Yesterday Power Line posted an article on the impact of massive federal spending. The article refers to a 2003 paper written by Thomas Laubach, an economist in the Federal Reserve's Division of Research and Statistics, titled "New Evidence on the Interest Rate Effects of Budget Deficits and Debt." In the paper, Mr. Laubach states:
"This study has shown that statistically significant and economically plausible estimates of the effects of government deficits and debt on interest rates can be obtained by focusing on long-horizon forecasts of future deficits or debt, and future interest rates. The projections of deficits and debt published by the CBO and the OMB are arguably among the best publicly available forecasts for these variables. The effects of these projections manifest themselves at the longer end of the yield curve, as economic reasoning would predict. All else equal, the results of this study suggest that interest rates rise by about 25 basis points in response to a percentage point increase in the projected deficit-to-GDP ratio, and by about 4 basis points in response to a percentage point increase in the projected debt-to-GDP ratio."
If you are like me, your eyes just glazed over. Please follow the Power Line link to get the full impact of what this means. Basically, it means long term interest rates will double, making it more difficult for the government to finance its debt and more difficult for you and I to finance homes, etc. We need to make some serious Congressional changes in 2010 if we are to head off the financial disaster that is now brewing in our country.
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