If you want to hear a dirge of doom and gloom, just listen to politicians on the subject of deficit spending. To Democrats, the fault lies with tax cuts (for the rich). With Republicans, it is unchecked spending (usually on Medicare and Social Security, with military spending being off limits).
I usually stop reading or listening when these one-sided arguments present themselves. Nonpartisan studies have shown for decades that it will take both tax increases and spending cuts to solve the problem or bring it back into line. But our immature political class just can’t seem to meet in the middle. In fact, the recent tax cut, which also increased spending, is a perfect example of the adolescence we have in Washington. And the timing at the top of an economic cycle is Keynesian economics in reverse.
Some argue that the deficit is about to get out of control. For that to happen, the interest on the debt pool, which has a median term of about 5.5 years, would have to climb above about 4 percent. I compute this figure by adding 2 percent annual growth to 2 percent annual inflation. Actually, I stole the figures from an article by Nobel Prize-winning economist Paul Krugman.
Right now, the interest rate on five-year Treasurys about 3 percent, and because most of the pool was financed in the last five years, the real rate is probably much lower. Finally, if the rate on 10-year Treasurys goes above 4 percent for any length of time, I would expect a recession brought about by mortgage interest rates climbing to 5.5 percent.
A recession would bring down rates dramatically. To be sure, runaway debt is always a possibility, but it is highly unlikely. So when you see politicians pull out their debt clocks on cable news, maybe you should just switch channels to HGTV.
William A. Johnson