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  • Deficit Spending and Higher Interest Rates Imperil the Recovery

    Long-term interest rates are rising rapidly, with the 10-year Treasury pushing against 4 percent for the first time since the summer of 2008 – before the financial markets collapse. The many influences on U.S. interest rates at the moment are all moving in the same direction – up.

    One influence is the growing concern that inflation could become a major problem in the near future, and this is building into the inflation expectation components of interest rates.

    Another is simply the unwinding of the flight to safety following the initial debacle in financial markets. Interest rates across the maturity spectrum were driven artificially low as investors large and small sought to preserve the value of their principle. As concerns ease, interest rates will naturally rise to more normal levels.

    Yet another influence traces to the very recent rise in the price of oil. This increase has given fast money investors the first opportunity in many months to make serious profits, but first they have to sell some of their Treasury holdings, thus pushing interest rates higher.

    The most dangerous driver of interest rates, however, is the U.S. budget deficit and the tremendous flows of debt coming out of the Treasury. This is simple economics – flooding the credit markets with U.S. debt means driving prices down and driving interest rates up. Bond market “vigilantes” – those major institutional buyers of government debt impervious to soaring rhetoric and political promises – have reawakened and want to see concrete steps toward getting the $2 trillion deficit under control.

    Rising interest rates, for whatever reason, are a very real threat to the hoped-for economic recovery. The housing sector appears to be near stabilizing, but this progress can evaporate quickly if mortgage rates shoot up. There are only a couple actions government can take at this point to ease interest rate pressures. First, the President should make clear his intentions with respect to re-nominating Ben Bernanke as Chairman of the Federal Reserve Board. This issue is an unwelcome source of uncertainty hanging over financial markets.

    Second, the President and the Congress must realize that bond vigilantes will not be swayed by new budget rules or other posturing. They want to see the economy strengthen while the deficit comes down now, and fast. The solution is to set aside all the new spending proposals and start cutting spending fast. Otherwise the economy’s few “green shoots”’ are likely to be killed off with a higher interest rate hard freeze.

    Posted in Energy [slideshow_deploy]

    21 Responses to Deficit Spending and Higher Interest Rates Imperil the Recovery

    1. Spiritof76, New Hamp says:

      "Rising interest rates, for whatever reason, are a very real threat to the hoped-for economic recovery."

      I can not believe the author doesn't understand the reason behind increasing interest rate on the Treasury bonds, no matter what the duration is. It reflects the risk. With the US going bankrupt, the investors will demand much higher rate than what it is today. In addition, the fed. is monetizing the debt. So, the interest rate will further increase for any investor to cover the inflation risk and the default risk. The credit rating agency is hinting at downgrading the US AAA credit rating.

      Now, on top of this maniacal spending by Obama, add cap and trade and government health care- all costing hundreds of billions. Economy will shrink further sending the unemployment into teen rates.

      We had those issues in 1979, Carter administration. It is going to be mush worse than that this time around.

    2. drowley, utah says:

      Rising interest rates. Rising gas prices. Rising cost of food. Rising taxes are inevitable, too.

      So many of us have seen it coming, but feel powerless to stop it. It feels like trying to raise your hand to stop an oncoming freight train.

      And I agree that cap and trade and government health care are bound to make it worse.

    3. Pingback: » Financial News Update - 06/11/09 NoisyRoom.net: “Extremism in the defense of liberty is no vice. Moderation in the face of tyranny is no virtue.” Barry Goldwater

    4. Bob, Mass. says:

      Seem like its 1979 all over again. A president is in that spends.(Carter) Gold and silver are up again, so its's time to get the cash ready to buy those cd's again. (13%) Hope I can roll over to those high yields again. GOOD LUCK EVERYONE , AND GOD BLESS AMERICA.

    5. Normca says:

      What's next ? Wage and price controls. It is the Obama economy, but he will blame his decision for price controls on Bush. This is all part of the plan.

    6. Dennis A. Social Cir says:

      Carter is alive and well, the dems are in power and inflation is on the rise. Wonder how long before mortgage interest reaches 15% again????

    7. Ben C, Ann Arbor, MI says:

      The following is a letter I got from my Dad. He is an eighty eight year old retired Naval Officer (flew AD-6's off aircraft carriers)and a true "Rocket Scientist" (worked for NASA developing the ion propulsion engine):

      Nobody has heard of the recession which started near the end of Pres. Wilson's second term, but it was a dilly, too. You don't hear about it because the recession was not as deep and recovery occurred in a couple of years. The maligned Calvin Coolidge did the right thing by reducing the government's size and reduced the federal budget. We soon had full recovery and the "roaring 20's" prosperity. A shipyard in Mobile, AL, where Daddy was a paymaster closed when I was 3 months old and, to a person, everyone was fired. Within a few months, in 1921, Daddy, a got another job in a bank in Vicksburg, MS.

      Many economists say the recessions/depressions since Woodrow Wilson, including the present one, have been due in major part to the Federal Reserve's (Fed's) expanding the money supply which led to burst economic "bubbles." [The Fed was established near the start of Wilson's first term. and Wilson later said it was the worst mistake of his Presidency.] Many say the speed of recovery from a recession/depression is fastest when the Coolidge model is followed. It is believed that our Great Depression lasted some seven year affer the rest of the world had recovered because Hoover and Roosevelt both tried to accelerate recovery by interferring with free markets — just as Bush and Obama have done on this crunch

      W. Bush tried to get formal oversight of Fanny Mae and Freddie Mac who both played a major role in hatching the current financial situation. Bush started trying in his first term and continued in his second, but RINOs and Democrats blocked passage of legislation authorizing oversight. Unlike national banks, etc., Fanny and Freddie have no oversight.

      To be fair, both Bush and Obama interferred in the free market trying to slow the recession/depression. But eeriely like Hoover/Roosevelt, Bush's interference with the free market and his ignoring of our Constitution were "peanuts" compared to the profound interference and ignoring done by Bush's successor: Obama.

    8. John Clancy Wyandott says:

      The Obama administration CLAIMS that private insurers will be a part of Obamacare. If you've followed the plight of private high schools and colleges that have tried to compete FINANCIALLY with government schools and colleges, you see trough the deception: Virtually all the colleges, with the exception of Hillsdale, have failed to resist government monies. Do you see a parallel in government involvement in health? and this is to say nothing about the the sensitive area of doctor-patient-family relationship. Vote no on Obamacare to defeat a movement toward totalitarianism and a loss of our freedoms.

    9. Al, The Villages, Fl says:

      Spiritof76, New Hampshire is right on (wonder why his neighbors don't get it?). Yes, we are heading for the same disaster created by Carter and yes, it will be worse. The real crisis is that this administration knows it but their goal is to change (remember that word?) our government from a democratic republic into a european-like secular socialist government – or like the USSR.

    10. John Rosky Andover, says:

      Someone needs to stop Obamas spending and the Reps are afraid and the Dems want more. I would like to know how much my grandson is going to have to pay for all this wish list spending the government is forcing on us. Health Insurance for 12 million Illeagle immigrants,cap in trade

      and the other projects that will come next.

    11. Jim, Charleston SC says:

      The US will go bankrupt, no money to buy bullets, then we get attacked. Is this the direction we're heading in??

      Let's hope we can survive till the next election, then we can get back on track and retake this country and put it back on the right path.

    12. Sharp, General Deliv says:

      Obama's ONLY objective is to destroy the American economy in order to establish a dictatorship. Every lie he tells is just a smoke screen, a diversion, just so people will discuss the merits of this or that, like a children in a car seat with a steering wheel, and a little horn. How could it be anymore obvious. Read the history of dictatorships and last weeks Pravda, to get a clue.

    13. Lynn B. DeSpain says:

      Just think, it's been going on just six months for Obama to take us from Number One to the point where Saudi Arabia will only sell us Oil for Gold, not or money. Imagine another three and a half years? Right now, between living in Oregon and the Federal Government, they take one dollar for every two I get. And folks, my wife and I ae retired and on a fixed income, way below six figures!

      We're going to have to get a grubstake to finish out this hand!

      Hozro

    14. Lynn B. DeSpain says:

      Just think, in Six months Obama has taken us from number one to apoint downhill where Saudi Arabia now demands Gold for Oil instead of our Dollars, not that I blame them.

      Between living in Oregon and the Federal taxes, they take one dollar for every two that we make. Trust me, my wife and I are retired and on a fixed income and live on a lot less than six figures!

      We're going to have to get a grubstake to stay in this game for another three and a half years!

      Hozro

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    19. Derekp says:

      I think i've seen this somewhere before…but it's not bad at all

    20. Pingback: The leading economic index | 1800blogger

    21. john says:

      hi, i am john..Nobody has heard of the recession which started near the end of Pres. Wilson’s second term, but it was a dilly, too. You don’t hear about it because the recession was not as deep and recovery occurred in a couple of years. The maligned Calvin Coolidge did the right thing by reducing the government’s size and reduced the federal budget. We soon had full recovery and the “roaring 20’s” prosperity. A shipyard in Mobile, AL, where Daddy was a paymaster closed when I was 3 months old and, to a person, everyone was fired. Within a few months, in 1921, Daddy, a got another job in a bank in Vicksburg, MS. Savings Calculator

    22. john says:

      I think i’ve seen this somewhere before…but it’s not bad at all Between living in Oregon and the Federal taxes, they take one dollar for every two that we make. Trust me, my wife and I are retired and on a fixed income and live on a lot less than six figures!. Savings Calculator

    23. john, new york says:

      I think i’ve seen this somewhere before…but it’s not bad at all. Savings Calculator

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