Tags: Summers | Governments | Borrow | Money

Larry Summers: Governments Should Borrow More Money, Not Less

Monday, 04 June 2012 09:04 AM

Former U.S. Treasury Secretary Lawrence Summers says governments with good credit should borrow more money.

"Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more not less," Summers writes in the Financial Times.

"They can also invest in improving their future fiscal position, even assuming that no positive demand stimulus effects are likely to materialize."

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"At a time of negative real rates, accelerating any necessary maintenance project and issuing debt leave the state richer not poorer; this assumes that maintenance costs rise at or above the general inflation rate."

Many in both the United States and Europe are arguing for further quantitative easing to bring down longer-term interest rates, notes Summers.

“This may be appropriate given that there is a much greater danger from policy under-reacting to current economic weakness than from it overreacting,” he says.

“However, one has to wonder how much investment businesses are unwilling to undertake at extraordinarily low interest rates that they would be willing to with rates reduced by yet another 25 or 50 basis points.”

Summers says it is also worth questioning the quality of projects that businesses judge unprofitable at a -60 basis point real interest rate but choose to undertake at a still more negative real interest rate, and whether extremely low safe real interest rates promote bubbles of various kinds.

Reformer.com reports that interest rates on U.S. government treasury bonds spiraled downward last week as investors, deeply fearful of events in Europe, sought a safe haven for their money. Both the U.S. dollar and Treasury bond prices spiked higher as investors shunned risk.

Editor's Note: How You Lost $85,000 During the Last Decade. See the Numbers.

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