Of interest rates and budget deficits
Amidst all the talk about bond vigilantes and Obamanomics, JPMorgan economist Jim Glassman makes a good point about the murky relationship between interest rates and budget defiticts:
A quick review of history underscores the weak link between debt levels and interest rates. The US federal debt outstanding surged during World War II from 40% of GDP to 110% by the end of the war. That ratio came down to 25% by the early 1980s, amid a secular rise in interest rates. Then from that time through the mid-1990s, the debt-to-GDP ratio climbed steadily even as interest rates came down in what is now referred to as the Great Disinflation. Japan’s experience is even more striking, with its debt now 170% of GDP and yet Japan’s interest rates are the lowest of any industrial economy. Debt burdens are important, if they are a reflection of underlying mismanagement of fiscal policy. But clearly the interest rate story is more complex. Usually, cyclical swings in the economy, which undermine fiscal balance, are the main act for interest rates.