The Inflationary Economy

A 2003 report by the Federal Reserve calculated the effects of government debt and its impact on long-term interest rates. It was done before the current deep recession and weak “recovery” and the efforts of the Administration.

The report concluded: "A percentage point increase in the projected deficit-to-GDP ratio raises the 10-year bond rate expected to prevail five years into the future by 20 to 40 basis points. Similarly, a percentage point increase in the projected debt-to-GDP ratio raises future interest rates by about 4 to 5 basis points."

In other words, the effect of inflation in the form of higher interest costs.

Inflation induced by heavy deficits does not arise rapidly during a recession, but it jump-starts once recovery gets going. Then it quickly gets out of hand.

All the theory economists use as remedies get stymied by politicians who know the medicine will cause economic belt-tightening. Those remedies will be over-ruled by political considerations.

The present Greek, Portugal and Spain debacles are perfect examples of what happens when belt-tightening is avoided too long. (See the Earl J Weinreb NewsHole® comments.)