Why Are We Worried About Deficits Leading to Higher Interest Rates?

Because interest rates on U.S. Treasuries are dropping (italics mine):

The U.S. government debt is rising inexorably, according to the conventional wisdom in Washington, and the political system is too paralyzed to take unpopular actions to rein it in. Privately, many policymakers take it as a given that the situation will change only when the nation faces a Greek-style fiscal crisis.
But apparently nobody told the people who lend the U.S. government money. On Friday, they were willing to hand over their cash to the Treasury for 10 years for 3.3 percent interest, a level so low it implies they consider the United States among the safest investments in the world. Collectively, those investors — think mutual funds, pension funds and foreign central banks — could lose hundreds of billions of dollars if they’re mistaken and the United States has a debt crisis.
It is the Beltway vs. the bond market, and they can’t both be right.

In this case, the bond market is right.

Yeah, I just said that. In fact, given the importance of the U.S. consumer in driving global consumption and spending, we need to pile on more debt: more public debt means more private savings (which then can lead to increased spending). While the economic equivalent of creationism (deficit reductionism in times of massive un- and underemployment) might be fashionable and politically correct, it is no more useful to economists and the money people than creationism is to biologists. Concerns about the debt payments are particularly bizarre since 75% of all U.S. debt is held by private and public U.S. entities (including people). We get most of the money paid out back.
And the bond markets know this…
Related post: Atrios puts it succinctly–Gotta Park Money Somewhere.

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1 Response to Why Are We Worried About Deficits Leading to Higher Interest Rates?

  1. It’s not that “we are worried” about deficits leading to inflation. It’s that the wealthy creditor class financially benefits from a little deflation, and doesn’t particularly givafuk about unemployment.

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