On Monday Dean Baker was upset that Robert Samuelson thought the two-decade Japanese experiment in stimulus policies should somehow be taken as a warning note against stimulus policies. Baker wrote:
Whether Japan’s debt is “excessive” can be debated, but it certainly does not have an excessive interest burden. Its interest burden is currently around 1.0 percent of GDP. It would be even lower if the interest paid to the central bank, and refunded to Japan’s treasury, were subtracted.
This low burden is possible because the interest rate on Japan’s debt is extremely low, with short-term debt getting near zero interest and long-term interest rates hovering near 1.0 percent. Samuelson wrongly imagines that the government would face a disaster if interest rates rose. In fact, it would be able to buy up its long-term debt at huge discounts and quickly reduce its debt to GDP ratio.
(Bond prices move inversely to interest rates, so if interest rates on 10-year treasury bonds rose to 3 percent, Japan’s central bank could buy them back for around half of their current price. There would be no real reason to do this, but it would placate the sort of ignorant people who tend to dominate economic policy debates and get obsessed about debt to GDP ratios.)
Now when I read this, I was all set to make a snarky post about me having a long-term, fixed-rate mortage, as well as a bunch of credit card debt I’m trying to pay down, and asking you guys if–per Dean Baker–I should be pining for a massive spike in interest rates.
But I don’t need to do that, I can just turn to Dean Baker who wrote on Wednesday (two days after the above):
Currently net interest rate payments are 1.4 percent of GDP. The Congressional Budget Office (CBO) projects this will rise to 3.3 percent of GDP by 2023. This 1.9 percentage point rise in projected interest payments is by far the largest cause of projected increases in deficits over the decade. In addition, the interest refunded from the Fed to the Treasury is projected to fall by 0.3 percentage points, meaning that higher interest costs are projected to add a total of 2.2 percentage points to the deficit.
This rise is noteworthy because it is almost entirely due to higher interest rates rather than large debt, since the debt to GDP ratio is projected to be only marginally higher in 2023 than it is today. The projection of higher interest rates is in turn a projection about Federal Reserve Board policy. In other words, CBO projects that the Fed’s decision to raise interest rates over the next decade will be the main factor pushing deficits higher.
The Post somehow missed this one.
Hmm, maybe the explanation is that the people at The Post had read Baker’s blog analysis from 48 hours earlier, and thought the rise in interest rates would do wonders for the US government’s debt situation?