Cheap Money

Yield on U.S. Government debt is at record low levels, this despite the ongoing noisy debate about excessive borrowing and the threat of future inflation. A percent and half annually for 10 years? What’s with that?

Obviously there are big factors at play. Political and financial confusion in Europe are significant, no doubt. Money is fleeing from that turmoil to safer havens, including loans to Uncle Sam, despite angst over the size of our federal debt and deficit.

The rate on every other loan or deposit is linked to the price of government paper. That includes the interest you earn when you make a deposit in your bank. Have you checked the rate on a savings account lately? .00000something?

These extremely low rates tell us more than just that flight money is landing here. It also suggests there is very little tolerance for risk and perhaps a lack of imagination among those with money in their hands. Nobody’s swinging for home runs.

What else might it suggest? Maybe a new normal for expected rate of return on investments that are being made. How about 10% annual instead of 20? 5% instead of 10? Compared to today’s certificates of deposit, 5% would be awesome. Of course level of risk has to be factored in, and you can certainly lose money just about any place you put it. Expectations have come down. Put in slightly different terms, a longer payback period seems OK for a lot of folks, particularly if the return seems secure.

What’s this have to do with electric transportation and energy infrastructure? How does cheap money impact decisions to build or buy the pieces of a smarter energy economy? Does it change the merit of investment in clean energy technology relative to continuing to burn fossil fuels?

It sure does. It skews any investment choice that involves both equipment and the purchase of supplies and labor to operate it in the direction of more equipment and less of everything else. In this case, spend more for the equipment and less for the fuel.

Investment involves payment for the equipment itself and an additional expense that has to be counted as well, the cost of the money used for the purchase. You can think of it as the interest you would pay if you buy using borrowed money. Or consider it “opportunity cost,” the value of the opportunities you give up by tying up your own funds.

Right now, if you have money in a savings account it’s apparently worth .00000something annually. If you’ve loaned it to the United States Government for the next 10 years it’s a whopping 1.5%. Wow!

How about putting your money where it will pay twice as much as Uncle Sam? Suppose you could identify an income stream that is worth 3% on the money you invest and there is a possibility the actual dollar flow would increase over time? Compared to available alternatives this has to be an attractive deal for some. It’s an even better deal for energy equipment investment if any reasonable assumption (one that projects fuel to become more expensive) is made about the cost of future fuel purchases that will be avoided.

WattNext is in the business of bringing the equipment for a smarter, more economical energy economy to Florida. In following posts we’ll consider the economics, what it looks like to you or me as consumers trying to decide whether to buy a Chevy Volt or put a WattTree™ carport in the driveway.


About wattnextblog

I'm Bill Ferree, a chief officer of WattNext, Inc.
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