In his New York Times article, July 27, 2012 July 27, 2012 Paul Krugman discusses current interest rates, policy, and the economy in general. While the economy struggles and unemployment remains stubbornly high, interest rates are at historical lows. The government is issuing inflation protected bonds at a negative .6% interest rate. People are actually paying the Federal Government to hold their money.
This is clearly a goofy picture. It probably persists because of a combination of ignorance on the part of policy makers and plain old maneuvering for political gain. Or perhaps other strange forces are at work. We won’t try to unravel the mystery here. Let’s just say “wow what a puzzle,” and then move back a few steps for another look.
What we see is a fabulous opportunity. This is weird, just like hitting the lottery would be weird. Dropped in front of us is a pot of money, almost free money. We have a place for it, our energy infrastructure.
We desperately need to accelerate the transition to a more economical, low carbon energy production and use model. The switch is capital intensive, that is, it requires investment in new equipment that will eliminate the continued expense of extracting, processing and transporting fossil fuel. There’s need to substitute non-consuming equipment in place of fuel. We’re near the end game for dependence on chemical energy released from messing with Mother Nature’s arrangement for carbon. Like it or not this is coming.
The question is whether to invest or spend, now. Investment decisions are a two part process. It’s a pretty routine two part test. First, will there be a return of the original investment. Secondly, is the return fast enough?
The first part is simple. Just add up all the benefits you’ll get, and if they’re greater than what you put in, it’s a go. Will the return be fast enough is the trickier question. It hinges on interest rates. Will the return be greater than what is needed to pay back the principal and pay the interest? For big ticket items, like a house or car or a highway bridge, this cost of money is a big deal. Do the math on a 30 year mortgage if you have doubts. Interest can be half or more of the total cost.
Right now the cost of money is essentially zero. And the Federal Reserve indicates it will keep interest rates low for some time to come. So, for long-life investments half the cost that must be considered in more normal times doesn’t factor into the cost:benefit calculation. Infrastructure investment is on sale at half off.
To the question: Should we invest or spend now? We have to spend. We still use a huge amount of fuel. In Florida it costs us about $100 Million a day. We’re stuck with that spending until we have a lower cost alternative. Should we invest? You bet!….every dollar we can get our hands on.