The Free Lunch is Over
Soon we'll all have to pay for our externalities; at least there will be super long term bonds
Photo by Alexa Suter on Unsplash
Hello,
Welcome to Known Unknowns, a newsletter where there is no free lunch—but plenty of duration to be had.
The Mar-a-Lago Accords
Am I the only one super excited that the U.S. government may start issuing consols? Yes, I know the whole idea of forcing countries to hold longer bonds than they want is getting all the attention. And who knows if that will ever happen. But consols?! They are my favorite kind of debt. The OG. So much fun to price. They have so much duration, and the world really needs that.
I mean, we should not force our allies to buy anything. That would be bad—it would increase interest rates, throw currency markets into chaos, and we’d miss our reserve currency status when it’s gone. But as a good friend, we may want to point out to our allies that, with all their pension obligations, they actually need more duration. Oh, and here’s this nice bond that adds 100 years of duration to your portfolio—it’s a win-win. Everyone would have less risk.
More seriously, I think we need to have a conversation about the maturity structure of the debt we issue and the duration needs of our bond buyers. I can believe regulatory distortions increase the demand for short-term debt, and that may create some needless risk. Maybe we should talk about that. Is this the best way to start that conversation? Probably not—but there’s always a valuable kernel of truth in Trump’s policies.
No free lunch, no matter who is president
Whenever people tell me they’re afraid of fraud in financial markets, I tell them it’s not that hard to spot. Anytime someone tells you they can beat the market, give you high returns, and the value of your portfolio will never fall—run. Or at least take a hard look at the fees they’re charging. The relationship between risk and reward is as firm as the laws of gravity; it also underpins all of finance. There is no free lunch (except when it comes to issuing consols).
It’s also inescapable when it comes to public finance. I wrote about Jason Furman’s take on the failures of Bidenomics. He argues the Biden administration believed it could get a free lunch—that they could spend and stimulate demand endlessly, and then we got inflation. They fell for the same lie Europeans did: that you can remake a green economy, save the planet, and no one will have to go without anything. In fact, we’ll all get richer and drive nice new cars! They thought they could do industrial policy without creating distortions, please all their interest groups, and somehow be more efficient than the private sector.
Politicians promising something for nothing is as old as time. But I reckon this got worse in the 2010s. The low-rate environment made it easy to believe there were no trade-offs. We could spend, balloon the Fed’s balance sheet, and nothing would break. When the cost of capital is near zero, that’s kind of true. Alas, no financial condition lasts forever, and all policies pose trade-offs—they cost money, they create winners and losers, and if you assume you can get something for nothing, you’ll probably end up with more losers.
I fear the Trump team risks falling into the same trap. We hear promises that tariffs will bring in money but impose no costs on consumers or the broader economy. That we can deregulate and enhance efficiency enough to pay for underfunded entitlements. Odds are that’s not true. I even believe a lot of these policies may boost growth—but not enough to pay for themselves, especially in an environment where inflation is now a thing and rates are higher.
Stigmatizing Singleness
I had a very unromantic Valentine’s column for Bloomberg arguing that we should bring back some stigma to being single. Which, granted, is an odd argument for a single person to make. But I recently heard an economist advocate for bringing back the stigma of being single (or just unmarried). After all, it’s less good for society and children and whatnot. And maybe he has a point. If there is indeed an externality, it should bear a cost—and as a single person myself, I’d prefer social shame over yet another single tax I have to pay. You can’t buy shoes with social approval, maybe we all need a nudge.
Shame can be effective. I write about interwar France—women managed to get married, even when the pickings were slim, because they had to. Were they better off for it? I’m not sure. They did stay married. But what choice did they have? What we do know is that the French interwar economy was better off.
Until next time, Pension Geeks!
Allison
In the early 1980s, I managed (with mixed feelings) to bringing family policy into the tax code. The genesis was the almost accidental discovery that households with children had faced by far the larger tax increases in the postwar era…which then grabbed Reagan’ attention. The argument didn’t depend on trying to subsidize one group or the other but on a basic public finance principle now almost totally ignored: ability to pay. Resurrecting that attention to this principle would go a long way toward addressing how family Poliy might again receive the amount and TYPE of attention it deserves. Too much to put into a comment.
Consols are like the financial version of a time capsule except instead of burying something cool, we’re just passing down a century of debt. Great for pension funds, maybe, but in a world where economic cycles barely last a decade, betting on 100-year bonds feels like trying to predict the weather in 2125. Bold move.