Rising Rates Reveal Debt Reality

The Fed's lucky streak of deceiving bond investors with low interest rates may be drawing to a close. Nevertheless, the extended period of low borrowing costs has bred a new breed of bulls - not even bulls, more like ostriches - which bury their heads in the sand of declining debt service ratios so they don't have to face intractable levels of US government debt and the potential for an interest rate surge. If these ostriches were to actually look at the numbers, they would realize that the US is simply living on borrowed time.

The government of the United States is the holder of the world's reserve currency and, as such, has enjoyed the benefits of low interest rates despite its inflationary practices. The recycling of our trade deficit has hidden what would otherwise be much higher borrowing costs and a much lower purchasing power for the dollar. That condition has prompted pundits like Paul Krugman to claim, "...many economists, myself included, warned from the beginning that the plan [Obama's stimulus program] was grossly inadequate. Put it this way: A policy under which government employment actually fell, under which government spending on goods and services grew more slowly than during the Bush years hardly constitutes a test of Keynesian economics." Mr. Krugman (a Nobel Prize winner in economics) actually laments that government spending and debt accumulation isn't growing fast enough!

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