The coronavirus pandemic has caused a surge in borrowing, at governments, companies, and households. Of these three, the numbers at the government level are the most spectacular – generating giant deficits all over the world.
Most of us grew up with the notion that large budget deficits are bad. At first, we believed that budget deficits caused inflation. Then we believed that they caused slow growth. Either of these may be true; or both may be true, depending on how the rest of the economic landscape looks. Amid this uncertainty, there is one thing we CAN say: budget deficits are costing us less in this low interest rate environment. We looked at Treasury financings for every year from 2015 through the first four months of 2020. In the 2020 time frame, new borrowings are costing us less than 1% per year. Rates were low in 2015, but during later years, we typically paid twice as much on longer bonds, and slightly more than 1% on bills. Furthermore, every month, older bonds on which we paid high rates are maturing and being refinanced at much lower rates. The public is benefiting much like you might if you refinanced your home loan from 3.75% to 2.75%.
As of May 2020, the average interest rate on all US debt – new and outstanding – had broken below 2% for the first time ever, putting the brakes on overall interest expenditures.
So while budget deficits are alarming, low rates are not only a benefit for current borrowings, we are also saving money on old debt. Some of that can reverse if rates rise from here, but a portion of our debt is in fact financed longer term, where savings will last for years. So if there was ever a good time for the US government to borrow, now is it.
Bonus fact: while we may worry we owe a lot of debt to China, that country’s holdings of US debt are just 5% of total outstanding debt. Japan owns slightly more, and the UK sits at third place. By far the majority of US debt is owned by Americans or our government itself.