Today’s topic: What deficits do, or don’t do, to interest rates.
Today’s quotes are from an article by the Associated Press, titled Analysts wary of growing budget deficits:
Like a person packing on pounds, the United States keeps adding to its flabby budget deficits, endangering the nation's economic health and the pocketbooks of ordinary Americans.
Here's the worry: Persistent deficits will lead to higher borrowing costs for consumers and companies, slowing economic activity.
Snappy question never asked:
You said the USA is "adding to" its budget deficit. Why, then, does the data published in the Monthly Treasury Statement indicate that the USA has been subtracting from its budget deficit—for at least two years?
Follow-up question:
If the worry is higher borrowing costs, why would one of the most respected analysts out there—Alan Reynolds—choose the following ending for an article on this very topic: "In conclusion, there is no clear connection between government deficits or surpluses and long-term interest rates"?
And, more importantly, why would you—in your own article—bury the following not-so-alarming evidence twenty paragraphs after the alarming opening paragraphs you chose?
...the size of the current budget deficits, while unwelcome, do not signal that a crisis is imminent, they said.
An important barometer is the size of the federal debt-- now about $8 trillion-- relative to the overall economy, as measured by gross domestic product. Under that measure, this debt accounts for around 63.2 percent of GDP, Bethune said.
"Generally speaking, when it is over 75 percent of GDP, then the yellow flag goes out. I would say 95 percent of GDP and over is definitely a red flag," Bethune said.
...Despite the recent string of large budget deficits, long-term interest rates in the U.S. have behaved well. In fact, relatively low long-term rates around the world have puzzled economists and spawned a number of theories.
Final question:
Do you agree with Bethune that the debt-to-GDP ratio, not yet in his "yellow flag" zone or his "red flag" zone, is a far more objective basis for discussing debt, deficits, and the USA's fiscal health? [If so, you might want to sample what this blog has been saying for the last year.]
