Can the world support U.S. debt?
Date posted: April 17, 2012
When it comes to the national debt, we see three facts: First, the debt has increased. Second, foreigners have bought much of the debt. And third, interest rates paid on the debt are very low. Here’s the big question. Can these three facts continue? N.C. State University economist Mike Walden responds.
“Very good question …. And actually your question was the subject of a recently completed research project that was published in a peer-reviewed journal. And the answer those economists came up with was, very unlikely.
“First of all, they said that actually the U.S. debt, which has increased and is projected to increase, could … continue to be financed by foreign investors as there will be enough capacity, according to these economists, in the world down the road for foreign investors to supply the funds to buy up U.S. debt.
“So that’s good if we, in fact, are going to have more debt. The bad news these researchers found is it’s very unlikely — in fact, probably impossible — that the low interest rates that we’re now paying on the debt would continue. That is to say that in order to attract foreign investors to buy our increasing debt down the road, we would have to see interest rates in the U.S. go up substantially. And that will not only mean more money spent by the U.S. government on servicing the debt, but it will likely also mean other interest rates in the economy — everything from the interest rate on buying a home to the interest rate on a personal loan or a car loan — will also go up.
“And, of course, that tends to work to the detriment of the U.S. economy. So right now we have somewhat been shielded [from] our rising debt because of low interest rates. That will likely not continue.”
Category: Economic Perspective