Don Kenobi
/ 83.5.248.* / 2009-07-06 23:43
“Similarly, a percentage point increase in the projected debt-to-GDP ratio raises future interest rates by about 4 to 5 basis points.” Economists are predicting a wide range of ratios but Mr Congdon said it was “not unreasonable” to assume debt doubling to 140pc. At that level, Mr Laubach’s calculations would see long-term rates rise by 3.5 percentage points.
The study is damning because Mr Laubach was the Fed’s economist at the time, going on to become its senior economist between 2005 and 2008, when he stepped down. As a result, the doubling in rates is the US central bank’s own prediction.
So, if Mr. Laubach is correct, that implies a 10-year bond at something around 7%, which would put the 30-year mortgage rate in the range of 9%. You can do the rest of the math as far as credit cards, car loans, student loans etc. go. That wouldn’t be a terribly attractive environment for growth, would it?