It’s time to revive a British financial innovation from the 18th century: perpetual bonds.

24BOX_Henry_Pelham.jpg.CROP.article250-medium.jpg /% Prime Minister Sir Henry Pelham

Painting by William Hoare/National Portrait Gallery, London/Wikimedia Commons.

Another way of looking at it is that global financial markets are sending a clear signal to the United States. At a time when demand for goods and services is depressed, demand for American government debt is sky-high. The responsible choice is to let the supply meet the demand and borrow more .

But excessive worry about deficits is hard to purge from the system. One common objection, raised recently by Damon Linker is that the principal on a loan (even one taken at zero or negative interest) eventually has to be repaid .

Except it doesnt. Right now, the Treasury Department floats loans of a variety of durations, ranging from 28 days to 30 years. Lenders generally demand higher interest rates for longer-duration loans. But right now the rates on even the 30-year loans are extremely low. We couldand shouldimitate Pelham and see what the market would demand for a loan that never has to be repaid. How high an interest rate would people demand for a loan like that? Well theres no way to know without offering one on the marketplace. But right now 30-year bond rates are at never-before-seen lows. so paying a higher rate wouldnt involve any unprecedented borrowing costs.

In exchange wed gain some valuable information and confidence. Questions about how many perpetual bonds its prudent to issue would no longer be dominated by nonsense about the cleanest dirty shirt and vague worries about hypothetical possible future refinancing crises. Instead wed have a straightforward value question: Are the social and economic merits of additional borrowing worth the market interest rate or not? Well-targeted tax cuts and reasonably designed infrastructure stimulus should easily meet the test, while pork wouldnt. But the outcome will depend on the actual state of market demand for government debt versus other investment vehicles. As demand for debt declines and growth prospects improve, interest rates will rise, meaning less borrowing will pass cost-benefit scrutiny.

Meanwhile, higher-but-low-by-historical-standards interest rates will in some ways be helpful to savers. Right now if you want to save money you face a fierce tradeoff between accepting low yields and taking on big risks. Consols offer a third way, a safe high-yield investment for those willing to lock their money up forever.

Most of all, perpetual bonds would help us move beyond the destructive politics of the grand bargain. The government could borrow money without adding to the national debt. Instead of obsessing over the debt-to-GDP ratio, we could tackle the present-day problem of unemployment and the medium-term barriers to growth. The current structure of American debt served us well for a long time, but times change. Successful countries manage their debt not just by borrowing prudent amounts, but by being smart about how they borrow. Today we face unusual fiscal circumstanceslarge projected future borrowing needs plus very low interest ratesand that calls for a little innovative thinking. Governments have rarely issued perpetual bonds, but our ability to offer them credibly is a strength of our very stable system of government. Its time to take advantage of that to lock in todays low borrowing costs. Forever.