Deficit Spending and Higher Interest Rates Imperil the Recovery

J.D. Foster / June 11, 2009

Long-term interest rates are rising rapidly, with the 10-year Treasury pushing against 4 percent for the first time since the summer of 2008 – before the financial markets collapse. The many influences on U.S. interest rates at the moment are all moving in the same direction – up.

One influence is the growing concern that inflation could become a major problem in the near future, and this is building into the inflation expectation components of interest rates.

Another is simply the unwinding of the flight to safety following the initial debacle in financial markets. Interest rates across the maturity spectrum were driven artificially low as investors large and small sought to preserve the value of their principle. As concerns ease, interest rates will naturally rise to more normal levels. (more…)