- Prison Planet.com - http://www.prisonplanet.com -

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

Posted By admin On July 6, 2009 @ 7:02 am In Money Watch | Comments Disabled

Philip Aldrick
London Telegraph [1]
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.


US lurching towards debt explosion with long term interest rates on course to double 250509BANNER [2]

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. [1]

Article printed from Prison Planet.com: http://www.prisonplanet.com

URL to article: http://www.prisonplanet.com/us-lurching-towards-debt-explosion-with-long-term-interest-rates-on-course-to-double.html

URLs in this post:

[1] London Telegraph: http://www.telegraph.co.uk/finance/financetopics/financialcrisis/5754447/US-lurching-towards-debt-explosion-with-long-term-interest-rates-on-course-to-double.html

[2] Image: http://prisonplanet.tv/signup.html

[3] Keynesians Are Wrong: We CAN Have Disinflation With Rising Real Interest Rates: http://www.prisonplanet.com/keynesians-are-wrong-we-can-have-disinflation-with-rising-real-interest-rates.html

[4] Dire CBO report projects US debt will be double GDP by 2037: http://www.prisonplanet.com/dire-cbo-report-projects-us-debt-will-be-double-gdp-by-2037.html

[5] The Case for Higher Interest Rates: http://www.prisonplanet.com/the-case-for-higher-interest-rates.html

[6] Economist Predicts US Interest Rates To Explode To 3.75% This Year: http://www.prisonplanet.com/economist-predicts-us-interest-rates-to-explode-to-3-75-this-year.html

[7] Without Low Interest Rates, The U.S. Financial System Dies: http://www.prisonplanet.com/without-low-interest-rates-the-u-s-financial-system-dies.html

Copyright © 2013 PrisonPlanet.com. All rights reserved.