Will we see Stagflation?
Analysts Fear Expanding U.S. Deficits Endanger Economic Health
"Like a person packing on pounds, the United States keeps adding to its flabby budget deficits, endangering the nation's economic health and the pocketbooks of ordinary Americans. Here's the worry: Persistent deficits will lead to higher borrowing costs for consumers and companies, slowing economic activity.
As Uncle Sam seeks to borrow ever more to finance those deficits, rates on Treasury securities would rise to entice investors. That would push up other interest rates, such as home mortgages, many auto loans, some home equity lines of credit and some credit cards.
"That's the pocketbook risk to the American consumer," said Greg McBride, a senior financial analyst at Bankrate.com, an online financial service.
For businesses, rates on corporate bonds would climb. It would become more expensive to borrow to pay for new plants and equipment and other capital investments.
With a succession of budget deficits, "you do expect to see higher interest rates. Where we fight about this is over how big the effects are. But they are definitely there," said James Feyrer, assistant economics professor at Dartmouth College.
The government's budget deficit last year was $319 billion. While smaller than the record $413 billion in 2004, it still was the third-highest ever.
A White House budget official now predicts that the deficit in the current budget year will top $400 billion, pushed up by the costs of the Gulf Coast hurricanes. The red ink is expected to keep flowing for years.
The nonpartisan Congressional Budget Office forecasts deficits every year through 2015; that is as far out as the office projects. The White House forecast, which runs to 2010, also expects annual shortfalls.
"The budget deficit is like gaining weight. You are not really aware of it until at some point, all of a sudden you can't do what you want to do because you are heavier. Interest rates go up and slow things down," said Brian Bethune, economist at Global Insight. "Then you go to your check up and the doctor tells you you got to lose 25 pounds."
America's economic doctor is Federal Reserve Chairman Alan Greenspan.
Greenspan, who retires Jan. 31 after 18-plus years at the central bank, repeatedly has urged Congress and the Bush administration to get the country's financial house in order.
Bloated budget deficits, if not curbed, could endanger the economy over the long term, Greenspan warned. Increased government borrowing would drive up interest rates and weigh down economic activity.
"In the end, the consequences for the U.S. economy of doing nothing could be severe," he said recently.
The looming retirement of 78 million baby boomers will put massive strains on the country's finances, Greenspan said."