What If Interest Rates Return To Historic Normals?

from The American Thinker:

November 28, 2010


What if interest rates return to 'historic normals?'

Rick Moran

Servicing our debt would become a major problem if interest rates were to return to historic levels, according to Yuval Levin at NRO:





[I]f the current very low rate continues, and our fiscal policy basically follows the track laid out by the president's last budget, then the interest on the debt 10 years from now will be a little over $350 billion. If the rate goes back to the 20-year average, however, interest on the debt 10 years from now will be more like $1.15 trillion. Again, no small difference. Indeed, it is enough to make some prominent elements of our deficit debate seem a little ridiculous.





The debate is a "little ridiculous" at the lower number of $350 billion but who's counting? Not Obama, whose policies foretell deficits over a trillion dollars for the next decade.



But what about all these proposals to reduce the deficit?





Many of the savings in the various deficit-reduction proposals bandied about in recent weeks would also be swamped by the same effect. But of course, wishing for interest rates to remain as low as they are doesn't make much sense either-these low rates are a function of the economic crisis we have just been through. Better economic growth, which we all want, would surely bring higher interest rates-and the Fed has certainly been pursuing this goal too (whatever you might think of the means by which it has done so).



The solution, of course, is to reduce the size of the deficit and debt while fostering economic growth. So even if the prospect of exploding interest costs makes a mockery of some recent deficit-reduction proposals and projections, deficit reduction is exactly what we need to head off that exploding interest. The particular figures in various projections-whether it's the numbers offered by the president's fiscal commission, the figures put out by the Congressional Budget Office, or the projections soon to come in the administration's budget-are likely to be pretty far off mark. But the point is the basic direction of our fiscal policy. We simply must begin to move toward lower spending and higher growth. As Lindsey makes clear, time is genuinely running out if we are to avoid a Japanese-style calamity.


Posted at 10:19 AM