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Ex-OMB Chief Economist: World Can’t Finance U.S. Debts

Friday, 16 March 2012 03:18 PM

Is there enough money in the world to finance the U.S. debt? Almost certainly not, according to a former chief economist for the White House’s Office of Management and Budget.

In a paper published in the journal International Finance, John Kitchen and co-author Menzie Chinn considered the size of U.S. debts held by foreigners in comparison with the needs the country would face if it kept to its spending trajectory.

The world might be able to keep up over the medium term, but farther out the numbers cease to be believable, Kitchen and Chinn contend.

They conclude that “unprecedented levels and growth of foreign official holdings of U.S. Treasurys will be required to keep longer-term Treasury security interest rates from rising substantially above current consensus projections.”

Specifically, it would take an increase in foreign holdings of U.S. debt equal to 20 percent of world GDP by 2020, up from five percent now, if the target is to keep the 10-year Treasury yield at 5.4 percent. “Given the large demands for funding governments worldwide, imagining such an increase for the U.S. alone seems challenging at the least,” Kitchen writes on the economics web site Econbrowser.com.

The current 10-year Treasury rate is 2.29 percent, kept low in part by unprecedented Fed actions, including massive quantitative easing efforts. The current inflation rate is 2.9 percent, above the Fed’s target of 2 percent. A recent selloff in Treasurys is raising speculation that the monetary authority might not be able to keep rates at virtually zero through late 2014, as promised.

One highly placed critic is Federal Reserve Bank of Richmond President Jeffrey Lacker.

He wrote on the bank’s web site that the Fed would like have to raise interest rates in 2013 to hold off inflation. “My current assessment is that an increase in interest rates is likely to be necessary some time in 2013,” Lacker wrote.

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Friday, 16 March 2012 03:18 PM
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