Once upon a time, a whole two months ago, Jim Cramer, the hyperactive American television host, was famous for his love of free markets and equities.
Now, he has a new focus: persuading Donald Trump’s White House to issue “war bonds” to fund the fight against Covid-19. “War Bonds — it is time [for] 30-year, trillion dollars [at] 2%,” he tweeted this week, declaring that domestic investors “want this piece of paper. We want to win this war!””
Will Mr Trump listen? It is unclear. Larry Kudlow, Mr Cramer’s former colleague at CNBC who is now chief White House economic adviser, says he is “all for” war bonds as “a long-term investment”.
However, Steven Mnuchin, Treasury secretary, seems less persuaded. No wonder. With 30-year Treasuries commanding a yield of 1.4 per cent on Thursday, there is little immediate logic for the government to sell bonds that would cost the government more. In any case, Mr Mnuchin needs households to spend money on goods and experiences — not bonds — when the pandemic ends.
Yet, even if the words “war bond” never move beyond Twitter, investors should take note of this, for three reasons. Firstly, government debt levels are exploding in a manner which will soon shine a spotlight on who buys US Treasuries.
This week, for example, Goldman Sachs warned clients that America’s debt to gross domestic product would hit 99 per cent this year and 108 per cent in 2023, up from 79 per cent last year. If so, this would beat the previous record seen in the second world war — which, not uncoincidentally, was the last time the US sold war bonds to a patriotic public.
Thankfully, there is absolutely no sign that Mr Mnuchin faces problems funding this debt now. A compliant US Federal Reserve is already buying up Treasuries. If economic conditions deteriorate in the coming months it is likely that the Fed’s next step would be to embrace “yield curve control”, where it purchases both long and short-term debt to keep rates low along the entire range. Meanwhile, the dollar’s reserve currency status means that non-US entities continue to buy Treasuries too.
However, as investors ponder the future, they should (re)read a remarkable letter that Wall Street banks wrote to the Treasury last year — well before the pandemic hit — which warned of “an increased need for this [US] debt to be financed domestically”, since the proportion of foreign purchases of US Treasuries was falling. The banks suggested then that US households could be natural future buyers, since their holdings were relatively low.
Such calls are likely to intensify, with or without explicit war bonds, particularly if protectionism rises. “I think you will see a much bigger focus on the question of who is owning US debt — are they an ally, or not?” predicts one former senior central banker.
The second point to contemplate is what happens to US bonds. After the second world war, the US government reduced its debt pile with a mixture of growth and “financial repression”, a strategy of holding long-term rates below the prevailing inflation rate, creating negative real returns, amid investment controls.
Until a decade ago, it was hard to imagine this reoccurring in the west. But, as Carmen Reinhart and other economists have noted, echoes of this have emerged since the 2008 crisis. Regulatory reforms have led western banks and pension funds to buy more government debt, even as quantitative easing delivered negative real rates.
There is a high chance that financial repression will intensify in the coming years. This probably will not entail using the explicit investment, price and capital controls that were employed after the war. But nothing can be entirely ruled out. Investors should urgently reread Prof Reinhart’s research because it shows that financial repression delivers negative returns for bondholders. Those widely purchased war bonds, in other words, were essentially a tax on savers which the public accepted in the patriotic cause.
That, in turn, highlights a third point: American economic attitudes are changing at a startling speed to embrace more state interference. One obvious sign of this is Mr Trump’s attempt to use wartime powers to give orders to manufacturing companies such as 3M. Another is the Fed’s extraordinary $2.3tn support package for companies and local entities that was announced on Thursday morning — with even more largesse promised soon.
That horrifies some observers. “We are on a road to essentially changing our form of capitalism and free enterprise permanently — how do you claw this back?” laments Scott Minerd of Guggenheim partners. But such laments are rare right now. Mr Cramer’s appeal is not just a sign of the patriotic, state-controlled times; it also shows how cavalier the pundits have become towards the mountain of debt.
Follow Gillian Tett with myFT and on Twitter
