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.

2008 253
2009 170
2010 167
2011 203
2012 256
2013 320
2014 385
2015 431
2016 464
2017 489
2018 530
2019 566
2010-2014 1,330
2010-2019 3,810

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

2009 0.2%
2010 0.6%
2011-14 3.9%
2015-19 4.7%

Ten-Year Treasury Note Rate

2009 3.0%
2010 3.2%
2011-14 4.8%
2015-19 5.4%

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.

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Andrew Busch
Andrew Busch


Andrew B. Busch is Global FX Strategist at BMO Capital Markets, a recognized expert on the world financial markets and how these markets are impacted by political events, and a frequent CNBC contributor. You can comment on his piece andreach him here and you can follow him on Twitter athttp://twitter.com/abusch .