- The Foundry: Conservative Policy News from The Heritage Foundation - http://blog.heritage.org -

The Global Government Debt Bubble

Posted By Conn Carroll On February 2, 2009 @ 10:44 am In Ongoing Priorities | Comments Disabled

This Friday the New York Times [1] reported:

Even as Congress looks for ways to expand President Obama’s $819 billion stimulus package, the rest of the world is wondering how Washington will pay for it all.

“The U.S. needs to show some proof they have a plan to get out of the fiscal problem,” said Ernesto Zedillo, the former Mexican president who helped steer his country through a financial crisis in 1994. “We, as developing countries, need to know we won’t be crowded out of the capital markets, which is already happening.”

Heritage scholar J.D. Foster puts some real numbers [2] to Zedillo’s concerns:

While forecasting federal borrowing beyond 2009 is speculative, the combination of current law programs plus the stimulus–and without any additional borrowings for additional financial market interventions or other new spending–suggests at least another $1.6 trillion of new government debt, bringing the total of publicly traded federal debt to $9.9 trillion by the end of 2010.

A common means of putting such figures into perspective is to compare them to the size of the economy. At the end of 2008, the ratio of federal debt to GDP was about 44.9 percent. Under the assumptions here about new issuance and using the CBO forecasts for nominal GDP, debt at the end of 2009 will be about 57.9 percent, an increase of 13 percentage points in just a single year. By the end of 2010, the debt-to-GDP ratio will have reached 67.9 percent for a two-year increase of 23 percentage points.

Using the consensus estimates, by the end of 2010 interest rates will be up another 0.3 to 0.5 percentage points, for a total increase due to the government debt bubble of 0.7 and 1.1 percentage points.[2] That would mean that today’s mortgage rate of 5.33 percent would be between 6 percent and 6.4 percent. Such increases in interest rates would significantly weaken the economy further and delay for many months any hope of significant recovery.

The consensus estimate for interest rate effects also implicitly assumes that governments around the world are largely following their own normal fiscal policies. In contrast, the global recession has caused deficits to balloon almost everywhere, and governments worldwide are considering their own massive programs to stimulate their economies. So the United States will be offering this great wave of federal debt to the credit markets while most other countries will be doing the same. Because interest rates are set on global markets, this even larger global wave of government debt is likely to have much greater interest rate effects than would be the case if the United States were acting alone.


Article printed from The Foundry: Conservative Policy News from The Heritage Foundation: http://blog.heritage.org

URL to article: http://blog.heritage.org/2009/02/02/the-global-government-debt-bubble/

URLs in this post:

[1] New York Times: http://www.nytimes.com/2009/01/30/business/worldbusiness/30davos.html?ref=todayspaper

[2] some real numbers: http://www.heritage.org/Research/Economy/wm2257.cfm

Copyright © 2011 The Heritage Foundation. All rights reserved.