What’s happened to total debt?
Date posted: February 2, 2011
Everyone knows the federal government has borrowed a tremendous amount of money over the past couple of years. So why are interest rates still low? N.C. State University economist Mike Walden responds.
“Typically when you have an increase in borrowing, a very fast increase in borrowing, the costs of borrowing — the interest rate — would go up. It’s kind of like if you go to the farmers market one weekend and everyone for some reason wants to buy apples, and everyone is trying to buy apples: Well, the price of apples is going to go up.
“We have not seen that with interest rates. In fact, interest rates are at a 30- or 40-year low. The reason is that while the federal government has been borrowing more money … other players in the credit markets have actually been borrowing less money. Consumers — consumers — have actually reduced their borrowing over the last three years, as well as private businesses have reduced their borrowing. And local and state governments have reduced their borrowing.
“And so if you look at the numbers, what you see is an offset there. You see, yes, increased borrowing by the federal government, but you see reduced borrowing by these other entities. That’s why we have not seen pressure, upward pressure, on interest rates.
“Now that still says there could be a problem down the road, because as the economy recovers we would expect to see, for example, business borrowing go up and potentially consumer borrowing go up. If the federal government continues to borrow at high levels, then that would put upward pressure on those interest rates.”
Category: Economic Perspective