Noah Smith: Zero interest rates forever may be only way to handle rising government debt


U.S. Is Heading to a Future of Zero Interest Rates Forever

By Noah Smith
Bloomberg News
Thursday, June 27, 2019

The Congressional Budget Office has just released its projections for the U.S. federal budget during the next 30 years. The picture is one of steadily rising deficits. Federal government borrowing now amounts to about 4.2% of gross domestic product each year. By 2049, the CBO predicts, that will more than double, to 8.7%:

Only a small portion of these deficits will be due to tax cuts; the CBO projection expects that individual income taxes rise substantially as a share of GDP. Nor will it be due to government profligacy; CBO predicts that discretionary spending will shrink substantially relative to the size of the economy.

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Instead, the growth in deficits is mostly about two things. First, government health care spending is projected to grow, which is partly due to population aging and partly because the CBO predicts that medical costs will keep going up. Second, and even more importantly, the CBO predicts that interest rates will rise, forcing the government to spend much more on simply paying interest on its debt. The federal government now pays an average of 2.4 % to borrow; in three decades, the CBO predicts that this will rise to 4.2%.

If true, that will cause an exponential increase in the amount the government has to pay for debt service. ...

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