Barron’s urges Trump to adopt Hamilton policy by issuing long-term bonds

How can the United States government sustain its spending, deficits and debt? By issuing 100-year bonds, of course.

Barron’s magazine is urging President-Elect Donald Trump to take a page out of Alexander Hamilton’s playbook: take advantage of the historically low long-term interest rates by issuing Treasury bonds and to make them as long-term possible.

It is projected by the Congressional Budget Office (CBO) that the national debt will spike to $45 trillion within the next 20 years. When rates go up, then the U.S. government will face annual debt servicing payments of $1.5 trillion. This does not include the president-elect’s exorbitant spending spree, which is expected to add another at least another $6 trillion to the national debt.

With so much debt, what can Trump and the government do? Study Hamilton and follow in the footsteps of Mexico, Belgium and Ireland by issuing 100-year bond notes. Or, you could adopt Austria’s 70-year maturity. Whatever the case, Barron’s advice is to go long.

Here is an excerpt from the piece:

“Whether by historical coincidence, a shift in central-bank monetary policies, or the populist wave that has shaped both the United Kingdom’s vote to leave the European Union and Trump’s triumph in the U.S. presidential election, interest rates appear to have hit their trough. That, of course, will be known only in retrospect. What seems certain is that today’s interest rates are far closer to their lows than to their highs.

Given that, the call for borrowers should be clear: Go long. It doesn’t take a genius on the order of Hamilton to realize that. U.S. homeowners have been taking advantage by locking in 30-year fixed-rate mortgages in the 3% range. If they haven’t, it’s because they may have opted for shorter-term loans of about 15 years, probably because they are approaching retirement and prefer to spend their golden years debt-free.

For a nation, however, it’s different. One should match one’s liabilities with the life of one’s assets, says James Bianco, head of Bianco Research and one of the most astute observers of financial matters. Given that the United States of America is 240 years old and has an infinite life expectancy, we hope, issuing 50-year or 100-year bonds makes sense.

It evidently does to any number of other nations, including those whose status is rather less gilt-edged than the U.S. Indeed, three members of the group once derisively known as Piigs have been borrowing for longer periods than the U.S. Treasury at attractive terms. Spain and Italy have issued 50-year bonds this year, while Ireland was able to place a 100-year bond last year. (Of the other members of the group, Portugal hasn’t issued superlong debt, while Greece hardly is in a position to do so, especially while President Barack Obama last week was calling for more debt relief for the beleaguered borrower.)

Belgium was also able to issue a 100-year bond this year, while Austria last month split the difference by going with a 70-year maturity, locking in 1.5% borrowing costs for the proverbial three-score-and-10 life span.

To be sure, these nations have been able to take advantage of the European Central Bank’s effort to stimulate the region’s ailing economies by buying up just about every bond in sight. In the process, yields have fallen, below zero in many cases, leaving long-term investors such as insurance companies scrambling to find investments that pay enough to fund their long-term liabilities.”

This has been the trend in the global financial markets in 2016: governments issuing long-term bonds with very little yields. Despite the absurdity behind these bond notes, there has been a demand by investors; Austria’s 70-year notes were quite popular when they were issued (SEE: Austrian government issues 70-year bond).

Of course, there is already a bubble forming in long-term debt, and this is just a method of kicking the can down the road. Governments must experience the pain now rather than delaying it any longer and expanding the distortions in the economy (SEE: The looming bubble in long-term debt).

What does the legendary economist Ludwig von Mises say about long-term bonds? Let’s take a look at his sage words:

“[W]hen governments initiated their policies of long-term irredeemable and perpetual loans . . . [t]he state . . . this eternal and superhuman institution beyond the reach of earthly frailties, offered to the citizen an opportunity to put his wealth in safety and to enjoy a stable income secure against all vicissitudes. It opened a way to free the individual from the necessity of risking and acquiring his wealth and his income anew each day in the capitalist market. He who invested his funds in bonds issued by the government and its subdivisions was no longer subject to the inescapable laws of the market and to the sovereignty of the consumers. . . . He was secure, he was safeguarded against the dangers of the competitive market in which losses are the penalty of inefficiency; the eternal state had taken him under its wing and guaranteed him the undisturbed enjoyment of his funds. Henceforth his income no longer stemmed from the process of supplying the wants of the consumers in the best possible way, but from the taxes levied by the state’s apparatus of compulsion and coercion. He was no longer a servant of his fellow citizens, subject to their sovereignty; he was a partner of the government which ruled the people and exacted tribute from them.”

What’s next in the bond market? 150-year bond notes? 200 years? Why not make it a millennium?

One more thing: why would anyone want to ape Alexander Hamilton? Just because the rap musical that bears his name is extremely popular, it doesn’t mean that he should be as well. Not only did he maintain a horrific personal life – Bill Clinton and Warren Harding were dedicated husbands compared to Hamilton – he was just as bad on policy.

Hamilton was the typical big government Keynesian who wanted war, welfare, stimulus and subsidies, and he never shied away from his love of a debt-fueled economy. Perhaps his biggest crime was supporting the creation of a central bank.

Note to Trump: read Thomas Di Lorenzo if you want to learn the true facts of Alexander Hamilton.