America’s good luck with low interest rates is easing our economic and fiscal woes, but we’d be wise to remember that it won’t last forever. And when rates rise, we’ll unfortunately feel the full force of our fiscal dilemma.
First, the good news. The Wall Street Journal reports today that “investors seeking shelter from the Eurozone debt crisis are pushing safe-harbor Treasury bill yields so low that they are lending to the U.S. government for free, or even paying a small fee to do so.”
In essence, investors who are seeking safety in an economic world of turmoil – highlighted by Europe’s government debt crisis that is neither limited to Greece nor close to resolution – are flocking to the security of U.S. federal debt.
You would never suspect that You’d never think that U.S. debt was is so safe, however, by listening to the debate in Washington. The nation’s leaders, who are looking at our rising deficit and debt numbers and listening to alarmed constituents, want to reduce deficits as soon as possible to “assure the markets” that the United States will maintain control of our economic future.
The markets seem quite assured already, thank you. Not even the inter-party brinksmanship over raising the debt limit by early August to prevent a federal default is giving investors much pause about lending Washington more money. Investors apparently assume that Congress will find the votes to raise the debt limit in time, or at least before a “technical default” of a few days turns into a real one in the days thereafter.
But the good news should not blind us to reality. With such low interest rates, annual federal interest payments on the total public debt have actually fallen since 2008 even while though the debt itself has risen significantly. At some point, Europe will solve its debt crisis and our economy will pick up steam – either of which would send interest rates higher.
No one knows, of course, precisely where interest rates are headed, going, or when. In fact, recent predictions that our economy will grow more slowly over the next year or two than previously expected could keep them low for a while longer.
But, as Washington accumulates more debt, interest rates will play an ever-greater role in shaping our fiscal future.
Here’s just one illustration:
In the long-term budget projections that it issued last week, the Congressional Budget Office said that, if interest rates going forward were just a half-point higher than projected, the total public debt would reach 200 percent of Gross Domestic Product in 2035, as opposed to CBO’s actual projection of 190 percent, and interest payments on the debt by then would comprise 30 percent of all federal spending.
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