Outside the Beltway

DEFICIT SCHMEFICIT

· Monday, July 21, 2003 · 2 comments

Jerry at Dean’s World links a column by Daniel Gross on why the deficit really doesn’t matter:

When you take out a mortgage, it’s not necessarily the amount you borrow that matters. Rather, the interest rate dictates how easily you can handle the loan. It costs about the same to repay the interest and principal of a $700,000 loan at 8 percent over 30 years as it does to pay back an $850,000 loan at 6 percent over the same time period.

The same holds for the national debt, although on a much bigger scale. The national debt has exploded over the years. But since the late 1990s, interest payments as a percentage of federal outlays have declined rapidly. In fiscal 1997, the first year of surplus, interest on the public debt consumed $355 billion, or 22.1 percent of federal outlays. Last year, interest costs fell to $332 billion (roughly the 1995 total), amounting to only 16.5 percent of total layouts. (This chart shows interest expense on a monthly basis for the past year and for every year since 1990.)

Interesting. Of course, the expense would go down even more without the deficits….

FILED UNDER: Economics and Business, , ,
James Joyner
About James Joyner
James Joyner is Professor and Department Head of Security Studies at Marine Corps University's Command and Staff College. He's a former Army officer and Desert Storm veteran. Views expressed here are his own. Follow James on Twitter @DrJJoyner.

Comments

  1. John says:
    Monday, 21 July 2003 at 18:16

    Funny coincidence today. So glad to know that deficits don’t matter. 🙂

  2. John says:
    Tuesday, 22 July 2003 at 16:14

    Oh, and now this

    But here’s where I defer to the traders. Their tone is starting to sound very similar to that which was evident some nine years ago. As was the case back then, there’s great concern today over selling pressures stemming from mortgage “convexity.” And yet today’s US economy is actually far more dependent on the infrastructure of home mortgage financing and refinancing than it was in 1994. According to Federal Reserve data, mortgage debt outstanding is currently about 67% of GDP; by contrast, in 1994, the ratio was 48%. If anything, that suggests there could be an even more powerful convexity-related unwind this time around. The traders today are telling us exactly what they did back then — the more rates back up, the more the long end gets hammered by an unwinding of mortgage-related hedging. It’s a warning we have to take seriously.

    But that’s not all. One of my most seasoned trader compatriots has always warned that a yield curve which “steepens in a downtrade” is emblematic of the most virulent of bear markets. And that’s exactly what is going on today. The spread between 2s and 10s in the Treasury market hit 259 bp at the close on 21 July — equaling the yield gap last seen in 1992. The traders are telling me that this “bear spasm” is now at risk of feeding on itself — until or unless it is stopped by an unexpected weakening in the economy or by direct intervention by the authorities.

    This is hardly an outcome that the Fed, or any of us, would deem desirable in the current climate. It runs the very real risk of spilling over into other asset markets — especially given the mounting potential for an a further sell-off in the US dollar as part and parcel of America’s long overdue current-account adjustment. Moreover, a sharp additional back-up in long rates poses a serious threat to a nascent recovery in the US economy — not only crimping the credit-sensitive sectors of homebuilding, capital spending, and consumer durables but also aborting the home mortgage refinancing cycle that has been so supportive of consumer demand. We tend to forget that the US economy is still closer to the brink of deflation than inflation. Wouldn’t it be ironic — and tragic — if the perils of deflation were compounded by a rout in the bond market?

    The deficit definitely matters.

    —

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