and the west as their product markets.
Astounding in the above chart is 2008 when U.S. bond yields actually DROPPED significantly as global recession gripped the planet… counter to normal economic expectations.
Nobody really likes it, but financing U.S. federal debt is about the only safe haven to park a few trillion that countries and super large investors might have laying around until the economic storm clouds lift.
Times, They Are A Changin’!
The gravy train can’t last forever. In the topsy-turvey world of economics, what goes down MUST come up! As the world economy recovers, Treasury yields now down will necessarily go up.
Note in the above chart… signs that it is beginning to happen are showing up this very month.
Since the Financial Times article on March 5th, just 15 days ago, yields on 10-year bonds has went up nearly 18% from 2.00% to 2.39% and it looks like a trend may be emerging.
Once there are other safe places to invest then large investors, like China, will flutter off elsewhere for better returns on investment again.
China, soon to be the world’s largest economy, has already jettisoned the U.S. dollar as its currency of world trade. That threatens the U.S. dollar’s favored world trade status.
As Europe recovers they will concentrate on bolstering their own economies instead of subsidizing U.S. debt.
Then suddenly everyone will notice that U.S. sovereign debt is growing at breakneck speeds and holding the U.S. economy down like a lead zeppelin.
These things will all combine to raise U.S. bond yields significantly, making it more and more expensive for the U.S. to borrow, perhaps even returning back to 1990 levels.
Federal spending is a toxic subject on the 2012 campaign trail. This nation is hemorrhaging debt to the tune of $4-$5 billion a day as is. That is a serious problem.
Raising taxes in a recession is the economic kiss of death to recovery, yet that is exactly what we face at the end of this year for literally every American. Cuts in spending will be necessary. Where has yet to be decided.
For infrastructure investment that leaves more borrowing as the only option, even at the risk of growing the national debt.
The time to invest in much-needed infrastructure improvements at affordable rates is beginning to fade. If we don’t act fast we might not be able to afford it later.