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Home Publications Blogs Beat the Press Congress and the President Will Focus on Debt Even Though Interest Payments Remain at Historic Lows

Congress and the President Will Focus on Debt Even Though Interest Payments Remain at Historic Lows

Thursday, 17 October 2013 04:22

The Washington Post article on the budget agreement told readers:

"Senate Budget Committee Chairman Patty Murray (D-Wash.) was to have breakfast Thursday morning with her House counterpart, Rep. Paul Ryan (R-Wis.), to start a new round of talks aimed at averting another crisis. Obama repeated his vow to work with Republicans to rein in a national debt that remains at historically high levels.

It obviously felt it necessary to the not especially accurate tidbit that the debt remains at historically high levels. (It was considerably higher immediately after World War II.) Since the Post is playing the game of adding in random pieces of information, it could have equally well ended this this sentence by telling readers that efforts at deficit reduction came in spite of the fact that the ratio of interest to GDP is at historically low levels at 1.5 percent of GDP. While this ratio is projected to rise (because of projections of higher interest rates), in a decade we will just be getting back to the interest share of GDP we saw in the early 1990s.

Also, since the Fed is refunding roughly $80 billion a year from its asset holdings, the true interest burden to the Treasury is less than 1.0 percent of GDP. The Fed is projected to reduce its asset holdings and therefore the size of this refund later in the decade, but that is a policy choice. If the Fed feels the need to pull out reserves to raise interest rates and slow the economy, it can also accomplish this by raising reserve requirements for banks. It may opt not to go this route, but if the concern is that interest payments will be a serious burden, this is a problem that could be easily avoided. 

The Post could have also ended the sentence by pointing out that this focus on deficit reduction was occurring in spite of the fact that the economy is still down almost 9 million jobs from its trend levels of employment.

Comments (5)Add Comment
Arsonists Who Started the Fire Return to Conduct Fire Prevention Courses
written by Last Mover, October 17, 2013 7:18

Dean Baker could have written the link above. It's about the professional debt alarmists who now simultaneously deny they contributed to the mania leading to the shutdown/default circus, as they back away to explain that cooler heads must prevail and keep their eyes on the real problem ... the debt monster that got away and still must be conquered with appropriate sacrifices made by "entitlement takers".
Dean, another thing that the WAPO always conveniently ignores
written by Auburn Parks, October 17, 2013 8:08
Since "the debt" is nothing more than the total number of T-bonds held by the Non-Govt as safe, interest bearing financial wealth. If you think "the debt" is too high, you must also believe that the Non-Govt has too many financial assets. But of course, all we ever focus on is the liability side (the one that doesn't matter for the Dollar Sovereign) and never think about the asset side.
written by skeptonomist, October 17, 2013 9:10
The interest is paid mostly to US citizens, so it is not vanishing into a black hole - it comes right back into the economy. The Social Security system holds about $2.7T in bonds, so future retirees are getting a lot of it. Foreigners also hold a large fraction, which comes about because of trade deficits. As Dean says, reducing those deficits should be a major priority.
written by Bart, October 17, 2013 9:38

I'm betting that the article also failed to mention that Obama did little to help when he agreed to make the Bush tax cuts permanent, as opposed to a continuance based on economic conditions.

This was a boon to Republicans and their argument that we spend much more than we take in.
Government makes a PROFIT out of its debt.
written by Ralph Musgrave, October 19, 2013 10:35

As long as interest paid on the debt is less than inflation (and it’s easy to keep it below inflation) then government pays a NEGATIVE real rate of interest: i.e. government makes a profit at the expense of its creditors. But that point will be a mile above heads of those Neanderthals commonly known as “politicians”.

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About Beat the Press

Dean Baker is co-director of the Center for Economic and Policy Research in Washington, D.C. He is the author of several books, his latest being The End of Loser Liberalism: Making Markets Progressive. Read more about Dean.