War Bonds, Huh. What Are They Good For? Absolutely Nothing.

Brian Chappatta

(Bloomberg Opinion) -- The United States of America already has war bonds. They’re called Treasuries.

Apparently, that $17 trillion market, the largest in the world, isn’t enough for some people. White House economic adviser Larry Kudlow said “I’m all for it” when asked on CNBC about the idea of the federal government issuing a “war bond” to fund relief efforts tied to the coronavirus pandemic. “This is a time, it seems to me, to sell bonds in order to raise money for the war effort, in this the pandemic effort,” he commented. Network personality Jim Cramer also shared his support for the idea on Twitter, calling for $1 trillion of 30-year bonds paying 2% interest.

This makes little to no sense. For one, the U.S. is obviously already gearing up to issue debt to fund its pandemic relief programs. I wrote last week about how some Wall Street strategists see the Treasury breaking up its sales — the general consensus is that it should flood the market with short-term bills because money-market funds are receiving waves of cash to invest. Moreover, the Treasury already issues 30-year bonds, and Cramer’s suggested rate is significantly higher than the current yield of 1.27%. If the stated goal is to borrow at the lowest cost to taxpayers, this is a losing proposal for the government.

It’s possible that the idea of U.S. war bonds is gaining traction because of talk about “coronabonds” in the European Union. They are not the same. The latter would be a shared debt instrument among all constituent countries, with proceeds directed to the areas most in need. EU leaders have talked about such securities basically since the founding of the currency bloc in 1999, but they’ve been a political hot potato because of the vastly different financial situations of rich countries like Germany compared with those of the comparatively poorer Italy and Spain. 

Another strange part of the intrigue around war bonds is that their traditional economic effects, as demonstrated during World War I and World War II, are exactly what the U.S. doesn’t need or want right now. The idea behind large-scale war bonds, in addition to raising money, is to lock up Americans’ cash in the securities to reduce their consumption and spending. Otherwise, individuals would be competing with the federal government for the same scarce resources, driving up their costs and therefore inflation as well. 

This is not the overriding concern of the U.S. economy. It might seem like forever ago, but remember that in January the Federal Reserve was obsessed with boosting inflation. Certainly no one is worried about runaway price growth at a time when more than 10 million Americans are suddenly unemployed.

On the contrary, the federal government would prefer that citizens have as much disposable income as possible to cover rent payments and other essential bills, plus support small businesses that have had to close in recent weeks.  If anything, as Bloomberg News’s Joe Weisenthal pointed out on Twitter, the most beneficial war bond instrument right now might just be stocking up on gift cards up from various local restaurants and other enterprises to help them survive this shutdown. A Washington, D.C., neighborhood even spearheaded a campaign called “Buy Restaurant Bonds” in an intentional nod to the previous war bond efforts.

Anecdotally, I played a small part in a similar effort to get cash upfront. An Italian restaurant in Brooklyn with a highly regarded wine list opened up its cellar a few weeks ago and sold any and all bottles at half the listed menu price. I bought two — I saw others purchase many, many more. This is the type of “battle” that needs funding in cities and towns nationwide. 

By contrast, it’s very much an open question whether the local restaurateur or business owner would benefit quite as much from a special war-bond program. Cramer’s pitch — “we want this piece of paper” — is more of a nod to financial market investors starved of any safe investments with a decent yield. Needless to say, that shouldn’t be the first priority in this relief effort.

As for Treasuries, one could argue they’ve been helping to fund actual war for the better part of two decades. The U.S. budget deficit reached a record $377 billion in absolute dollar terms 2003, the year the Iraq War began, and then further ballooned to more than $412 billion in 2004. The military has remained an outsized part of the federal government’s spending ever since: The Pentagon’s budget for the next fiscal year is more than $700 billion.

Put it all together, and there’s little incentive to initiate a war bond program other than as maybe a basic pitch to patriotism. A better strategy would be urging Americans to support local businesses as much as they can while having the Treasury continue to borrow in a regular and predictable manner to finance the government’s own relief efforts. Maybe that includes a new 50-year maturity. But war bonds as devised by Kudlow and Cramer are good for absolutely nothing. 

This column does not necessarily reflect the opinion of Bloomberg LP and its owners.

Brian Chappatta is a Bloomberg Opinion columnist covering debt markets. He previously covered bonds for Bloomberg News. He is also a CFA charterholder.

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