Busch: End Game On Government Finances And Interest Rates

Here are the CBO estimates for the interest costs for the US government debt going forward in billions.

There are sever major assumption flaws in the CBO estimates on the projected budget deficits.

One, these estimates do not reflect the impact of the new legislation on the economy. Two, the estimates presented in this chapter do not take into consider­ation any impact that the President’s budgetary proposals might have on GDP or other broad measures of economic activity. Three, the CBO's estimates for interest rates are not dynamically adjusted and here they are:

Three-Month Treasury Bill Rate

Ten-Year Treasury Note Rate

3.0% for the 10 year is already off by over 20%.

The point is that the $787 billion stimulus spending plan is creating major strains as it contributes to $3.25 trillion in debt issuance by the US government for this year. In turn, this is forcing up interest rates on the long end of the yield curve. Most importantly, these higher rates will be increasing the cost of interest to the US government and increasing the budget deficit. Should the CBO projections for economic growth and interest rates be wrong with revenues from taxes lower and rate costs higher, this will increase the size of the deficit. This is a classic debt spiral analogous to many failed third world countries.

Of course, the major difference is that the US borrows in US dollars and has a massive tax base to utilize. Unfortunately, the US is following in the footsteps of other debt spirals with the potential of inflating its way out of the debt. We can point directly at the central bank buying the government's debt for fueling this fear. (Bloomberg today reports that the Fed may actually step up purchases of assets until they are certain that an economic recovery may hold.)

All of this leads up to the conclusion that the involvement of the government in trying to ameliorate the effects of a contraction often lead to a worsening and prolonging of that contraction.

More from Andrew Busch including:

• Fear: Gone But Not Forgotten
• Fear: Gone But Not Forgotten Part II
• Repeating The Mistakes Of The Past
• Read All CNBC Guest Blogs Here
  

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