The U.S. Federal government has been running deficits in the hundreds of billion

Question

The U.S. Federal government has been running deficits in the hundreds of billions of dollars which means that the U.S. Treasury is issuing hundreds of billions of dollars in new Treasury securities. If this is all you consider, what are the consequences for interest rates, spending financed by private borrowing, the money supply, the bond supply and inflation from this action alone? While the U.S. has been running these massive deficits, what has been true about interest rates? How do you explain this contradiction in interest rate effects and what are the big concerns going forward?

Explanation / Answer

When the U.S. Treasury is issuing new Treasury securities,

1. Money Supply in the market will Decrease.

2. Interest rate will Increase.

3. The bond supply will Increase.

4. Inflation will decrease.

5. Spending financed by private borrowing will decrease.

With sizeable budget deficits, the prospects of an ever-increasing amount of government debt, the end of the Federal Reserve's crisis-driven program of accumulating Treasury bonds, and an uptick in inflation expectations. And further increases were likely. Such increases would not only substantially raise the cost of future government borrowing, but would also threaten any recovery in housing and other interest-rate-sensitive sectors.

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