Mr. Bernstein noted that while debt financing has its place, the White House also believes it has firm limits within its agenda. “The result of all this will be a mix of gradually increased revenues and investments in essential, high-yield public goods, funded by some loans.”
Looking ahead and to the past
What would need to happen to significantly increase these very low borrowing costs? There could be a crisis of confidence in Fed policy, a geopolitical crisis or sharp hikes in key Fed interest rates in an effort to stem inflation. In a more easily imaginable situation, some believe that if inflation stays near current levels in the second half of the year, bond buyers may lose patience and reduce their purchases until yields are more in line with rising prices. Prices.
The resulting higher interest payments on debt would force spending cuts, said Marc Goldwein, the senior policy director at the Committee on a Responsible Federal Budget. Goldwein’s organization, which strives for balanced budgets, estimated that even under the low rates last year, the federal government would spend more than $300 billion in interest payments — more than individual spending on food stamps, housing, disability insurance, science. , education or technology.
Last month, Brian Riedl, a senior fellow at the right-wing Manhattan Institute, published a paper titled “How Higher Interest Rates Can Push Washington into a Federal Debt Crisis.” It concludes that “debt is already expected to grow to unsustainable levels even before new proposals are passed.”
The offsetting global and demographic trends that have pushed interest rates down, writes Mr. Reidl, are an “accidental, and possibly temporary, subsidy to heavily borrowing federal lawmakers.” Assuming those trends continue, he said, would be like becoming a smug football team that “improved its overall win-loss record over several seasons — despite a rapidly deteriorating defense — as his offense continued to improve enough to barely score. his adversaries.”
But at least one historical trend suggests that rates will remain subdued: a general decline in real interest rates worldwide going back six centuries.
A paper published in 2020 by the Bank of England and authored by Paul Schmelzing, a postdoctoral research associate at the Yale School of Management, found that as political and financial systems have globalized, innovated and matured, defaults among the safest borrowers — strong governments — have increased. continuously decreased. According to his paper, one effect could be that “regardless of the specific monetary and fiscal responses, real interest rates could soon enter permanent negative territory,” yielding less than inflation.