Government Borrowing and Investing: Myths and Realities

There is a common belief that the U.S. government could borrow money at extremely low interest rates and use it to create a long-term endowment that would eventually fund the entire government, thus eliminating the need for taxes. However, this notion is flawed due to fundamental principles of finance and fiscal management. Let's explore why this approach is impractical and how current government practices can be improved.

The US Government's Borrowing Practices

The U.S. government has the ability to borrow money at exceptionally low interest rates, particularly for short-term Treasury bills (T-bills) with durations of 30-60 days. The rates for these instruments can fall to as low as 1% or even 0% in certain economic conditions. However, when it comes to long-term borrowing, the picture changes. Treasury bonds with maturities ranging from 1 year to 30 years typically command higher interest rates, generally between 2% and just under 4%, with 30-year bonds being the highest risk and reward.

It is important to note that when people, both domestic and foreign, purchase U.S. Treasury securities, they are lending money to the U.S. government. These securities are considered extremely safe, liquid, and backed by the “full faith and credit” of the United States. Short-term investors use T-bills as a way to earn a small return while waiting to invest in higher-yielding assets. Hence, the government's current borrowing practices are aligned with the safekeeping and liquidity of public funds.

The Inherent Risks and Myths

The key point to understand is that the government cannot ethically borrow short-term to invest in long-term, less liquid assets. This concept is violated at one of the fundamental rules of investing, and it often leads to financial crises. Historical examples, such as the stock market crash of 1929, the SL crisis of the 1970s and early 1980s, and the Lehman Brothers bankruptcy of 2008, highlight the catastrophic consequences when short-term funding is misused for longer-term investments.

Furthermore, proposing that the U.S. government borrow money from the public to invest in a stock market for higher returns would be highly problematic. The sheer size of the U.S. government means that Federal bureaucrats would have unparalleled control over the equity market, severely distorting fair pricing and potentially leaving the public in a vulnerable position.

The Reality of Government Finance

Government finance is complex and requires a balance between short-term and long-term strategies. While the government can and does borrow at low rates for short-term needs, its actual long-term fiscal policies are influenced by various factors including tax revenue, public spending, and economic growth. The idea of completely ending taxes via a government-endowed investment strategy is not realistic and poses significant risks.

Moreover, the corrupt nature of elected officials and the corrupt influence of big interests is a reality in modern governments. Elected officials often have their own agendas, which can lead to policies that benefit specific interests at the expense of the public good. This is not exclusive to the U.S. but is a global issue in many democracies.

The government's power can be a double-edged sword. While it has the potential to implement positive changes, these changes can be thwarted by the prevailing corrupt systems. Historically, even honest and well-intentioned politicians have found themselves entangled in the corrupt processes of governance.

Conclusion and Future Direction

While the idea of the government using borrowed funds to create a long-term endowment for public good is appealing, the impracticalities and risks involved make it a non-viable solution. Instead, public funds can be better managed by improving fiscal policies, increasing transparency, and rooting out corruption. Sustainable and equitable fiscal practices are key to ensuring long-term financial stability and public trust.