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Commentary By Brian Riedl

Why Interest Rates Could Drive a Debt Crisis

Economics Tax & Budget

We shouldn't bet the country's future on interest rates remaining low forever.

Senator Joe Manchin has (for now) killed the president’s Build Back Better proposal that — once the fake expiration dates are inevitably removed — would have added $3 trillion in new debt over the decade. Yet even without this legislation, Congress and the White House have been engaging in the largest borrowing-and-spending spree since World War II. Following $3 trillion of (largely justified) pandemic spending in 2020, President Biden has already signed legislation adding $2.5 trillion in new ten-year debt, and Congress is trying to raise the discretionary spending baseline by an additional $1 trillion over the decade. Combined with baseline deficits, the national debt held by the public — less than $17 trillion before the pandemic — would surpass $40 trillion a decade from now.

And yet there has been no widespread debt backlash from politicians, voters, economists, or financial markets. This newfound comfort with debt is based on the contention that low interest rates have rendered almost any government debt level to be affordable. The average interest rate paid by Washington on its debt has fallen from 8.4 percent to 1.5 percent over the past three decades. However, economic variables tend to fluctuate, and only a fool would assume that a current economic trend will last forever. In the past, economic forecasts and markets told us that high inflation and high unemployment cannot happen simultaneously, that the late-1990s tech-stock bubble wouldn’t burst, and that national housing prices can never fall. Just last year, the Federal Open Market Committee consistently underestimated current-year inflation by three full percentage points. Interest-rate forecasts have proven spectacularly wrong for 50 years.

Continue reading the entire piece here at the National Review Online

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Brian M. Riedl is a senior fellow at the Manhattan Institute. Follow him on Twitter here. Based on a recent MI report.

This piece originally appeared in National Review Online