US lurching towards 'debt explosion' with long-term interest rates on course to double

US lurching towards 'debt explosion' with long-term interest rates on course to double

www.telegraph.co.uk

The US economy is lurching towards crisis with long-term interest rates on course to double, crippling the country’s ability to pay its debts and potentially plunging it into another recession, according to a study by the US’s own central bank

(visit the link for the full news article)

In a 2003 paper, Thomas Laubach, the US Federal Reserve’s senior economist, calculated the impact on long-term interest rates of rising fiscal deficits and soaring national debt. Applying his assumptions to the recent spike in the US fiscal deficit and national debt, long-term interests rates will double from their current 3.5pc.

The impact would be devastating by making it punitively expensive to finance national borrowings and leading to what Tim Congdon, founder of Lombard Street Research, called a “debt explosion”. Mr Laubach’s study has implications for the UK, too, as public debt is soaring. A US crisis would have implications for the rest of the world, in any case.

...snip...

Mr Congdon said the study illustrated the “horrifying” consequences for leading western economies of bailing out their banks and attempting to stimulate markets by cutting taxes and boosting public spending. He said the markets had failed to digest fully the scale of fiscal largesse and said “current gilt yields [public debt] are extraordinary low given the size of deficits”. Should the cost of raising or refinancing public debt in the markets double, “the debt could just explode”, he said, adding that it would come to a head in “five to 10 years”.

Meanwhile Obama continues to spend the billions of Dollars as if nothing is wrong. In fact, the Fed can print infinite amounts of money. Due the discontinuation of M3 money supply data keeping the official inflation rate relatively low. But in one way or another, it's going to fire back on the American people. As long as China, Japan and other countries continue to bear the burden of US deficit (through the purchase of treasury bills), nothing is wrong, but the question is where they will draw the line.

The system is going to explode, no doubt about that on my mind. The higher the interest rate, the smaller the chance the US will ever be able to pay off its debts. Once investors lose their faith in the US' capability of ever delivering return on investment, they can make the US financial system collapse by simply stopping to purchase treasury bonds. Although that wouldn't be in anyone's interest, investors find themselves between a rock and a hard place, sooner or later there won't be an option left.

www.telegraph.co.uk
(visit the link for the full news article)

reply to post by Mdv2

potentially plunging it into another recession

In order for us to plunge into another recession, wouldn't we first have to get out of our current recession? Am I the only one who missed the notice that the recession was over? I was under the impression that there really isn't much of an end in sight.

You made mention of the fed printing infinite amounts of money, which is true. You consider it to be a reckless move on Obama's part. I just have to think that they are well aware of the consequences of their actions. There is no way that a bunch of paranoid CT'ers like us can see this but they can not. So in my mind it begs the question of what do they have up their sleeve? What is their real goal here?

I don't think they are asleep at the wheel. I think that they know exactly what they are doing. I think that they have manipulated / generated this entire fiasco, I just haven't figured out why yet. I don't think it is as simple as funneling wealth / class warfare. I think it is probably much more complicated and devious than that. I guess we will all know the real answer in a few decades.

Don`t think it will take a decade ...

Originally posted by Ayrton
Don`t think it will take a decade ...

To know the truth? I bet it will take more than a decade and then it will still be debatable. Similar to the cause of the great depression.

Should the cost of raising or refinancing public debt in the markets double, “the debt could just explode”, he said, adding that it would come to a head in “five to 10 years”.

5 - 10 years? Ahh.. that's plenty of time... Obama will be out of office by then so it doesn't matter.

Also, sorry, I just couldn't resist. I just love the pictures that the media choose for their stories, the picture in this story of Geithner looks like he just let one rip!

[atsimg]http://files.abovetopsecret.com/images/member/7b5e44a72a69.jpg[/atsimg]