Government debt is ballooning globally, but this short post centers on US government debt.
Over the past two decades, governments went on a debt binge, fueled by low interest rates. Now that rates have risen, investors worry that Western governments aren’t willing to make politically difficult decisions to curb public spending….
Of particular interest to me is that this has gone on in extreme parallel (to coin a phrase) in the US. In the years (too many of them) following the Panic of 2008, the US Fed kept interest rates, via its benchmark rate setting artificially suppressed, holding them down almost all the way to zero. That fueled the borrowing, since payments on the debt were so cheap. (The heavily negative impact on fixed-income Americans holding, as their primary income source, corporate and government debt instruments was of no mind to the Fed or to the administrations then in power.)
Federal spending needs to come down, certainly, but that’s made harder to do (the primary impediment is political timidity) at the higher interest rates currently extant.
Therein lies the rub. The Fed’s benchmark rates currently are at, or a skosh below, the rates historically consistent with the Fed’s 2% target inflation rate. The current push to lower them even further, globally as well as here at home, is mistaken. That won’t reduce borrowing; it’ll only increase it, partly to roll existent debt and partly to “take advantage of” the lower rates to increase net borrowing.
No. It’s time for the Fed to be quiet and sit down, leaving its benchmark rates at their current level. The only thing for the Fed to say publicly about rates is to announce in clear, no uncertain terms—no Fed speak—that it’s going to sit down and be quiet, and leave its benchmark rates at their current levels. It’ll be costly and slow for existing debt to be paid down, but our economy will recover to even greater prosperity on the other side. The cost of not sitting tight at current levels will be even greater in the long run of burgeoning debt that ends up so great it cannot be repaid, except with inflation destroyed dollars.
John Maynard Keynes once said that in the long run, we’ll all be dead (so who cares, went his subtext). But our children and grandchildren will be living in today’s long run. We should care today.