Thursday, 23 June 2011

When Interest Rates Revert to the Mean .... You'll hear the KABOOM!

US annual interest on debt will be $800 billion higher when interest rates revert to their mean.
hat tip:  Ian Nunn  Linked from Zero Hedge.

"Right now, thanks in large part to Federal Reserve policy, Uncle Sam can borrow at an average cost of just 2.5 percent. The average borrowing cost over the last three decades was 5.7 percent. Our debt is now $14 trillion and scheduled to grow to $25 trillion by the end of the decade. If interest rates normalize over that period the added interest costs in 2021 alone will be $800 billion—more than 20 times the mere $37 billion in budget cuts that tore up Congress in March. It would take virtually all of the cuts in the Ryan budget just to cover that added interest, much less to start bringing down the national debt. Unfortunately, the Fed is now in a fiscal box. A normalization of interest rates would break the Treasury. Hence, a normalization of rates really can't happen—we're stuck in a world in which the Fed must keep rates artificially low in order to prevent a budget disaster.
- Lawrence Lindsey writing in the Weekly Standard June 13, 2001"

Ed:  Is this saying that normalization won't happen or just that there is no Plan B?

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