Relationships Among Interest Rates, the National Debt, and Federal Income
As I've mentioned before, the Federal Reserve Board uses low interest rates to keep the U. S. from collapsing into a depression, and high interest rates to keep us from overheating to the point of runaway inflation.
Two-year lag between stimulating or dampening the economy and the time these moves become readily apparent
Unfortunately, there is a two-year lag between steps taken to heat or cool the economy and its heating or cooling. Over the decades Federal Reserve chairmen have gradually learned what indicators to use to decide when to stimulate the economy and when to curb it.
At the present time, interest rates are extremely low, as the Fed tries to stimulate the U. S. economy.
To whom is the national debt owed?
The U. S. national debt takes the form of Treasury bonds owned by individuals and organizations. The U. S. has to pay interest on these bonds, as well as paying off these bonds when they fall due. The bonds range from very short term to 30-year long-term bonds.
The U. S. government doesn't "call" its bonds
Unlike corporate bonds, the government doesn't "call" its bonds... i. e. force the redemption of high-interest bonds when interest rates drop, so that it can sell new bonds at the newer lower interest rates. If you bought 30-year Treasuries paying 16% interest in September, 1981, you're still getting 16% interest on them today. Once the government has sold a bond at a specific interest rate, it's stuck with that rate for the life of the bond.
As U. S. Treasury bonds fall due, the U. S. pays them off, and immediately issues new bonds for the same amount to finance its debt to the public. In other words, it finances its debt by rolling it over, rather than be paying it off.
Low interest rates benefit the government...
Clearly, it's of great benefit to the government that interest rates remain low so that it can refinance the national debt at minimum interest cost to the government.
...but low interest rates generally signal a recession and reduced tax receipts
At the same time, lower-than-average interest rates generally occur when the country is in a recession. This means that tax receipts are down for the federal government (not to mention high unemployment and a disgruntled electorate).
Managing the economy is a tight-wire act that requires meticulous timing, and insight into where the economy is headed. It's not a job for an amateur.
The Interest on the National Debt
The interest the government pays to service the national debt is the long-term average of the interest rates on all the bonds it has sold. (It will be September, 2011 before it pays off the last of the 16-percent bonds that it issued in September, 1981.)
This is very important because a sizable fraction of our federal income is spent servicing our national debt, crowding out other federal programs. Since the lion's share of federal budget is "locked in" for such entitlement programs as civil service retirement, federal highway programs, Social Security, etc., the government doesn't have a lot of discretionary money that it can divert for other purposes (just like us, with our personal household budgets). But how much it does have depends critically upon how much it has to pay its creditors in interest on the national debt.
Must use national debt (loans from the public) to stimulate the economy out of recessions
It's also important to have a low level of national indebtedness because, in a situation like we're facing now, where the Federal Reserve has pretty well emptied its quiver of arrows by lowering interest rates almost to zero, steps must be taken by other arms of the government to stimulate the economy by boosting federal spending. This is what President Bush is attempting to do by lowering tax rates. (Unfortunately, lowering taxes for the rich won't do much to increase spending by the rest of the public.)
After decades of deficit spending, the Clinton administration finally succeeded in balancing the budget.
During the Clinton administration, the U. S. finally balanced the federal budget, and while it didn't significantly reduce the magnitude of the national debt, at least we didn't add to our burden of debt. During these years, the United States was predicting a budget surplus that could be used either to pay down the national debt or to support new programs. (With medical costs rising 10% to 12% a year, Medicare is in danger of running out of funds, starting in about a decade.)
The bottom line is that the economy is a complex interlocking system that must be carefully tuned
Moderate deficit spending won't hurt us
As I've mentioned elsewhere, the U. S. can continue to maintain a national debt, and can even run ever-rising deficits, as long as the interest on the debt don't rise faster than the government's annual income. In other words, the interest that the government pays out each year to those of us who own government bonds can grow in absolute value as long as it doesn't grow as a fraction of the government's total annual income. But as I've mentioned above, the government's income can drop during times of recession., so the government still has to be careful how much indebtedness it takes on.
President Bush is calling for deficits that sound ominous
The Bush administration is proposing a deficit spending program that kicks off this year with the highest annual deficit in U. S. history. (One has to realize that this probably isn't corrected for inflation, and that, if it were corrected for inflation, it might not be the highest budget deficit on record. On the other had, this is the "going-in" forecast. The realities are usually significantly higher than initially advertised.)
The plan calls for a $1.46 trillion dollar tax cut program over the next few years. This doesn't include the costs of the Iraq war. This week, Alan Greenspan, testifying before the Senate Banking Committee, that he questions the fiscal wisdom of further stimulating the economy at this time (Bush's Tax Cut: Attacked from All Sides), and that "he favors ending the double taxation of corporate dividends, but not at the expense of huge budget shortfalls".
As I see it, the bottom line is that politics is impeding the stock market and the economy. The stock market may rebound if there is a war in Iraq, and it's over by the early part of April. However, I have an uneasy feeling that war won't help the stock market and the revival of the economy. But we'll see.
This week, President Bush and the Chairman of the Federal Reserve Board, Alan Greenspan, squared off on opposite sides of the table for the first time. Alan Greenspan (Greenspan Takes Star Turn in Theater of the Absurd) is a Republican, who supported President Bush' first tax cut, but he isn't supporting this tax cut.
I have an uneasy feeling that President Bush is overriding the expert, Alan Greenspan. (This reminds me of the doomed Louis, the XVIth, dismissing first Turgot and then Necker.)
Will things come politically unglued between now and next year's elections? Or not?
Why (I Think) President Bush Wants to Go to War Now
There is a trillion dollars worth of oil in Iraq. Even if the Iraqis get some of that money, oil companies will also clean up. (See "The United States of Oil")
There is nearly universal
voices on Iraq) to invading Iraq without letting the UN continue its
Prior survey results
"Getting Smart about Oil"
Taming the Oil Beast