Severe Budget Deficit Will Bring High Interest Rates
by Dr. Tony Magana
Americans are becoming increasingly concerned about the federal budget deficit. Now it appears that government overspending may not only be making the debt worse but also will result in inflation and high interest rates.
In the words of the Congressional Budget Office the federal budget is on an “unsustainable path” because the national debt will proceed to abound more explosively than even an economic recovery can abide. This same conclusion has been drawn by many economists and think tanks from both left and right of the political spectrum including the Brookings Institute, Heritage Foundation, and CATO Institute.
Despite these warnings President Obama and the liberal Democrats in Congress have persisted in wanting to affix new debts to the erstwhile mountainous deficit by creating a very expensive government health care program and the largest bureaucracy ever contemplated to monitor then tax carbon emissions. The Congressional Budget Office initially calculated that over 10 years the deficit will balloon up to $9.1 trillion under the most favorable scenario. This Democratic artifice includes a complete cessation of all Bush era tax cuts, not modifying the alternative minimum tax ( an automatic tax raise to middle class due to inflation and the increasing cost of living), moderate economic growth, and presumes new taxes to pay for the new health care program.
There was one consideration not taken into account which is currently developing. Increasing evidence is surfacing that rising interest rates and inflation may be coming sooner rather than later. The prominent Harvard economist, Martin Feldstein, wrote an opinion piece in the Financial Times warning of the potential of higher interest rates. Many who watch the financial world are now predicting inflation to occur as the economy recovers due to the large sums of money the government dumped into economy as a stimulus.
As a defense against inflation, the Federal Reserve has been buying back long-term Treasury bonds to keep the bond rate down. A recent decreased demand for Treasury bonds has forced the offering of higher interest rates to buyers and thus increase the amount of interest the government will have to pay on the national debt. The creeping unwillingness of foreign nations to buy these securities, China is the biggest customer, and the persistent lack of growth in the American economy are combining to drive these interest rates even higher still.
As if that is not bad enough, today the Congressional Budget Office released a report on what will happen if indeed as many fear inflation and high interest set in over the next ten years. If the interest rate goes to 6.4% the deficit will grow an additional $1.3 trillion more in just nine years but if the interest rate rises to a level similar to that seen during the Jimmy Carter Presidency of 10.5% then the deficit would be $5.6 trillion higher.
Unfortunately the risk of higher interest rates, inflation and the deficit are all interdependent upon one another. Increasing taxes to reduce the deficit would not help says Feldstein because it will weaken demand in the economy, thus in the long term we have no option but to cut government spending or face certain inflation and the consequences of out of control irresponsible spending.
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Copyright 2009 Dr. Tony Magana
Thanks for reading Contempo Magazine blog which discusses issues for McAllen, the Rio Grande Valley, and America from a conservative Hispanic point of view. Tony Magaña grew up in McAllen Texas, attended Texas A&M University, served as an officer in Army Reserve, and holds a doctorate from Harvard University. The co-founder of Contempo Magazine has participated in Valley business for over 20 years. He is a member of the National Association of Hispanic Journalists and also writes for the American Daily Review. Follow him on twitter http://twitter.com/contempomagazin
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