David McWilliams and Aidan Regan on using low interest rates

From Saturday’s The Irish Times, David McWilliams writes:

Luckily for us, there is no financial constraint for a craic bailout. The ECB has set interest rates to zero. The NTMA borrowed billions this week at negative interest rates. This means that money is free.

The State needs to spend when the private sector is saving, which is what is happening now. The country should issue a perpetual bond, as George Soros is advising the EU to do, or a 100-year bond as Austria did two weeks ago, to cover spending.

At zero interest rates and with the ECB ready to buy whatever the government issues, fiscal policy becomes monetary policy. This means the Government just issues IOUs, gets the money and can spend the money whatever way it chooses. A craic bailout should be first on the list.

And in the Sunday Business Post, Aidan Regan proposes:

Here’s how it works. The government issues a 20 year fixed interest rate bond that amounts to the equivalent of 10 per cent of gross national income. This equals around €30 billion. The Irish state could issue this type of long term bond tomorrow at effectively zero per cent. If you adjust for inflation, it would mean that the markets will pay the government to do it.

Taking this sum of money, the government would create a rigorously independent body to oversee the creation of a new national wealth fund. The board of the fund would employ various asset management experts to invest the money on behalf of the state. They would be mandated to generate a capital return of anything between 4-8 per cent per annum.

Basic mathematics would suggest that the probability of the Irish state generating a return greater than 0 is high. And anything above 0 means the state can pay off the debt while creating wealth and value for its citizens. If the compound interest return to the people’s wealth fund was 5 per cent, the Irish state could repay the debt issued to create the fund in less than 15 years. After this point, all capital returns go back to Irish society.

But more importantly, the state now owns the capital assets that it bought to generate the return. The Irish state has gone from being a debtor to a wealth owner. It has created value. If Apple or Amazon stocks go up, then so does the wealth of Irish citizens. This is because they now own a part of these profitable tech firms through their national wealth fund.

5 replies on “David McWilliams and Aidan Regan on using low interest rates”

Is Aidan Regan talking about the financial rate of return to the Exchequer or the economic rate of return to the economy as a whole? If the latter, where will the actual cash come from to “repay the debt”? (In the 1980s the Irish State faced a huge range of public investment needs, which had high calculated ERRs, but these could not be contemplated unless they could rapidly return actual cash to the Exchequer.)

Since we exited the GUBU decade in 1987 – and apart from the ‘little local difficulty” in 2008 – it seems our macroeconomic performance and the strategic management of industrial strategy at the global level has been of very high quality. Great credit is due to those involved. It mirrors the excellent diplomatic performance at the EU level in relation to Brexit and the recent elevation of the MoF to lead the Eurogroup and at a wider level in securing a temporary seat on the UNSC.

This appears to encourage a focus on the macroeconomy, on top-level industrial strategy and on the levels and structure of taxation and transfers required to maintain a semblance of social cohesion. The pieces referred to here – and much of the public economic commentary – appear to reinforce this focus. However, this focus appears to be accompanied by a corresponding implicit and tacit acceptance that the blatantly obvious dysfunctions in the microeconomy are beyond remedy. It may well be the case that they are, but it is useful to highlight them briefly in an EU context. The cost of living in Ireland (measured in terms of the price level of household final consumption expenditure) is 26% above the Euro Area (EA) average. Actual Individual Consumption (In Volume Index terms), at 95, is well below the EA average of 103, and the EU-15 average of 105. Of the 12 EU-15 members in the EA, we are in 9th position (only Spain, Portugal and Greece are below us). This reflects both the excessively high cost of living and the failure to provide public services efficiently and effectively on a universal basis (as they have been provided in most of the EU-15 for a generation). The cost of living gap means that Irish households are paying around €11,000 per household per year more than households in other members of the EA are paying on average and their actual individual consumption is much lower. It should not be surprising that there is considerable public discontent at the resulting economic hardship that is being experienced by hundreds of thousands of households – some of which was communicated at the General Election in February.

It is probably true that enacting the volume of legislation required to implement even a fraction of the policies needed to remedy this dysfunction and facing down the concerted opposition of those currently exercising economic and organisational power are far beyond the capability of any government – irrespective of the majority it commands in the Dáil. It certainly appears to be beyond the capability of this government. But it, or its successor, will have to acquire this capability. Time and public patience are running out.

I’m exploring rather than challenging the concept that Aidan Regan has presented because I’d really like to see how much mileage there is in it. I am neither an economist nor an expert on any of this.

1 Have any soundings been taken from those interfacing the bond market on the appetite for a dedicated purpose bond of this size and what kind of conditions might attach to it?
2 At a very high level, it is the same story as applied to property investment during the Celtic Tiger. Assemble a little bit of equity, get a non-recourse loan, tenant the building and flip on the asset based on its rising capital value and income flow. Not everybody did it, but lots did and it didn’t end well. I know this is different. But what goes up can come down.
3 I am guessing that one reason why this might be different is that it would be a diversified and comparatively “safe” portfolio, somewhere between a fully equity based (albeit diversified equity) and a lower risk, broader range of assets, pension type portfolio. In today’s market, a comparatively “safe” portfolio delivering 4% minimum and up to 8% (net of fees and costs)… If somebody knows who can deliver that for sure, give me their number please. The higher the required return, the greater the risk and the greater the volatility. Of course, the state will always be there, but the bond will have to be refinanced on a specific date.
4 I am guessing the bond would be full recourse to the state. So, however rigorous and independent your Board are, the buck would retreat to the government’s desk and the fund would be susceptible to political pressure. Would it necessarily bend to that pressure? I don’t know but Boards are servants of owners, not their masters.
5 I haven’t checked how much cash the NTMA already has on its hands. Why not start with some of that? Not sure that a new bond is required because I presume govt can get 0% coupon on any 20 year borrowing right now, as and when it needs it? Or is it envisaged that this bond would be secured first on the portfolio entirely or further backed by government guarantee, in which case, the real security is that guarantee, no?
6 Is there any pension fund that can claim an annual net return of 8% compound over the cumulative period of the past 20 years?

Thoughts on the above Aidan? I think if I were making a robust, serious and thought through proposal rather than articulating an abstract concept, I would be up for giving it a good testing. But, your call.

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