Jarda Borovicka writes to me

In the whole discussion about whether the U.S. should borrow more now when the interest rates are low, I miss one crucial thing – what happens when the debt comes due?

Risk-free debt is really risk-free only when the maturity also coincides with terminal repayment. But assume that the U.S. borrows an extra trillion of dollars now, due in 10 years (the average debt duration of the U.S. debt is something like 4 years?). Sure, the interest rate is low, but the borrowing is cheap only as long as we assume that during the 10 years the U.S. repays this whole extra debt, compared to what would have happened in the baseline world.

If not, the U.S. will need to refinance this debt in 10 years, and potentially at much higher interest rates. There is a potentially very large risk looming. Greece has experienced this the hard way – it collapsed not because it necessarily needed new borrowing but because it had to roll over the old borrowing at impossibly high rates.

And I have not heard the advocates of more borrowing to suggest any credible offsetting mechanism that would lead to repayment (not replacement with other borrowing) of this extra debt at or before maturity. But then the idea "let's borrow now because it's cheap" becomes seriously flawed.

I would compare those who advocate such outright borrowing without committing to credibly repay at maturity to people who fall for teaser mortgage rates and are rather negatively surprised to see the rate adjust later. It is interesting though that there seems to be a large positive correlation between people who advocate government borrowing because rates are low NOW, and those who call for protecting consumers against reckless lenders who tease them with a low temporary rate. To quote a famous Canadian singer, Isn't it ironic?


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