US lurching towards ‘debt explosion’ with long-term interest rates on course to double

Philip Aldrick
London Telegraph
Monday, July 6, 2009

The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank.

In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc.

The impact would be devastating by making it punitively expensive to finance national borrowings and leading to what Tim Congdon, founder of Lombard Street Research, called a “debt explosion”. Mr Laubach’s study has implications for the UK, too, as public debt is soaring. A US crisis would have implications for the rest of the world, in any case.

(ARTICLE CONTINUES BELOW)

Using historical examples for his paper, New Evidence on the Interest Rate Effects of Budget Deficits and Debt, Mr Laubach came to the conclusion that “a percentage point increase in the projected deficit-to-GDP ratio raises the 10-year bond rate expected to prevail five years into the future by 20 to 40 basis points, a typical estimate is about 25 basis points”.

The US deficit has blown out from 3pc to 13.5pc in the past year but long-term rates are largely unchanged. Assuming Mr Laubach’s “typical estimate”, long-term rates have to climb 2.5 percentage points.

Full story here.

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10 Responses to “US lurching towards ‘debt explosion’ with long-term interest rates on course to double”

1. CJ in Roanoke Says:
   July 6th, 2009 at 7:24 am

   I’m just waiting for the rest of the world to figure out that the USA will never be able to repay the debt they buy. If treasury yields go to double digit, that would be a disaster because the supposed recovery is based on cheap money.

   

   Madman Reply:
   July 6th, 2009 at 8:22 am

   Obama got on tv, like a month or two ago, and told the world there was no way we could repay them. Think it was on CNN. Been a while since I seen it, but it’s out there.

   

   pitofdoom Reply:
   July 6th, 2009 at 9:47 am

   All the fait currancies are toilet paper, so why just try and stealth away from the Dollar?

   It no longer has anything to do with Weath but more to do with Power, I think

2. Filbert Flubottom Says:
   July 6th, 2009 at 8:06 am

   That’s all well and good but have you factored in JP Morgan’s deal with Bush/Negroponte to enable them to jimmy-rig interest rates via interest rate swaps outside prying eyes/regulatory bodies…

   With 60+ trillion of these swaps outstanding that buys a lot of influence and ability to manipulate things in the favor of the banksters…

3. Jones Henry Says:
   July 6th, 2009 at 8:30 pm

   Zionists got USA! MUAHAHAHAHAHAHA!!!!!!!!!!!!!!!!!!!!!!!!!

4. drunk Says:
   July 6th, 2009 at 9:17 pm

   Financially, America has been SOLD!!!!! DEBT rules!!!!! WE did’nt MAKE this debt!!!! The criminals in D.C. made it. FOR WHAT ????? WHO STOLE THE MONEY?????? WHAT do you get in federal benefits????? NOTHING except stomping on our GOD given rights!!!!! It’s TIME !!!!! SEND THEM ALL TO HELL !!!!!

5. global plantation serf Says:
   July 7th, 2009 at 4:46 am

   Say, isn’t that going to kill the economy? Of course if the economy continues in free-fall the stock market will probably crash again. All those 401(k)s and college funds down the drain…

   Notice that taxes haven’t gone down and the govt is not downsizing. May I have more “Change We Need” please?

6. debtprisonandcasinosrus Says:
   July 7th, 2009 at 9:03 am

   FE MA CAMP HERE WE COME.

7. wrath of ed Says:
   July 7th, 2009 at 9:25 am

   thats what u get when u shove the dumb black asses to the front of the class ….suffer u racist pricks……PAY FOR IT!!

8. JACKASS Says:
   July 7th, 2009 at 12:32 pm

   THINK CONGRE$$ TRAITOR REVOLUTION