When the non-partisan Congressional Budget Office (CBO) released their original estimate of President Obama’s Budget , they said it was going to be expensive: in ten years the President would accumulate over $9 trillion in deficits. Turns out, that was low-balling it.
In their original estimate, CBO assumed that interest rates would be held constant. This makes modeling the costs a bit easier, but makes little economic sense. In reality, as annual deficits are piled onto the national debt, any rational person (or foreign government) debating whether or not to purchase a newly issued Treasury Bond will begin second-guessing the wisdom of that investment. To get them to stop second-guessing and start buying, the government will have no other choice than to raise interest rates to increase debt-buyers’ returns. Rising interest rates would drive net interest costs up further, driving deficits and debt up even higher, driving interest rates up further, and so on in a vicious cycle.
At the request of Congressman Paul Ryan (R-WI), CBO recently redid their estimate assuming interest rates would not be held constant, and this more realistic scenario paints a very scary picture indeed.
Looking at three different interest rate scenarios, more accurate estimates of President Obama’s deficits would cost an additional $1.2 to $5.3 trillion, bringing the grand deficit-total to as much as $14 trillion.
While it was known that Obama’s budget plan to add national healthcare, introduce a cap and trade, and expand the size and scope of the federal government was going to be costly, turns out there are now 5.3 trillion more reasons to care.