Economic Salvation in High Yield Treasury Bonds

1981 was a heady time, and Robert Hardaway looks back with appreciation. In his article on the Fox News website, The war on baby boomers, Hardaway notes that when Ronald Reagan became president, it was possible for a retiring worker who had a sum (by my calculation, $1 million, or $2.37 million in 2010 dollars) to invest in high yield Treasury bonds, could count on a guaranteed and safe annualized return of $160,300 annually. That was the height of the good economy, one which benefited from the efforts of the Carter administration, which passed on its excellent rates on Treasury bonds.

But then Ronald Reagan, as Hardaway intimates, made his big mistake. Not content with Treasury bond yields of 15-16%, mortgage rates of 18.5% on 30-year fixed mortgages, and an inflation rate of 10-13%, he teamed up with Paul Volcker to engineer a recession to bring inflation down, and with it, the interest rate on a Treasury bond. During the Reagan-Volcker recession, GDP fell 8% and unemployment rose to 10.8%. By 1987, inflation had fallen to 3%, that Treasury bond rate had plummeted to 7%, and the retiree with $1 million would only see $70,000 in annual income from his safe investment.

By the numbers it would seem that Barack Obama has continued in the footsteps of the failed Reagan policies, bringing inflation down to 1.64% in 2010 and with it the cost of a 30 year fixed mortgage to 4% and Treasury bond yields below 1%. While that same retiree would only be paying $2400 a month for a $500,000 mortage compared to $7700 during the Reagan heydays, he would also only be making less even than $10,000 annually on his Treasury bond.

Hardaway does not make any recommendation about how we can return to those high-inflation, high-interest rate days of 1981 and rescue the nation from its current economic doldrums. He does note, however, that growth would be better served by reducing taxes and putting money into the hands of hard pressed taxpayers, policies such as those which were part of the oft-derided stimulus but 30% of which was actually tax cuts of the kind Hardaway favors. Other Obama initiatives which seem to correspond with Hardaway’s prescription are the payroll tax cut, and extension of the Bush era tax cuts to those making under $250,000 (Hardaway might also favor extending those tax cuts even for the wealthy, but since he mentions “hard pressed” taxpayers, and that moniker would not apply to millionaires, we’ll leave them out of this calculation).

How do we return, then, to that economic paradise of 1981 that Hardaway so admires? Maybe we should get the advice of the president who brought us those high yield treasury bonds, Jimmy Carter.