Tuesday, June 28, 2011

The Deficit Is Worse Than We Think

In a WSJ op-ed, Lawrence Lindsey, a former Federal Reserve governor and assistant to President George W. Bush for economic policy, gives three reasons why The Deficit Is Worse Than We Think

  • Interest expense
  • Anemic growth
  • Health care costs
At present, the average cost of Treasury borrowing is 2.5%. The average over the last two decades was 5.7%. Should we ramp up to the higher number, annual interest expenses would be roughly $420 billion higher in 2014 and $700 billion higher in 2020. Normal interest rates would raise debt-service costs by $4.9 trillion over 10 years, dwarfing the savings from any currently contemplated budget deal. [...] The Fed will increasingly have to factor in the effects of any rate hike on the fiscal position of the Treasury.

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