Instead, markets are left with the narrative of negative yields and a “safe-asset shortage,” prompted in part by post-crisis banking regulations like Dodd-Frank and Basel III, in part by huge  quantitative easing programs among global central banks, and in part by individuals who are living longer and are focused on saving for retirement. Perversely, this seems to have put the banking system at greater risk — shares of Frankfurt-based Commerzbank AG fell to a record low this week, for instance — and has made it all the more difficult for pension plans to meet their promises.

The bond markets aren’t demanding fiscal profligacy. All they’re suggesting is a modest loosening of the purse strings, with money directed toward projects that benefit the overall economy. The problem, of course, is that more spending is usually framed as “bad” while lowering taxes is “good,” even though they both widen the budget deficit. In truth, both have appealing qualities — but only when applied properly.

Infrastructure spending done right potentially solves several structural problems in one shot. It offers construction jobs to those who might not otherwise have one, further adding to record employment numbers. It creates new or improved structures that will be used for decades and will move people and products more efficiently. It will lead to more sovereign borrowing, which feeds the appetite for safe assets. And, most crucially for the bond markets, it could counter easy monetary policy and some of the other forces leading to negative interest rates.

This is a better solution than trying to rationalize guaranteed losses on bonds. The U.S., Germany and other sovereign nations have a clear green light to borrow. It’s up to elected officials to step on the gas.

This story provided by Bloomberg News.

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