…and our future. David Greenlaw, James D Hamilton, Peter Hooper, and Frederic Mishkin, in an op-ed in last Friday’s Wall Street Journal had some thoughts.
Research we have recently presented at the US Monetary Policy Forum leads us to conclude that, as debt grows relative to GDP, rising interest rates could bring the debt-to-GDP ratio up to 176% in 25 years, and even higher under less favorable assumptions about unemployment and the current-account deficit.
[C]ountries with gross debt above 80% of GDP and persistent current-account deficits—as is currently the case in the United States—face sharply increasing risk of escalating interest payments on their debt. This means even higher budget deficits and debt levels and could lead to a fiscal crunch—a point where government bond rates shoot up and a funding crisis ensues.
Given the Federal Reserve’s greatly expanded balance sheet…more than $3 trillion today, there is an additional factor that could exacerbate inflation expectations—Fed remittances to the US Treasury. If interest rates climb higher over the next few years, this could lead to substantial losses on the Fed’s holdings of Treasurys and mortgage-backed securities, losses that could approach several times the size of Fed capital.
Never mind that this bust of capital would violate the Fed’s own rules imposed on non-government banks. And it would violate Dodd-Frank rules.
But President Barack Obama wants to keep borrowing and to keep inflating private lending—the housing market “recovery,” you see.
Which brings up another risk that Greenlaw, et al., didn’t mention—all that pushed-for private/commercial lending at today’s artificially low rates. That’s generally long-term lending (those mortgages, and business lending for construction and plant expansion). But when interest rates rise, as they must, those private/commercial lenders will be forced to borrow at tomorrow’s rising interest rates while still locked into today’s low rates on the loans they’ve let. Can you say, “S&L collapse?”
We really need adult leadership in the White House.