Deficits and Interest rates

Go figure: Deficits matter:

" . . . [T]he nation’s budget deficit is a cinch to go from merely staggering to positively stupendous. At the risk of being economically unchic, we own up to an anachronistic belief that deficits do matter. And that,
further, their impact is destined to be felt with conceivably
incalculable consequences by a financial system that’s already
dangerously stressed, as this one is, with huge shortfalls in our
accounts at home and abroad and a savings rate that’s hovering between
zero and zip.
"

That quote was from Barron’s Alan Abelson, who believes that not only do deficits matter (duh), but enormous deficits will make interests rates rise:

"Money to rebuild what Katrina destroyed will have to come from somewhere . . . which portends a huge surge of borrowing. That, in turn, means the supply of Treasuries will balloon, joining the heavy flow of bond sales from the portfolios of insurance companies rushing to raise cash to meet the torrent of claims in Katrina’s wake. Which likely spells higher interest rates and all the bad things that may issue from them in an economy so lopsidedly dependent on a housing boom created and sustained by cheap money. A prospect, we might note, that has helped send gold, that indefatigable anticipator of woe, to its highest price since 1988."

Well, rates may be going up, but at least we know that ex-inflation, we have no inflation.

Hmmm, that gives me an idea:  We should start reporting the budget deficit, ex-revenue shortfall. Then interest rates (Ex- any rise) will stay low!

Hey, this economic planning thing may be easier than you first thought . . .

Source:
Big Repair Job
UP AND DOWN WALL STREET 
ALAN ABELSON
Barron’s, MONDAY, SEPTEMBER 19, 2005      
http://online.barrons.com/article/SB112690872222043560.html

Print Friendly, PDF & Email

What's been said:

Discussions found on the web:
  1. Idaho_Spud commented on Sep 17

    Barry, thanks for the link on your previous post to Jeff Matthews Blog – I like it! Too bad he doesn’t post more often though.

    I have to agree with you though that the government and the cheerleaders either deliberately understate or flatly ignore data that don’t fit their rose-colored view.

    What does the president mean, *we* can pay for rebuilding from Katrina without raising taxes? I think he wants my 2 yr old daughter to pay for it, and that pisses me off!

  2. Globetrader commented on Sep 17

    I’m from Germany, where we are called to vote tomorrow and the party (Christian Democrats) challenging the current administration has the guts to say: Sorry guys and gals, but we will have to raise taxes, so we can start the reforms to bring you out of the doldrums.
    I think it is better to accept, that we need to change now, today, that we can no longer borrow from the future.
    The administration, we all have spent too much and every day which passes, where we do not change our behaviour is a day my little 4 year old girl and even her children will have to pay a week or even longer for to bring this debt of the past back to zero.

    It’s not only debt. Ask yourself, who will be buying these treasuries, the US-administration has to issue to pay for Katrina? Yes, a huge amount will be bought by the Peoples Republic of China. Do you really think, the US-administration will remain free in its political decisions, if a Chinese Central Banker already today has the power to send the Dollar tumbling down, by saying at a cocktail party, that China might consider selling some of its Bonds or might no longer buy as many as in the past in favour of the Euro or another currency?
    I remember Russia paying back 100 year old debts a few years back and the same is still happening, just that in 100 years the US will have to pay the then Asian Union the money back, which their grandfathers borrowed today to pay for items and wares they in hindsight not really needed.

  3. Lord commented on Sep 17

    The way to do this is to play with expectations. “We expected a trillion dollar deficit, but it is *only* 500 billion. Aren’t we doing things right!”

    If China won’t revaluate, then I guess America doesn’t have a choice but to borrow everything they have.

  4. RH commented on Sep 17

    Just gotta say,you’ve quickly become my favorite econ blogger. Keep up the good work, the honesty and the great sense of humor!

  5. Blackwood commented on Sep 18

    WHY has savings gone to zip?

    A stock market that has taken FIVE YEARS to return to 2001 levels doesn’t inspire a lot of confidence –or investment. And then look at the government’s own policy of dropping Treasury Bill interest rate returns to 1% for the last three years. Even today, you can get a whole underwhelming 3% return on 90 day T-bills.

    There’s not a lot of savings going on because frankly the rewards for saving have varied between dismal (putting your money into Pets.com and Enron) and nonexistant (savings account and short term t-bill returns).

  6. Idaho_Spud commented on Sep 18

    I agree with RH: When there once again is an incentive to save (say perhaps an interest rate that compares favorably to inflation), then people will begin to save. I also agree that the equity markets (with the exception of commodities) have been lackluster since the dotcom bust. Worse news, commodities are probably only doing well because monetary inflation is causing real goods to cost more dollars…

    The massive liquidity in the financial market has taken our economy to a bizarre place where it makes more sense to borrow and spend everything one can, rather than to save.

    Clearly this is not sustainable. IMHO the light at the end of the tunnel is a train. One made in China.

  7. tyler rainey commented on Sep 19

    Wow–Alan Abelson settles it!! That is priceless. The guy who did his level best for 20 years to keep everyone out of the biggest bull market in history is your controlling authority? Gene Marcial notwithstanding, that guy is the biggest hack in the history of financial journalism. Once again, I would to ask you to provide some real world evidence for the contention that deficits positively correlate with either inflation or higher interest rates. I’m open to persuasion, honestly.

    P.S. I’m looking at the TLT up 3/8 today. I guess the bond market didn’t read Barrons this weekend.

  8. erikpupo commented on Sep 19

    “Once again, I would to ask you to provide some real world evidence for the contention that deficits positively correlate with either inflation or higher interest rates. I’m open to persuasion, honestly.”

    Hey Tyler Rainey, try the 1970’s. Or better yet, try the 1920’s Weimar Republic in Germany.

  9. dave reynolds commented on Sep 27

    why do people have such a hard time with the deficit-higher rates connection? There’s a finite amount of money available for loans of all kinds, correct? The more the federal govt borrows to finance it’s massive debt, the less there is available for everyone else, and the ‘cost of money’ will inevitably rise…

    I could be oversimplifying but I doubt it.

Posted Under