This commentary originally appeared at 8:07 a.m. EDT on June 4 on Real Money Pro -- for access to all of legendary hedge fund manager Doug Kass's strategies and commentaries, click here.
So, what is to be done? Rather than focusing on lowering already epically low rates, governments that enjoy such low borrowing costs can improve their creditworthiness by borrowing more not less. They can also invest in improving their future fiscal position, even assuming that no positive demand stimulus effects are likely to materialize. At a time of negative real rates, accelerating any necessary maintenance project and issuing debt leave the state richer not poorer; this assumes that maintenance costs rise at or above the general inflation rate.
-- Lawrence Summers, "Look Beyond Interest Rates to Get out of the Gloom," Financial Times (op-ed)
During the current panic in the world's stock markets, it is time to look at the bright side of low interest rates -- particularly in looking at the opportunities in countries such as the U.S. and Germany, which have been viewed as havens and have benefited from the flight to safety.
As I have recently written and as Harvard's Lawrence Summers wrote over the weekend in the Financial Times, the U.S. should now borrow aggressively, extend debt maturities and lock in interest rates, similar to how our largest corporations have termed out their debt over the past few years.
This would be far more beneficial and rational than another bout of quantitative easing (and lowering already low interest rates) in the U.S., which:
- would have a dubious incremental impact (considering the already current level of interest rates); and
- would actually shorten debt maturities (when just the opposite should be considered).
As a friend emailed me a few minutes ago, there are two possible reasons why the U.S. is not undertaking this now: either authorities hold to the view that the buyers of our debt won 't go long term or the U.S. doesn't want to increase its interest costs in the short term and hence the deficit.
This is short-term thinking.
The opposite strategy (borrowing more and locking in low interest rates) is intelligent and more rational longer-term thinking. It would likely be valuation-enhancing and could result in an upgrade of our country's creditworthinesss (as it improves our financial position).
This is yet another reason to buy American.
- U.S. relative and absolute economic growth is superior to global growth. The U.S. economy, though sluggish in recovery relative to past expansions, is superior to most of the world's economies (with the exception of some emerging markets) in terms of diversity of end markets, quality of global franchises, management expertise, operating execution and financial foundations.
- U.S. banks are well-capitalized, liquid and deposit-funded. Notwithstanding JPMorgan Chase's (JPM) recent trading gaffe, our banking industry's health (which is the foundation of credit and growth), is far better off than the rest of the world in terms of liquidity and capital. Our largest financial institutions raised capital in 2008-2009, a full three years ahead of the rest of the world. As an example, eurozone banks continue to delay the inevitability of their necessary capital raises. Importantly, our banking system is deposit-funded, while Europe's banking system is wholesale-funded (and far more dependent on confidence).
- U.S. corporations boast strong balance sheets and healthy margins and profits. Our corporations are better positioned than those in the rest of the world. Through aggressive cost-cutting, productivity gains, external acquisitions, (internal) capital expenditures and the absence of a reliance on debt markets -- most have opportunistically rolled over their higher-cost debt -- U.S. corporations are rock solid operationally and financially. Even throughout the 2008-2009 recession, most solidified their global franchises that serve increasingly diverse end markets and geographies.
- The U.S. consumer is more liquid and stable. An aggressive Fed (through its extended time frame of zero-interest-rate policy) has resulted in a U.S. consumer who has re-liquefied more than individuals who live in most of the other areas in the world. (Debt service and household debt are down dramatically relative to income and back close to historic averages.)
- The U.S. is politically stable. After watching regime after regime fall in Europe in the last year (and given the instability of other rulers throughout the Middle East), it should be clear that the U.S. is more secure politically and from a defense standpoint than most other regions of the world. Our democracy, despite all its inadequacies, has resulted in civil discourse, relatively balanced legislation, smooth regime changes and law that contributed to social stability and a sense of overall order.
- The U.S. has a solid and transparent corporate reporting system. Our regulatory and reporting standards are among the strongest in the world. Compare, for example, the opaque reporting and absence of regulatory oversight in China vs. the U.S. (It is beyond compare.)
- The U.S. is rich in resources.
- The U.S. has a functioning and forward-looking central bank that is aggressive in policy (when necessary!) and capable of acting during crisis.
- The U.S. dollar is (still) the world's reserve currency and is far more solid than the euro.
- The U.S. is a magnet for immigrants seeking a better life. This and other factors have contributed to a better demographic profile in our country that has led to consistent population growth and formation of households. (Demographic trends in the U.S. are particularly more favorable for growth than those population trends in the Far East.)