“Permit me to issue a nation’s money and I care not who writes the laws,” so, allegedly, once said Mayer Amschel Rothschild (1744-1812). Last week, Fed Chairwoman Janet Yellen took advantage of falling commodity prices, turmoil in markets, an anemic recovery in the U.S. and weakening economies overseas – especially China – to leave the rate on Fed Funds at the zero to twenty-five basis points where it has been since December 17, 2008. She also cited a lack of inflation and concern that a stronger dollar would further inhibit economic recovery at home.
What she did not mention was the effect of higher interest rates on debt owed by the federal government and, thus, its fattening impact on the deficit. Federal debt is about $18.2 trillion. That number excludes debt owed by state and local governments, as well as funds owed by agencies. And, of course, it does not include future obligations of social welfare programs like Social Security, Medicare and Medicaid. Deficits in fiscal 2015 will add about $400 billion to existing debt. A one percent increase in interest rates would up the deficit by about 40 percent. Should rates revert to normal levels, the deficit would rise to a trillion dollars. Ms. Yellen is surely mindful of the salutary effect low interest rates have had on annual federal deficits.