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Shiller: Governments Ought to Borrow More

Friday, 19 Nov 2010 03:45 PM

Government efforts to rein in deficit spending don’t make sense because bond yields are at “rock bottom” after adjusting for inflation, according to Yale University professor Robert J. Shiller.

Five-year Treasury Inflation Protected Securities have yielded less than zero for almost two months. Yields on similar U.K. securities have been negative for most of that time.

“It is strange that so many governments are now emphasizing fiscal consolidation, when they should be increasing their borrowing,” Shiller wrote in a commentary posted on the Project Syndicate website.

“This would be an opportune time for governments to issue more inflation-indexed debt,” he wrote. As an alternative, he suggested bonds tied to nominal gross domestic product, or economic output before taking inflation into account.

“Opportunities for governments to do this exceed those of the private sector, which in many cases continue to be constrained by slow economic growth. Moreover, unlike private firms, governments can count as profits on their investments the benefits of positive externalities (benefits that accrue to everyone),” he wrote.

“Surely, governments’ levels of long-term investment in infrastructure, education, and research should be much higher now than they were five or ten years ago, when long-term real interest rates were roughly twice as high. The payoffs of such investments are, if anything, higher than they were then, given that many countries still have relatively weak economies that need stimulating.”

Negative yields on inflation-linked bonds indicate that investors expect the annual rate of increase in a price gauge, such as the consumer price index, to be greater than the yield on conventional debt with a similar maturity.

The U.S. Treasury sold $10 billion of five-year TIPS last month at a yield of minus 0.55 percent. It was the first time that a new U.S. government security yielded less than zero, a sign that investors expect the Federal Reserve to succeed in sparking inflation.

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Government efforts to rein in deficit spending don t make sense because bond yields are at rock bottom after adjusting for inflation, according to Yale University professor Robert J. Shiller. Five-year Treasury Inflation Protected Securities have yielded less than zero...
robert,Shiller,governments,Ought,Borrow,More
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2010-45-19
Friday, 19 Nov 2010 03:45 PM
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