Dollars and Jens
Sunday, June 10, 2007
interest rates
Oh, hey, I opened a blogger window. I wonder what I was going to type.

Oh, I think it had to do with interest rates. If you've not noticed, they're up like 50 basis points in the past month. The highest weekly close on the ten-year yield in the last five years, according to data from the federal reserve website, was 5.22% in early 2006. We ended this past week around 5.17%.

The yield curve was inverted for a long time, persistently worrying some people. It has now righted itself. Projections from, among other sources, the White House, have been raised to near-normal economic growth for the next year or two.

The bit of rain I wish to on this parade is the issue of the federal budget deficit. I've refused for a while to get too worked up about it in the near-to-intermediate term because, as a percentage of GDP, it's not actually that high right now, it's not projected to be that high in the near future, and interest rates were around 4.5%. If the size of the economy is growing, in nominal terms, above 5%, borrowing money now and collecting taxes later makes sense if interest rates are much below 5%. The margin of error on these things was always a check on this as an argument for deficits that were too big — as, in fact, was intertia — but as interest rates climb, potentially (to cite a number floated by Bill Gross a few days ago) toward 6.5%, the idea that Congress should be within some plausible tweaks of budgetary balance becomes more compelling.

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