U.S. Debt Levels Will Kill Growth

This past month the U.S. Congress once again opened the national piggy bank to the biggest of the big financial institutions. On December 24, the U.S. Treasury announced that it would provide an unlimited amount of assistance to Fannie Mae and Freddie Mac, the government supported enterprises that are the largest source of funds for U.S. home loans. According to the American Enterprise Institute, taxpayer losses will top $400 billion from this mis-guided policy http://tiny.cc/EvadC . Additionally, bailouts such as this raise the national debt, which now exceeds $13.1 trillion, to its highest level relative to the size of the economy, since 1946. Since 1946, the federal debt has grown 15 times faster than the overall economy and now approaches 90 percent of GDP.

According to a recently completed study, http://www.kansascity.com/444/story/1675905.html advanced countries spending above the 90 percent threshold cut their average annual growth by about two percentage points lower than countries with public debt of less than 30 percent of GDP. Thus a continuation of the recent trend in bailouts and deficit spending will lower yearly economic growth. Furthermore, interest rates, including mortgage rates, will rise significantly over the next two years absent federal government spending restraint. Likewise, the Federal Reserve will have to push short term interest rates, such as the prime rate, higher to combat higher inflationary pressures resulting from out-of-control federal spending.

To quote former First Lady, Nancy Reagan, “Just say no.”

Ernie Goss