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Deficits and Interest rates

Posted By Barry Ritholtz On September 17, 2005 @ 10:17 am In Economy,Fixed Income/Interest Rates | Comments Disabled

Go figure: Deficits matter:

" . . . [T]he nation’s budget deficit is a cinch to go from merely staggering to positively stupendous. At the risk of being economically unchic, we own up to an anachronistic belief that deficits do matter. And that,
further, their impact is destined to be felt with conceivably
incalculable consequences by a financial system that’s already
dangerously stressed, as this one is, with huge shortfalls in our
accounts at home and abroad and a savings rate that’s hovering between
zero and zip.

That quote was from Barron’s Alan Abelson, who believes that not only do deficits matter (duh), but enormous deficits will make interests rates rise:

"Money to rebuild what Katrina destroyed will have to come from somewhere . . . which portends a huge surge of borrowing. That, in turn, means the supply of Treasuries will balloon, joining the heavy flow of bond sales from the portfolios of insurance companies rushing to raise cash to meet the torrent of claims in Katrina’s wake. Which likely spells higher interest rates and all the bad things that may issue from them in an economy so lopsidedly dependent on a housing boom created and sustained by cheap money. A prospect, we might note, that has helped send gold, that indefatigable anticipator of woe, to its highest price since 1988."

Well, rates may be going up, but at least we know that ex-inflation, we have no inflation [1].

Hmmm, that gives me an idea:  We should start reporting the budget deficit, ex-revenue shortfall. Then interest rates (Ex- any rise) will stay low!

Hey, this economic planning thing may be easier than you first thought . . .

Big Repair Job [2]
Barron’s, MONDAY, SEPTEMBER 19, 2005      

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URL to article: http://www.ritholtz.com/blog/2005/09/deficits-and-interest-rates/

URLs in this post:

[1] ex-inflation, we have no inflation: http://bigpicture.typepad.com/comments/2005/09/except_for_infl.html

[2] Big Repair Job: http://online.barrons.com/article/SB112690872222043560.html

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