Tuesday, March 22, 2016

Too much interest expense volatility for fiscal expansion

The chart looks at the variation in federal government interest expense (red) relative to real growth (blue). The one sigma variation in interest payments is about .6% of GDP.  But 3/4 of federal spending is mandated, so the discretionary spending budget will vary by about 10% yearly.  That means the US Senate will have to  manage the discretionary budget on a very short term basis.  They and the Fed cannot manage the extreme volatility on short term treasuries when some 2 trillion in  roll over is coming due every year. 

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