Symposium 2010: What is your outlook for the economy and interest rates and what risk does the federal deficit and federal debt have in the outlook for the economy and business long-term?

I think the economy is going to be stagnant this year. We’ll probably have very low growth, if any. Interest rates will be kept low by the Federal Reserve in an effort to boost the housing markets, but I think largely it’s all reflective of failed economic policies by the Obama Administration and the Congress.

The federal government is spending way more than it is taking in right now, so it’s having to issue debt to pay for that spending rather than reigning in the spending itself. So, we’re creating this massive financial obligation that is going to have to be paid off at some point. With the world economy largely in the tank with ours, there aren’t too many options when it comes to people willing to buy our government debt. China has been the big player but they’re not stupid. They see the writing on the wall. We’re getting in over our heads in debt. At some point, the financial risk that this overleverage creates will make buyers of our government bonds demand a higher interest rate to compensate for that risk.

If the federal government were a public company issuing debt in the financial markets, they’d be junk bond status. The triple A rating be damned; they wouldn’t have that if they were a private company. Investors are going to wake up to this fact before long. The government’s triple A rating is artificially created in that they have the ability to raise taxes to pay for the debt. Yes, they do, but with our dysfunctional Congress and administration I’m not sure it would be realistic for that to happen nor am I sure that it is an economically sound policy to take. It creates a moral hazard that the government never has to do without and that it can spend and spend beyond its means with no adverse reaction and merely pass on the burden to the taxpayers.

Ultimately, the budget deficits and federal debt are going to lead to higher interest rates and probably higher taxes unless the Congress balances the budget and makes real, substantial, and permanent cuts across the board in federal spending. Again, all of this creates uncertainty and financial risk which is negative for the economy and business in the long-term.

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