Last week on NPR, Robert Reich did a nice segment connecting the (not exactly cryptic) dots between high rates of unemployment, extraordinarily low interest rates, and the clear benefits of improving the nation’s infrastructure. However, he noted that the extraordinarily low interest rates meant that we could borrow cheaply (to fund infrastructure projects that would re-employ people – in case that part wasn’t obvious) “from the rest of the world.”

Actually, the low interest rates also mean that we (or the federal government) can borrow much more cheaply from ourselves (i.e., American households and businesses) too. And since the beginning of the Great Recession, we’ve been doing that more and more. While Federal borrowing has risen sharply (both a symptom of and sensible response to the recession), private savings – both household and business – have sharply increased. In fact, the upward swing in household and business savings is larger than the upward swing in federal government borrowing. This means that we are borrowing much less from the rest of the world than we were even before the Great Recession hit (in fact, it’s currently less than half as much as we were borrowing at the height of the housing bubble in 2005).

This is, of course, both bad and good news. The bad news is that the huge upward swing in private savings means that private spending is way, way down – and that’s why the economy remains so sluggish. The good news is that domestically financed increases in federal budget deficits means that, despite all the overheated rhetoric decrying them, there is no direct generational implication of them – we’re borrowing from ourselves and we’ll just pay it back to ourselves at a later date (for the long version of this argument, see here). More good news is that today’s low interest rates are no fluke or quirk that will quickly reverse – they are the inevitable consequence of this huge upward surge in private savings, and they will remain with us as long as the economy keeps operating so far below potential. Low interest rates, however, have not proven a panacea for growth, hence the need for bigger budget deficits to get us back to full employment.

Unfortunately, the past few quarters have seen U.S. borrowing from the rest of the world increase again – the mirror image of the increase in the trade deficit that has dragged on growth in that time. This trade deficit, in turn, highlights yet again the need to do something to allow the dollar to reach a level that keeps pre-Great Recession levels of trade deficits to return. If we do this, then we can borrow from ourselves to both fund economic recovery and a better infrastructure.

Click figure to enlarge